25 Need-To-Know eChapter by PearsonUK

25 NEED TOKNOW

The 25 Need-To-Know series takes the 25 most useful tools and models for a given management subject and shows you what they are and when and how to apply them.

In this series preview chapter you will: • See a selection of the most effective KPIs, Tools and Models • Learn about the best practice do’s and don’ts • Become a more knowledgeable and effective manager

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NEED TO KNOW

KEY PERFORMANCE INDICATORS Net promoter score (NPS) Net profit margin The do’s and don’ts of using key performance indicators

25 NEED TO KNOW

STRATEGY TOOLS The Suns & Clouds Chart (Evans) The do’s and don’ts of strategy development

25 NEED TO KNOW

MANAGEMENT MODELS Strategic dialogue The do’s and don’ts of using management models

on ter ick ap C l ch ch ea

‘This book does a fantastic job of narrowing down the best KPIs for you and your team. It’s short, sharp and incredibly useful.’ Thomas H. Davenport, Distinguished Professor at Babson College and author of BigData@Work

In this series preview chapter you will: • See a selection of the most effective KPIs • Learn about the best practice do’s and don’ts • Become a more knowledgeable and effective manager

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@FTPH

chapter

Net promoter score (NPS) ■■

Why: To better understand customer satisfaction

■■

What: To measure how satisfied your customers are

■■

When: When customer satisfaction, repeat customers and positive recommendations matter

■■

The question this indicator helps you to answer: to what extent would customers recommend our company to their friends?

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1 ■ Net promoter score (NPS)

Why does this KPI matter? Understanding how satisfied and therefore how loyal your customers might be is important for any company because happy and returning customers are likely to grow future revenues and profits. The problem is that most customer surveys are complex, expensive and hard to interpret. In response to this, the net promoter score (NPS) was developed as ‘the one number you need to know’ based on just one simple question: How likely is it that you would recommend [company X or product Y or service Z] to a friend or colleague? The NPS is based on the fundamental premise that every company’s customers can be divided into three groups: ■■ Promoters ■■ Passives ■■ Detractors.

This allows an organisation to track these groups and get a clear measure of their performance through its customers’ eyes. Moreover, and of critical importance, empirical research has shown that there is a striking correlation between the customer’s grouping and actual behaviour – repeat purchase and referral patterns – over time. Further research mapped the growth rates of companies with high NPS scores and in comparison to their competitors. The results were striking. In most industries, this one simple statistic explained much of the variation in relative growth rates: that is, companies with a better ratio of Promoters to Detractors tend to grow more rapidly than competitors. Developed by (and a registered trademark of) Fred Reichheld, Bain & Company and Satmetrix, the NPS is a straightforward metric that holds companies and employees accountable for how they

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Measuring and understanding your customers

treat customers. When combined with appropriate diagnostics and follow-up actions, it drives improvements in customer loyalty and enables profitable growth.

How do I measure it? How do I collect the data? NPS is collected using a survey (mail-based, online or conducted by phone). The best NPS practitioners collect the measurement in two ways: 1 Execute a top-down NPS. Set up an anonymous survey and contact existing customers to ask the NPS question – rating the overall customer/company relationship. At the same time, ask customers about the scores they would give to your competitors. This will enable a simple and direct comparison of performance through the eyes of the customer. 2 Measure NPS around transactions that are most vital (transactional NPS). Measure at a key customer touchpoint for a measurement that offers feedback on operational performance at that key moment of truth.

What formula do I use? Using a 0 to 10 scale, an organisation can calculate its NPS by taking the percentage of Promoters and subtracting the percentage of Detractors. ■■ Promoters (score 9–10) are loyal enthusiasts who will keep

buying and refer others, fuelling growth. ■■ Passives (score 7–8) are satisfied but unenthusiastic customers

who are vulnerable to competitive offerings. ■■ Detractors (score 0–6) are unhappy customers who can

damage your brand and impede growth through negative word-of-mouth.

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1 ■ Net promoter score (NPS)

To calculate the NPS, take the percentage of customers who are Promoters (those who scored between 9 and 10) and subtract the percentage who are Detractors (those who scored between 0 and 6). See Figure 1.1.

Neutral

Not at all likely

Extremely likely

Detractors % of Promoters

Promoters % of Detractors

= Net promoter score

Figure 1.1

How often do I measure it? Most companies don’t collect customer data frequently enough. Instead of the ‘big’ annual customer survey, companies can use this simple one-question approach to collect data more frequently. A good idea is to collect data on NPS continuously, or at least monthly from a subset of your customers (e.g. 10% of customers). This way, you can get trends and avoid drawing conclusions on biased or outdated data.

Where do I find the data? The data for your NPS come from surveying your existing customers.

How difficult or costly is it to measure? The simple nature of this KPI makes it more cost efficient than more traditional customer satisfaction surveys. However, as with any customer satisfaction survey, costs can be significant. Costs are particularly high for hard copy and mail surveys. A way to reduce costs is to automate data collection.

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Measuring and understanding your customers

How do I set targets for this KPI? Here are some benchmarks from the NPS leader table compiled by Satmetrix: Table 1.1

2011 Net promoter industry reports for the USA and the UK

NPS leaders – USA 2011 Company NPS

NPS leaders – UK 2011 Company NPS

USAA – banking Trader Joe’s – grocery Wegmans – grocery Costco – department store and wholesale Apple – computer hardware

87% 82% 78% 77%

Apple – computer hardware First Direct – banking LG – television Samsung – television

67% 61% 39% 35%

72%

Sony – computer hardware

30% Source: Satmetrix

Practical example We can look at this simple calculation example. A company surveyed 1,000 customers with the question: ‘How likely would you be to recommend the product from this company to a friend?’ Respondents can then score their reply on a 0–10 scale (0 = not at all likely, 5 = neutral, 10 = extremely likely). Here is a breakdown of the replies: Score

Counts

Score

Counts

0 1 2 3 4 5

1 2 0 0 2 5

6 7 8 9 10

10 110 170 400 300

The NPS is therefore: NPS = (% of customers who are Promoters) – (% of customers who are Detractors)

[

]

300 + 400 Promoters: –––––––––––––– × 100 = 70% 1,000

[

]

1 + 2 + 0 + 0 + 2 + 5 + 10 Detractors: –––––––––––––––––––––––––––––––––– × 100 = 2% 1,000 NPS = 70% − 2% = 68%

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1 ■ Net promoter score (NPS)

Some tips and traps to consider The NPS will give a nice, simple number; however, what it won’t give you are the reasons why customers would or would not recommend you or your products or services. A very powerful supplement to the single-question survey is a set of open questions along the following lines: ■■ What do you particularly like about this company/product? ■■ What or which areas could be improved?

This way, the company will get insight not only into how many customers are Promoters versus Detractors but also into the areas that need to be improved. Take this example from the Canadabased online retailer Zappos. The NPS survey is administered in two different situations: 1) after an order; 2) after a customer speaks with a customer loyalty representative. Zappos online questions ask the NPS (on the 0–10 scale): ‘How likely are you to recommend Zappos to a friend or a family member?’ However, to gain further information that would help the company move its customers who are Detractors or Passive to Promoters status, Zappos also asks the customer: ‘If you had to name one thing that we could improve upon, what would that be?’ Moreover, following the interaction with the customer loyalty representative (and again on the 0–10 scale) the customer is asked: ‘If you had your own company that was focused upon service, how likely would you be to hire this person to work for you?’ Further questions ask ‘Overall, would you describe the service you received from (insert name of customer loyalty representative) as good, bad or fantastic?’ and ‘What exactly stood out as being good or bad about this service?’ As a point of warning, people highlight the fact that the NPS methodology lacks statistical integrity because grouping the

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Measuring and understanding your customers

responses into just three categories causes the error interval to multiply nine-fold. It might be that the NPS oversimplifies the scoring a little and companies might be better off looking at the actual breakdown of answers from the 10-point scale and their changes over time.

Further reading and references Net promoter is a customer loyalty metric developed by (and a registered trademark of) Fred Reichheld, Bain & Company, and Satmetrix. Frederick F. Reichheld, The one number you need to grow, Harvard Business Review, December 2003. Fred Reichheld, The Ultimate Question: Driving Good Profits and True Growth, Boston, MA: Harvard Business School Press, 2006. www.netpromoter.com www.satmetrix.com

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chapter

Net profit margin ■■

Why: To better understand your financial performance, especially how well a company is run and controls its costs

■■

What: To measure the percentage of net profits from the overall sales revenues

■■

When: When investors and managers want to understand and compare the profitability of businesses

■■

The question this indicator helps you to answer: how much net profit are we generating for each dollar of revenue generated?

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8 ■ Net profit margin

Why does this KPI matter? With the previous KPI we looked at net profit as a total number. In order to make net profits more comparable and to understand how much profit a company makes for each dollar in revenue, we can produce the net profit margin (also referred to as return on sales or net income margin), which takes the net profit of a company as a ratio over its total sales or revenues. The net profit margin is therefore a key indicator of how well a company is run (i.e. how efficient it is and how well it controls its costs), as a low net profit margin could indicate too high operating costs or a wrong pricing structure. Low net profit margins mean that a company has a lower ‘margin of safety’ and that small changes such as a slight decline in sales or a rise in operating expenses (e.g. higher fuel or electricity bills or a hike in raw material prices) could quickly diminish any returns and turn the company from a profitable business to a loss-maker. For managers, net profit margins are particularly useful when compared over time and relative to other companies in the same sector. Investors often compare net profit margins across industries to identify the most profitable and attractive sectors and companies to invest in.

How do I collect the data? Data collection method The data for the net profit margin metric are collected from the income statement (see Chapter 7).

What formula do I use?

(

)

Net profit Net profit margin = –––––––––––– × 100 Revenues

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Measuring and understanding your financial performance

How often do I measure it? Usually measured each month as part of the income statement preparation.

Where do I find the data? The net profit and revenue data are extracted from the accounting data.

How difficult or costly is it to measure? The costs of producing the net profit measure are usually low as long as a company has the relevant accounting information available. As most companies hold these data in existing accounting systems, it is just a matter of adding a calculation routine to the existing system.

How do I set targets for this KPI? Net profit margins vary by industry, but all else being equal, the higher a company’s profit margin compared to its competitors, the better. As a very general ball-park benchmark (which will depend a lot on the industry), a net profit margin of between 20 and 40% is considered to be very good. Here are some examples of the most profitable companies in the S&P 500 (a listing of the biggest and best public companies in America): ■■ Public Storage (NYSE: PSA) = 46.14% ■■ Corning Incorporated (NYSE: GLW) = 45.65% ■■ Altera Corporation (NASDAQ: ALTR) = 40.97% ■■ Linear Technology Corporation (NASDAQ: LLTC) = 39.14% ■■ CME Group Inc. (NASDAQ: CME) = 37.20% ■■ The average net profit margin for all S&P 500 companies is

around 10%.

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8 ■ Net profit margin

Practical example In Chapter 7 we calculated the net profit and net sales revenues for Grande Corporation based on its income statement (see pages 55–6). To get to the net profit margin we simply divide the two numbers as follows: Net profit Net profit margin = –––––––––––––––––––––––– Net sales revenues $2,126,000 Net profit margin = ––––––––––––––––– $32,983,000 Net profit margin = 6.4%

Some tips and traps to consider As with net profits, net profit margins can also be measured by business unit or even by product or service, which often gives more interesting insights.

Further reading and references www.investopedia.com/terms/p/profitmargin.asp www.in-business.org.uk/formula-for-calculating-net-profitmargin/ www.ccdconsultants.com/documentation/financial-ratios/ net-profit-margin-interpretation.html

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The do’s and don’ts of using key performance indicators

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Top 2 do’s 1. Do: Start with your strategy In order for any indicator to become ‘key’ it has to be related to the most important and critical aspects of your business. The strategy or strategic priorities of any organisation should outline what matters the most, and therefore key performance indicators (KPIs) should link to the strategy and strategic priorities. The small set of strategic objectives should be the starting point for the development of KPIs. If the strategy outlines what a company needs to focus on in order to be successful, then the KPIs should help to measure the execution of this strategy. The best way to develop a solid set of KPIs is to convert the strategy into a one-page strategy map. A strategy map outlines the overall performance goals as well as the key objectives and priorities that a company must deliver along the way. The strategic objectives are usually mapped along four perspectives that support each other: ■■ financial perspective – outlining the financial objectives ■■ customer perspective – outlining the objectives related to

customers and the market ■■ internal process perspective – outlining the internal business

process objectives ■■ learning and growth perspective – outlining the objectives

related to employees, culture and information systems. Mapping out how the objectives in each perspective support each other is one of the big benefits of a strategy map. Instead of itemising strategic objectives in a seemingly unrelated list, the strategy map depicts how each objective supports other objectives and how they all help to deliver the company’s ultimate performance goals. For more information, read the white papers and case studies on strategy mapping at www.ap-institute.com.

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The do’s and don’ts of using key performance indicators

2. Do: Define the questions you need an answer to KPIs have to be relevant and meaningful. They are relevant if they are linked to your strategy. They become meaningful if they help you answer a key business question. My advice is that you develop between one and three so-called key performance questions (KPQs) for each of your strategic objectives. KPQs help you identify your real information needs and will guide you to the right indicators. Develop your KPIs so that they help you answer your most important and strategic business questions. Here is a quick example: ■■ Strategic objective: Grow customer satisfaction and loyalty ■■ KPQ: To what extent would our customers recommend our

product to their friends? ■■ KPI: Net promoter score

For more information, read the white papers and case studies on key performance questions at www.ap-institute.com.

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xxii

The do’s and don’ts of using key performance indicators

Top 2 don’ts 1. Don’t: Measure simply because other companies do One of the biggest traps that companies fall into is simply measuring what everyone else seems to measure. A great example is the staff survey, where most companies seem to copy the questions

Top 2from don’ts each other. Instead, it is important to think about what it is

you really need to know. Only then will you create a list of mean-

1. Don’t: simply ingfulMeasure and relevant KPIs.because other companies do

One of to theemphasise biggest traps that fall into is simply I want that thecompanies purpose of this book is notmeasurto give ing what everyone else seems to measure. A great example the you 25 KPIs that you simply start measuring. The list of 25isprestaff survey, where most seem copy questions sented here are global bestcompanies practice KPIs thattoyou canthe choose from from each other. Instead, it is important to think about what it is or amend, but only if they meet your information needs. you really need to know. Only then will you create a list of meaningfulJust andmeasure relevant KPIs. 2. Don’t: what is easy to collect IAnother want tobig emphasise that the purpose ofisthis book is notor towhat give trap is only measuring what easy to collect you 25 KPIs that you simply measuring. The listwe of already 25 preis easiest to count. We oftenstart default to the metrics sented global KPIs you can choose have inhere our are systems orbest the practice measures we that can most easily turnfrom into or amend, but if they meet your numbers. Thisonly is usually a path to information meaninglessneeds. and mediocre business metrics.

2. Don’t: Just measure what is easy to collect

In my experience, the best KPIs require a little more thought and Another big trap isefforts only measuring what is easy to collect what often significant in collecting and analysing. Forormany

is easiest to count. We often default the metrics wenumbers already KPIs it is important to go beyond the to face value of the have in our systems or thearound measures can mostRemember easily turnwhat into and analyse the meaning thewe numbers. numbers. This said is usually a path meaningless mediocre Albert Einstein so aptly: ‘Not to everything that and counts can be business counted, metrics. and not everything that can be counted counts.’ In my experience, the best KPIs require a little more thought and often significant efforts in collecting and analysing. For many KPIs it is important to go beyond the face value of the numbers

Findand theanalyse rest of the do’s and don’ts in the full book! the meaning around the numbers. Remember what Albert Einstein said so aptly: ‘Not everything that counts can be

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counted, and not everything that can be counted counts.’

‘Of all the books on business strategy, this is the most concise, lucid and elegantly structured statement of the current state of knowledge. Brilliant, and beautifully written.’ Jules Goddard, Fellow, London Business School

In this series preview chapter you will: • See a selection of the most effective Strategy Tools • Learn about the best practice do’s and don’ts • Become a more knowledgeable and effective manager

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25 The Suns & Clouds Chart (Evans) This tool will help you: ■■

Appreciate that ‘in these matters, the only certainty is that nothing is certain’ (Pliny the Elder, the Roman military strategist-cum-philosopher)

■■

Assess the balance of risks and opportunities in your strategy from the dual perspectives of likelihood and impact

■■

Amend your strategy as appropriate to ensure that the resultant opportunities surpass the risks involved

About this tool ‘When written in Chinese the word crisis is composed of two characters. One represents danger, and the other opportunity,’ said John F. Kennedy. Risk and opportunity may indeed be two sides of the same coin. Both are displayed in the Suns & Clouds Chart. I first created the chart in the early 1990s. Since then I’ve seen it reproduced in various forms in reports by my consulting competitors. They say imitation is the sincerest form of flattery, but I still kick myself that I didn’t copyright it back then!

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The reason it keeps getting pinched is that it works. It manages to encapsulate, in one chart, conclusions on the relative importance of all the main strategic issues facing your firm. It shows, diagrammatically and visually, whether the opportunities surpass the risks. Or vice-versa. In short, in one chart, it tells you whether your strategy is viable. Or not.

How to use it Assemble all the major risks and opportunities you have identified during your strategy development process. They will include: ■■

Market demand risks – arising, perhaps, from the analysis of Tool 5

■■

Industry competition risks – from Tool 6

■■

Competitive position risks – from Tool 7

■■

Business plan risks – from the implementation of your strategy.

Don’t list every risk, or you’ll end up with dozens. Focus on the ones that matter – those that will have a big impact if they happen – or those that are likely to happen. Likewise for opportunities. Try to end up with 6–10 risks and the same number of opportunities. You are now ready to slot them into a Suns & Clouds Chart. The chart forces you to view each risk (and opportunity) from two perspectives: how likely it is to happen, and how big an impact it would have if it did (see Figure 25.1). You don’t need to quantify the impact, but instead have some idea of the notional, relative impact of each issue on the value of the firm. In the chart, risks are represented as clouds, opportunities as suns. For each risk (and opportunity), you need to place it in the appropriate position on the chart, taking into account both its likelihood and impact.

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25 ■ The Suns & Clouds Chart (Evans)

Key

Market risks

Internal risks

Opportunities

Likelihood Low

Medium

High

Medium

C A

B D

C Low

Impact on value

High

Figure 25.1 The Suns & Clouds Chart The Suns & Clouds Chart tells you two main things about how viable your strategy is: whether there are any extraordinary risks (or opportunities), and whether the overall balance of risk and opportunity is favourable.

Extraordinary risk Take a look at the top right-hand corner of the chart. There’s a heavy thundercloud in there, with two exclamation marks. That’s a risk that is both very likely and very big. It’s a showstopper risk. If you find one of them, your strategy is unviable. The closer a cloud gets to that thundercloud, the worse news it is. Risks that hover around the diagonal (from the top-left to the bottom-right corners) can be handled, as long as they are balanced by opportunities. But, as soon as a cloud starts creeping towards that thundercloud, for example to around where opportunity B is placed, that’s when you should start to worry.

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But imagine a bright shining sun in that spot where the thundercloud is. That’s terrific news, and you’ll have suitors clambering over each other to back you.

The balance In general there’s no showstopper risk. The main purpose of the Suns & Clouds Chart then will be to present the balance of risk and opportunity. Do the opportunities surpass the risks? Given the overall picture, are the suns more favourably placed than the clouds? Or do the clouds overshadow the suns? The way to assess a Suns & Clouds Chart is to look first at the general area above the diagonal and in the direction of the thundercloud. This is the area covered in Figure 25.1 by the parabola. Any risk (or opportunity) there is worthy of note: it’s at least reasonably likely to occur and would have at least a reasonable impact. Those risks and opportunities below the diagonal are less important. They are either of low-to-medium likelihood and of lowto-medium impact, or they’re not big enough, or not likely enough, to be of major concern. Take a look at the pattern of suns and clouds in your chart around the area of the parabola. The closer each sun and cloud is to the thundercloud, the more important it is. If the pattern of suns seems better placed than the pattern of clouds, your strategy may be sound. In the chart above, there are two clouds and two suns above the diagonal. But risk D lies outside the parabola. The best placed is opportunity B. Risk A and opportunity A more or less balance each other out, likewise other risks and opportunities. Opportunity B seems distinctly clear of the pack. The opportunities seem to surpass the risks. The business looks viable. One of the best features of the Suns & Clouds Chart is that it can be made dynamic. If the balance of risk and opportunity shown on the chart is unfavourable, you may be able to do something about it – and the chart will show this clearly.

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25 ■ The Suns & Clouds Chart (Evans)

For every risk, there are mitigating factors. Many, including those relating to market demand and competition (the darker clouds in Figure 25.1), will be beyond your control. Those relating to your firm’s competitive position, however, are within your power to influence. They may, indeed, be an integral part of your emergent strategy. Likewise, your strategy may improve the likelihood of achieving a key opportunity on the chart, thereby shifting the sun to the right. Risk mitigation or opportunity enhancement in the Suns & Clouds Chart can be illuminated with arrows and target signs. They’ll show where your firm should aim for and remind you that it’s a target. It should improve the overall balance of risk and opportunity in your strategy.

When to use it – or be wary You can use the Suns & Clouds Chart in so many situations. It was designed for purposes of strategic due diligence in transactions such as acquisitions, alliances and investments, but it is just as useful in project appraisal, strategy review (as here) or even in career development and change – see my book Backing U!: A Business-Oriented Guide to Backing Your Passion and Achieving Career Success. It could even be useful in spotting emergent talent in the world of entertainment (see ‘Using it: Madonna’). Don’t worry if your Suns & Clouds Chart doesn’t make that much sense initially. This chart changes with further thought and discussion. Always. Arguably its greatest virtue is its stimulus to discussion. It provokes amendment. Remember, you cannot be exact in this chart. Nor do you need to be. It is a pictorial representation of risk and opportunity, designed to give you a feel for the balance of risk and opportunity in your strategy. What about highly improbable but potentially catastrophic risks, you might ask? The chart deals with them, too. In the autumn

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of 2001, my colleagues and I were advising a client on whether to back a company involved in airport operations. After the first week of work, we produced an interim report and a first-cut Suns & Clouds Chart. In the top left-hand corner box, we placed a risk entitled ‘major air incident’. We were thinking of a serious air crash that might lead to the prolonged grounding of a common class of aircraft. It seemed unlikely, but would have a very large impact if it happened. 9/11 came just a few days later. We never envisaged anything so devastating, so inconceivably evil, but at least we had alerted our client to the extreme risks involved in the air industry. The deal was renegotiated and completed successfully.

case study

Using it: Madonna Suppose you’re an investor. It’s 1982 and you show up at a grubby studio in downtown Manhattan to meet a young woman with grandiose aspirations of stardom. Ms Ciccone is a dancer who can sing a bit. She’s a hard worker, but she’s hard up. She’s been scraping a living in New York City for five years, through a succession of low-paid jobs, including nude modelling. She has made some progress as an entertainer. She has worked with a number of modern dance companies, been a backing dancer on a world tour and played vocals and drums with a rock band, the Breakfast Club. She has written and produced a number of solo disco and dance songs – and has signed a singles deal with Sire Records. Her first single, Everybody, written by herself and for which she received $5,000, is proving quite a hit on the dance charts and in the clubs. However, it has made no impact on the Billboard Hot 100. Would you have backed her? On the basis of the Suns & Clouds Chart alone, possibly not – see Figure 25.2. Music trends were moving in other directions. Everybody was successful only in the small niche of club music. She might have followed that up with another single or two, even an album. But they, too, might have found just a niche following. She was, basically, a dancer, with a rather screechy voice. She dressed and looked sexy, but so did loads of other dancers.

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25 â&#x2013; The Suns & Clouds Chart (Evans)

Risks

Opportunities

1. Dance scene led by black bands (e.g., Kool, Michael Jackson) 2. Moving to new pop (e.g., Human League, Men At Work) 3. Female artists more into soul (e.g., Diana Ross) or ballad (e.g., Olivia N-J) than rock (e.g., Tina Turner) 4. Madonnaâ&#x20AC;&#x2122;s high-energy dance music pitch too narrow a market 5. Madonna has limited singing talent

1. Everybody had niche club following, so too for follow-up singles? 2. Likewise with a first album 3. Madonna seems highly driven and committed to self-promotion 4. She could be packaged for new pop video market of MTV 5. Madonna could create new genre of white, female, dance rock?

165

Likelihood Medium

High !!

Medium

Impact on value

Big

Low

3 1

4 3

Small

Figure 25.2 Would you have backed Madonna in 1982? But you may have seen something else. One opportunity (sun 3) may have stood out. You would have spent some time with her and caught a glimpse of what many later came to recognise: a relentless drive, evidenced by her painstaking build-up of performing experience in those early years; a steely professionalism; an extroversion bordering on the exhibitionist, with a readiness to blend her very person with her image; boundless ambition. This was special. You may well have backed her.

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One year later and her Suns & Clouds Chart (Figure 25.3) would have changed beyond recognition. Her first album, Madonna, reached the top 10 in the album charts and 5 of its singles became hits. One of them, Holiday, went on to sell 12 million copies. The main risks concerning the breadth of her appeal would have evaporated. The main opportunity – of her being able to carve out a new genre of white, female dance-rock music with huge popular appeal – was now looking not just conceivable but likely. Risks

Opportunities

1. Dance scene led by black bands (e.g., Kool, Michael Jackson) 2. Moving to new pop (e.g., Human League, Men At Work) 3. Female artists more into soul (e.g., Diana Ross) or ballad (e.g., Olivia N-J) than rock (e.g., Tina Turner) 4. Madonna’s high-energy dance music pitch too narrow a market 5. Madonna has limited singing talent

Likelihood Low

Medium

High

Big

!! 5

Medium

Impact on value

2 4

1 3

2 Small

Figure 25.3 Would you have backed Madonna one year later?!

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25 ■ The Suns & Clouds Chart (Evans)

167

If you hadn’t backed her the year before, you wouldn’t be able to afford to now. Opportunities were unbounded. Fast forward now to 1992. In the interim, albums such as Like a Virgin, True Blue, and Like a Prayer had kept Madonna at the top of the charts. She had even received critical acclaim in a movie, Desperately Seeking Susan. Then along came Sex, a coffee-table book of photographs featuring Madonna in an array of sexually explicit poses. It was damned by the media as narcissistic, some said pornographic. Erotica soon followed, an album that met with similar disdain. The video accompanying the (successful) lead single was withdrawn from MTV. Then Madonna took the leading female role in a movie, Body of Evidence, a smuttier take on Basic Instinct. It flopped. Had Madonna blown it? Had her star waned? Were these ventures into sexual explicitness just a sad, final fling for an entertainer who had passed her sell-by date? Would you have backed her then? Could she ever recover from such a critical mauling, from an apparent obliteration of her fan base? Could she ever generate again the kind of multimillion-dollar income stream she had achieved in the 1980s? You may well have done. For all the risks, the dominant feature in Madonna’s latest Suns & Clouds Chart would have been her consistent strategy. If that had to be encapsulated in one sentence, which is what a good strategy should be, it could have been: ‘To build on her capabilities in the performing arts through sustained investment of cash, time and energy in image reinvention and self-publicity.’ That strategy may have dragged down her fortunes in 1992, but surely it could, just as easily, yank them up again in years to come? And, perhaps, she may have learned some lessons from the debacle and be a trifle more circumspect in her future reinventions? Her chart may have looked like Figure 25.4. The one thing you know for sure in the world of entertainment is that performers must keep their name in the headlines, their face on the front covers of magazines, whether in praise or condemnation. Any news is good news. No news is obscurity. In her year of sexual exhibitionism, Madonna had been very much the news. All she had to do next was reinvent herself again, preferably into something less controversial – an Argentinean folk heroine, perhaps, or an Eastern mystic, or an all-American girl, or a devoted mother, or a lady of the manor, whatever – and she could postpone her sell-by date indefinitely.

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25 Need-to-know strategy tools

Risks

Opportunities

1. Pop music dominated by youth and boy bands 2. Madonnaâ&#x20AC;&#x2122;s music style now dated 3. Her image tarnished by multimedia ventures into explicit sex

1. All media coverage has value 2. The public loves to forgive 3. Madonna remains highly driven and committed to self-promotion 4. Her strategy of self-reinvention should ride her through the ups and downs

Likelihood Medium

High !!

2 4

Medium

Impact on value

Big

Low

3 3

Small

Figure 25.4 Would you have backed Madonna ten years later?

The strategy was brilliant. Surely you would have backed her. She would go on to achieve the highest grossing concert tour by a female artist ever, the controversial Confessions tour. Later she would break that record again with her MDNA and Sticky & Sweet tours. A material girl indeed.

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Top 10 do’s and don’ts of strategy development The do’s and don’ts of strategy development

market analysis. No subsequent analysis of your competitive position, your strategic gap or your alternatives for bridging that gap will have any validity unless underpinned by the solid foundation of market understanding.

Top 2 do’s 3. 1. Do: understand the market Analyse aggregate demand, customer behaviour and your competitive environment every which way. Shove it all into an xxvi Top 10 do’s and don’ts of strategy development appendix, or even into a virtual appendix to the printed appendix, and pull out the main drivers for your strategy document. You never know when you might have recourse to snippets of that market analysis. No subsequent analysis of your competitive position, your strategic gap or your alternatives for bridging that gap will have any validity unless underpinned by the solid foundation of market understanding. A01_EVAN6436_01_SE_FM.indd 25

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5. 2. Do: remember risk It is curious how so many strategy documents fail to conclude with an assessment of risk and opportunity. This never happens in strategic due diligence, undertaken when a company or finance house is poised to invest in or buy out a target, so why should it in strategy, purpose of which is to allocate investment 3. Do:happen understand the the market resources in a particular direction? The same tools could and Analysebe aggregate demand,development customer behaviour comshould used in strategy (see the and Sunsyour & Clouds petitive environment every which way. Shove it all into an Chart, Tool 25). appendix, or even into a virtual appendix to the printed appendix, and pull out the main drivers for your strategy document. Top 5You don’ts never know when you might have recourse to snippets of that

5. Do: remember risk It is curious how so many strategy documents fail to conclude 12/11/2014 with an assessment of risk and opportunity. This never happens27/08/2014

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in strategic due diligence, undertaken when a company or finance house is poised to invest or buy out a target, so why should it 2. Don’t: underestimate the in competition happen in strategy, the purpose of which is to allocate investment It does wonders for organisational to have dig at and the resources in a particular direction?morale The same toolsa could now again.development But what is good for the chat round xxvi Thecompetition do’s and be don’ts of strategy development should used inand strategy (see the Suns & Clouds the water cooler Chart, Tool 25). is not good at all for the strategy workshop. Who are they? What are they up to? What could they be up to? In your worst nightmare, what could they do to you? It is as well to be analysis. No subsequent analysis of your competitive posiTopmarket 2prepared. don’ts Build such thoughts into your risk analysis and mitition, your strategic gap or your alternatives for bridging that gap gate accordingly. will have any validity unless underpinned by the solid foundation 1. Don’t: 2. underestimate of market understanding.the competition It does wonders for organisational morale to have a dig at the competition now and again. But what is good for the chat round the water cooler is not good at all for the strategy workshop. Who are they? What are they up to? What could they be up to? In your worst nightmare, what could they do to you? It is as well to be prepared. Build such thoughts into your risk analysis and mitigate accordingly.

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2. Don’t: write a thesis 4. Recently I came across a strategy document that ran to over 200 pages of well-written, well-analysed text. But I couldn’t, for the devil of me, find a strategy. A strategy document has to be digestible to your board directors, including non-executives, who will be less well versed in the intricacies of your organisation and, xxviii Top 10 do’s and don’ts of strategy development potentially, to outside investors. It must be clear, concise and non5. Do: remember esoteric. Allrisk relevant detail should be arranged in appendices. It should be punchy – which is why I favour the use of PowerPoint, 4. Don’t: write a thesis It is curious how so many strategy documents fail to conclude which forces you to write a conclusion for each slide, rather than with an assessment of riskaand opportunity. This never happens Recently I came across that ran over Word. And, ultimately, itstrategy shoulddocument be conclusive: the to title of 200 the in strategic due diligence, undertaken when a company or finance pages of well-written, well-analysed text. But I couldn’t, for the executive summary slide should encapsulate the derived strategy house is poised to invest in or buy out a target, so why should it devil me, find a strategy. A strategy document has to be digestin oneofsentence. happen strategy, the purpose of which isnon-executives, to allocate investment ible toinyour board directors, including who will resources in a versed particular direction? Theofsame could and be less well in the intricacies yourtools organisation and, A01_EVAN6436_01_SE_FM.indd 27 27/08/2014 should be used in strategy development (see the Suns & Clouds potentially, to outside investors. It must be clear, concise and nonChart, Tool 25). esoteric. All relevant detail should be arranged in appendices. It Find the rest of the do’s and don’ts in the full book! should be punchy – which is why I favour the use of PowerPoint,

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‘This book is a must read. A great reference collection for both practitioners and academics.’ Theo Camps, Professor at Tilburg University

In this series preview chapter you will: • See a selection of the most effective Models • Learn about the best practice do’s and don’ts • Become a more knowledgeable and effective manager

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chapter

Strategic dialogue ■■

Why use it? The strategic dialogue is a generic eight-step model for formulating and implementing strategy that is based on engagement with key stakeholders: what the organisation can and will do is not invented in an ivory tower, but is developed and implemented in dialogue with key external and internal partners and stakeholders.

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What does it do? The model treats strategy as an integral process of formulation and implementation. It focuses on content and process: doing the right things and doing things right. It is an iterative process with an approach that leads to making clear strategic choices with the support of key stakeholders.

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When to use it? The strategic dialogue can be used as a systematic approach to strategy in situations where both the formulation and implementation of a realistic and supported strategic plan is needed.

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What question will it help you answer? How should I organise my strategy process to maximise the chances for strategic success?

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Strategy

The big picture The strategic dialogue is a generic eight-step model for formulating and implementing strategy (Figure 2.1). It focuses on content and process: doing the right things and doing things right. It is an iterative process with an approach that leads to choices while leaving room to keep options open. And it is an approach – the name ‘strategic dialogue’ says it all – that is based on engagement with key stakeholders: what the organisation can and will do are not formulated in an ivory tower, but rather in dialogue with key external partners and stakeholders, and these are explored and discussed with internal stakeholders. However, a dialogue doesn’t imply a democracy: those responsible will still have the final say and have to make the strategic choices. In a strategy process, there are three critical success factors: ■■ A good understanding of the context of the strategy

definition: without shared understanding of cause, necessity and ambition, a company trying to formulate its strategy is drifting. And without knowing where you stand, there is no way to set a course. ■■ An adequate use of content in terms of quality, completeness

and depth – a thorough analysis with appropriate models and instruments to obtain a complete understanding of the possibilities and impossibilities of the organisation and of the environment in which it is active. A thorough analysis is the basis for finding the right strategic options. ■■ An effective and inspiring process based on engagement:

who are involved at what moment in time, what are the roles, and how is participation organised? In other words: applying the correct methods of engagement. These help to increase the intrinsic level of understanding, stimulate creativity and develop ideas.

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What are my capabilities?

What are my realistic options?

Searchlight

Operationalisation

Options

Outside-in: Scenarios

What are my capabilities?

Figure 2.1 Strategic dialogue

Strategic dialogue

How do I implement?

Inside-out: Analysis

To what do I aspire?

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Choices

What are my preferred options?

Executions

Do we realise changes?

Monitoring

How do I implement?

Source: after Van den Berg and Pietersma (2014)

For strategic success, organisations will have to understand the essence of context, the essence of content and the essence of the process. Organising both strategy formulation and strategy implementation processes as a dialogue will lead to strategic success. The strategic dialogue presumes that strategic success is the result of the formula: Formulation × Mobilisation × Realisation That is to say, strategic success comes from successful strategy formulation multiplied by mobilisation of the right people times successful strategy realisation (or implementation).

Formulation Many companies devote most of their attention to the F of formulation. They formulate a strategy that, if correct, shows them the way amid the uncertainties of current and future markets. It could lead to the perfect plan. And then it is ‘only’ a matter of perfect execution. All too often, however, strategic plans are not flawless. It is difficult to make the right choices up front for unforeseen

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Strategy

future developments. Often choices made â&#x20AC;&#x201C; if they really are made in the first place â&#x20AC;&#x201C; do not always reflect a combination of thorough analysis and sound entrepreneurship. And often the strategy states what the company will do, but not what the company will stop doing (which is often inherent in making choices). Emphasis on formulation is no guarantee for a consistent execution of strategy, nor for a consistent interpretation by all involved.

Realisation Next to formulation, it is the R of realisation that typically receives the most attention in strategy processes. Sometimes there are elaborate and detailed implementation plans, which are as comprehensive as an encyclopaedia, and sometimes these are only fragmentary. Most of the time there is some kind of implementation plan, and attention will be given to communication and progress. Milestones and required breakthroughs in the implementation plan are monitored and periodically scheduled on the management agenda (however, they are often not properly addressed, as operational fires must be extinguished first). But even if there is a brilliant strategy with elaborate implementation plans and well-managed change projects, all too often everyone is still surprised that the strategy is not working and does not deliver what they had expected.

Mobilisation The demands faced by companies in the twenty-first century are structurally different from before and this will be (or should be) reflected in the strategy process. Strategy processes have (or have to) become more agile and decisive. Strategy inherently is about the long term, but nowadays the pressure from banks and shareholders to achieve results in the short term is great. The tolerance for mistakes and risks remains low. Adjustments must be made instantly. You must therefore focus more than ever on the third variable: the M of mobilisation. This is about organising

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■

Strategic dialogue

involvement and engagement in the process of both strategy formulation and strategy implementation. In short, it is about engaging key business partners and both external and internal stakeholders to get their understanding of and support for (or even buy-in on) your strategy.

When to use it The strategic dialogue is a systematic approach to strategy formulation to be used in situations where both the formulation and implementation of a realistic and supported strategic plan are needed. It was originally developed as a methodology to overcome generic pitfalls that were frequently found during strategy formulation. These pitfalls are to be avoided in any strategy process and involve three aspects of the strategy formulation process: the scope of the process; the execution of the process; and the decision-making in the process. These aspects, and a description of some of the pitfalls, are shown in the following table.

Aspect

Pitfall

Description

Scope

‘Me too’

Blindly following the most important (or annoying) competitor. Getting carried away with seemingly attractive new initiatives or possibilities and forgetting to make rational considerations. Too much reasoning from a collective vision, being too caught up with the organisation’s own dynamics, and too little analysis. Holding on too rigidly on to past experiences. Making assumptions on markets and customers instead of doing a thorough analysis.

‘The grass is always greener’

‘Collective truth’

‘We’ve always done it this way’ ‘We know what they want’

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Strategy

Aspect

Pitfall

Description

Execution

‘An elite activity’

Involving top management only and not the rest of the organisation. Taking too little time for the process. Presenting budget adjustments (‘last year’s plan +5%’) as strategy. Getting stuck in continuous analysis into the last digits behind the comma, often driven by a ‘riskaverse mindset’. Engaging key external and internal stakeholders is experienced as difficult, inappropriate and/or inconvenient.

‘No time to discuss’ ‘The controller as strategist’ ‘Paralysis by analysis’

‘Talk about them, not with them’

Choices

‘It’s all about the money’

‘The hockey stick effect’

‘Let’s make a compromise’ ‘There is only one boss…’

‘Another good plan (for the file)’

Dominance of financial considerations (bottom line), making strategy more like an investment prospectus. Placing ambitions over analysis, leading to overly optimistic longterm prognosis. Trying to keep everybody happy and avoiding to make real choices Top management makes every decision (and wonders why nobody gets it or follows through on it). Not putting the strategy into action.

We emphasise that the context or situation in which a new strategy is to be formulated affects both the content of the strategy and the process of formulating the strategy. This, of course, also holds for a strategy process with the strategic dialogue model. The scope and depth of the strategy process with the strategic dialogue model are also highly dependent on the specific contexts. This includes such contexts as restructuring, mergers or

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Strategic dialogue

acquisitions and external disruptions (new technologies etc.). In each of these situations, compromises must be made between different aspects in the strategy process, as circumstances require specific demands. It may be that there is only a little time available, and the lead time will therefore be limited. It can also prevent the requirements of confidentiality limiting the group of people involved in expressing themselves. The nature of a specific situation determines the strategy process, sometimes creating more constraints than for a ‘regular’ strategy process.

How to use it The strategic dialogue model is an integrated methodology of strategy formulation and implementation which has been developed on the basis of practical experience. It is not a onesize-fits-all standard prescription on how to do strategy, but it’s a generic approach that you can customise to your organisation and circumstances. Every company and every environment are different and require a customised approach. The strategic dialogue model offers an iterative process which is applicable to a multitude of situations and strategic issues. In the strategic dialogue model, we identified eight distinct steps, each with distinctive purposes, scope and activities: ■■

Searchlight. The setting of the process of strategy formulation and implementation and finding a shared ambition and business scope.

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Outside-in: Scenarios. The mapping of potential strategic positions from plausible future business environments.

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Inside-out: Analysis. The exploration of strategic options based on the abilities and limitations in the company.

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Options. The translation of analytical information to insights and, from there, to generating strategic options.

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Choice. The estimation of the risks and feasibility of the various options, leading to the choice of strategy.

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Strategy

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Operationalisation. Making an implementation plan, setting the implementation process in detail and cashing in on ‘quick wins’.

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Execution. The actual implementation of plans, policies and actions for change.

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Monitoring. The assessment of ongoing developments in the environment and organisational performance in relation to the strategy and strategic goals.

In each of the eight steps, other management models can be used for analysis, design or interaction. These are not equally important in every situation, nor is there a prescribed list of models to use in one or more of the steps. To get a clearer view of which ones to use, and when, see the references at the end of this chapter. The schematic of the strategic dialogue model has the shape of two circles linked together: the process of formulation and of implementation (see Figure 2.1). These two circles together also form a lemniscate – the symbol for infinity – representing the integrated and iterative character of our approach to strategy. It depicts how everything is connected to everything else through logical links. Ideally, the strategy process will go through all eight steps of the model (an entire cycle) from left to right in the figure. The process of developing a mission statement, vision and strategy is described in the left-hand cycle. This process is fluid, interactive and creative. In the middle, the actual process of selection of strategic options takes place. This is where different options are weighed and choices are made. In the right-hand cycle, the emphasis is on the realisation and implementation of the choices made. This process is more rigid and action-oriented.

The final analysis Formulating a successful strategy depends upon the quality of content and the method of implementation. However, of equal

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Strategic dialogue

importance is the way in which the process is organised and the way the results are communicated to all parties. Efficient organisation and effective dialogue will greatly increase the success of the implementation phase. A number of factors are critical to get right when first setting up the process, in order to optimise the chances of delivering successful results: ■■ Determine who is to be involved, and which roles they are to

assume during the strategy formulation process. ■■ Decide how to organise enthusiasm and buy-in for the

strategy with the rest of the organisation – a plan without any commitment from those supposed to execute it is unlikely to succeed. ■■ Assess the quality of the team members’ input with regard to

both the analyses and the vision. Consider their willingness to think about the future in a systematic and fundamental way. ■■ Decide which other models and instruments would be of

value as part of the process. ■■ Decide how to communicate with non-participants about and

during the process. This becomes increasingly important once the results become visible. ■■ Include processes to ensure that agreed procedures are

adhered to, by all those involved, especially during the implementation phase.

References Van den Berg, G. and Pietersma, P. (2012) The Grand Book on Strategy. Den Haag: SDU [in Dutch: Het Groot Strategieboek]. Van den Berg, G. and Pietersma, P. (2014) The 8 Steps to Strategic Success: Unleashing the Power of Engagement. London: Kogan Page.

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The do’s and don’ts of using management models

Top 2 do’s 1. Do connect your mind, heart and gut feeling Useful insights gained from business analytics and data crunching may help you to understand the context and content of your business (mind), but without passion (heart), the motivation to pursue the strategic goals of your organisation will be missing. Moreover, if the direction, decision or course of action doesn’t feel good (gut feeling), your leadership will lack conviction and the organisation will fail to follow. So, decisions must be made based on a solid connection between mind, heart and gut feeling. The rich variety of management models available, ranging from engineering approaches to social sciences and psychology, can help you in this.

2. Do take time to discuss outcomes Management models are designed to resolve common problems and challenges in business. Unfortunately, no management model, or group of models, can deal with an organisational problem in itself. Management models can help by providing a structured and logical view on the situation or even a new way of seeing it. It is then the interpretation and shared understanding of this view that provides the valuable insights and the sound basis for making appropriate business choices.

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xix

The do’s and don’ts of using management models

Top 2 don’ts 1. Don’t assume the outcomes are obvious to everybody Some management models may be familiar to some colleagues, but probably not all. This is not surprising – there are so many management models in many fields of expertise. You would not expect a psychologist, who has never worked in R&D or an (industrial) operations department, to know about stage-gating. Nor would you expect an engineer to know about competing values. When introducing and using management models make sure you explain the model clearly and thoroughly to all involved. Pay particular attention to how the model works. Don’t hide any shortcomings of the model from your colleagues – always let them know what areas it can be helpful in and where it is of no use at all.

2. Don’t make outcomes absolute Some management models are strongly data driven – for instance models in finance or in operations often have a quantitative character. However, the management models function according to the adage: garbage in, garbage out. That means that a management model cannot compensate for or correct any incorrect data that is analysed with the model. When using models with a strong quantitative aspect, be thorough and precise about the data that you select for analysis.

Find the rest of the do’s and don’ts in the full book!

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25 NEED TOKNOW

We hope you enjoyed this sample chapter of the series. As a thank you we are offering you 20% off all 3 books if you order today! http://bit.ly/1FrnVh4

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