Strategy Toolkit

1. Strategy Toolkit

2. Foreword • Welcome to the “Strategy Toolkit”. • Good strategy is based upon structured thinking. Subsequent action based upon that strategy is dependent upon the clear communication of your structured thinking. Accordingly, this booklet has been put together to help support you in structuring and communicating your thoughts as you help clients address their (often complex and ill-defined) problems. • Hopefully this booklet will: • act as a reminder (or an introduction) to a range of useful structuring tools; • give a clear description of each tool and indicate where it may be most fruitfully employed; • highlight some of the short-cuts (and pitfalls) when using those tools; • provide a best practice example which can be adapted to your own situation; and • The aims of the toolkit are simple: • to increase the quality and insightfulness of the work we do for our clients; • to improve our efficiency by avoiding reinvention of standard tools; • to support ongoing training programmes; • to create an ongoing store of intellectual capital; and • to help communicate with all our colleagues in the firm, helping them understand what we do • Perhaps the biggest intellectual challenge in compiling this booklet was defining what we mean by a tool. I am not convinced this issue has been fully solved, and you may discern three types of construct: • widely accepted strategy consulting tools (e.g. growth share matrix); • approaches to particular types of issue which are less prescriptive; and • presentational devices, applicable to many situations • All, however, should support you in generating strategic insight for your client. • This booklet is intended to be your back-pocket guide to the tools most commonly used on strategy projects. It does not claim to be exhaustive or even comprehensive. However, you will find over 50 tools on the following pages, each one selected for its usefulness and general applicability to the types of client engagements we work on. I am sure that some of your favourites will be missing – but this is only version one and the toolkit will evolve through time. It is intended that this booklet will be updated regularly and your input is most welcome. • We believe that development of this Strategy Toolkit is an essential element in building a world-class strategy practice within CONSULTANT. However, it is not a substitute for hard work and creative thinking, so do not limit yourself to the tools in this book. • Finally, some acknowledgments. This toolkit is not the first to be produced by the practice. It draws heavily on previous versions, whose authors I would like to thank. I am also very grateful to those of you who have submitted best practice examples and suggested entries – keep them coming.

3. Strategy at D&T ................................ ................................ ................................ ...... 5 An indicative guide to using the tools ................................ ................................ .............. 6 Data sources ................................ ................................ ................................ ................... 7 100% bars ................................ ................................ ................................ ....................... 8 Activity maps ................................ ................................ ................................ ................... 10 Answer first hypothesis ................................ ................................ ................................ ... 12 Asset extension modelling ................................ ................................ ............................... 14 Business definition ................................ ................................ ................................ .......... 16 Capability assessment ................................ ................................ ................................ .... 18 Competitor analysis template ................................ ................................ .......................... 20 Conversion waterfall ................................ ................................ ................................ ........ 22 Customer experience analysis ................................ ................................ ........................ 24 Customer segmentation ................................ ................................ ................................ .. 26 Customer segmentation analysis ................................ ................................ .................... 28 Dupont analysis ................................ ................................ ................................ .............. 30 Economies of scale ................................ ................................ ................................ ......... 32 Executive dashboard ................................ ................................ ................................ ....... 34 Forecasting techniques ................................ ................................ ................................ ... 36 Free cash flow diagram ................................ ................................ ................................ ... 38 Gantt charts ................................ ................................ ................................ .................... 40 Growth share matrix ................................ ................................ ................................ ........ 42 Growth spread matrix ................................ ................................ ................................ ...... 44 KPC comb charts ................................ ................................ ................................ ............ 46 Marimekko charts ................................ ................................ ................................ ............ 48 Market definition ................................ ................................ ................................ ............. 50 Market entry and exit ................................ ................................ ................................ ....... 52 Market sizing ................................ ................................ ................................ ................... 54 Model front panel ................................ ................................ ................................ ............ 56 Parfait charts ................................ ................................ ................................ ................... 58 Partnering maps ................................ ................................ ................................ .............. 60 PEST analysis ................................ ................................ ................................ ................. 62 Porter’s five forces ................................ ................................ ................................ .......... 64 Portfolio matrix ................................ ................................ ................................ ................ 66 Prioritisation funnel ................................ ................................ ................................ .......... 68 RACI analysis Table of contents ................................ ................................ ................................ ................. 70 Reverse costing ................................ ................................ ................................ .............. 72 Risk matrix ................................ ................................ ................................ ...................... 74 RONA charts ................................ ................................ ................................ ................... 76 Root cause analysis ................................ ................................ ................................ ........ 78 ROS/RMS ................................ ................................ ................................ ....................... 80 Scatter graphs ................................ ................................ ................................ ................. 82 Scenario development ................................ ................................ ................................ .... 84 Sector charts ................................ ................................ ................................ ................... 86 Sensitivity charts ................................ ................................ ................................ ............. 88 Shareholder value analysis ................................ ................................ ............................. 90 Share momentum charts ................................ ................................ ................................ . 92 Sources of value waterfall ................................ ................................ ............................... 94 Strategy articulation map ................................ ................................ ................................ 96 SWOT analysis ................................ ................................ ................................ ............... 98 Traffic light charts ................................ ................................ ................................ ............ 100 Value chain analysis ................................ ................................ ................................ ....... 102 Value disciplines ................................ ................................ ................................ ............ 104 Weighted column chart ................................ ................................ ................................ ... 106 Feedback form ................................ ................................ ................................ ................ 10 8

4. An indicative guide to using the tools 4

5. 100% bars Description The 100% bar is a powerful and flexible presentation tool for highlighting the relative proportion of elements within a fixed total. Typical application • 100% bars work effectively for many purposes, such as: • comparing competitors within an industry or market by sales, market share, geography, product type etc. • costs that go into the manufacture of a particular product; • key elements that comprise a company’s revenue streams • addressing changes over time etc. • This enables people to easily recognize the relative impact of different factors that go into a process or trend. • In particular, placing a series of 100% bars in order can highlight changing patterns in relative terms, over time, region or any other segmentation. 100% bars do not reflect changes in the absolute size of the category in question. Typical process Excel has an option to create 100% bars as part of its Chart Wizard, so they are easy to create. Gather the data appropriate to the particular application you are using the 100% bars for, from expert interviews, analyst and brokers’ reports and, if necessary, client interviews. Ensure that you are happy with the data you have gathered and that, if you are creating a series of bars, the information refers to the same type of data. Annotate the chart and draw conclusions from it. Unless you are dealing with many categories, it is best to put the absolute size of each item at the end of the bar. For comparisons between bars over time, clearly mark the CAGR for each of the key elements of the bar. 5

6. Example output Concentration of Customer Profitability 7m £17m A % of Total B C 40% of customers generate 90% of profit D Customer ranked by profitability Net profit Source: RBS presentation, Feb 2001 Wealth by Source Region $7.2tr $16.6tr $17.4tr $23.1tr Africa Middle East % of Total S. America Asia N. America Europe 1986 1996 1997 2000 Source: Private Wealth Management, 1998/99 Tricks and tips Use shading to highlight key messages you wish to show to the client. 100% bars are often interchangeable with (or augmentations of) Mekkos and Parfait diagrams. Contact 6

7. Activity maps Description An activity map is an easy, visual summary of a company or series of companies and what they do. Activity maps are a good way of moving from a broad overview of a particular company or industry’s activities to a detailed and comprehensive list of all activities within the value chain. They are designed more to spark discussion than provide an answer to a particular problem, but make good slides for a presentation or a client pack. You can use the activities collated in a number of ways to stimulate thought about the company in question. Try: - Mapping company activities against competitors and discussing differences; - Shading boxes according to relative capability; and - Shading boxes according to desired state and noting discrepancies with ‘as is’ It is surprisingly difficult to develop activity maps. Take time over the process and make sure you don’t miss out important activities. Start by drawing the value chain in which the client operates, vertically on the left side of your slide. Taking each element of the value chain in turn, try and record all the sub-activities necessary that comprise the element as a whole. Place each activity in a box to the right of the value chain. This exercise can be completed with a client, but if not try and discuss it with a client afterwards to ensure you have captured all activities . Typical application Typical process 7

8. Backbone Network Local Equipment High-level activity map for fixed line telecoms: Now and Future Example output Media/ Publishing Corporate Advertising Communications Content Production News Films/ Programming Music Games Publishing Information Transactions Rich Media Interactive Voice E-mail Video conference Exhibition User Applications Middleware ASP Content Provision ASPE Traditional offline media Fixed ASP W-ASP Search engines E-comm. tools App’n hosting tools Enterprise app’ns Content-specific apps Netw’k mgmt Strm’g media Cach’g Metr’g BIlling Browsers Web sites Portal Mobile Portal Portal Open “Walled Garden” Open “Walled Garden” Internet Access Provision Customer management Fixed Mobile Hosting ISP ISP Network Provision Network Equipment and Infrastructure National Backbone Intern’l Backbone Bandw’th Trading Coloc’n/ Hotelling Switching/ routing Fibre Co-ax Copper Switches and Routers Rights of Way Multiplexers Sat. M’wave Local Access Fixed Netw’k Eqpm’t Infrastructure Mobile Fixed Network Services Radio Fibre Dial-up PSTN/ ISDN HSI Cable Data xDSL Co-ax 2G 2.5G 3G GPRS Devices Applications Fixed Handsets Mobile Handsets PDAs TVs Specialist Devices Set top box Operating Systems Local Middleware Specialist Local Apps Key areas of future activity - owned or as part of an alliance Current area of activity Source: TMC example Tricks and tips Note: the above example is not to scale (was originally the size of a powerpoint slide). To present this much data in a client situation, ensure that all boxes are clear and well spaced. You can shade boxes according to competency or desired competency if you wish to draw out key messages. Overlaying current with desired activities helps clarify key conclusions in advance of alliance, M&A activities, etc. Consider adding rows for parameters which fall outside the value chain, but which can help distinguish competitors, e.g. geography, customers. Contact 8

9. Answer first hypothesis Description The hypothesis or logic tree is a key method of thinking used on strategy projects. It provides a framework for a piece of research or analysis to ensure that all factors are suitably accounted for and evaluated, and allows you to apply principles of structured thinking to simplify complex problems. Structured thinking is a key method for approaching - and hopefully answering - a question in a compelling way. It helps you to be clear about the key issues you are tackling, to remember the information you have uncovered and to structure the solution you propose. The hypothesis tree should be used early on in a project, once a basic understanding of the issues has been established. It should be returned to and changed as your thinking develops. The hypothesis tree can be translated directly into a research tree to structure the activities that need to be performed. Once the key questions have been established it is usually clear which research method is the most appropriate. The process of creating a hypothesis tree is ideally completed by one person first, then discussed with the team - hypothesis trees cannot be written by committee. Begin by formally stating the situation your client is in. Then write down the key complication. In other words, define your client’s problem. This should lead to a question which will point you towards your tree’s hypothesis or ‘answer’. Write this at the ‘top’ of the tree as a positive statement which directly answers the client’s question. Create sub-branches by splitting the top of the tree into its natural components (this takes practice). Each horizontal level should contain statements of a distinct category or type; vertically, the ideas should support each other. Typical application Typical process 9

10. The proposed changes to the loyalty scheme will generate significant profit uplift … but will not have the desired impact if the changes are incremental BankCo. Loyalty Scheme Redesign Will generate profit uplift Incremental changes won’t work Poor customer rel’nship and targeting Rewards do not solicit required behaviours Can change customer behaviour Declining market position Cost reductions can be made Can increase contribution from best customers Can manage out poor customers Can improve customer behaviours Can convert more prospects Can create new revenue streams Can reallocate balance sheet costs beneficially Can reduce costs for sourcing of goods Can save mis-targeted marketing spend • Sourcing costs are higher than industry • Can offer high value goods selectively • Swap high for low value rewards • Can legally change provision position • Others have lower provisions • Posted materials can be reduced • Process inefficiencies can be reduced • Can identify profitable customers • Can retain them longer • Can increase x-sales • Can reduce LLP • Can identify borrowers, and make them borrow more • Can identify poor customers • Can price them out profitably • Can manage attrition • Can identify good prospects • Can design attractive CVPs • Can win converts from competition • Can increase share of wallet • Can increase x-sales • Can partner profitably • The sub-branches should obey the MECE principle (Mutually Exclusive Completely Exhaustive). This implies that: • if one of the sub-branches is false then the top of the tree must be false • if all the sub-branches are true then the top of the tree must be true • Discuss the tree with your team as an initial test of logic and completeness, and change if it is required. Once the tree is developed sufficiently, each question should be possible to address in a manageable way. Take each element of the tree and formulate an appropriate match in the research tree to satisfy the question Example output Source: Example Tricks and tips A positive statement, although more difficult to express, is more valuable in developing a proof. Express assertions in complete sentences rather than in note form as they better assist clear thinking. Some first level “splits” of the hypothesis tree occur rather regularly. Typical first level branches are: - Sales, margins and costs; and - Customers, competitors and costs Contact 10

11. Asset extension modelling Description Asset extension modelling is a simple too (or technique) for identifying new business opportunities, based upon a company’s existing strategic assets. It is all too common in the new economy to define potential business opportunities which are simply not realisable given the starting position of a particular company. This techniques avoids those pitfalls by isolating core, near and far opportunities based on the structuring of existing assets such as brand, market reach, capital, IP, etc. By defining the “distance” of a business opportunity it is much more likely that you will identify the likelihood of achieving stretch opportunities without straying into the realms of fantasy. Typical applications for asset extension modeling might include: - e-commerce brainstorming; - identifying regeneration targets; - skills gap analysis; - re-engineering; and - portfolio investment planning and divestment analysis Complete a skills audit, ensuring that all asset classes are captured (from soft assets through to hard assets). Typical asset classes might include: free cash, debt availability, skills, scale of workforce, IP (knowledge, patents), customer base, products, brand, access to industry influences, etc. Rank the strength of each assets, and then cluster into 2-6 groups. One or two teams members should then develop an asset extension map, which can then be tested internally with the rest of the project team. Run this past the primary client contact and incorporate his or her feedback. Plan and organize a workshop, paying specific attention to the “stretch questions” you will ask. During the workshop, treat the exercise like a brainstorming session, but keep drawing the threads back to the defining assets. Conclude the workshop by gaining agreement on which opportunities are most likely to be successful. Typical application Typical process 11

12. Skills extension Brand extension Far satellite Internet Internet On-line Private derivatives wealth B-B Bank management management integration Internet and settlement tools services derivatives management Near satellite and settlement Mobile research Institutional Operational Gold and Operational provision fixed risk on-line jewellery Institutional risk on-line income advisor trading investor trading advisor transaction and risk platform management Mobile hub credit XML Open Core derivatives derivatives architecture Mobile trading ECN for US bond platform equities syndication Open Internet tool architecture Private ECN for UK Mobile Bank Interest rate equities credit derivative derivatives network XML Institutional derivatives fixed Forex portal trading income platform transaction platform Market extension Product extension Example output Asset Extension Modeling Source: April 2001 Tricks and tips Don’t let suggestions in the “far satellite” region get too far away from reality. But balance this against the need for individuals to test their creativity. Use extension modelling alongside scenario planning, beachhead mapping, etc. Contact 12

13. Business definition Description A framework to help clients understand how they might best manage their business as unified or separated entities. It also forms a basis for identifying new business opportunities and for estimating the potential of markets. Business definition is based on the logic that “shared customers plus shared costs constitutes a single business”. Alternatively, if a business shares neither customers or costs they are distinct. This has significant implications on how to structure businesses in a manner which can leverage scale and reach customers to maximise cross selling and minimise channel costs. There are many uses for business definition, but key applications include: - establishing the boundaries of new e-business; - deciding how to manage a portfolio of opportunities; - as a basis for market entry studies; - to support new business start-ups; and - value proposition development Begin by getting a contextual understanding through background reading. Use this knowledge to identify discrete business activities in the area your client is working (as is). For example, food manufacture, pet food brand management, wheat milling, food distribution (US), food distribution (France). Determine the cost structure (i.e. the key components) for each activity. Use the 80:20 approach, but dig down as quickly as possible into existing management accounts. Plot 100% bars for costs against each other, and identify through shading where cost sharing occurs (or could occur). Map the channel processes at a high level, which serve the customers for each business activity. Plot this as a value chain, each against the others and identify areas of channel/customer sharing. Plot each business activity on the “cost sharing vs. customer sharing” matrix. Typical application Typical process 13

14. Business Definition Framework 100% Single business (with niche potential) Single business Distinct business (with cost leadership potential) Cost sharing 50% Distinct businesses (with channel sharing potential) Single business (with substitution potential) Distinct businesses 0% 0% 50% 100% Customer sharing Use this to draw out implications regarding which businesses can be: - stand alone or unified; - leveraged off each other’s distribution or cost base; and - better “cross-sold” between sets of customers. Example output Source: Example Tricks and tips Read examples of how new entrants have managed to get a foothold in new industries, and determine what elements of their existing business they have leveraged. For example, Virgin’s brand extension activities, or Japanese cost sharing in the motorcycle and engine manufacturing business). Assignments of this sort can be helped greatly by Global Corporate Finance’s knowledge of “best owners” for discrete businesses. Don’t assume your client is the best owner of its existing business portfolio. Clare H. Harding Contact 14

15. Capability assessment Description Capability assessment encompasses a number of tools designed to focus a client on specific skills that the client or competitor’s company may have or lack, and that therefore may act as a basis for a sustained source of competitive advantage. Capability assessment is an important activity for isolating and ranking capabilities in a particular company, business unit or department. It can be used either to rank capabilities as seen within a company, or as perceived by customers or clients externally. By using tools such as the spider chart in displaying the results, characteristic patterns can be isolated, and the cumulative impact of over- or underperformance in a number of fields can be highlighted. See also: Value disciplines Determine the key capabilities you wish to assess the company by. These may be the three core capabilities from the ‘value disciplines’ model, or other categories (agreed with the client in advance), indeed almost anything that can be broadly termed a ‘capability’. This might include: - superior skills in producing high quality products; - superior system for delivering customer orders accurately and swiftly; - better after-sale service capability; - more skill in achieving low operating costs; - unique formula for selecting good retail locations; - unusual innovativeness in developing new products; - better merchandising and product display skills; and - superior mastery of an important technology Conduct a comprehensive survey of a predetermined target audience (customers, employees, etc.) based on ranking each capability. Average the results for each category to get a single score for each capability. Plot the results of the survey on a spider chart so that each capability runs along its own axis. Join the points on each axis together to form a complete shape. You may wish to shade the area enclosed by the lines to indicate a rough ‘overall’ performance. Annotate your results carefully so as to highlight the conclusions you have drawn. Typical application Typical process 15

16. Strategic fit with ML 4 3 Rapid implementability Success of EXN 2 Asset optimisation Financial 1 Asset operations Human 0 Leveraging of EXN relationships Physical Customer operations Brand Regulation & political Enhancing fund management infrastructure Industry leadership EXN BW Industry collaboration Culture 1- low importance 4- high importance Commercial & Marketing Reputation Support There are many other ways to present the information in an informative way - take the so-called ‘wheel of fortune’ (below). Example output Source: FSI Project, April 2001 Assets Cash generating activities Financially strong negotiating position Operating in a growth industry Experienced and stable workforce Attractive, captive, guaranteed footfall High quality customer segmentation data Airports and lots of space On airport infrastructure e.g. roads and utilities Location (proximity to capital and entrance to EU) Very strong airport brands @ Heathrow and Gatwick BAA brand is fairly anonymous Good track record of management and investments Generally risk adverse Realistic Looking at the long term Professional Responsible Safe Source: Client project, May 2001 Be aware that selecting capabilities and subjectively ranking them can produce results that are very sensitive for the client and/or generate certain levels of disagreement. Also, take care when reproducing diagrams in final packs as they tend to divert attention and/or cause disagreement. Remember when conducting a customer survey to be aware of the impact of your sample size, the types of questions you ask and the ‘unrealistic’ environment of the survey. Also, make sure to ask open questions so you can provide qualitative evidence to support or bring out your conclusions. Inherently relative, spider charts usually work best when a series of different results are compared. For example, ask customers to rank not only the company but competitors; or compare the results of internal surveys between deparments. Tricks and tips 16

17. Competitor analysis template Description A template which aids direct comparison between industry competitors, based around strategically important differentiating factors. This template is not uniform, but is typically structured. Typical application Wherever a rigorous comparison between market players has to be made. To address a company’s structure, strategic conduct and performance. There is no “magic” to this particular template, but something similar should be employe in order to avoid uncomparative or non-focused analysis. Review the hypothesis for your current client assignment and agree the key parameters which capture the behaviours of each competitor related to your specific issue. Try the template on one or two competitors. Then simplify and modify it on the back of the experiences you find. Feed the information into the strategic decision making steps in the assignment. If you cannot fit all of your summary onto a single page you have not understood the issue or the competitor well enough. Revise. Typical process Tricks and tips 17

18. Structure Conduct Performance • Profitability - Reliance on mass affluent market • Charles Schwab has experienced significant net income growth (5 year CAGR of 33%). However, the recent downturn • in online trading • has impacted • Charles Schwab • more than other • online brokers • because of their • greater focus on • affluent customers, as opposed to active traders • Value creation • Customer assets - new broking customers and customers attracted from others • Charles Schwab attracted self-directed customers from traditional • full-service • brokerages and • customers • new to broking • 7.5 Mn active accounts, • $872 Bn customer assets • (2000) • Acquisitions - Investment /HNW focus • Research group Chicago Investment Analytics (Nov 2000) • Investment management group US Trust for $2.9 Bn (June 2000) to tap wealthy investors “purveyor of investment advice and private banking services to some of America's richest families” (More than $5 Mn investable). Will retain their separate brands • eTrading technology and brokerage CyBerCorp (Feb 2000) (Provides internet based services to highly active online investors) • Resource Trust Company HNW bank. (Feb 2001) Requires clients to have $3 million of investable assets • Alliances - Extending the distribution network • Multi-year alliance with AOL to become the premier financial services company and brokerage firm across AOL’s personal channels (Oct 2000) • Teamed with Ericssonto develop mobile investing products (June 2000) • Alliance with the 3 major wireless carriers (Nov 2000) • Marketing - Customising the product offering • Lower pricing for customers with higher asset bases or trading volumes • Looking to expand offering to provide private banking services for affluent customers and access to leading edge technology for active traders. • Other new products include Gift Package for new investors (June 2000);and Women’s financial site (Oct 2000) Mission - To provide customers with the most useful and ethical financial services in the world • Strapline: “Creating a world of smarter investors“ • Philosophy • High tech, high • Technology leadership • A culture of innovation • Organisation • 24,300 employees Products International businesses Retail services • Latin American center • Charles Schwab Europe • Charles Schwab Hong Kong Ltd • Charles Schwab Tokyo Marine Co • Charles Schwab Canada • Asia Pacific Services center • 415 branches, electronic brokerage • 3,000 funds, 32 proprietary Schwab funds • Investment tracking • Stock quotes • Trade orders • Asset allocation • Research Schwab Retirement Plan Services Schwab Institutional Capital Markets & Trading • Trade execution • Trading, research and support services for institutional clients • Customised services for HNW customers • Operational support, trading and technology solutions for independent fee-compensated investment advisors • Investment advice to retired • Services to plan administrators • TrustMark services Example output Source: UBS, March 2001 Contact , Vince Colvin, Sedef Imer 18

19. Conversion waterfall Description The conversion waterfall is a tool that helps identify areas of relative competitive weakness and strength, whether between internal factors (e.g. different locations or products) or relative to competitors. The waterfall is a simple way of representing the findings of a customer interview programme targeting six major measures. The conversion waterfall illustrates the attitude and/or behaviour patterns of a company’s customer base. It provides insight into where a company is losing or gaining customer interest. By focusing attention towards the strongest relationships, conversion waterfalls can be used to direct a company’s efforts into retaining customers. See also: Customer Segmentation, Customer Lifecycle Understanding customer behaviour is a very important part of strategic business analysis. By examining customer attitudes and behaviour, a business can identify where their strengths and weaknesses lie and begin filling the competitive gap or maximising a competitive opportunity. Begin by carefully planning your activities. This includes defining the hypothesis to be tested in your interview programme, and determining the interview target population. When setting up the interview programme, ensure the sample size is large enough. As a rule of thumb, interview more than 30 customers. Design your questions to ensure you answer the questions required for the planned output, and include redundancy to check customer consistency. Clearly define each category in the interview plan/questionnaire. If you don’t understand the differences between the factors you are evaluating, the customer never will. Where possible conduct research in more than one market. A variance of results may just show cultural differences, but in some cases it might give an insight into the way different markets operate. Spend some time thinking about the results. Average the quantifiable scores, then seek to explain through reference to what you know of an organization's brand, image, store, location or product feature. Typical application Typical process 19

20. New Holland Competitor Apply the results with intelligence and consider accompanying the chart with qualitative comments gathered in the interview process to flesh out your conclusions. Clients can take different messages from the results of this analysis. They may wish to refocus their efforts on areas of weakness; or they could change the messages they are taking to market so that their stronger performance is recognized. It is possible to show a repurchase column, representing the number of customers that return. This is a key output of customer satisfaction as customer acquisition costs in some industry sectors are enormous, so assessment of repurchase across segments is critical to understanding customer dynamics. Make sure you identify customer segments and then target your interview programme at the most important segments. It is very important to get the segmentation process right first, as otherwise valuable differences may be obscured during averaging. Example output % of population Conversion waterfall, combine harvesters, 2001 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Awareness Knowledge Liking Preference Tested Purchase Source: TMC Project, March 2001 Tricks and tips Contact 20

21. Customer experience analysis Description Customer Experience Analysis is a mechanism for identifying the critical decisions, events and actions a customer undertakes during the full purchase process. It helps identify the customer contact points and the key criteria for success at each one. This analysis is sometimes labeled Customer Value Exchange. Typical application Useful for any company which has to compete for and retain customers (i.e. all of them). The concept is easily extendable to employees (internal customers), suppliers, partners and other shareholders. Improving customer profitability is only possible if you change the customers’ behavior (e.g. buy more, use lower cost channels, recommend to friends etc.) Measuring customer behaviour at every interaction point with the company allows you to advise on where your client must invest (i.e. change things) in order to bridge the gap between customer expectations and delivery against them. Many other tools can contribute to this analysis, including CVP definition, root cause analysis, customer satisfaction surveys, product prioritisation, financial return modeling, customer segmentation etc. Typical Process • The full process for undertaking this analysis can be extremely comprehensive. Below is described a number key steps which are typically undertaken. • define and agree customer segments (need-based) • develop insight into customer behaviours (e.g. understand customer promise, rank needs, define perception gap etc.) • develop hypothesis of how to fill ‘gap’ and estimate $potential • identify all customer contact points (high level, then detailed) • develop detailed gap analysis at each contact point – using existing client and public domain data, interviews etc. • prioritise areas for investment which will solicit maximum change • determine root cause • financially model benefit returns • design processes for achieving changes in customer behaviour • develop transition plan and measuring/monitoring system • Clearly, the full end-to-end analysis requires multiple tools and techniques, but the fundamental framework of identifying and prioritising customer contact points can be very powerful. 21

22. Key contact features identified for a UK insurance company Example output • Progress monitoring • One point of contact • Telephone problem solutions Consume • On time transaction completion • Effective problem handling • Follow up contact Evaluate Deliver Service • Quality of service and staff • Ease of access to service and efficiency • Accommodation of customer requirements • Order taking process and documentation • Payment alternatives • Account set up • No additional charges • No billing enquiries required Pay Purchase • Product/Service quality • Sales Consultant recommendation • Price, delivery times • Additional services (e.g. ‘all in one’ provider) • Ease of access/convenience Detailed selection Search for alternatives Repurchase Interest Awareness Recommend • Access to financial advice • Price differences • Promotional materials • Overview of products, services and options • Service requirement identified • Ease of contact for enquiry • Initial contact enquiry • Marketing material • Service provision satisfies customer’s expectations • Performance confidence • Customer - supplier relationship • Quality of problem resolution • Financial advice • Advertising and Media • Personal Recommendation Source: FSI project, 1998 Tricks & Tips This is very difficult to sell to a client as an end-to-end solution. It needs to be broken down into it’s sub-elements. Use a value chain to help build the initial high level customer interaction points. One way to identify how value may be generated from changing customer behaviours is to use a ‘customer contact point matrix’. Create a comprehensive list of all customer contact point (list vertically), then list all the profit impacting behaviours you desire of a customer (list horizontally). Use ‘traffic lights’ to indicate ‘high-medium-low’ impact. Typical sorts of changes to behaviour you might look out for are: buy more, buy more frequently, buy more categories, submit business, close business, recommend to friends, use cheaper channels, buy higher margin products etc. Contact Vince Colvin 22

23. Customer segmentation Description • The key to operating successfully in a competitive market is understanding customers needs, values and behaviours and being able to take action. Segmentation identifies groups of customers with homogeneous needs, who can be served by a tailored proposition. • From what you know about the client’s customer database, industry analysis, client or expert interviews, and focus groups, begin by developing a number of hypotheses about likely segmentation schema. • Segmentation seeks to group customers according to similar purchase behaviours, attitudes and profiles. The outputs of a segmentation schema must be: • - identifiable/recognizable: you must be able to identify which • segment a customer is likely to be in so that marketing • programmes can be actioned; • - actionable: you must present strategic options for each • segment which are achievable; • - measurable: it must be possible to measure segments by key • dimensions and assess them for market potential; and • - stable: there must be an assessment of a segments short, • medium and long term viability. Segments rarely remain the • same over time • When you are happy with your hypotheses develop a questionnaire to test them/validate them. Keep the questioning as short as possible and only focus on the things you really need to know. “Pilot” the questionnaire with a small group of customers to test that it works. • The sample size for the actual programme should be a minimum of 50 to be useful, or 30 per customer segment identified. This can be a large task and it may be more economical to subcontract the work out. • Analyze your results. Perform factor analysis to group customers and identify trends and similar responses, and be prepared to re-formulate your hypotheses if necessary. • Look at the groups to identify the characteristics that can be used to describe them and their purchasing criteria, remembering the objective is to identify a MINIMAL number of groupings. • Draw out the implications of your findings as they may require the client to readdress its marketing strategy and/or business model. Typical process 23

24. Remember that the purpose of segmentation is to identify “attractive” customer segments. Defining what is meant by attractive is key and depends upon the clients business objectives, for example; - customers who are currently highly profitable; - customers with high lifetime (future) value; and - large customer segments who, whilst might not be hugely profitable, support business development into other more profitable segments. The client’s views of the existence of customer segments, their characteristics and attractiveness are often based on opinion and not fact and should be viewed with caution. Segments do not need to include all customer data points. There will be some outliers. If outliers look significant or interesting then conduct further research to understand whether they are significant. Example output Irregular Visitors x x x Event goers x x x x x x x Risk averse Shoppers x x x Meeting goers (business) x x x x x x x x x x x x Commuters Vulnerable people / carers (1) x x x x x x Regular Note: size of bubble represents the approximate size of potential segment 1: Bubble size representative only Source: Client project, Aug 2000 Tricks and tips Contact 24

25. Customer segmentation analysis Description Customer segmentation is the subdivision of a market into discrete customer groups that share similar characteristics. Any product or service potentially appeals to a universal audience. In reality, a company will sell to only a small segment of the population, and may derive value from a sub-segment of that. Customer segmentation can be a powerful means to identify unmet customer needs. It allows you determine a client’s customer base and its characteristics in a meaningful way, splitting customers up into groups and ultimately making operational decisions about the allocation of resources for such activities as product development, marketing, selling methods, distribution strategies and pricing. This allows a company to compete only where it is strong and likely to prosper. For example, companies that identify underserved segments can achieve a leadership position by being the first to serve them. Customer segmentation is most effective when a company tailors offerings to segments that are the most profitable and targets them where the company has a distinct competitive advantage. Divide the market into meaningful and measurable segments according to customers’ needs, their past behaviours or their demographic profiles. In many ways, this is the most difficult part of the process. Determining the most insightful segmentation variables can be done through research, customer surveys, or focus groups (see customer segmentation section for details). Determine the attractiveness of each segment by analyzing, for example, the revenue and cost impacts of serving each segment or client retention rates. Use shading and annotation to draw out the key market segments the company should be targeting. Try and identify ways the client can invest resources to tailor the product, service or its marketing or distribution programmes to match the needs of the key target segments. Typical application Typical process 25

26. Types of segmentation and their applications Loyalty Segmentation for US Bank Create market position Identify customer needs Prioritize targets Develop CVP Retired savers Reach Retention (%) £100m Mid- Affluent Segment by: Lifetime NPV • Economic value • Demographics • Purchase behaviours • Usage behaviours • Channel • Attitude 4.8% Mid- Wealthy Young Affluent Young Wealthy Students low relevance high relevance Customer annual contribution ($) • Ultimately, this should allow you to develop a performance measurement programme. This should assess ROI and be flexible enough to adjust over time as market conditions change. • The most important thing for segmentation analysis is ensuring that the categories you define are meaningful for the exercise you are participating in. The easiest segments to identify - age, region, and so on - are often the least indicative ways of dividing a group of people for a company hoping to achieve a particular objective. Base all segmentation on hard, data-based analysis, not gut-feelings. • One of the most difficult lessons of customer segmentation, particularly for the client, can be finding out which customers not to sell to. Example output Source: Example Tricks and tips 26

27. Dupont analysis Description Dupont analysis is the creation of a series of financial ratios designed to quickly indicate a company’s health so that senior staff can manage the business for sustainable growth. Any decision that influences product prices, unit costs, volume or efficiency impacts the profit margin or turnover ratio. Understanding how these linkages work is the key to operating a company successfully and extracting maximum value from capital. Pioneered by the Dupont company, these ratios are designed to provide a comprehensive summary of performance of a particular company. The ratios are simple to calculate, each links closely to a separate business function (for example, marketing). This helps to demonstrate the relationships between otherwise disparate business units. Typical application Typical process • The process to be followed is highly dependent upon the particular issue you are addressing for your client. However, some general guidelines apply: • use both published a data and your own market/performance analysis as inputs to the Dupont analysis (e.g. Management accounts, analyst reports, annual reports etc.) • agree with your team and client the definitions of each ratio - these do vary • calculate the ratios from your research data • think about your audience, then create a presentation which addresses their particular ‘hot buttons’ (e.g. lenders are more interested in liquidity and leverage; managers care about profitability; shareholders care about ROE) • As a strategist you should not stop at this point. This is where the insight begins: • try to understand the drivers of financial performance. This can be informed by other strategic analyses (such as Porter’s five forces, which have direct bearing on sales volume, margins, unit costs etc. that impact the PAT ratios) • question which measure is critical for your client. For example, is ROE really most critical for a new entrant into a market or would market share alone • highlight potential trade-offs between financial and operational decisions to best manage organic growth • If appropriate to your task, design performance measurement systems that reflect the critical Dupont ratios favourably 27

28. PAT - dividend Sales Assets Debt + Equity PAT X X X X PAT Debt + Equity Equity Assets Sales Margin (Marketing efficiency) Asset turnover (Production efficiency) Capital leverage Equity leverage Retention ratio ROA (operating efficiency) ROC (capital efficiency) ROE (equity efficiency) Equity growth rate (sustainable growth) ROC profit capital employed exceptional revenue costs fixed assets working capital price volume unit cost fixed costs fixed assets stock debtors creditors potential entrants suppliers buyers substitutes industry competitors market share market size market growth Dupont Analysis – Framework 1 Example output Dupont Analysis – Framework 2 Tricks and tips Dupont analysis works best with easy to quantify and measure, finance based, statistics. Unlike much of strategic work, the introduction of estimates weakens the analysis. Remember: ratio analysis does not give answers; it helps you ask the right questions. Contact Vince Colvin 28

29. Economies of scale Description Drawing a scale curve shows the benefits of scale in the production of a particular product or component. Economies of scale can help to explain differences in cost between different producers. Economies of scale are most likely to be found in industries with large fixed costs of production such as chemicals, petroleum, steel and automobile manufacture, etc. They are a significant barrier to entry if fixed costs are high. Economies of scale do not just apply to manufacturing businesses, however. There can also be economies of advertising, promotion and marketing. Begin by gathering the relevant data on cost per unit from your client (e.g. get exact capacity and cost per tonne for client in four plants). Research your client’s competitors’ costs through desk based or direct research. If necessary, with project partner approval, you can also interview competitors. For missing data, try and use your ingenuity (e.g. by how much would your cost per unit drop if the size of organisation doubled). Organise your results in a table showing output and the effect of a change in output on cost input. Use the Excel scatter function to create your chart, and the r2 function to determine whether there is a strong correlation. Typical application Typical process 29

30. Manufacturing scale curve, biscuits industry, 1997 Cost per Tonne (excl. materials, 1993, £k/Tonne) 1,2 A 10 times increase in scale represents a theoretical cost improvement of £275p. Some of this, however, would be offset by increased distribution and other costs. Broxburn 1,0 Linkoping Hatton 0,8 Durango Ashby Gyor 0,6 Lauragais Carlisle X1 Maastricht Dortmund 0,4 Manufacturing Capacity (kTonnes, 1996, Log scale) R2 = 65% Jyvas Hyva X2 Genoa Tyneside 0,2 0,0 1 000 10 000 100 000 Example output Source: Example Tricks and tips Be aware that the quality of result will depend on the number of data points used (e.g. five gives an illustrative outcome, ten to twelve points will give more confidence). The example above illustrates economies of scale via a decreasing average cost curve. It is also possible to illustrate the same effect with an increasing returns to scale diagram where the scale on the vertical axis is inverted. Economies of scale operate at the level of factory or plant rather than company for manufacturing . Be aware that there are two versions of the scale curve: one is really about learning, the other is about scale. In the first case, the horizontal axis should represent the cumulative number of units produced to date and the vertical axis, the cost per unit over time. (e.g. aeroplane manufacturing where few units are produced each year and the cost of each unit falls as assemblers get better at it). In the second case, the horizontal axis should represent the size of a given process and the vertical axis the cost per unit for this process in various plants (as above). Manufacturing directors/managers are not often approached for market research and are may be more willing to discuss production units and capacity if asked the right way. Contact 30

31. Executive dashboard Description The executive dashboard is a tool designed to give a one-page overview of the performance of a company that goes beyond simple measures of financial performance. It provides a framework to translate strategic objectives into measurable performance indicators, giving the CEO/COO full and timely control over business performance and/or business change Typical application • The dashboard comprises a series of key performance indicators (KPIs) that look beyond financial performance alone and can address a very wide range of issues. The most common applications are • monitoring the performance of a business in a dynamic industry • monitoring the progress of business process reengineering • monitoring organisational change initiatives • Some typical example KPIs include: financial performance (turnover, profit, working capital); employee measures (satisfaction levels, utilisation); customer measures (churn, delivery time, satisfaction) • Most successful applications of the dashboard have supporting “exception reporting” pages which identify individuals responsible for outstanding or poor performance against targets or milestones. Dashboards are typically constructed as the final output of an earlier study of the business fundamentals, so the first step is always to review earlier work and interview team members and the client. KPIs may be determined through a number of mechanism, including analysis of management accounts, benchmarking, consultation with industry experts. However, do not be surprised if a business is seeking to build a dashboard with no clear view of the critical KPIs (it is certainly not unknown). In this instance determination of the critical KPIs may be long exercise including multiple client interviews, customer interview programmes etc. Whatever, make sure you agree the definition of each KPI and the most critical ones which will populate the dashboard. After the critical KPIs are determined it will be necessary to derive a hierarchical logic tree of sub-KPIs which feed the critical measures. It is common that the desired measures will not be (easily) available within the business. In this instance it will be necessary to put interim (manual) measures in place to capture the data. The hierarchy of KPIs should stop when an individual’s name can be placed against each measure and hence be held accountable. Typical Process

32. Finally, when constructing the dashboard panel (in HTML, Visual Basic,Excel), always include an indication of which measures are improving or worsening (often via traffic lights or coloured arrows). Example output Source: TMC proposal, May 2001 Tricks and tips Remember: the function of the executive dashboard is to move clients from vague performance measures to sharp, quantified performance indicators. An example might be moving from a general awareness of the need to monitor product mix to a specific commitment to keep to only two branded products per sales category. “We can’t measure that” is not a good enough answer. There is always a way to capture critical measures, even if the manual costs are high. Ask a web page designer to help with the presentation – it will look clearer than your effort. Help by keeping it simple. If you don’t have a dashboard, get out of the car. Contact

33. Forecasting techniques Description Forecasting techniques are used to project future market size and growth from the statistical analysis of historical data. There are three main methodologies for deriving an estimate of market growth: - extrapolating historical data: using time series and statistical demand to infer trends from what has happened in the past. This approach broadly assumes consistent market drivers over the period in question; - inferring from derived demand: developing a general trend from the way demand in other related industries or markets has changed over time; and - compiling projective opinions: gathering multiple views from better informed parties and constructing a best guess estimate The most common method for extrapolating forecasts from historical trends is by the analysis of time series data. Time series typically comprise four elements: - trends: growth rates of the past market; - cycles: long term fluctuations, usually linked to the economic cycle; - seasonality: consistent fluctuations throughout the year; and - erratic or stochastic events: normally caused by events outside an industry or market’s control Trends and cycles often require a long time to become evident and can be masked by seasonality and erratic events. Factors can be internal or external to a company, such as the launch of an advertising campaign. When hard pressed for data, a good way to forecast growth is to look to other industries or markets for guidance: Typical process Down-stream industry demand Complementary industry demand Up-stream industry supply “Lateral” industry demand To forecast ... Demand for steel Demand for ski boots Demand for car rental Demand for Mountain Bikes Infer from ... Demand for : - automotive OEM - ship building Supply of : - winter holidays Demand for : - business trips Demand for : - video games E.g. Industries using our output Industries whose output affects demand for our products Industries whose product / service is bought in conjunction with ours Industries which share some characteristics with ours (customers, etc.) 33

34. Particularly useful for product purchases where advanced planning is required and for new products where past data does not exist • Outcome valid only if the buyer has clearly formulated intentions, will carry them out and will describe them to interviewers... • Rarely used in practice (low response rate) Buyer intention surveys • Frequently used • Particularly to interview competitor sales people • Be aware they may try to promote a product but can be useful to understand major changes Sales force opinion • Very frequently used • Experts can include trade associations, independent consultants, senior members of companies, distributors, suppliers • Care should be taken to establish the basis for their estimate - was it based on original market research or is it a figure from another expert? Expert opinion Asking ‘experts’ for their opinion is an alternative, less formal approach to forecasting. However, undertake this with care. Ask as many qualified experts as possible and triangulate their views to minimise error. Be aware that opinions can be consistently wrong if all experts are using the same erroneous data set to base their opinions on. Become an expert yourself by reading widely and you will be better able to judge their views objectively. It is not always practical to do our own research, or you may want to independently validate expert opinions. In these situations used published market research, and bear in mind the following: Forecasting periods should be kept as short as possible (no greater than 36 months) to preserve accuracy. It will, however, depend on the product and/or sector. Established products such as sliced bread will be easier to predict for a longer term than interactive TV, for example. • Was it based on interviews with 1000 customers or a couple of industry experts? • Speak to the authors(s). Do their estimates stand up? How was the market estimated? Reconcile with other research • Frequently, lack of reconciliation is due to analysis of slightly different markets, or because one person has used manufacturer selling price in one instance, retail selling price in another. • Check whether growth is real or nominal • Is the report thorough? • Has it been prepared by a trade body or market researchers? • Have you had difficulties with this company's estimates before? • Are key pieces of data excluded, e.g. not all countries covered to the same detail? Is the source reliable? Tricks and tips 34

35. Free cashflow diagram The free cashflow diagram is an excellent format for displaying the results of a cash flow analysis over time. Its strength lies in the fact that it displays all of the key business indicators looked for by a senior executive. These include: sources of value; fixed and variable investment costs; break-even; net and cumulative cash position; net present value. Description Typical application Free cashflow represents the net cash flow that a firm or project expects to generate. Unlike a cashflow statement, which attempts to reconcile sources/uses of cash with starting/ending cash (accounting perspective), free cash flow focuses on the key strategic component of the generating/financing equation. Given this, the free cashflow diagram can be used in almost all circumstances where you need to display the commercial outcome of any strategic business investment. It is one of the most frequently used tools in the strategy consultants armoury. Typical process • The diagram should be drawn from an earlier Excel spreadsheet analysis. The following steps outline the main features: • Identify main sources of cash in and cash spend. (Be aware that more than 5-6 sources makes the chart look cluttered and detracts from the key messages. Consider grouping small and non-critical sources together as ‘other’.) • Put cash flow on the x-axis, time on the y-axis. • Create column chart chart, showing cash above the line (use +ve numbers) and cash costs below the line (use -ve numbers) • Hand draw the net cashflow and cumulative cashflow lines. • Highlight the breakeven point and the point of maximum exposure (highest negative cashflow). • Name cashflow sources. • Insert figures for net cashflow for the year and cumulative year on year cashflow figures. This should lead to break even analysis and an analysis of profitability. • The key ratio for analysis is that of risk exposure - the difference between maximum risk exposed point (worst NPV) and best possible NPV. There is a clear link between the cash flow diagram and the sources of value waterfall. Both show the individual components of an overall financial flow. • Draw this picture early (in combination with your sources of value waterfall diagram). It can form the bedrock of common sense decisions and is a very useful communication tool with your team and the client 35

36. Example output Base Case Cash Flow (£m) Cumulative cash flow Corporate Actions Net cash flow Outsourcing TCA Order routing OMS ABCD Ongoing costs Break-even Fixed Investment Maximum exposure Net Cash (£m) -35 -7 18 34 64 NPV (£m) -35 -38 -20 8 51 Source: FSI Project, April 2001 Tricks and tips With a little bit of tweaking you can use this format to display other time dependent factors most relevant to your client. Try to avoid including terminal values in this presentation of cash flows. Most business project planning anticipates pay back in the medium term (3-4 years). In some industries terminal value can dominate (e.g. telecom 3G licences, rail investment), in which case it warrants a completely separate argument and representation. Cashflow isn’t everything. Consider the results of the cashflow diagram in the light of softer issues, which may also have an impact on the project. These could include organisation culture, recruitment or change management. Vince Colvin Contact 36

37. Gantt chart Description A Gannt chart is a graphical timetable of project activities and milestones. As well as showing the planned duration of activities, it can also be used to show responsibilities for workstreams, interdependencies between workstreams, and critical paths. Typical application • Gannt charts are used to help plan and manage projects. They should be used in almost any proposal to help explain how we would carry out the engagement. They should also be updated regularly during projects to aid project management. Whilst Gannt charts are rarely used in final client presentations, they can be very useful in intermediate presentations to show progress and future plans, and to highlight project constraints. • The information to be plotted on a Gannt chart should be obtained during the course of project planing and ongoing management. This should include: • Project phases • Project workstreams • Activities within each workstream • Project milestones • Planned duration of activities • Effort required for each activity • Availability of resources • Gannt charts can be drawn directly in Powerpoint or developed using a project management application such as Microsoft Project. • Involve the project team members and the client in the development of Gannt charts. Typical process 37

38. Project Proposal Gantt Chart • Pressure test vision • Gather information • Develop hypothesis • Scope & workplan ‘Kick Start’ 29 30 31 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 • Agree key drivers of client segmentation/templates • Develop client needs • Client interviews • Form segments & CVP Clients • Agree framework • Develop European competitor models • Develop US competitor models and market trends • Augment European value propositions • UBS relative product & channel review • Form segments & CVP Market & Competitors ‘as is’ client /products • Consolidate into strategic client segments • Develop likely winning CVP for each segment • Identify channel implications and unserved customers groups • Identify and scale sources of value to UBS Consolidation • Pre-wire • Prepare board presentation Meetings Hypothesis meeting Interim meeting Consolidation meeting Final meeting Example output Project Proposal Gantt Chart Source:Banking project; March 2001 Tricks and tips Use colours and dotted bars to improve clarity. Gannt charts should be living documents - project plans should change as more information becomes available during the course of the project. Use real dates as column headings, rather than (say) Week 1, Week 2 etc. Gannt charts can be very complex, particularly on large projects. Make sure you have an up-to-date summary Gannt chart that fits on one page so that you don’t lose track of the big picture. Any manager Contact 38

39. Star High market share in high growth market requires plenty of cash to sustain growth but strong market position yields high profits Question mark Low market shares in high growth market needs large cash input to finance growth, but poor yields due to weak competitive position. Star Question mark Hold or build market share Build market share, specialise, harvest, divest Growth rate Cash cow High market share, low growth, good cash flow can be used to fund developing business Dog Low market share, low growth, usually a cash trap Cash cow Dog Hold market share or harvest Harvest, divest or specialise Relative market share Growth share matrix Description The growth-share matrix - developed by the Boston Consulting Group in the 1970s - is a simple two by two, devised to map business units’ or competitive position. It maps the relative positions of a company’s business units against their industry’s growth rate and the relative market share of the business unit. Among other things, the matrix: - draws attention to cashflow and investment characteristics of various types of businesses; - encourages you to view diversified firms as a collection of cashflows and cash requirements; - explains why priorities for corporate resource allocation can be different for each business. The growth share matrix helps to determine a strategy for each business unit to the overall benefit of the portfolio of opportunities that a business develops. Begin by defining your subject for analysis (market, industry, company) and listing the components (competitors, units, etc.). Then, basing growth on product, market or industry size data over three to five years, calculate the compound growth rate for each product, market or industry. Strictly speaking, “high growth” businesses are in industries growing faster than the general economy. Calculate the average size of product, market or industry over time period and plot your results with growth rates against market share. Market share is represented on a log scale, based on the largest data point, with the largest values on the left of the chart. (The size of the bubble should reflect the average size over the time period.) Typical application Typical process 39

40. Business Units Product - Markets 25 D Star ? F 20 E A 15 G Market Growth (%) Cash Cow Dog 10 B 5 C 0 10x 5x 3x 2x 1x 0.5x 0.3x 0.2x Relative Market Share = $30 million sales The position of the vertical divide is largely a question of judgement. However, the horizontal divide is classically placed at 10-15% and the vertical at 1.5 or 2 Relative market share is used as a surrogate measure for economies of scale and experience. If such economies do not exist in the market, conclusions drawn from the growth share matrix may not hold. The growth share matrix a product of the 1970’s. Exercise caution when using as it may not be strictly relevant to current circumstances. With current capital markets many firms no longer have to rely on cash cows to finance stars. Example output Source: Example Tricks and tips Contact 40

41. Growth spread matrix Description The growth spread matrix plots a company or division’s ability to create value, relative to its growth. The resulting chart can be split into four quadrants: - destroying value and growing quickly (top left); - destroying value and growing slowly/shrinking (bottom left); - creating value and growing slowly/shrinking (bottom right); and - creating value and growing (top right) The ideal position for a business unit, sector or companies is in the top right corner. Companies classically tend to move around in an anti-clockwise direction from top left to top right. A business unit which is performing badly will have its underperforming parts cut out or sold, leaving a healthy base which can grow and create value. A growth spread matrix is used to show the relative performance of a portfolio of business units or companies within a sector. Define the context for your assessment - it could be an industry, sector, market or company - and the sub-elements which comprise it. Obtain the last three to five years’ financial results for each element. Define the net assets of each. In the case of comparing companies across an industry or market, you would take this information from the balance sheet. Inside a company, the information can be derived from the management accounts. Calculate the growth of net assets for each element over the period of examination. Calculate the “spread”, or value generated by each element, typically as the cashflow return on investment less the cost of capital. Plot a bubble for each element in a matrix with growth on the vertical and “spread” on the horizontal axis. The size of the bubble is indicative of the size of the business unit. Use annotation and shading to draw out the key conclusions indicated by the matrix. Typical application Typical process 41

42. Company A vs. Selected Peers Most Recent FYE 10% Company C Company B 5% Company D Company E Company F 0% Historical Real Asset Growth Company G Company H -5% Company A -10% -10% -5% 0% 5% 10% CFROI - CoC = $1 Billion Inflation Adjusted Gross Assets Example output Source: Example Tricks and tips If the spread cannot be calculated easily, consider using a proxy such as economic value added. At the extreme use market capitalisation less net assets. Contact 42

43. KPC comb charts Description The reasons that customers purchase products are central to a company’s competitive positioning. KPC (key purchase criteria) comb charts are a way of representing these criteria in a visually arresting manner. They allow you to: - evaluate the comparative importance of different purchasing criteria, and which aspects of a client’s product are really valued; - rank your client’s performance against the results of customer research; and - rank your client against competitors. They are similar to ‘Happy Line’ analysis that assesses how well a company performs against the product characteristics that are really valued by its customers. KPC comb charts form part of gap analysis and have implications for resource allocation. As such, they are a core part of any market segmentation analysis exercise. Understanding the importance of specific criteria to customers allows a company to align its products and services more closely to those customers and deliver greater value. The data for KPC comb analysis comes from a structured customer survey programme. Any interview programme is a major exercise and should be carefully planned. Take particular care to separate ‘wish list’ needs from preferences that apply in reality: ultimately, every consumer would like the product to overperform, arrive immediately and be free! The survey should be structured so to rank each criteria for each competitor in the market. Create an Excel table with the results and calculate an average score for each competitor on each category. Plot the results on a Bar + Line chart. Typical application Typical process 43

44. Criteria Comp 1 Comp 2 Comp 3 Client Do not forget to set the minimum and maximum for the vertical axis to the range offered to the customers in the interview process (say, from 1 to 10, not 0 to 10). Apply the results with intelligence and consider accompanying the chart with qualitative comments gathered in the interview process to flesh out your conclusions. Clients can take different messages from the results of this analysis. They may wish to refocus their efforts on areas of weakness; or they could change the messages they are taking to market so that their stronger performance is recognised. Customers can be segmented according to purchasing criteria. This is a useful technique used by retailers FMCG companies. FMCG companies will develop a portfolio of products targeted at different consumer segments (based on purchase criteria). A retailer’s category will include a range of products which target all (relevant) customers (segments) to the store. Example output Key purchase criteria (KPC) comb, Industry X, Germany, 1999 10 Score (1 to 10) 9 8 7 6 5 4 3 2 1 Criteria 1 Criteria 2 Criteria 3 Criteria 4 Criteria 5 Criteria 6 Key purchasing criteria Source: Example Tricks and tips Contact 44

45. Marimekko charts Description • Mekkos are one of the simplest ways of displaying data with a high level of visual impact to develop strategic insight. • Mekkos are typically used to display information about competitors in an industry, but can be used for a wide variety of other applications. • They present subsets of a wider data set in a simple picture. They can be used for almost any set of data, including: • Market/industry maps, e.g. geography and product • Cost reduction prioritisation, e.g. by process, by business group • Customer analysis, e.g. customers by company • To create Mekkos, you will need to use the Magic Mekko Macro. • Gather your research data from appropriate sources. Divide the data into the segments and sub-segments you wish to analyse. If there is insufficient data for small areas, use estimates or assumptions and document what you have done. • Create a table of the results, with one segment per column, ranked by decreasing size. Each sub-segment of a given segment is placed in the successive rows of the relevant column. • Copy your table into the macro tool. Format your Mekko: state the values at the top of each bar and state the total at top right. Shade to highlight key messages. • Note that it is possible to make a mekko without using the mekko maker. Use the following (Agarwal) process, by developing a set of of stacked bar charts and then stretching them in Powerpoint to the appropriate width. Typical application Typical process 45

46. Flooring market by geography, volume (m2) of sales in 1997 Scandinavia 103 2,297 555 373 348 211 378 240 100% 90% 80% 70% 60% Proportion of Sales Volume 50% 40% 30% 20% 10% 0% US Germany Japan UK/ Ireland France Southern Europe North West Europe Tatami Parquet (wood & cork) Volume of sales in 1997/ millions of m2 Ceramic Laminate Rubber Linoleum Vinyl (incl. Chlorfree) Textile Example output Source: Example Tricks and tips In general, don’t put numbers on Mekkos - they distract the reader from the impact of the image. If it is necessary to include data or descriptions, use a separate slide. For clarity of reading, segments of 5% or less should be grouped into an “other” segment. Contact 46

47. Market definition Description A market is a place, either conceptually or physically, where a series of different products compete against each other. However, it is not always easy to determine which products compete significantly enough to be considered to be within the same market. Markets are characterised by the sale and purchase of specific goods or services that have a certain purpose or meet a certain need. Because needs (and purposes) are subjective and difficult to define, however, we have to abstract a little to arrive at a workable ‘test’ for what a market is not, rather than a neat definition. Successful market analysis requires a robustly defined market. An incorrectly defined market will lead to inaccurate assessments of market growth, competition and customers. Begin by creating a realistic definition of the market based on your current knowledge. Based on your hypothesis, define the boundaries of your market by listing ways in which customers can be segmented; and by ways in which it can be differentiated from contiguous markets. Consider whether the market needs to be subdivided to account for differences between, for example: - Geography: the UK apple market is different to and distinct from the Australian market; or - Time: the market for morning newspapers is different from the market for evening newspapers Identify a close product or supplier - one you think is in the market or on the market boundary. A strict test to define a market rigorously includes principles of substitution. Two companies are in the same market if a change in one company’s pricing of its product leads to a significant switch of customer to the other company. A ‘significant’ switch is one that materially impacts a company’s profit margin (use expert advice if necessary). Repeat this process for each potential competitor until the switch proves to be insignificant. Typical application Typical process 47

48. 100% 80 60 40 20 Example - New Covent Garden Market 0 Potential market - Buyers who have a potential interest in flowers Available market - Those who have a need to buy fresh flowers in bulk Qualified available market - Those who are willing and able to travel to NCG for 5am Served market (target market) - Those who are interested in the flowers in stock Penetrated market - The set of consumers who have already bought the product Through this, you should end up with a definition based specifically on the key customer characteristics at play. Be aware of your process at all times - it will explain why you have defined the market as you did if you are questioned about it. And test your hypothesis with team members to check its robustness. Example output Levels of market - Demand side Total Population Percent UK population Potential market Available market Qualified available market Served market Penetrated market Be sure that the definition is relevant to the client’s situation; make sure that your definition has not been driven by data that is available. Do not confuse markets with industries - a common mistake. Industries are defined from the supply-side: hence, there is a single white goods industry (built from common components in common factories), but washing machines and dishwashers compete in different markets. Be careful about the distinction: particularly when looking at companies that operate in overlapping markets by selling ‘bundled’ products. The ‘bundle’ provider is effectively competing against players in a series of markets, but also attempting to create a new market for the ‘bundle’ as a whole. Tricks and tips Contact 48

49. Entry Barriers Exit Barriers • Identify current entry barriers • to understand industry profitability • to understand how high prices can be set without attracting new entrants • Develop actions to change situation • Raise entry barriers to prevent new entrants (as an incumbent) • Lower entry barriers (as a new entrant) • Identify exit barriers to understand industry profitability and attractiveness • Identify exit barriers when considering exit to allow for action to be taken to reduce them Market entry and exit Description The threat of entry into an industry depends on a combination of barriers to entry and the expected incumbent reaction. The threat of entry is reduced if there are high barriers to entry or likely aggressive incumbent retaliation. Exit barriers keep companies in business despite low or negative returns. They can be economic, strategic or emotional factors that keep companies competing in businesses even though they may be earning low or even negative returns on investment. Understanding the size of barriers to entry and exit can help to estimate the likelihood of entrants to the industry/market, or of businesses leaving the industry, thereby helping an understanding of the industry’s structure and dynamics. Taking data from the usual research resources - client data/interviews, conversations with experts, analyst and brokers’ reports, group analysis and supply chain analysis - try and determine: - the factors that make the industry accessible or inaccessible to new entrants; and - the factors that would restrict departure from an industry Try and quantify each of these factors: including the resources, relationships or scale required to successfully overcome the barrier. Estimate both direct and residual costs associated with leaving the industry. Compare the levels of skills, technology, etc. against those required to overcome the entry barriers; and any steps incumbents may take to raise entry barriers. Compare the cost of exit against the benefit; and any steps that may lower exit barriers. Typical application Typical process 49

50. The most attractive segment- few new companies can enter and poorly performing players can exit easily When both entry and exit barriers are high, profit potential is high, but is usually accompanied by more risk. Although entry is deterred, unsuccessful companies will stay and fight High Entry Barriers The case of low entry and exit barriers is uncommon Here entry is relatively easy and will be attracted by upturns in economic conditions or other temporary windfalls. However capacity will not leave the industry when conditions deteriorate Major types of barriers to ENTRY Major types of barriers to EXIT • Economies of scale • Product differentiation • Capital requirements • Switching costs • Access to distribution channels / property rights • Cost disadvantages independent of scale, e.g. • favourable location • proprietary technology • access to raw materials • Government policy, e.g. licensing • Specialised assets • low liquidation values or high transfer / conversion costs • Fixed costs of exit • labour agreements • spare part capability • Strategic interrelationships • image • financial markets • shared facilities, etc. • Emotional barriers • Government / social restrictions Low High Low Exit Barriers This should enable you to form and robustly defend a view of: - the degree of industry vulnerability to new entrants; - the sustainability of the current competitive structure; - the drivers of current costs and margins; and - the existing profitability structure and how it may change Example output Source: Example Tricks and tips Barriers to entry are either structural (a result of differences in the structure between companies under consideration - incumbents and new) or behavioral (a result of expected changes in competitive behaviour of the incumbents that run counter to the interests of the new entrant). Contact 50