Archive for September 22nd, 2008

Planning to Be the Best

Posted by 22 September, 2008 Comments Off on Planning to Be the Best


In the old strategic planning, goals often reflected desired financial returns or con­ventional wisdom about what was reasonable in the circumstances. But the Japanese competitors did not play by the same rules. They saw nothing wrong with tilting at en­trenched leaders in photocopiers or autos, for example, even though entering the U.S. markets for these products meant violating the prescriptions of the BCG and GE portfolio models. And GE’s circuit breaker business went way beyond conventional ex­pectations, making such radical improvements that it was able to grow profits, quality, and share despite a no-growth market. Where do goals such as these come from, and how can they be implemented when the more modest goals of the old strategic plan­ning were so often missed? The case of Xerox will help answer these critical questions.
In 1983, when Xerox CEO David Kearns decided to stem the flood of competi­tion, he announced the beginning of a total quality campaign. To the uninitiated, total quality sounds like tougher quality control, more inspections. It is not. Total quality programs eliminate quality inspection and focus on doing it right the first time. (“It” may be fitness to standard, fitness to need, or fitness to latent need, as discussed in lesson 1.) This means every person must do his or her job right, or stop the process if he or she does something wrong. Total quality involves suppliers and distributors as well. (MeAlpin Industries, a Xerox supplier, now sends its managers to a Xerox quality course, designs its parts with a Xerox team, and endures Xerox auditors on its factory floor.) Total quality touches every process in the company, from manufacturing processes to sales and customer service processes. To accomplish total quality, Xerox puts in charge those people who know each process best: the front-line workers.
This type of program involves a big change for most companies-a change in corporate culture. Employee initiative must be encouraged, and employees can no longer be punished for mistakes. They will not report them otherwise. Employees must be trained in the statistical methods needed to monitor and improve the quality of their own work. And they must learn to work together in teams to solve problems or think of ways to work better.
The first move Kearns made to kick off Xerox’s quality program was an appeal to the company’s 100,000 workers-the task of championing customer needs would fall to them.39 And they have proven more than able to meet such challenges. For ex­ample, in 1990, a team of people from sales, distribution, and accounting determined how to save Xerox $200 million in inventory costs.
Perhaps the hardest part of changing the corporate culture is admitting openly what is wrong with the old one. Whatever is wrong, however, is at the root of any problems and must be grubbed out. The old culture becomes a conservative force, preventing employees and managers from focusing on customer needs and limiting the rate of organizational learning and change. At Fuji Xerox, the company’s total quality program began by admitting that there were some rather serious problems, and that they were systemic rather than the fault of any one manager or group. Hideki Kaihatsu, one of Fuji Xerox’s directors, explains:

The first step was to understand the problems facing the company and why these prob­lems occurred. This soul-searching analysis revealed many surprising facts:

T Our leadership had become fragmented and inconsistent.

T Our managers had become complacent, arrogant, and
had lost their sense of urgency.

T We did not pay close enough attention to
customer requirements.

T We found our product development process
particularly sloppy and not acceptable.

T  We depended too much upon U.S. design capability.

T  The product development process was slow and
there was little cross-functional co­operation.

T We did not recognize the value of maintaining strong
bonds with our suppliers.
In the days of the old strategic planning, a manager’s career could have been ruined for coming forward with even one of these criticisms. In fact, that’s one rea­son consulting firms flourished: When one knew the messenger would be killed, one was eager to hire someone else to deliver the message, regardless of price! But Xerox’s disastrous performance forced its managers to put these games behind them and take an honest look at their company. The result was an almost incredible list of major problems.
Solving them was not as simple, however, as setting the solutions as strategic goals. How could change be accomplished, and how much change was a reasonable goal? How could the goals be broken down into smaller, more attainable tasks? The answers could not be found within Xerox; the needed changes were too radical. But surely they could be found somewhere; there were undoubtedly companies that could provide role models, companies that were the best at each of the individual processes Xerox had to rebuild. With this realization in mind, Xerox created one of the most im­portant of the new planning techniques: benchmarking.
Case Study: Benchmarking at Xerox


Benchmarking began at Xerox in 1979 as a way to analyze compet­ing products. According to Robert Camp of U.S. Marketing for Xerox’s Business Services, “Selected product comparisons were made; operating capabilities and features of competing copying ma­chines were compared; mechanical components were taken apart and scrutinized. “42 This reverse engineering of competing products was a natural response to the inroads made by Japanese competi­tors. But with Xerox’s quality program. benchmarking was extended beyond product comparisons, to include process comparisons and companies from other industries.
For example, Xerox used L.L. Bean for benchmarking. Camp tells the story:

When Iwel first informed our management that we were going to assess ourselves against L.L. Bean. There was disbelief. But we had much to learn from them. The L.L. Bean statistics that dealt with their warehouse order picking . . . showed that they were able to do it almost three times faster than Xerox.

This meant that L.L. Bean could fill customer orders faster than Xerox. When Xerox adopted a computerized system like L.L. Bean used, one that “made a conscious effort to sort the orders and minimize the picker’s travel distance” according to Camp, Xerox also was able to fill orders faster. This is an example of what Xerox now calls “func­tional benchmarking.” The following are the definitions of the four benchmarking methods Xerox uses:

1.       Internal benchmarking compares a company’s operations with an internal exemplar, for example, a plant that has innovated suc­cessfully in certain areas.

2.   Competitive benchmarking makes comparisons with individual competitors; reverse engineering of a competing product is one example.

3.    Functional benchmarking is when “we compare function against function across wide sections of different industry types,” as in the L.L. Bean comparison.

4.    Generic benchmarking looks at fundamental business processes that tend to be the same in every industry, such as taking orders. servicing customers, and developing strategies. For these generic practices, Xerox “looks at a wide cross-section” from different in­dustries “to make sure that we have in fact identified those in­dustry best practices,” again according to Camp.
The benchmarking process in its various forms gives Xerox a practical way to set radical goals-the company simply finds some other company that is the best in a certain (often narrow) area, and studies how the company became best. CEO Kearns of Xerox defines it succinctly as “the continuous process of measuring products, ser­vices and practices against the toughest competitors or those com­panies recognized as industry leaders. ” It must be a continuous process, according to Kearns, because “we realize we are in a race without a finish line. As we improve, so does our competition.” Xerox cannot afford to become complacent, and the new planning tools give the company the ability to compete effectively in the cur­rent environment. Kearns adds that “Five years ago, we would have found this disheartening. Today we find it invigorating.”

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Strategic Planning and Process Redesign

Posted by 22 September, 2008 Comments Off on Strategic Planning and Process Redesign


So what does GE do now? Its circuit breaker business provides a good example. This stagnant SBU in a mature industry would have flunked all the screening tests, but with a billion in yearly revenues, it hardly seemed appropriate to divest it and leave the market to competitors Seimens and Westinghouse. Besides, if any lesson had come out of the old planning models, it was that profits did not necessarily come from high-share, high-growth SBUs. (As Stephen Hardis, Eaton Corpora­tion’s vice president of planning, put it, “It’s great to say, ‘Why don’t we all go into growth businesses?’ But those are not all highly profitable. If there’s a hell for plan­ners, over the portal will be carved the term cash cow.”)33 Instead of divesting, GE consolidated operations-from six circuit breaker plants to only one (in Salisbury, North Carolina).34 Solving this problem in just one location seemed like enough of a challenge.
Then management assessed the problem, but not in the conventional way, by asking planning staff and consultants for a report. Instead they formed an interdisci­plinary team with specialists from manufacturing, marketing, and design, and asked them to figure out how to make the manufacturing process profitable. The group de­cided to compete on the basis of speed, and adopted the goal of reducing manufac­turing time from three weeks to three days.
This radical change could not be accomplished given the existing process, in which GE engineers designed a unique box for each customer using a selection from GE’s 28,000 parts, then factory workers assembled the boxes by hand. So the team re­designed the product line, paring parts to 1,275 while still allowing customers the ability to customize their boxes. Next the team developed an expert computer system that could automatically convert customer requirements into instructions for the fac­tory machines. This eliminated the engineers and the delay needed for custom design­ing. The team also added more machines, increasing the automation of the production process.
Finally, the team tackled personnel problems on the factory floor. The key issue was delays associated with decision making. According to a Fortune reporter:

The solution was to get rid of all line supervisors and quality inspectors, reducing the organizational layers between worker and plant manager from three to one. Everything those middle managers used to handle-vacation scheduling, quality, work rules-be­came the responsibility of the 129 workers on the floor, who are divided into teams of 15 to 20. And what do you know: The more responsibility GE gave its workers, the faster problems got solved and decisions made.
Because of these changes at GE, costs dropped, quality improved, and cus­tomers believed they had more features from which to choose. Delivery was made in three days, as hoped; the backlog shrunk from two months to two days; employee morale was up; and market share was growing despite the flat market. The 1989 sta­tistics, for example, were quite amazing: Productivity was up 20 percent, and ROI was above 20 percent. But it was not easy to turn this dog into a star; the project began in 1985, four eventful years before the stunning results we report. Everything had to change, from product line through production process to corporate structure and cul­ture. Not every line manager is capable of leading such a transformation, but it defi­nitely takes a line manager to do it. No central planning staff would undertake such goals, or succeed if it did. Still, the new planning approaches are tougher on manage­ment. Managers must champion change; they must be willing to push authority down into the organization; and they must learn to use, and work in, teams. As GE’s Roger Schipke puts it, “Now it’s a question of ‘Can they develop a strategy for their busi­ness?’ Some will make that cut, some won’t.” When he took over the major appliance group, only one of the four top managers reporting to him made that cut. The others were fired.
Success with the new planning approach also requires reducing the barriers be­tween company and customer-touching customers and listening in the proactive sense described in lesson 1. For example, GE now promotes an answer center in TV ads and on product packaging. Staffed 24 hours a day, the center may be reached via a toll-free call. Several million calls are logged annually. Frank Sonenberg of Ernst & Young’s Consulting Group says that, “By making information easily available to con­sumers f General Electric] builds brand loyalty in a tough competitive field.”

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The General Electric Screen

Posted by 22 September, 2008 Comments Off on The General Electric Screen


GE developed a more flexible, multidimensional matrix on the theory that the portfo­lio approach should not be limited to relative market share and market growth. Too great an emphasis on these two variables may mask many other factors that make a business or brand attractive and indicate its strengths. Also, relative share is of great­est importance where economies of scale and “experience curve” effects give the largest producer a significant cost advantage. (An experience curve reflects a decline in unit costs as more units are produced; it is the result of learning or “experience” in contrast to straight economies of scale.) Yet the experience curve does not always apply. As a result of such insights, many strategic planners have gone beyond the BCG approach to other approaches that rely on multiple measures of a firm’s ability to com­pete successfully. One of the first and best known of these alternative approaches is the investment opportunity chart or business screen developed by GE.

In the business screen approach, a strategic business unit (SBU) is classified ac­cording to how well it rates on certain success measures, referred to as its business strength. The industries in which SBUs operate are classified on the basis of measures of opportunity, referred to as industry attractiveness. Among the measures of business strength are the SBU’s product quality, price sensitivity, knowledge of the market, technological capability, image, and so on, whereas industry attractiveness is mea­sured by factors such as intensity of competition, seasonality of sales, legal con­straints, importance of technological change, and the like (Exhibit 2.5). Not all these factors can be measured as objectively and precisely as market growth, relative mar­ket share, and cash flow. On the other hand, the GE method offers much greater flex­ibility and comprehensiveness than the BCG approach.

The business screen is used in the following way: The nine cells shown in the il­lustration are placed in three zones. GE colored these zones green, yellow, and red; hence, this is often called the stoplight approach. The three zones at the upper left in­dicate industries that are attractive and match the SBUs’ strengths. They have a green light” for investment. The three cells along

(if you are having trouble viewing the image, click the below thumbnail to view the actual and clear image)



the diagonal indicate industries of medium interest. They have a “yellow light” to denote caution; usually these SBUs warrant a strategy geared toward maintaining their present market share. The three cells at the lower right show weak SBUs for which a harvesting or divesting strategy may be the best option. The circles A through G represent the SBUs; their size is in proportion to the size of the industries in which they compete. The pie slices repre­sent each SBU’s market share within its industry.
The GE business screen’s history is representative of the history of strategic planning. Developed in the 1970s by William Rothschild at GE with Mike Allen of the consulting firm McKinsey & Company, the tool was carefully-and laboriously- applied in annual planning and forecasting by GE’s large central planning staff. Now, however, according to GE spokesman Bruce Bunch, the business screen “takes too much time” and is not used at GE any more.29 In fact, neither GE nor McKinsey will claim ownership of it today (in response to inquiries concerning permission to repro­duce it for publication). Once the heir apparent of the strategy throne, this method is a homeless orphan! (It remains a standard in the business school curriculum and im­portant for the concepts it represents, even though it is no longer in widespread use.)
What happened? The SBUs of GE and many other firms that were identified as winners according to the business screen were not necessarily better than other SBUs. They ought to have been-nobody could dispute that these represented great business opportunities. However, GE line managers did not necessarily know how to pursue the opportunities, and someone else-perhaps someone from Europe or Japan-might have pursued an opportunity more effectively. The model leaves out the focus-focus-focus factor after all.
As a result of problems in implementing strategies produced with such matri­ces, bigger companies, GE included, pushed planning back to the line managers and cut central staff. For example, in 1984, Michael Naylor, General Motor’s director of strategic planning, declared that “planning is the responsibility of every line man­ager,” and added that “the role of the planner is to be a catalyst for change-not to do the planning for each business unit.”
The case of GE’s Major Appliance Business Group is instructive. The group’s central planning staff numbered in the 50s at the beginning of the 1950s. Although some of the planners’ calls were right-for example, they identified the Japanese threat back in the 1970s-operating managers resisted the growing authority of plan­ning staff and tended to ignore them. They insisted on ignoring Japan and treating Sears as their major competitor, for example. In other cases, planners were dead wrong-their focus on numbers blinded them to realities of implementation. As GE’s Roger Schipke concluded when he took over the major appliance group (and booted out planners) in 1982, “An awful lot of conclusions were drawn by that group some­what in isolation. We had a lot of bad assumptions leading to some bad strategies.”

Business Week performed an interesting study in 1984, tracking a random sample of 33 planning strategies described in the magazine in 1979 and 1980. The tally: 19 clear failures and only 14 clear successes.32 A lot of planners lost their jobs that year!

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Competitive Position Matrix

Posted by 22 September, 2008 Comments Off on Competitive Position Matrix

The matrix can be modified to analyze the position of products relative to their com­petitors. In Exhibit 2.3, the top ten beer brands are plotted using 1990 data. The mar­ket growth rate is not used, because it is the same for every brand in this market (total 1990 U.S. beer sales grew 3.1 percent over 1989, but were flat for the three previous years). Instead, the growth in each brand’s sales is used to show which grew faster. Sometimes, as in this illustration, each brand’s growth is made relative to the growth of the market to show whether its share is growing or shrinking. (To do this, divide a brand’s annual revenue growth or unit growth by the market’s annual growth, or by dividing current market share by last year’s market share to find the percentage of change in market share, as in Exhibit 2.3.)

Exhibit 2.4 shows the data we used to create a competitive position matrix for the U.S. beer market. This kind of analysis can show the market in a new light. The leader in sales, Budweiser, had a strong relative market share, but was weak on the growth dimension of the matrix-its share was slipping. The hot brands were Coors Light and Miller Genuine Draft, which gained a significant share in 1990. The cash flow implications of the BCG matrix do not necessarily apply, however, because com­peting brands may be owned by different companies. This analysis can be taken a step farther by identifying each brand’s brewer and comparing the company portfo­lios, or by plotting companies instead of brands. One could learn, for example, that Anheuser-Buseb had the largest share, 43.4 percent, and that its sales grew 7 percent, more than twice as fast as the total market. Also, one would find that brewer’s share is closely related to performance. The top three-Anheuser-Buseb, Miller, and Coors-were responsible for all the market growth in 1990. (Of course, you would need to update these statistics to the latest available before making any “real world” decisions about how to market a brand of beer, or any other product!)


1990 Share
of Shipments

1989 Share
of Shipments

% Change
in Share

Relative Market
Share, 1990






Miller Life





Coors Light





Bud Light










Milwaukee’ Best





Old Milwaukee





Miller High Life





Miller Genuine Draft










25.2/25.9 = 0.97; 0.97 – .1 = 0.027 x 100 = – 2.7%
25.2/10.5 = 2.4
One might also plot a matrix that compares light and regular beers, which would indicate that, of the top 25 brands, the only light beer to lose share in this sample pe­riod was Old Milwaukee Light. Altogether, light beers in 1990 had about a 30 percent market share and annual growth of 12.5 percent. And some background reading on the beer industry would reveal that Old Milwaukee Light’s sliding share reflected the fi­nancial problems of its parent brewer, Stroh, which cut Old Milwaukee’s advertising and other marketing expenses in 1989 in an effort to harvest profits from its brands and thus lost 12 percent of its volume. This analysis would indicate that light beers are currently the high performers of the beer market.
This example illustrates a fundamental principle of the new strategic planning:

The firm must use available techniques and information creatively to gain new in­sights into its position and opportunities. It is not enough to crank out the same old matrices that were used last year, even if they are as venerable as the BCG matrix. It is important to ask intelligent questions (“Are light beers fueling the growth in the beer industry?” “Is the leading brand losing share?”), and to take a creative approach to analysis to answer such questions clearly. The firm that asks an intelligent question before its competitors do may be able to seize an opportunity first.26
It is fair to say that nobody uses the BCG matrix as the cornerstone of plan­ning any more. It exists only in the textbooks littering the nation’s business schools. And yet there is a fundamental wisdom to this planning model that should not be ig­nored. Perhaps it even makes sense to bring the tool back again-at least in modi­fied form.
The strongest argument for the BCG matrix is that market growth rates and market shares are still good indicators of strategic potential. After all, which do you think will do better, all else being equal: A brand with low share in a mature, slow-growth market, or one with high share in a dynamic, fast-growth market? You see- there is something worth saving about it after all!
The continued relevance of the BCG approach is underscored by a recent “breakthrough” contribution to the strategy literature from two top people at Bain & Company, which bills itself as an international strategy-consulting firm. The authors of the Bain study examine the conventional wisdom which “holds that market share drives profitability” by examining profitability and other variables in a wide selection of consumer products. Their finding? Surprise! “Instead, a brand’s profitability is driven by both market share and the nature of the category, or product market, in which the brand competes.” Specifically, “A brand’s relative market share has a dif­ferent impact on profitability depending on whether the overall category is domi­nated by premium brands or by value brands to begin with.”27 To put this finding in the context of the BCG matrix, it turns out that in the competitive consumer prod­ucts markets of the United States in the 1990s:

T Relative market share is still an important predictor of ROI,
T But it is still mediated by the attractiveness of the market,
T However, market growth rate seems less important than whether the
market is brand or price oriented.
Note the qualifier here-that the attractiveness of the market, while still a key to returns, is not well represented by market growth rate. This may reflect the sad re­ality that most of the brands in the study are in similarly mature, slow-growth mar­kets. But whatever the reason, the point is that a matrix approach to predicting future success would work today, as long as you modified the matrix by substituting a premium brands-versus-discount brands variable for the slow-versus-high growth variable of the original matrix. Otherwise, the portfolio approach’s reliance on a market share variable and a market attractiveness variable is still sound.
We want to expose you more deeply to this school of strategic planning by show­ing you variants on the BCG model that permit the user greater control over the vari­ables, thus making it easy to adapt the model to changing market conditions.

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Portfolio Analysis: is It Ready for a Rebirth?

Posted by 22 September, 2008 Comments Off on Portfolio Analysis: is It Ready for a Rebirth?


Perhaps no company has contributed more to the “old” strategic market planning than General Electric (GE). In the 1970s, GE reorganized its forty-eight divisions and nine product lines into strategic business units (SBUs). Each SBU consists of one or more products, brands, company divisions, or market segments that have some­thing in common, such as the same distribution system, similar customers, or the same basic technology. At the same time, each SBU has its own mission, its own dis­tinct set of competitors, and its own strategic plan. About 20 percent of the largest manufacturing firms in the United States have adopted the SBU system. Recently, for example, Campbell’s Soup Company established eight SBUs: soups, beverages, pet foods, frozen foods, fresh produce, main meals, grocery, and food service. The SBU structure’s great merit is that it defines the company according to the markets it serves-one SBU per market. Smaller companies are often focused on a single mar­ket, but larger ones easily lose their marketing orientation without the SBU structure to force it.

The Boston Consulting Group (BCG) suggested in the 1970s that SBUs should be managed as a portfolio the way financial investments are managed (Exhibit 2.2a). Differ­ent SBUs may have different missions, but all work together to achieve the organization’s overall objectives. Top

Optimum Cash Flow

management decides which business units or brands to build up, maintain, phase down, or eliminate. In short, the organization is continually attempting to improve its portfolio of SBUs by divesting itself of units that do not perform well and, at the same time, acquiring promising new ones (Exhibit 2.2b).
The BCG approach focuses on three factors: market growth, the SBU’s relative market share, and cash flow. An SBU’s relative market share is determined by dividing its market share by that of its largest competitor. Thus, if Gillette’s razors-and-blades SBU has a 65 percent share of that market while Schick, its largest competitor, has 16 percent and BIC has 11 percent, their relative market shares are:

Gillette 4.1 (65%/16%)
Schick 0.3 (16%/65%)
BIC 0.2 (11%/65%)

The dividing line between high and low relative market share is set at 1. Only the market leader can lie to the left of this point. The more dominant the leader’s share, the stronger its position in the marketplace.
SBUs are categorized by the amount of cash they generate, resulting in the fol­lowing four categories:

1. Stars-These SBUs are in industries with high sales growth rates, and they have a high relative market share. The stars are the leaders in their markets. They need continual inputs of cash to maintain their high growth rates. Even­tually that growth will slow and they will become cash cows.

2. Cash cows-Cash cows are SBUs with a higher market share than competi­tors in a low-growth market. They have high sales volume and low costs. Thus, they generate more cash than they need; the excess cash can be used to support other SBUs. At Gillette, the razors-and-blades SBU generated 32 per­cent of the company’s 1989 sales revenues, but 64 percent of its profits. Profit margins on this SBU were a whopping 34.7 percent, compared with 15.2 percent for stationary products and 6.9 percent for toiletries.25 Domestic beer is a cash cow for Anheuser-Busch, supporting the new product lines discussed earlier.

3. Question marks-These high-growth, low-market-share SBUs are problems for management because their future direction is uncertain. They require a lot of cash simply to maintain their position, let alone increase their market share. Management must decide whether to pour in enough cash to make them into leaders; if not, these SBUs probably will be phased out of the portfolio.

4. Dogs-Dogs are low-growth, low-market-share SBUs. They may provide enough cash to support themselves, but they are not a substantial source of funds. Such SBUs often are in the process of entering a particular market or phasing out of it. Either way, their position is below average.
The distribution of an organization’s SBUs in the different categories provides a profile of the firm’s health. But such an analysis also needs to consider the direction in which each SBU is moving. Organizations prefer to turn question marks into stars and, as growth slows, into cash cows that can be used to fund other question marks. This is precisely the sequence that occurred at Gillette, where the excess cash from the razor blade business was funneled into disposable lighters. Eventually Gillette’s Cricket lighter became a star.
The portfolio approach aids in the setting of marketing strategies. The follow­ing basic strategies are closely related to this approach:

· Build-This strategy is appropriate for question marks if they are to grow into stars. The firm invests heavily to improve product quality, develop promo­tional campaigns, or subsidize price reductions-all in an effort to beat the competition.

· Hold-This strategy is used to protect cash cows and stars that are strongly en­trenched. The market leader simply defends its market share and maintains cus­tomer loyalty.

· Harvest-When the future looks dim for a weak cash cow, a dog, or even a question mark, the best strategy may be to harvest as much profit from it as possible before letting it go. Marketing (especially promotion) and research and development expenditures are curtailed; economies of production are empha­sized; and customer services are reduced. In short, all costs are lowered as the SBU is “milked” of its cash-generating potential.

· Divest-When a dog or question mark has no future, it is sold off or dropped from the portfolio because the cash needed to fund it can be used better else­where.

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