Five Focus Areas to Drive Improved Performance
Ultimately, the desired outcome from any given company strategy is increased revenue and/or reduced operating cost but whilst there are many ways to achieve this, Business Leaders should initially focus on five key areas to determine the thrust of their improvement approach.
Increasing the financial return to company owners is what motivates personal sacrifice and risk taking. It’s not the be-all and end-all but it’s certainly important. Thinking about the desired outcome first (Ends) before the strategy (Ways and Means) encourages Business Leaders to think through their ‘wireframe’ for future performance improvement. Five areas naturally present themselves: increasing revenue; commanding a price premium; improving operating effectiveness; improving capital effectiveness; and improving intangibles, like management.
Over the medium-term all companies need to grow revenue and growth comes in two main forms: customers and products. Business leaders can seek to conquest more of the same customers in an existing or new market, or sell to a new customer segment in an existing or new market. Increasing average customer spend, raising prices and/or reducing price discounts through, say, a price waterfall analysis, are approaches that seek to increase customer revenue. But Business Leaders can also choose to sell new products to existing and new customers or modularise the product with associated price laddering. The intention being to increase the customer spend relative to competitors.
Commanding a Price Premium
The ability to command a price premium through a superior brand positioning, differentiated product features and benefits, and/or a meaningfully different customer experience often proves to be an essential ingredient for long-term success. Assuming similar cost-to-serve models, the competitor with the higher price point has greater capacity to reinvest in ways that increase competitive advantage, for example: new product benefits, enhanced customer service levels, automation, etc. Often, but not always, the incumbents that compete on differentiation command the highest price premium and the greatest share of the industry profit pool. A useful rule of thumb is to ensure perceived customer value is greater than price which, in-turn, is greater than variable cost. All other combination create problems.
Improved Operating Effectiveness
The company’s operating model can crudely be apportioned into two parts: the cost-to-acquire customers and the cost-to-serve customers. The Business Leader’s chosen approach to attract, activate and retain customers through sales and marketing activity constitutes the cost-to-acquire model and so cost efficiencies realized through automation, technology and systems; outsourcing non-core functions and processes; reducing customer churn levels; and adapting the customer’s sales experience in ways that reflect their lifetime value to the company, are all logical places to investigate areas for improvement. The cost-to-serve-model will be unique to each company but two approaches help focus Business Leaders: simplifying complexity by determining which internal activity creates value for customers; and which activities support capabilities. For example, internal activity that doesn’t help create value for the customer and isn’t considered part of the core capabilities infrastructure, should be explored.
Improved Capital Effectiveness
Companies typically face two fundamental problems when it comes to capital effectiveness: they have historically invested less capital than would be expected given their relative size and market share; or have historically invested unwisely and in ways that have generated a poor return. In either case the Return on Net Assets is often uninspiring. Business Leaders in capital effective companies tend to focus their investments on geographies and customer segments where the right to win has been established by a set of core competencies that will be built or enhanced by the investment. Improve only what matters.
People competencies (skills, knowledge and behaviours) is almost always critical in implementing any strategy. Business Leaders often focus on two main areas of improvement: building and enhancing existing competencies so more can be achieved with the same resource; or building entirely new competencies that enable the company to compete in a different way. For example, the success of a new product or entry into a new customer segment might be dependent on sales and marketing skills the company does not yet have.
The five performance improvement areas are, if you like, the DNA of competitive advantage if we agree that competitive advantage is superior performance that manifests itself in superior price, cost-to-serve or both. All things being equal the Business Leader can choose to focus on a single or multiple performance improvement area. There’s usually a correlation between risk and financial return. The more areas of improvement focus, the greater the complexity and implementation risk but is compensated with a higher financial return. Finally, the business leader needs to be mindful of inter-connectivity between the important area, for example, wanting to command a price premium has implications for the type of customer segment served, product sold, customer experience and competitive differentiation.