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The Strategy Analytics Toolkit Gemini Consulting Beta Version: October 1998 DRAFT.

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1 The Strategy Analytics Toolkit Gemini Consulting Beta Version: October 1998 DRAFT

2 - 2 - StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Contents Introduction - what it is, and what it isnt Geminis Approach to Strategy: –Strategy and Results –Understanding a Clients Strategic Position –Analytics to Understand a Clients Strategic Position About the Toolkit Structure and Contents Toolkit Analytics: –Competitors/Industry Stream Analytics –Customer Needs Stream Analytics –Profitability Stream Analytics –Capabilities Stream Analytics –Developing and Evaluating Options Next Steps and Feedback Process Page

3 Introductionwhat it is, what it isnt

4 - 4 - StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT The Toolkit describes key analytics used by Gemini in strategic work with clients Designed for use by all Gemini consultants: –Most frequent users are likely to be strategy consultants. –However, we hope that project managers, business development staff, and consultants from other disciplines will find it a useful reference tool. –Contains analytics that, in our experience, are the most relevant and useful for strategy work: –Analytics and content developed in consultation with all Gemini POAs. Does not deal with the process of how to engage the client organisation to achieve the desired outcomes: –This topic is addressed in more detail by the LMR a discipline Kbase. –See also Geminis Evolving Change Model, on Gemini Compass. –Does not provide tools or frameworks to understand the emotional and political domains. INTRODUCTION a. Leadership Mobilisation and Renewal. The toolkit is intended as an aide memoire, and will supplement Gemini strategy training programmes.

5 - 5 - StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT The Toolkit draws on Geminis heritage With the Toolkit, we hope to build a common language among all Gemini consultants around fundamental strategic tools and techniques. United Research 1991 Mac Group 1991 Bossard 1998 Eurostart 1994 Svennerstal & Partners 1996 IKO (Norway) 1991 Asia Advisory Services 1991 GTP 1993 CESAT 1995 Gamma International 1991 SIAR 1998 INTRODUCTION

6 - 6 - StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT The focus of the toolkit is on core analytics The strategy competency groups provide a structure for knowledge management. INTRODUCTION Segmentation/Data Warehousing Marketing Effectiveness Customer Value Management (CVM) Channel Strategy and Management Market Focus/BMFO Sales Effectiveness/ Pricing Segmentation/Data Warehousing Marketing Effectiveness Customer Value Management (CVM) Channel Strategy and Management Market Focus/BMFO Sales Effectiveness/ Pricing Balanced Scorecard Shareholder Value/EVA Activity Based Management (ABM) Corporate governance and multi-business role of the centre and organisation Balanced Scorecard Shareholder Value/EVA Activity Based Management (ABM) Corporate governance and multi-business role of the centre and organisation Growth Strategy Value Innovation Vision Engineering Strategic Intent/Core Competencies Corporate Strategic Planning Transformation Mapping Growth Strategy Value Innovation Vision Engineering Strategic Intent/Core Competencies Corporate Strategic Planning Transformation Mapping Acquisition Screening Alliance Management Joint Ventures Applied Knowledge Management/Perfor mance Innovation Post merger integration Acquisition Screening Alliance Management Joint Ventures Applied Knowledge Management/Perfor mance Innovation Post merger integration Strategy Development & Planning for Growth (J. Schmidt) Partnering & Managing Capabilities (TBD) Strategic Marketing (A. B. de Jaegere) Guiding & Measuring Success (M. Tattum) Industry/competitor analysis Profitability analysis Option formulation and evaluation Capabilities analysis Customer analysis Industry/competitor analysis Profitability analysis Option formulation and evaluation Capabilities analysis Customer analysis Core Strategy Analytics Toolkit Focus Link to Organisational Design Strategy Competency Group Structure Link to IM Strategy

7 - 7 - StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Strategy competencies will be built-up from core consulting and strategy skills Strategy Competency Group Overview The toolkit plugs a key existing gap. Covered at GU and project based learning Core Strategy Analytics (Tools & Frameworks) Core Strategy Skills Core Consulting Skills Toolkit Analytical Problem Solving Process E.g.: Presentations Interviewing Researching Modelling Etc 6 months1 year Strategy Development & Planning for Growth Guiding & Measuring Success Strategic Marketing Partnering & Managing Capabilities Time with Gemini Gap filled by toolkit PoA based training to be developed Covered at GU Covered at Induction, GSW and PoA based training INTRODUCTION

8 - 8 - StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT The toolkit supports each stage of the Analytical Problem- Solving Process Analytical Problem-Solving Process a Define Issues Form Hypotheses Gather Data Analyse Data Develop Insights Develop Conclusions & Recommendations Which option should your clients select? How should they implement it? What are the risks? How can they be overcome? How can they measure progress? The Toolkit is particularly helpful in understanding how to gather and analyse data. What is the situation? What are the options to resolve the issues? How can the situation be improved? What is the actual strategic position? What supplementary analysis do we need to do? What evidence do we need to confirm/refute the hypotheses? What analysis will we do, and what data should we collect? What do we believe the strategic position to be? What are the boundaries of the businesses? What are the drivers of value? How are we positioned? What are the options? What might we do? What is the stated issue? Are there more fundamental ones? a. See Gemini University Strategy Skills Course for further details. INTRODUCTION Main Toolkit Help

9 - 9 - StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT In any business, there are different levels for which we develop strategy (and vision) Strategy Analysis Pyramid The toolkit focuses on business level strategy, the key building block. a. Defined as multibusiness. See also corporate level strategy initiative document in German POA, and Koch Training Sessions in South African POA. Business Strategy Vision Goals Corporate Strategy a Toolkit Focus INTRODUCTION

10 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT We must be aware of some important caveats... The toolkit is not a cook book. Blind application of many of the analytics could lead to the wrong, or indeed no answer: –Analysis, particularly the output, needs guidance and thought. There is no substitute for experienceboth in strategy and industry knowledge: –The only way to truly develop strategy skills is through an apprenticeship model. There is an appropriateness of robustness for all analysis: –Analytics can be used with different levels of data, for different situations, e.g. business development, A&D, and RD. Strategic position changes and an industry shifts: –It is easy to get stuck in an old paradigm, leading to wrong assumptions and solutions. –Beware of accepting industry assumptions without challenging and seeking evidence. –Challenge the status quo by testing the feasibility of the complete opposite of existing industry modus operandi. INTRODUCTION... and dont forget creativity.

11 Geminis Approach to Strategy Strategy and Results Understanding a Clients Strategic Position Analytics to Understand a Clients Strategic Position

12 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Gemini is in the business of helping our clients improve business performance and delivering results Three Key Levers For Improving Business Performance An effective business strategy focuses on improving these three fundamentals. Shorter Term Longer Term Strategic Position (Toolkit Focus) Operational Effectiveness Unique Capabilities and Assets STRATEGY AND RESULTS

13 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Geminis strategy is about the right results not just the right answer Characteristics Required for Strategic Success Results are realised only when strategies are implemented. Robust and creative strategy that can be implemented Strategic actions embedded in day-to-day business Organisational understanding, momentum, and enthusiasm Capability to adapt and evolve strategy as market and industry develop STRATEGY AND RESULTS

14 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Good strategies provide measures to monitor performance on a variety of client issues How should we respond to/take advantage of... We need to fix our performance... The issue is... Can you help us... We want to be in the X business, how do we develop it... Make explicit assumptions about the future. Provide and assess alternate options. Understand the trade-offs of what to do and what not to do. State the financial impact of alternative options, including doing nothing. Provide milestones and measures to track performance. Detail actions to ensure the organisation fulfils its ambition. Most importantly, strategies should deliver results. Different entry points/questions asked by clients but with common elements to the solutions STRATEGY AND RESULTS All require an understanding of the clients unique position both internally, and in relation to its competition and industry.

15 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Our approach to strategy development embraces the emotional and political issues as well as the rational ones Rational domain: –Strategic position. –Operational effectiveness. –Capability development. Emotional domain: –Development of consensus and commitment at each level and in each area. Political domain: –Shifting of power within the organisation. STRATEGY AND RESULTS These elements are interdependent, however, the toolkit focuses on rational analysis tools.

16 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT In an A&D, we assess the companys strategic position to identify improvement opportunities and issues to address Define Key Strategic Issues to Address Understand client mindset, assumptions and issues Review Existing Strategy/Actions Understand Strategic Position Operational effectiveness probes and diagnostics identify other improvement areas. STRATEGY AND RESULTS Characteristics Required for Strategic Success Robust and creative strategy that can be implemented Strategic actions embedded in day-to-day business Organisational understanding, momentum, and enthusiasm Capability to adapt and evolve strategy as market and industry develop

17 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT In Results Delivery, we assess the strategic position to resolve key strategic issues Results Strategy development is not a simple, sequential taskit is creative, interactive, and iterative. Define Strategic Issues Develop and Evaluate Options Understand Strategic Position STRATEGY AND RESULTS Robust and creative strategy that can be implemented Strategic actions embedded in day-to-day business Organisational understanding, momentum, and enthusiasm Capability to adapt and evolve strategy as market and industry develop Political & Emotional Implementation Capability Rational

18 Geminis Approach to Strategy Strategy and Results Understanding a Clients Strategic Position Analytics to Understand a Clients Strategic Position

19 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT The key to strategy formulation is understanding a clients unique strategic position, and how that is changing over time A companys strategic position shapes on its ability to create more value than its competitors: –Customer value. –Economic value to reward other stakeholders (shareholders, employees, partners, etc.). The drivers of strategic position in an industry or industry segment shift over time a, but are a function of: –Industry attractiveness, competitors strength. –Ability to serve customer needs. –Cost position. –Capabilities and resources. It is vital to understand the companys unique strategic position and to choose what it will, and wont do: –How do we position the client as a player among other industry players. –What are the specific trade-offs it must make vis-à-vis its unique capabilities and position in the industry? UNDERSTANDING A CLIENTS STRATEGIC POSITION a. See also M Porters article: What is Strategy, HBR November–December 1996.

20 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT The actions of companies influence industry scenarios and therefore their own strategic positions UNDERSTANDING A CLIENTS STRATEGIC POSITION Future Industry Scenarios Present Structure Driving Forces of Change Dynamic Pressures and Competitive Actions Industry Dynamics Framework Industry scenario planning through international comparisons and analogies from other industries Industry evolution and future logic Business opportunities Strategic options and new KSFs Innovations New business strategies: –New business concepts –Investments and divestments –M&A and alliances Status quo forces or barriers to change: –Lack of resources or knowledge –Committed resources and investments –Power structure –Inertia and complacency Historical development Industry logic: –Business logic –Social logic Competitor map: –Position and role Forces at play (Porter) Key Success Factors (KSFs) Triggers of change: –Technology –Regulation –New industry –Segments –Change in input costs and availability Buyer learning, experience and uncertainty Industry growth, profitability and cyclicality New actors Source: SIAR School. Understanding the future development of driving forces and competitive actions is a major consideration when evaluating alternative strategic options.

21 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT What should the company do? How can it best shape and influence the future industry? –Evaluate options –Decide on action To understand a businesss current and emerging strategic position, we need to understand the rules of the game The ways in which companies operate and interface inherently assume answers to these questions. Strategic Position What are the (economic) boundaries of the businesses the company is in? How are they changing? How do companies create value in each of the businesses? How is this changing? How is the client company positioned relative to the competition to create value? How is it changing? UNDERSTANDING A CLIENTS STRATEGIC POSITION

22 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Companies can be analysed and understood based on a set of industry perspectives UNDERSTANDING A CLIENTS STRATEGIC POSITION Industry perspectives help focus the analysis and brings past experience to bearwe must continue to enhance this understanding. Source: SIAR School. Emerging Industries Biotechnology Raw Material Pulp and paper Mining Fragmented Industries Furniture textiles Services Core Technology Industries Automotive machine tools Ball bearings Distribution- oriented Retailing Service Management Industries Consumer services Professional services Intermediary Industries Construction Mgt consulting Shipbuilding Brand-based Food computers Financial services Network Industries Banking Telecommunication Credit cards Medra Key Industry Groupings Industry PerspectiveBenefits This is a set of ideal types of industriesprovides perspectives to highlight competitive issues and focus analysis on the most important areas: –Get to the point fast. Brings understanding from earlier experience Provides a starting point for diagnosing industry logic and dynamics: –Generate strategic options –Focus development of business strategy This is a set of ideal types of industriesprovides perspectives to highlight competitive issues and focus analysis on the most important areas: –Get to the point fast. Brings understanding from earlier experience Provides a starting point for diagnosing industry logic and dynamics: –Generate strategic options –Focus development of business strategy

23 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT There are some key issues specific to each industry which help focus analysis UNDERSTANDING A CLIENTS STRATEGIC POSITION Industry Perspectives Issues Industry Technology-basedProject-basedBrand-basedRaw Material-basedService BusinessNetwork Industry Market Dynamics Competitive Logic Product lifecycle Technology Product lifecycle Technology Investment waves; customer pull, technology push Product lifecycle Quality demands Positioning Product lifecycle Quality demands Positioning Cyclical Substitutes Technology Cyclical Substitutes Technology Local business Information technology Scale economies Local business Information technology Scale economies Deregulation Information technology Infrastructure Deregulation Information technology Infrastructure Market segmentation Technology Economies of scale Market segmentation Technology Economies of scale Customer base Technology Customer base Technology Customer loyalty Advertising Customer loyalty Advertising Integration Capacity Low cost sources/ production Integration Capacity Low cost sources/ production Market segmentation Quality standards Market segmentation Quality standards Market segmentation Network coverage Technology Market segmentation Network coverage Technology Success Measure Market share New products/ models Market share New products/ models Customer base status Brand strength Cost efficiency Customer retention Utilisation Customer retention Utilisation Technology Product/ manufacturing Technology Product/ manufacturing Customer base Flexible organ. Financial strength Customer base Flexible organ. Financial strength Brands Raw material Production efficiency Raw material Production efficiency Human resources Management Human resources Management Networks Critical Assets Risk and Growth Mechanisms Key Factors in Coping with Risks Achieving Synergies International isation R&D investments New technologies New applications R&D investments New technologies New applications Exploit new demand waves Piggy back on customers Project risks Exploit new demand waves Piggy back on customers Project risks Extension Revitalisation Extension Revitalisation Integration Exploration Utilisation of excess raw material Integration Exploration Utilisation of excess raw material Overcome fragmentation Duplication mentation Overcome fragmentation Duplication mentation Network-based Changes in infrastructure Regulation Capital expenditure Network-based Changes in infrastructure Regulation Capital expenditure Marketing power Distribution Alliances Balancing own development and production vs. sub- contracting component supplies Marketing power Distribution Alliances Balancing own development and production vs. sub- contracting component supplies Customer base management Organisational flexibility Project management Financial management Customer base management Organisational flexibility Project management Financial management Brand management Advertising/ promotion Brand management Advertising/ promotion Syndication Cash flow synergies Vertical integration Balancing upstream and downstream Economies of scale Syndication Cash flow synergies Vertical integration Balancing upstream and downstream Economies of scale Organisational innovations Local dominance Strategic alliances Systems development Local dominance Strategic alliances Systems development Organic Acquisitions Organic Acquisitions Partnerships Licensing Acquisition Licensing Acquisition Exploiting cost gaps

24 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Capabilities The necessary analysis to understand the strategic position usually falls into four natural streams of activity Typical Categories of Analytical Work to Determine Business-Unit-Level Strategic Position Industry and Competitors Customer Needs Understanding the strategic position is a creative process relying on insights across all streams of analysis. UNDERSTANDING A CLIENTS STRATEGIC POSITION Profitability Drivers

25 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT To develop strategic position insights, we must consider evidence and facts from all four streams UNDERSTANDING A CLIENTS STRATEGIC POSITION Strategic Position What are the (economic) boundaries of the businesses the company is in? How are they changing? How do companies create value in each of the businesses? How is this changing? How is the client company positioned relative to the competition to create value? How is it changing? Competition/IndustryCustomer NeedsProfitabilityCapabilities Evidence and Facts What are the boundaries/scope of the competition? Are there successful niche players/broad-focus players, and where do they make money? How big is the market? How fast is it growing? Are some parts growing faster than others? What are the average returns in the industry? How have they changed over time? How do they vary between players? Have there been any new entrants, and why? Are they making money? Has anyone left the industry? Why? Is the business constrained by regulation? What are the boundaries of regulation? How does the industry deliver value to its customers? Is this changing? What and why is the overall performance of our client relative to competitors (e.g. market share, profitability)? Why do customers purchase? What is generating value? How do customers purchase? What is the trigger? What different needs-based segments exist? What is the underlying customer need? What substitute products are there? What trends are emerging? What are the key purchase criteria by segment? Are purchase behaviours changing? How? Why? How does our client meet the key purchase criteria compared with the competitors? What are the pricing determinants? What are the natural boundaries of unit cost drivers (by product/ geography)? How do companies make money? How is pricing determined in each business? What are the major areas of unit cost position? What are their drivers? How is the cost structure changing? Why? How well is our client positioned to set prices compared with its competitors? What is the cost position of our client relative to its competitors? Is it changing? What are the boundaries of the capabilities required to compete successfully? What capabilities are required to deliver value? How is this changing? How strong are our clients key capabilities, relative to its competitors?

26 Geminis Approach to Strategy Strategy and Results Understanding a Clients Strategic Position Analytics to Understand a clients Strategic Position

27 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Analytics help us understand particular elements of the clients strategic position ANALYTICS TO UNDERSTAND A CLIENTS STRATEGIC POSITION Analytics are divided into core and supplementary and are broken down by stream. What are the (economic) boundaries of the businesses the company is in? How are they changing? How do companies create value in each of the businesses? How is this changing? How is the client company positioned relative to the competition to create value? How is it changing? Key Questions to Understand Strategic Position Key Analytics to Understand Strategic Position Essential to understand the strategic position of our clients: –Without analytics, any assessment of strategic position will be flawed Essential to evaluate clients strategic options Break-even analysis Cluster analysis Company/competitor analysis Cost structure Customer experience Financial/ratios analysis Key purchase criteria Market-sizing and share Relative cost-positioning Segmentation Strengths and weaknesses Value chain Venkat matrix Relevant in specific businesses or situations Adoption cycle Business/unit profitability Economies of scale Experience curve Growth share matrix Key success factors PEST Porters five forces Price elasticity Product life cycle Product substitution SWOT CORE ANALYTICS SUPPLEMENTARY ANALYTICS

28 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Competitors/Industry Stream: Questions and Analytics Competitors/Industry Stream Strategic Questions Main Analytics Strategic Position What are the (economic) boundaries of the businesses the company is in? How are they changing? How do companies create value in each of the businesses? How is this changing? How is the client company positioned relative to the competition to create value? How is it changing? What are the boundaries/scope of the competition? Are there successful niche players/broad-focus players, and where do they make money? How big is the market? How fast is it growing? Are some parts growing faster than others? What are the average returns in the industry? How have they changed over time? How do they vary between players? Have there been any new entrants, and why? Are they making money? Has anyone left the industry? Why? Is the business constrained by regulation? What are the boundaries of regulation? What are the boundaries/scope of the competition? Are there successful niche players/broad-focus players, and where do they make money? How big is the market? How fast is it growing? Are some parts growing faster than others? What are the average returns in the industry? How have they changed over time? How do they vary between players? Have there been any new entrants, and why? Are they making money? Has anyone left the industry? Why? Is the business constrained by regulation? What are the boundaries of regulation? How does the industry deliver value to its customers? Is this changing? What and why is the overall performance of our client relative to competitors (e.g. market share, profitability)? Core AnalyticSupplementary Analytic Value chain Financial/ratios analysis Market-sizing and share Key success factors SWOT Porters five forces PEST Company/Competitors analysis Growth/Share matrix ANALYTICS TO UNDERSTAND A CLIENTS STRATEGIC POSITION

29 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT What are the (economic) boundaries of the businesses the company is in? How are they changing? How do companies create value in each of the businesses? How is this changing? How is the client company positioned relative to the competition to create value? How is it changing? Main AnalyticsStrategic Position Core AnalyticSupplementary Analytic How and why do customers purchase? What is the trigger? What different needs-based segments exist? What substitute products are there? What is the underlying customer need? What trends are emerging? How and why do customers purchase? What is the trigger? What different needs-based segments exist? What substitute products are there? What is the underlying customer need? What trends are emerging? What are the key purchase criteria by segment? Are purchase behaviours changing? How? Why? What are the key purchase criteria by segment? Are purchase behaviours changing? How? Why? How does our client meet the key purchase criteria compared with its competitors? Segmentation and targeting Cluster analysis Customer experience Product substitution Adoption cycle Key purchase criteria Product life cycle Customer Needs Stream Strategic Questions Customer Needs Stream: Questions and Analytics ANALYTICS TO UNDERSTAND A CLIENTS STRATEGIC POSITION

30 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Profitability Stream Strategic Questions Main AnalyticsStrategic Position Break-even analysis Economies of scale Experience curve Value chain Cost structure Relative cost-positioning Price elasticity Core AnalyticSupplementary Analytic Business/Unit profitability What are the (economic) boundaries of the businesses the company is in? How are they changing? How do companies create value in each of the businesses? How is this changing? How is the client company positioned relative to the competition to create value? How is it changing? How is pricing determined? What are the natural boundaries of unit cost drivers (by product/geography)? How is pricing determined? What are the natural boundaries of unit cost drivers (by product/geography)? How do companies make money? How is pricing determined in each business? What are the major areas of unit cost position? What are their drivers? How is the cost structure changing? Why? How do companies make money? How is pricing determined in each business? What are the major areas of unit cost position? What are their drivers? How is the cost structure changing? Why? How well is our client positioned to set prices versus the competitors? What is the cost position of our client relative to its competitors? Is it changing? How well is our client positioned to set prices versus the competitors? What is the cost position of our client relative to its competitors? Is it changing? Profitability Stream: Questions and Analytics ANALYTICS TO UNDERSTAND A CLIENTS STRATEGIC POSITION

31 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Capabilities Stream Strategic Questions Main AnalyticsStrategic Position Strengths and Weaknesses Core Analytic What are the (economic) boundaries of the businesses the company is in? How are they changing? How do companies create value in each of the businesses? How is this changing? How is the client company positioned relative to the competition to create value? How is it changing? What are the boundaries of the capabilities required to compete successfully? What capabilities are required to deliver value? How is this changing? How strong are our clients key capabilities relative to its competitors? Capabilities Stream: Questions and Analytics ANALYTICS TO UNDERSTAND A CLIENTS STRATEGIC POSITION Venkatramen Matrix

32 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT On projects, most of the analytics may be useful across more than one stream Summary of Stream Analytics Competitors/ Industry Customers Needs ProfitabilityProfitability CapabilitiesCapabilities List of Analytics ANALYTICS TO UNDERSTAND A CLIENTS STRATEGIC POSITION Break-even analysis Cluster analysis Company/competitor analysis Cost structure Customer experience Financial/ratios analysis Key purchase criteria Market-sizing and share Relative cost-positioning Segmentation Strengths and weaknesses Value chain Venkatramen matrix Adoption cycle Business/unit profitability Economies of scale Experience curve Growth share matrix Key success factors PEST Porters five forces Price elasticity Product life cycle Product substitution SWOT Core Supplementary

33 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT When starting on projects, consultants should follow some basic mental checks Understand Logics and Targets of Stream Set Issues to Address Choose/Use Analytics Flesh out Answers Whats the scope of my stream compared with other streams? –Make sure no unnecessary overlaps occur –Make sure the whole scope of the project is covered by at least one stream What kind of answers am I looking for? What questions must I address? –Refer to stream-specific questions Validate understanding of questions, with: –Team manager –JTMs –Client What analytic can help me answer my questions? –Refer to stream-specific analytics Analytics may be shared: –Avoid duplication Make sure you answer all relevant questions Make sure all answers are documented Ensure communication across all projects streams: –Strategy streams (highly interdependent) –NWTs Process Flow: Mental Checks ANALYTICS TO UNDERSTAND A CLIENTS STRATEGIC POSITION The value is from combined output and insights, not from the individual stream alone.

34 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Some useful tips when conducting analysis... Identify key Gemini contacts and experts Draw on faculty Talk to others who have performed similar analysis Analysis Top Tips Ask for help Derive facts Validate and cross reference Gain insight Facts! Facts! Facts! Set priorities Structure analysis Define hypotheses early Master the information overload Consider creative ways to do business Validate and prove hypotheses prior to communicating them Be open to break-through solutions but approach the client carefully Identify clients interest and hidden agendas Ensure early discussion of possible strategic options with client, preferably in face-to-face meetings Handle the client and the politics behind the scene

35 About the Toolkit Structure and Contents

36 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT The analytics are broken down into five main sections Toolkit Roadmap Competitors/ Industry Analytics Customer Needs Analytics Profitability Analytics Capabilities Analytics Developing and Evaluating Options STRUCTURE AND CONTENTS

37 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT The Toolkit contains both core and supplementary analytics Core Analytic Competitors/industry: –Value chain –Market-sizing and share –Financial/ratio analysis –Company/competitor analysis Customer needs: –Segmentation/Needs-based –Cluster analysis –Key purchase criteria –Customer experience Profitability: –Cost structure analysis –Break-even analysis –Relative cost-positioning Capabilities: –Strengths and weaknesses analysis –Venkat matrix Developing and evaluating options: –Segment attractiveness –Financial valuation Analytic Competitors/industry: –Value chain –Market-sizing and share –Financial/ratio analysis –Company/competitor analysis Customer needs: –Segmentation/Needs-based –Cluster analysis –Key purchase criteria –Customer experience Profitability: –Cost structure analysis –Break-even analysis –Relative cost-positioning Capabilities: –Strengths and weaknesses analysis –Venkat matrix Developing and evaluating options: –Segment attractiveness –Financial valuation Supplementary Analytics Analytic Competitors/industry: –SWOT –PEST –Porters five forces –Growth share matrix –Key success factors Customers needs: –Product life cycle –Product substitution S-curve –Adoption cycle Profitability: –Economies of scale –Experience curve –Price elasticity –Business/unit profitability Analytic Competitors/industry: –SWOT –PEST –Porters five forces –Growth share matrix –Key success factors Customers needs: –Product life cycle –Product substitution S-curve –Adoption cycle Profitability: –Economies of scale –Experience curve –Price elasticity –Business/unit profitability STRUCTURE AND CONTENTS

38 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT STRUCTURE AND CONTENTS The Toolkit follows a standard pattern for each streams section Typical Structure of a SectionFor Each Analytic Introduction Analytics (core, then supplementary): –What it is –Why we use it –Strengths and limitations –How to apply –Illustrative output –Potential insights –Hints and pitfalls –Data sources –Case examples Related analytics Compilation of stream-specific analytics: –Definition of analytic –Rationale for using the analytic –Outlines of strengths and limitations of analytic –High level steps for how to use the analytic (no detailed guidance) –Graphical output of analytic/electronic link –Outline of how the analytic helps generate insights –Practical tips on using the analytic –Typical sources for data required –References of good Gemini examples of the analytics use –References of other analytics that supplement or complement this analytic Conclusion: –Link to strategy questions and answers, general caveats

39 Competitors/Industry Stream Analytics Introduction Value Chain Market/Sizing and Share Financial/Ratio Analysis Company/Competitor Analysis SWOT Analysis PEST Analysis Porters Five Forces Growth Share Matrix Key Success Factors Conclusions

40 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Competitors/Industry Stream: Questions and Analytics Competitors/Industry Stream Strategic Questions Main Analytics Strategic Position Core AnalyticSupplementary Analytic ANALYTICS TO UNDERSTAND A CLIENTS STRATEGIC POSITION What are the (economic) boundaries of the businesses the company is in? How are they changing? How do companies create value in each of the businesses? How is this changing? How is the client company positioned relative to the competition to create value? How is it changing? What are the boundaries/scope of the competition? Are there successful niche players/broad-focus players, and where do they make money? How big is the market? How fast is it growing? Are some parts growing faster than others? What are the average returns in the industry? How have they changed over time? How do they vary between players? Have there been any new entrants, and why? Are they making money? Has anyone left the industry? Why? Is the business constrained by regulation? What are the boundaries of regulation? What are the boundaries/scope of the competition? Are there successful niche players/broad-focus players, and where do they make money? How big is the market? How fast is it growing? Are some parts growing faster than others? What are the average returns in the industry? How have they changed over time? How do they vary between players? Have there been any new entrants, and why? Are they making money? Has anyone left the industry? Why? Is the business constrained by regulation? What are the boundaries of regulation? How does the industry deliver value to its customers? Is this changing? What and why is the overall performance of our client relative to competitors (e.g. market share, profitability)? Value chain Financial/ratios analysis Market-sizing and share Key success factors SWOT Porters five forces PEST Company/Competitors analysis Growth/Share matrix

41 Competitors/Industry Stream Analytics Introduction Value Chain Market/Sizing and Share Financial/Ratio Analysis Company/Competitor Analysis SWOT Analysis PEST Analysis Porters Five Forces Growth Share Matrix Key Success Factors Conclusions

42 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT We have provided tools for understanding our clients business scope and overall attractiveness COMPETITORS/INDUSTRY STREAMINTRODUCTION Why? Establish the scope of our analysis, and focus our effort: –Define the boundaries of the business and relevant segments in which our client competes: A fundamental step, usually the first in most strategy engagements Often clients perceive themselves to be competing in the business, not the segments, thus: –They miss opportunities, or –They are vulnerable to competitors Help reshape clients perceptions of where they are competing: –Particularly useful in an industry in which the competitive boundaries have shifted Potentially, uncover opportunities in under-served segments, or areas in which our client is vulnerable to competitors Establish the scope of our analysis, and focus our effort: –Define the boundaries of the business and relevant segments in which our client competes: A fundamental step, usually the first in most strategy engagements Often clients perceive themselves to be competing in the business, not the segments, thus: –They miss opportunities, or –They are vulnerable to competitors Help reshape clients perceptions of where they are competing: –Particularly useful in an industry in which the competitive boundaries have shifted Potentially, uncover opportunities in under-served segments, or areas in which our client is vulnerable to competitors How? In some instances, defining the business and segments can be done very quickly In other cases, it is a highly iterative process requiring input from other analytics, and applying our judgement to this At a high-level, we can usually define a clients business quickly by: –Questioning our client. –Examining broker reports, annual reports, industry reports, and textlines. However, to gain a deeper understanding, and generate meaningful insights, we typically need to: –Construct a value chain for the industry, and for our clients. –Determine the size of the business, and segments, and how these have changed, and are expected to change. –Determine the market share of competitors in the business and sub-segments, and how and why these are changing. –Review the relative and absolute performance of our client and key competitors (including their financial performance). We describe each of these four processes later In some instances, defining the business and segments can be done very quickly In other cases, it is a highly iterative process requiring input from other analytics, and applying our judgement to this At a high-level, we can usually define a clients business quickly by: –Questioning our client. –Examining broker reports, annual reports, industry reports, and textlines. However, to gain a deeper understanding, and generate meaningful insights, we typically need to: –Construct a value chain for the industry, and for our clients. –Determine the size of the business, and segments, and how these have changed, and are expected to change. –Determine the market share of competitors in the business and sub-segments, and how and why these are changing. –Review the relative and absolute performance of our client and key competitors (including their financial performance). We describe each of these four processes later

43 Competitors/Industry Stream Analytics Introduction Value Chain Market/Sizing and Share Financial/Ratio Analysis Company/Competitor Analysis SWOT Analysis PEST Analysis Porters Five Forces Growth Share Matrix Key Success Factors Conclusions

44 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Value chainintroduction What It Is A description of the key activities performed either across an industry or across a company: –Usually shown as a linear flow of activities. –A company value chain, also shows the support activities performed, e.g. systems support. Michael Porter codified the value chain concept in a A value chain should show where value is being created within an industry or company: –Should be quantitative, not qualitative. –Should show the value of costs and revenues at each stage in the value chain. A description of the key activities performed either across an industry or across a company: –Usually shown as a linear flow of activities. –A company value chain, also shows the support activities performed, e.g. systems support. Michael Porter codified the value chain concept in a A value chain should show where value is being created within an industry or company: –Should be quantitative, not qualitative. –Should show the value of costs and revenues at each stage in the value chain. Why We Use It Primary objective is to determine where and how value is created in an industry or company Value chains are also used to: –Understand the key activities within an industry or company. –Determine whether there is any backward or forward integration in an industry. b –Map key players at each stage of an industrys value chain. Primary objective is to determine where and how value is created in an industry or company Value chains are also used to: –Understand the key activities within an industry or company. –Determine whether there is any backward or forward integration in an industry. b –Map key players at each stage of an industrys value chain. Strengths & Limitations Strengths: –Clarifies key stages in an industry or company, showing where value is created, and can demonstrate key shifts along the value chain. –Limitations: –Users do not apply the analytic fully, i.e. they stop at describing key activities, and do not determine where value is created. Strengths: –Clarifies key stages in an industry or company, showing where value is created, and can demonstrate key shifts along the value chain. –Limitations: –Users do not apply the analytic fully, i.e. they stop at describing key activities, and do not determine where value is created. a. In his book Competitive Advantage, Free Press. b. Forward = purchasing supplier, backward = purchasing customer. COMPETITORS/INDUSTRY STREAMCORE ANALYTICS

45 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Value chainhow to apply it There are three steps in developing a value chain: –Identify individual value activities: The appropriate degree of disaggregation depends on the economics of the activities and the purposes for which the value chain is being analysed. Distinguish between primary and support activities. –Assign the value activities to the categories (or functions) that best represent their contribution to a firms competitive advantage. –Order the activities, broadly following the process flow: Determine the links between activities. Once the activities are detailed in the value chain, map costs, returns and players across the value chain where applicable. COMPETITORS/INDUSTRY STREAMCORE ANALYTICS

46 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Value chainillustrative output Source: M. E. Porter, Competitive Advantage, Free Press, Links with suppliers Logistics Marketing and Sales After-sales Support Human Resources R&D Procurement Margins Primary Activities Support Activities Operations/ Manufacturing Generic Manufacturing Company Value Chain Distribution of Operations Costs in Flow Control Values Source: Adapted from M. E. Porter, Competitive Advantage, Free Press a. 27% = HR costs; 40% = Purchased operating inputs. ProcurementHR Management InfrastructureR&DInbound Logistics Operations a Outbound Logistics Marketing and Sales Service Support Activities Primary Activity Margin 1% COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Infrastructure Competitors can also be mapped along the value chain.

47 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Value chaintop tips Potential Insights Hints and Pitfalls Analytic helps determine: –Key shifts within an industry (backwards or forwards along the value chain) –Why competitors may be targeting specific sections of the value chain –Whether the industry value chain is changing Analytic helps determine: –Key shifts within an industry (backwards or forwards along the value chain) –Why competitors may be targeting specific sections of the value chain –Whether the industry value chain is changing Do: Quantify the cost at each stage in an industry or company value chain Understand the dynamics of a value chainwhats changed? why? Read Porters book on the roles of the value chain analytic in assessing competitive position: –This is not necessarily a Gemini point of view, but provides useful background context Do: Quantify the cost at each stage in an industry or company value chain Understand the dynamics of a value chainwhats changed? why? Read Porters book on the roles of the value chain analytic in assessing competitive position: –This is not necessarily a Gemini point of view, but provides useful background context COMPETITORS/INDUSTRY STREAMCORE ANALYTICS

48 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Data Sources Gemini project work (providing value chain output from previous projects) Questioning clients and/or industry experts Piecing together the activities via secondary data sources: – Annual reports – Broker reports – Industry reports – Database searches Internal cost data (client management accounts) Gemini project work (providing value chain output from previous projects) Questioning clients and/or industry experts Piecing together the activities via secondary data sources: – Annual reports – Broker reports – Industry reports – Database searches Internal cost data (client management accounts) Case Examples Case Examples Value Chaindata sources, case examples and related analytics The following documents contain good examples of value chain analysis and output: –Crossing the Rubicon: The Business Implications of the Euro, EuroCoE, Gemini Compass –Various documents from BUPA project, on London Server archives The following documents contain good examples of value chain analysis and output: –Crossing the Rubicon: The Business Implications of the Euro, EuroCoE, Gemini Compass –Various documents from BUPA project, on London Server archives Related Analytics Related Analytics Developing an industry and company value chain is typically a critical step in defining a clients business (see introduction of this section): –One of several of analytical steps in defining a business Used to map out a customers experience of our client company: –See Customer Experience HBR May/June 1998Profit Poolsa fresh look at strategy Developing an industry and company value chain is typically a critical step in defining a clients business (see introduction of this section): –One of several of analytical steps in defining a business Used to map out a customers experience of our client company: –See Customer Experience HBR May/June 1998Profit Poolsa fresh look at strategy COMPETITORS/INDUSTRY STREAMCORE ANALYTICS

49 Competitors/Industry Stream Analytics Introduction Value Chain Market/Sizing and Share Financial/Ratio Analysis Company/Competitor Analysis SWOT Analysis PEST Analysis Porters Five Forces Growth Share Matrix Key Success Factors Conclusions

50 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Market-sizing and shareintroduction What It Is Quantifying the size and growth of a market or segments either by: –Value (of revenue or profitability over a specified period). –Volume (of units produced over a specified period). As with many strategy analyses, it is important to show the dynamic, i.e. quantify the size of a business or segment over time: –Historically (over a number of years). –Forecasting (projecting out over future years). In some cases, market size may be available from secondary data sourcesotherwise we must estimate it. Measure of how much of a business market or segment individual competitors account for. Market share can be measured by: –Value (i.e. proportion of total revenue or profit). –Volume (i.e. proportion of total units produced). Typically, we look at both absolute market share, and relative market share (i.e. share compared with other competitors). There are several market share measures: –Absolute and relative share of total business market. –Absolute and relative share of total business segment. –Absolute and relative share of total addressable market (i.e. segments in which our client competes). Quantifying the size and growth of a market or segments either by: –Value (of revenue or profitability over a specified period). –Volume (of units produced over a specified period). As with many strategy analyses, it is important to show the dynamic, i.e. quantify the size of a business or segment over time: –Historically (over a number of years). –Forecasting (projecting out over future years). In some cases, market size may be available from secondary data sourcesotherwise we must estimate it. Measure of how much of a business market or segment individual competitors account for. Market share can be measured by: –Value (i.e. proportion of total revenue or profit). –Volume (i.e. proportion of total units produced). Typically, we look at both absolute market share, and relative market share (i.e. share compared with other competitors). There are several market share measures: –Absolute and relative share of total business market. –Absolute and relative share of total business segment. –Absolute and relative share of total addressable market (i.e. segments in which our client competes). Why We Use It Help determine absolute and relative share of competitors in a business or segment: –Essential to understand which competitors are successful or unsuccessful. Helps determine the attractiveness of a business or segment: –Its size. –Whether it is growing, flat, or shrinking. –Relative attractiveness compared with other businesses or segments. Determine the power of competitors compared with each other, customers, and suppliers. To determine the relative performance and position of competitors, and how this is changing over time: –Whos successful/unsuccessful? Why? –Are new entrants gaining share? –Are substitutes being used? In conjunction with other analytics, establishes whether share builds other advantages, e.g. lower unit costs, RMS vs. ROCE. Help determine absolute and relative share of competitors in a business or segment: –Essential to understand which competitors are successful or unsuccessful. Helps determine the attractiveness of a business or segment: –Its size. –Whether it is growing, flat, or shrinking. –Relative attractiveness compared with other businesses or segments. Determine the power of competitors compared with each other, customers, and suppliers. To determine the relative performance and position of competitors, and how this is changing over time: –Whos successful/unsuccessful? Why? –Are new entrants gaining share? –Are substitutes being used? In conjunction with other analytics, establishes whether share builds other advantages, e.g. lower unit costs, RMS vs. ROCE. Strengths & Limitations Strengths: –Provides a quantitative measure of business of segment attractiveness. –Provides the key benchmark against which we measure market share, and determine relative performance of competitors. –Essential to understanding competitors relative size, importance, and performance. Limitations: –Sizing a market from scratch can take weeks or months. –Not the only determinant of attractiveness c.f. potential to make money. Strengths: –Provides a quantitative measure of business of segment attractiveness. –Provides the key benchmark against which we measure market share, and determine relative performance of competitors. –Essential to understanding competitors relative size, importance, and performance. Limitations: –Sizing a market from scratch can take weeks or months. –Not the only determinant of attractiveness c.f. potential to make money. COMPETITORS/INDUSTRY STREAMCORE ANALYTICS

51 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Sizing Based on Publicly Available Data Understand how sources size the market (i.e. methodology). Evaluate reliability of source data. Try to obtain 2–3 independent estimates of market or segment size, and cross-check estimates. Understand trends in market size and underlying root causes. Validate total size and trends with client and/or industry experts. Understand how sources size the market (i.e. methodology). Evaluate reliability of source data. Try to obtain 2–3 independent estimates of market or segment size, and cross-check estimates. Understand trends in market size and underlying root causes. Validate total size and trends with client and/or industry experts. Market sizing and sharehow to apply it Constructing Own Estimate of Market Size Identify key drivers of market size, e.g.: –Number of customers in total business or segment. –Number of units of goods or services (e.g. number of flights, number of cars produced). –Average number of units purchased per customer. Identify key drivers of future market size, e.g.: –Relevant macroeconomic trends. –Changes influencing customer demand. –Changes in number of customers, or average purchases per customer. Develop methodology to size the marketthere are two broad approaches: –Top-down, i.e. from macro-variables (e.g. total size of related businesses). –Bottom-up, i.e. from micro-variables (e.g. number of customers). –Often we use both a top-down and bottom-up approach to check results. Develop picture of how things have changed over time: –What is the 5 year growth rate? –Calculate Compound Annual Growth Rate (CAGR). Split out real and nominal growth for value basis, i.e. adjust for inflation. The time available and degree of accuracy required will determine choice of methodology. Once you have developed your methodology, the key stages are: –Developing and documenting assumptions. –Gathering data. –Building market size estimates. –Validating and refining market size estimates. Identify key drivers of market size, e.g.: –Number of customers in total business or segment. –Number of units of goods or services (e.g. number of flights, number of cars produced). –Average number of units purchased per customer. Identify key drivers of future market size, e.g.: –Relevant macroeconomic trends. –Changes influencing customer demand. –Changes in number of customers, or average purchases per customer. Develop methodology to size the marketthere are two broad approaches: –Top-down, i.e. from macro-variables (e.g. total size of related businesses). –Bottom-up, i.e. from micro-variables (e.g. number of customers). –Often we use both a top-down and bottom-up approach to check results. Develop picture of how things have changed over time: –What is the 5 year growth rate? –Calculate Compound Annual Growth Rate (CAGR). Split out real and nominal growth for value basis, i.e. adjust for inflation. The time available and degree of accuracy required will determine choice of methodology. Once you have developed your methodology, the key stages are: –Developing and documenting assumptions. –Gathering data. –Building market size estimates. –Validating and refining market size estimates. COMPETITORS/INDUSTRY STREAMCORE ANALYTICS CAGR = Current size Starting size n = number of years growth 1/n1/n Market Sizing

52 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Market sizing and sharehow to apply It Steps before Determining Market Share Determine the business market(s) or segments to be sized Size the business market(s) or segment(s): –See Market-sizing Identify the company's or individual competitors sales, profits or units of output Determine the business market(s) or segments to be sized Size the business market(s) or segment(s): –See Market-sizing Identify the company's or individual competitors sales, profits or units of output Various Market Share Measures Exist Measure of Share How to Do Absolute Market ShareBusiness Total Company Sales Total Market Sales Total Company Sales Total Market Sales Absolute Market ShareSegment Company Segment Sales Market Segment Sales Company Segment Sales Market Segment Sales Relative Market ShareBusiness a Total Company Sales Total Sales of Largest Competitor Total Company Sales Total Sales of Largest Competitor Relative Market ShareSegment a Company Segment Sales Biggest Competitors Segment Sales Company Segment Sales Biggest Competitors Segment Sales COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Calculating Market Share a. If company is the largest, compare to other players.

53 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Market-sizing and shareillustrative output COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Market Sizing Evolution of sales by Business SegmentEvolution of % of Total Sales by Business Segment BusinessCAGR Other9 % Medipsy11 % GSMS301 % Dynamis23 % Acute care25 % Overall24 % % 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

54 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Potential Insights Potential Insights Analytic helps determine: – Industry attractiveness (past, present, future). – Relative success of competitors (when used to determine absolute and relative market share). – Competitive pressure (from growth rates and consolidation). – Degree of market concentration/fragmentation. – Relative performance of competitors, and how this is changing. – Critical issues to probe further (e.g. why competitor X is gaining share; cost advantages of holding dominant share). – Hypotheses regarding market share and profitability of competitors. Analytic helps determine: – Industry attractiveness (past, present, future). – Relative success of competitors (when used to determine absolute and relative market share). – Competitive pressure (from growth rates and consolidation). – Degree of market concentration/fragmentation. – Relative performance of competitors, and how this is changing. – Critical issues to probe further (e.g. why competitor X is gaining share; cost advantages of holding dominant share). – Hypotheses regarding market share and profitability of competitors. Hints & Pitfalls Hints & Pitfalls Market-sizing and sharetop tips Do: Sanity check first (comparisons with GDP, demographic data, other countries). Cross-check all data (both publicly available market size data and own estimates). Test/validate with client market size assumptions and output. Gather past, present, and future market size estimates. Probe for the root causes of changes in total market size. Ensure consistency between methodology for measuring total market size and measuring individual companies performance. Look at relative share (i.e. not solely absolute share). Dont Only use this data to determine attractiveness Just use to size revenue (can size by other units, e.g. units at output). Over analyseinsight often comes from other analysis. Assume a clients calculation is correct: – Always check industry assumptions. Forget to look at historical developments. Do: Sanity check first (comparisons with GDP, demographic data, other countries). Cross-check all data (both publicly available market size data and own estimates). Test/validate with client market size assumptions and output. Gather past, present, and future market size estimates. Probe for the root causes of changes in total market size. Ensure consistency between methodology for measuring total market size and measuring individual companies performance. Look at relative share (i.e. not solely absolute share). Dont Only use this data to determine attractiveness Just use to size revenue (can size by other units, e.g. units at output). Over analyseinsight often comes from other analysis. Assume a clients calculation is correct: – Always check industry assumptions. Forget to look at historical developments. COMPETITORS/INDUSTRY STREAMCORE ANALYTICS

55 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Data Sources Publicly available data: –Clients data (business plans, and internal reports) –Annual reports (for client and competitors) –Broker reports (from investment banks) –Industry reports –Database sources –Industry associations Covered in relevant sections on related analytics: –No additional data required to determine market share. Publicly available data: –Clients data (business plans, and internal reports) –Annual reports (for client and competitors) –Broker reports (from investment banks) –Industry reports –Database sources –Industry associations Covered in relevant sections on related analytics: –No additional data required to determine market share. Market-sizing and sharedata sources, case examples and related analytics Case Examples Case Examples The following documents contain good examples of market-sizing analysis and output: –Global Transaction Services (Market Sizing Methodology): FS Kbase, Gemini Compass The following documents contain good examples of market-sizing analysis and output: –Global Transaction Services (Market Sizing Methodology): FS Kbase, Gemini Compass Related Analytics Related Analytics Market-sizing is a critical step within Business Definition (see introduction of this section) Company/competitor analysis Financial analysis/ratios analysis Market-sizing is a critical step within Business Definition (see introduction of this section) Company/competitor analysis Financial analysis/ratios analysis COMPETITORS/INDUSTRY STREAMCORE ANALYTICS

56 Competitors/Industry Stream Analytics Introduction Value Chain Market/Sizing and Share Financial/Ratio Analysis Company/Competitor Analysis SWOT Analysis PEST Analysis Porters Five Forces Growth Share Matrix Key Success Factors Conclusions

57 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Financial analysisIntroduction Financial analysis consists of analysing the financial performance of a company, over time and relative to its peers: – In particular to understand whether and how companies create value. – Used to assess where a companys problems might lie. – Can be done internally for own company, or externally for competitors. – Ratios are especially useful in comparisons with competitors. Building on three different kind of financial statements, financial analysis allows either trends, ratios or cost structure analyses. Inputs to Financial Analysis a The Balance Sheet The Profit and Loss (P&L) Account The Cash Flow statement Assess evolution of: –Revenues, profits, and costs. –Capital base (debt, equity). –Asset base (tangible, intangible). –Cashflow. Assesses/measures specific financial features of a firm. Ratio/Trends Analysis Breaks down cost structure into constituents (see cost structure analytic) Cost Structure Analysis a. See detail in following pages. Dimensions of Financial Analysis a COMPETITORS/INDUSTRY STREAMCORE ANALYTICS

58 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Financial analysisintroduction (cont.) All of the statements are linked together and relate back to the ongoing activities of the firm. Transactions in year Cash received and paid credit given and received Trading Revenues Recorded in Year Expenditure Recorded in Year Other Capital Paid In Borrowing Assets Purchased Other Capital Paid In Borrowing Assets Purchased ONGOING STREAM OF EVENTS PROFIT AND LOSS ACCOUNT Revenues relevant to year= Income Expenditure relevant to year= Expenses Profit (loss) Opening BALANCE SHEET Assets Fixed Assets Working capital Financing Owners interests Outside liabilities Opening BALANCE SHEET Assets Fixed Assets Working capital Financing Owners interests Outside liabilities Closing BALANCE SHEET Assets Fixed Assets Working capital Financing Owners interests Outside liabilities Closing BALANCE SHEET Assets Fixed Assets Working capital Financing Owners interests Outside liabilities CASHFLOW STATEMENT Operating activities Investing activities Servicing of financing Taxation Financing CASHFLOW STATEMENT Operating activities Investing activities Servicing of financing Taxation Financing COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Profit and Loss P&LMatches costs to associated revenues in a given year to give a representative picture of profitability. Hence, assets are Depreciated over time and charged to P&L gradually as the asset is used up over its useful life to enable the revenues to be created. Cashflow Shows the real cash flows associated with income and expenses in a given year, to show the actual change in cash position. Costs and revenues are not matched. Balance Sheet Summarises the value of what a company owns less what it owes, and balances them with the sources of financing (debt and shareholders funds). Stated at a specified point in time (not for a period)

59 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Financial analysisintroduction Accounts Payable Money owed to suppliers Accounts Receivable (or Trade Credit) Money owed by customers Assets Things owned Book Value The value at which an item is reported in financial statements (cf. market value) Capital The amount invested in a venture Definition of Common Financial Terms Capitalisation Sum of all long-term sources of financing to the firm (equals total assets less current liabilities) Cashflow The amount of cash generated or consumed by an activity over a certain period of time Common Shares (or Common Stock) Securities representing an ownership in a firm Cost of Goods Sold Cost of sales Total of all costs required to acquire and prepare goods for sale Cost of sales Total of all costs required to acquire and prepare goods for sale Cost of Debt Yield to maturity on debt (i.e. internal rate of return to maturity)frequently after tax, in which event it is 1 minus the tax rate times the yield to maturity Debt (Liability) An obligation to pay cash or to provide other goods or services to another party COMPETITORS/INDUSTRY STREAMCORE ANALYTICS

60 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Financial analysisintroduction (cont.) Depreciation Reduction in the value of a long-lived asset from use or obsolescence. The decline is recognised in accounting by a periodic allocation of the original cost of the asset to current operations Dilution The deduction in any per share item (such as earnings per share or book value per share) due to an increase in the number of shares outstanding either through new issue or conversion of outstanding securities Earnings (or Income; Net Income, Net Profit; Profit) The excess of revenues over all related expenses for a given period Equity ( or Owners equity, shareholders equity, net worth) The ownership interest of common and preferred stockholders in a company (on a balance sheet, equity equals total assets less all liabilities) Fixed Cost Any cost that does not vary over the observation period with changes in volume (as opposed to variable costs) Insolvency The condition of having debts greater than the realistic value of ones assets (as opposed to solvency) Liquid Asset Any asset that can be quickly converted to cash without significant loss of value Liquidity Extent to which a company has assets that are readily available to meet obligations Market Value Price at which an item can be sold (cf. book value) Operating Expenses Costs incurred to produce goods or services Revenues Sales Trading Profit (or EBIT) Earning before interest and tax (see method of calculation in following pages) Definition of Common Financial Terms COMPETITORS/INDUSTRY STREAMCORE ANALYTICS

61 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Financial analysisintroduction (cont.) The P&L account provides a representative picture of profitability in a given year Turnover - Cost of Goods Sold Gross Profits (Salescould be minus discounts) (Direct costs) - Overheads PBIT (Administration - indirect costs and depreciation) (Trading profit = operating profit) - Interest PBT (Interest charges for financing) (Profit Before Tax) - Tax PAT (Corporate tax) (Profit After Tax) Dividend (Appropriation of profits transferred to balance sheet in retained profit) Retained for Reserves COMPETITORS/INDUSTRY STREAMCORE ANALYTICS P&L Account Costs such as assets are matched and are depreciated over time and charged to the P&L gradually as the asset is used up

62 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Financial analysisintroduction (cont.) Owners Funds Issued common stock Capital reserves: –Surpluses from sources other than normal trading and that belong to ordinary shareholders Revenues reserves: –Surpluses generated by trading The balance sheet shows a companys financial position at a specific date 1. Assets 2. Liabilities/Funds The balance sheet features two basic areas of the companys financials: Fixed Assets All long-term assets: Intangibles (Goodwill, patents, etc.) Net fixed assets (land, building, equipment, etc.) Long-term investments (share in associated companies) Current Assets All short-term assets: Inventories (stocks, work in progress, raw materials, etc.) Cash Accounts receivable (due from trade debtors) Miscellaneous (all other short-term assets) What the business owns Uses for where the money is spent Amounts owed by the business Sources from which the money is obtained Current Liabilities All short-term liabilities (to be paid within 1 year): Account payable (due to trade creditorssuppliers) Short-term loans (bank overdraft and all other interest-bearing short-term debts) Miscellaneous (all other short-term liabilities) Long-term Liabilities All long-term loans (more than 1 year) COMPETITORS/INDUSTRY STREAMCORE ANALYTICS The Balance Sheet

63 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Financial analysisintroduction (cont.) Cash flow statement tells how a companys cash position has changed during the year Operating activities: All items that relate to the companys operations. Investing activities:All buying and selling of fixed assets that relate to the companys operations. Servicing of finance:Interest paid on loans and dividends paid to shareholders. Taxation Financing:All transactions relating to the raising of funds. COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Cash Flow Statement The key difference between the P&L and cash flow is that the cashflow shows real sources of income and expenditures, whereas the P&L only shows a representative picture, by for example, including only an allocation of asset expense.

64 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Financial ratio analysisintroduction What It Is Ratios are measures of a firms specific financial features Financial ratios typically fall into four categories: Ratios are measures of a firms specific financial features Financial ratios typically fall into four categories: Why We Use It Financial ratios help us diagnose the financial health of a firm: –Profitability/efficiency ratios measure how well a firm uses its assets to generate profits –Liquidity ratios measure a firms ability to meet short-term liabilities –Solvency ratios are an indicator of a firms financial strength (assess the mix of funds in the balance sheet and measure firms ability to withstand operating setbacks) –Investment ratios are indicative of the markets perceptions of a company. They are used mainly by investors to value a company. Financial ratios help us diagnose the financial health of a firm: –Profitability/efficiency ratios measure how well a firm uses its assets to generate profits –Liquidity ratios measure a firms ability to meet short-term liabilities –Solvency ratios are an indicator of a firms financial strength (assess the mix of funds in the balance sheet and measure firms ability to withstand operating setbacks) –Investment ratios are indicative of the markets perceptions of a company. They are used mainly by investors to value a company. Strengths & Limitations Strengths: –Can be used to identify potential areas of improvement Limitations: –Accounting principles can differ making comparisons difficult –Need to be wary of management managing year-end figures –Book values for fixed assets may be out of date Strengths: –Can be used to identify potential areas of improvement Limitations: –Accounting principles can differ making comparisons difficult –Need to be wary of management managing year-end figures –Book values for fixed assets may be out of date Key strategic ratios Other ratios a Inventory turnover Days inventory Total asset turnover Days receivable Fixed asset utilisation Return on sales: –Profit margin –Gross margin Return on net assets Return on equity Quick ratio Working capital Current ratio Interest coverDebt equity ratio Dividend yield Earning yield Dividend cover Dividend per share Price-earning ratio Earning per share Profitability/ Efficiency Ratios Liquidity Ratios Solvency Ratios Investment Ratios a. To be used selectively, according to the industry and/or the level of detail required COMPETITORS/INDUSTRY STREAMCORE ANALYTICS

65 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Profitability/Efficiency Ratios Financial ratio analysishow to do it Key Strategic Ratios (1/5) Return on sales (ROS): Are goods sold at an appropriate price and produced efficiently? –Two ratios reflect ROS: Ratio Profit Margin (also known as operating margin) Profit Margin (also known as operating margin) Formula =PBIT Sales Where: PBIT: profit before interest and tax =Sales – cost of goods sold – operating expenses =Trading profit =PBIT Sales Where: PBIT: profit before interest and tax =Sales – cost of goods sold – operating expenses =Trading profit What It Does Measures bottom line company profitability Indicates the effectiveness of sales and production in producing profit Constitutes a good ratio for comparing the performances of competitors in the same industry Measures bottom line company profitability Indicates the effectiveness of sales and production in producing profit Constitutes a good ratio for comparing the performances of competitors in the same industry Drivers Sales: –Price –Volume Operating expenses Sales: –Price –Volume Operating expenses Gross Margin =Gross profit Sales Where: Gross profit =Sales – cost of goods sold =Gross profit Sales Where: Gross profit =Sales – cost of goods sold Measures percentage of revenue remaining after the cost of goods sold is covered Constitutes a weak ratiolooks at variable a costs only Measures percentage of revenue remaining after the cost of goods sold is covered Constitutes a weak ratiolooks at variable a costs only Price Cost of producing goods Price Cost of producing goods COMPETITORS/INDUSTRY STREAMCORE ANALYTICS a. Costs that are altered by a change in output.

66 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Profitability/Efficiency Ratios (cont.) Financial ratio analysishow to do it Key Strategic Ratios (2/5) Return on Net Assets (RONA): How profitable is this company? Ratio RONA is also known as: Return on Asset (ROA) Return on Capital Employed (ROCE) RONA is also known as: Return on Asset (ROA) Return on Capital Employed (ROCE) Formula = (Profit Before Interest + Tax) a Fixed Assets + (Current Assets – Current Liabilities) b (Profit Margin x Asset Turnover) a.Can be defined as profit after tax, but before deduction of interest. b.Current assets – current liabilities = working capital. It represents the amount of day-to-day operating liquidity available to business. = (Profit Before Interest + Tax) a Fixed Assets + (Current Assets – Current Liabilities) b (Profit Margin x Asset Turnover) a.Can be defined as profit after tax, but before deduction of interest. b.Current assets – current liabilities = working capital. It represents the amount of day-to-day operating liquidity available to business. What It Does Measures profitability Measures how well assets have been employed, irrespective of how the company is financed Measures profitability Measures how well assets have been employed, irrespective of how the company is financed Drivers Profit margin: –Price –Cost Asset turnover: –Sales –Capital employed Profit margin: –Price –Cost Asset turnover: –Sales –Capital employed Return on Equity (ROE): What is shareholders profit? Ratio ROE Formula =Profit After Tax Ordinary Funds a a.Issued capital + capital reserves + revenues reserves =Profit After Tax Ordinary Funds a a.Issued capital + capital reserves + revenues reserves What It Does Measures the return on ordinary shareholders funds: –Assesses the efficiency with which the firm employs owners capita Measures return for shareholder Measures the return on ordinary shareholders funds: –Assesses the efficiency with which the firm employs owners capita Measures return for shareholder Drivers Profit margin: –Price –Cost Asset turnover: –Sales –Capital employed Financing: –Debt to equity ratio –Cost of debt –Tax-effectiveness Profit margin: –Price –Cost Asset turnover: –Sales –Capital employed Financing: –Debt to equity ratio –Cost of debt –Tax-effectiveness COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Profit after tax used because it is the return from which dividend is subtracted.

67 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Profitability/Efficiency Ratios (cont.) Financial ratio analysishow to do it Key Strategic Ratios (3/5) Current Ratio: Will the company have sufficient cash in the immediate future to meet its short-term liabilities? Ratio Current Ratio Formula =Current Assets Current Liabilities i.e.: (cash and near-cash assets available to business) over (upcoming cash requirements) =Current Assets Current Liabilities i.e.: (cash and near-cash assets available to business) over (upcoming cash requirements) What It Tells Indicates a companys short-term financial position: –Compares the assets that will turn into cash within the year to the liabilities that must be paid within the year –A company with a low current ratio lacks liquidity in the sense that it cannot reduce its current asset investment to supply cash to meet maturing obligations: It must rely instead on operating income and outside financing The most informative feature of a current ratio is its normal level and any trend from year to year Indicates a companys short-term financial position: –Compares the assets that will turn into cash within the year to the liabilities that must be paid within the year –A company with a low current ratio lacks liquidity in the sense that it cannot reduce its current asset investment to supply cash to meet maturing obligations: It must rely instead on operating income and outside financing The most informative feature of a current ratio is its normal level and any trend from year to year Drivers Nature of the industry: –Some have to carry large stocks and, have long production cycles –Others carry almost no stock and receive more credit than they give Type of current asset: –Some are more liquid (i.e. easier to sell readily) Volatility of working capital requirements Debtor and creditor management: –Bargaining power of company Nature of the industry: –Some have to carry large stocks and, have long production cycles –Others carry almost no stock and receive more credit than they give Type of current asset: –Some are more liquid (i.e. easier to sell readily) Volatility of working capital requirements Debtor and creditor management: –Bargaining power of company COMPETITORS/INDUSTRY STREAMCORE ANALYTICS

68 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Solvency Ratios Financial ratio analysishow to do it Key Strategic Ratios (4/5) Debt to Equity ratio (D/E): What is the mix of funds in the balance sheet?: –The D/E turns up under many different names and with different methods of calculation, which causes some confusion. Ratio D/E Often referred to as leverage or bearing D/E Often referred to as leverage or bearing Formula 1. Total Debt Total Equity Where: Debt = long-term liabilities + current liability and Equity= ordinary funds = Issued capital + capital reserves + revenue reserves 2. Total debt Total funds Where: Total funds: 1. Total Debt Total Equity Where: Debt = long-term liabilities + current liability and Equity= ordinary funds = Issued capital + capital reserves + revenue reserves 2. Total debt Total funds Where: Total funds: What It Does Makes a comparison between: –Funds that have been supplied by the owners (equity). –Funds that have been borrowed (debt). Defines level of safety to lender: –Measures a companys ability to withstand operating setbacks. Typically high leverage equates to high financial risk, as debt is paid prior to shareholders equity when a company is wound up. This is a fundamental ratio Makes a comparison between: –Funds that have been supplied by the owners (equity). –Funds that have been borrowed (debt). Defines level of safety to lender: –Measures a companys ability to withstand operating setbacks. Typically high leverage equates to high financial risk, as debt is paid prior to shareholders equity when a company is wound up. This is a fundamental ratio Drivers Debt and its nature, i.e.: –Long-term loans only, vs. –Long- and short-term loans (i.e. all interest-bearing debt), vs. –Long-term loans, plus all current liabilities There is an optional leverage for a given business risk one of the drivers is hence industry or company risk. Tracking leverage over a period shows when the company is exposing shareholders to more risk. Some businesses shy-away from investing debt, and under-leverage. Debt and its nature, i.e.: –Long-term loans only, vs. –Long- and short-term loans (i.e. all interest-bearing debt), vs. –Long-term loans, plus all current liabilities There is an optional leverage for a given business risk one of the drivers is hence industry or company risk. Tracking leverage over a period shows when the company is exposing shareholders to more risk. Some businesses shy-away from investing debt, and under-leverage. =Fixed assets + current assets =Ordinary funds + long-term liabilities + current liabilities COMPETITORS/INDUSTRY STREAMCORE ANALYTICS

69 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Investment Ratios Financial ratio analysishow to do it Key Strategic Ratios (5/5) These ratios are indicative of the markets perception of the company: –They are used mainly by investors to value the firm. They reflect a companys performance and expectations of future performance. They do not explain what has happened operationally or in terms of financial structure. Ratio Formula What It Does Drivers Pricing-Earning Ratio (PE) Share Price EPS Share price to be found in the Financial Times Alternatively stated as: Market Capitalisation Profit After Tax Share Price EPS Share price to be found in the Financial Times Alternatively stated as: Market Capitalisation Profit After Tax Widely quoted parameter of share value Value is determined by investors based on companys ability to deliver a good return to the equity shareholder Provides a quick indication of whether a company is rated highly or lowly Indicates expected growth (relative to other companies or the stock market in general) Widely quoted parameter of share value Value is determined by investors based on companys ability to deliver a good return to the equity shareholder Provides a quick indication of whether a company is rated highly or lowly Indicates expected growth (relative to other companies or the stock market in general) Investors view of future return on equity compared with this years earning per share Level of stock market Investors view of future return on equity compared with this years earning per share Level of stock market Earning per Share (EPS) Profit After Tax Number of Shares Profit After Tax of share to be found in the notes to the financial statements Profit After Tax Number of Shares Profit After Tax of share to be found in the notes to the financial statements Absolute amount of EPS tells nothing about a companys performance However, growth in earnings per share has a significant impact on market price Investors look for stability as well as growth Absolute amount of EPS tells nothing about a companys performance However, growth in earnings per share has a significant impact on market price Investors look for stability as well as growth Profit COMPETITORS/INDUSTRY STREAMCORE ANALYTICS

70 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Profitability/Efficiency Ratios Financial ratio analysishow to do it Other Ratios (1/4) These ratios must be used selectively, according to the business and/or the level of detail required. Ratio Inventory Turnover Formula Cost of Goods Sold Ending Inventory What It Tells Helps to tell whether an appropriate level of stock is held: –Measures how often an inventory item turns over per year (or how many times it has been sold) Helps to tell whether an appropriate level of stock is held: –Measures how often an inventory item turns over per year (or how many times it has been sold) Drivers Sales (volume) Inventory: –Size –Appropriateness Sales (volume) Inventory: –Size –Appropriateness Days Inventory (also called stock turns) Days Inventory (also called stock turns) 365 Inventory Turnover Measures the number of days required to sell the inventory once Sales (volume) Size of inventory Sales (volume) Size of inventory Total Asset Turnover Sales Total Assets Indicates how well a company uses its assets: –Measures sales generated by each unit of assets Measures capital intensity: –A low asset turnover signifies a capital–intensive business –A high turnover signifies a business that is not capital-intensive Indicates how well a company uses its assets: –Measures sales generated by each unit of assets Measures capital intensity: –A low asset turnover signifies a capital–intensive business –A high turnover signifies a business that is not capital-intensive Sales (volume, price) Assets: –Fixed –Inventories –Accounts receivable Sales (volume, price) Assets: –Fixed –Inventories –Accounts receivable Days Receivable (also called debtor days) Days Receivable (also called debtor days) Accounts Receivable Sales Measure of how long it takes a company to collect what it is owed Monitors credit control department effectiveness Measure of how long it takes a company to collect what it is owed Monitors credit control department effectiveness Collection period Fixed Asset Utilisation Sales Fixed Assets Measures how well plant, buildings, etc, are utilised Heavily influenced by nature of industry so seldom used Measures how well plant, buildings, etc, are utilised Heavily influenced by nature of industry so seldom used Sales (volume, price) Assets: –Level –Valuation Sales (volume, price) Assets: –Level –Valuation COMPETITORS/INDUSTRY STREAMCORE ANALYTICS

71 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Liquidity Ratios Financial ratio analysishow to do it Other Ratios (2/4) Ratio Quick Ratio (acid test) Formula Current Assets – Inventory Current Liabilities What It Does Tests what would happen if the company had to settle up with all its creditors and debtors immediately: –If the quick ratio is less than 1 it would be unable to settle quickly If a ratio is low and declining it points to a rising overdraft Tests what would happen if the company had to settle up with all its creditors and debtors immediately: –If the quick ratio is less than 1 it would be unable to settle quickly If a ratio is low and declining it points to a rising overdraft Drivers Nature of the companys business (see current ratio) Working Capital to Sales Ratio Current Assets – Current Liabilities Sales Where: Working capital = (current assets – current liabilities) Current Assets – Current Liabilities Sales Where: Working capital = (current assets – current liabilities) Shows how much capital is required to finance operations in addition to capital invested in fixed assets A falling ratio indicates the possibility of over-trading (insufficient resources in the balance sheet to carry the level of existing business) Shows how much capital is required to finance operations in addition to capital invested in fixed assets A falling ratio indicates the possibility of over-trading (insufficient resources in the balance sheet to carry the level of existing business) Nature of the companys business (see current ratio) COMPETITORS/INDUSTRY STREAMCORE ANALYTICS

72 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Solvency Ratios Financial ratio analysishow to do it Other Ratios (3/4) Ratio Interest Cover Formula PBIT Interest Where: PBIT = Profit Before Interest and Tax Interest being the cost of financing (item of the Profit and Loss Account) The cover is expressed as so many times PBIT Interest Where: PBIT = Profit Before Interest and Tax Interest being the cost of financing (item of the Profit and Loss Account) The cover is expressed as so many times What It Does Measures a companys ability to service its borrowing Drivers Operating profit Total amount borrowed Rate of interest Operating profit Total amount borrowed Rate of interest COMPETITORS/INDUSTRY STREAMCORE ANALYTICS

73 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Investment Ratios Financial ratio analysishow to do it Other Ratios (4/4) Ratio Dividend Yield Formula DPS Share Price DPS = dividend per share (see below) DPS Share Price DPS = dividend per share (see below) What It Does Important ratio for both the investor and the company Yield ratios allow investors to make comparison between the return on shares and other types of investment Important ratio for both the investor and the company Yield ratios allow investors to make comparison between the return on shares and other types of investment Drivers Profit Financing structure (reinvestmentdividend only) Profit Financing structure (reinvestmentdividend only) Earning per ShareEPS Share Price EPS = Earning Per Share (see Key Strategy ratios, p. xx) Dividend Cover EPS DPS Indicates future stability and growth of dividend: –High cover suggests dividend is fairly safe –Also indicates company is aiming for high growth Indicates future stability and growth of dividend: –High cover suggests dividend is fairly safe –Also indicates company is aiming for high growth Profit Reinvestment Profit Reinvestment Dividend Per Share Dividends a Number of Shares a.In Profit and Loss account. b.In notes to the financial statements. Dividends a Number of Shares a.In Profit and Loss account. b.In notes to the financial statements. Profit available after reinvestment in company Important for the many of investors who are keen to see steady dividends Profit available after reinvestment in company Important for the many of investors who are keen to see steady dividends Profit Reinvestment Profit Reinvestment COMPETITORS/INDUSTRY STREAMCORE ANALYTICS

74 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Financial analysis illustrative output COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Cashflow, £m, 1983–1994 Source: Dawson International; see also further examples in document 1232Ldn23Jun94Dl-db. Trends in ratios can similarly be plotted

75 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Financial ratio analysisillustrative output COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Margin Costs Asset Base Asset Base £ A Dupont Tree a (also known as RONA model) is a useful way to structure and present output. LeversShareholder Value RONA/Dupont Model

76 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Financial ratio analysistop tips Potential Insight The ratios are useful when viewed over time or compared with other companies (usually in the same industry): –Analysing over five years helps smooth ups and downs Ratio analyses are a key input to a comparison of competitors The ratios are useful when viewed over time or compared with other companies (usually in the same industry): –Analysing over five years helps smooth ups and downs Ratio analyses are a key input to a comparison of competitors Hints and Pitfalls Do: Look for divisional data when analysing diverse multi-product conglomerates Look for industry-specific ratios Be wary of management managing end-of-year figures Find out what the terminology used means: –US and European terminology differ –Accounting principles differ, making comparisons difficult Always treat the notes and main statements as inseparable: –You need both to get the job done properly Always look for trends and differences over time (5 years) Try to obtain comparative data on companies in the same industry (international comparisons can be hard (especially Germany), due to different accounting principals) Make sure you are comparing like with like Ask the questions Why and So what? Dont: Ever draw conclusions from one parameter Do: Look for divisional data when analysing diverse multi-product conglomerates Look for industry-specific ratios Be wary of management managing end-of-year figures Find out what the terminology used means: –US and European terminology differ –Accounting principles differ, making comparisons difficult Always treat the notes and main statements as inseparable: –You need both to get the job done properly Always look for trends and differences over time (5 years) Try to obtain comparative data on companies in the same industry (international comparisons can be hard (especially Germany), due to different accounting principals) Make sure you are comparing like with like Ask the questions Why and So what? Dont: Ever draw conclusions from one parameter COMPETITORS/INDUSTRY STREAMCORE ANALYTICS

77 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Financial ratio analysisdata sources, case examples, and related analytics Data Sources Company reports (annual report, IOK in US) Analysts reports Industry reports (e.g. ICC in UK for ratio reports) SEC (Securities Exchange Commission, USA) Company reports (annual report, IOK in US) Analysts reports Industry reports (e.g. ICC in UK for ratio reports) SEC (Securities Exchange Commission, USA) Case Examples Case Examples The following documents provide training material: –How to Understand and Use Company Accounts, (Strategic Research Kbase)i –Financial Analysis, Using and Interpreting Ratios, August 1998 (Consultant Group KBase) St Gallen University training (in German POA) Financial analysis (A&D Kbase) COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Related Analytics Related Analytics Cost structure analysis Business case (see A&D Kbase for training material) Financial analysis spreadsheet model - Sten-Erik Molander ( ) Cost structure analysis Business case (see A&D Kbase for training material) Financial analysis spreadsheet model - Sten-Erik Molander ( )

78 Competitors/Industry Stream Analytics Introduction Value Chain Market/Sizing and Share Financial/Ratio Analysis Company/Competitor Analysis SWOT Analysis PEST Analysis Porters Five Forces Growth Share Matrix Key Success Factors Conclusions

79 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Company/competitor analysisintroduction What It Is Background information: –Date founded –Overview of what the company does –Executive team –Vision statement –Ownership structure Organisation structure: –Size of subsidiaries workforce Key financials: –Current, historical, and projected, (see financial analysis) Market positioning: –Market share, geographical markets, target customer segments Channel usage: –Percentage through each, productivity Product portfolio: –Main products –Price brackets Relationship to industry value chain: –Key suppliers and customers –Distribution channels Recent actions/moveslate breaking news Strategic issues and behaviour Background information: –Date founded –Overview of what the company does –Executive team –Vision statement –Ownership structure Organisation structure: –Size of subsidiaries workforce Key financials: –Current, historical, and projected, (see financial analysis) Market positioning: –Market share, geographical markets, target customer segments Channel usage: –Percentage through each, productivity Product portfolio: –Main products –Price brackets Relationship to industry value chain: –Key suppliers and customers –Distribution channels Recent actions/moveslate breaking news Strategic issues and behaviour Why We Use It Provides a basic understanding of a company and its performance Directs further analysis by highlighting key strengths and capabilities Use of a common template can enable a comparison between players Identify number, names and focus of players Understand strategic positions (product/service offering, channel usage) Identify strengths and weaknesses of different players in an industry Identify gaps in portfolios and capabilities of client Identify relative strength of client company Understand key competitor moves Provides a basic understanding of a company and its performance Directs further analysis by highlighting key strengths and capabilities Use of a common template can enable a comparison between players Identify number, names and focus of players Understand strategic positions (product/service offering, channel usage) Identify strengths and weaknesses of different players in an industry Identify gaps in portfolios and capabilities of client Identify relative strength of client company Understand key competitor moves Strengths & Limitations Strengths: Gives a clear overview of basic facts about a company: –Necessary to add insight to competitor or market analysis Provides direction to further analysis Efficient way to capture vital data on competitors Gives overview of competitors attributes along multiple axes Limitations: May provide few insights in itself: –Requires benchmarking over time or against competitors Often complex and difficult to use effectively in presentations: –Need to extract key messages and display using other tools –Requires effort to summarise Often focuses on the present rather than the future: –Difficult to determine competitors strategic shifts Strengths: Gives a clear overview of basic facts about a company: –Necessary to add insight to competitor or market analysis Provides direction to further analysis Efficient way to capture vital data on competitors Gives overview of competitors attributes along multiple axes Limitations: May provide few insights in itself: –Requires benchmarking over time or against competitors Often complex and difficult to use effectively in presentations: –Need to extract key messages and display using other tools –Requires effort to summarise Often focuses on the present rather than the future: –Difficult to determine competitors strategic shifts An assessment of a companys own (or competitors) performance that should, at the least, include: COMPETITORS/INDUSTRY STREAMCORE ANALYTICS

80 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Company/competitor analysishow to do it Acquire a Basic Understanding of the Company/Industry Read general information about the company on its Internet site Read introduction to analysts company reports Establish where it fits in the value chain Read general information about the company on its Internet site Read introduction to analysts company reports Establish where it fits in the value chain Determine data needed Ensure all necessary background information is included Include information related to the strategic issue being examined by the project Ensure all necessary background information is included Include information related to the strategic issue being examined by the project Gather and analyse data There are a wide variety of sources available Analyse data where appropriate: –Use financial analysis techniques –Product/channel analysis Understand key trade-offs that competitors in an industry have: –e.g. niche vs scale There are a wide variety of sources available Analyse data where appropriate: –Use financial analysis techniques –Product/channel analysis Understand key trade-offs that competitors in an industry have: –e.g. niche vs scale Evaluate Company Plot competitor field maps Understand relative competitive positions and rationale: –Product/Service offerings –Channel usage Depending on what we need to know, use SWOT model to help evaluate competitor Ensure analysis relates to, or answers the questions, we are trying to answer Plot competitor field maps Understand relative competitive positions and rationale: –Product/Service offerings –Channel usage Depending on what we need to know, use SWOT model to help evaluate competitor Ensure analysis relates to, or answers the questions, we are trying to answer COMPETITORS/INDUSTRY STREAMCORE ANALYTICS

81 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Company/competitor analysisillustrative output COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Company Profile Template (Tailored to Specific Use) Competitive Field map 4: Multi-local vs. Global Networked Islands Global Scale Local Scale BofA Deutsche HSBC Citibank Stan.Chart. Asian Focus ABN AMRO ABN AMRO German-centric Focus: European companies Seeks domestic relationships Serve both local and cross-border businesses well Chase Major money centre focus; supplemented with partner banks Competitive Field Map BKB

82 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Company/competitor analysistop tips Potential Insights Hints and Pitfalls Provides an overview of what the company is about, and an indication of success to date: –Directs further analysis –Drives insights when benchmarked against competitors (see competitors comparison) Identifying competitors strengths and weaknesses helps us to understand threats and opportunities for our client Must tie in with KSFs for industry Provides an overview of what the company is about, and an indication of success to date: –Directs further analysis –Drives insights when benchmarked against competitors (see competitors comparison) Identifying competitors strengths and weaknesses helps us to understand threats and opportunities for our client Must tie in with KSFs for industry Do: Use creativity in data gathering if information is not readily available Ensure you use an 80/20 rule: –You can do much of the analysis very quickly, then fill only critical gaps after that Gain basic knowledge about the company at a very early stage: –Obtain/produce an overview of the companys activities –Pay particular attention to revenue Check with your client if you have not used the clients own data Consider outsourcing to shop or institute Focus on major players if the market is highly fragmented, Remember that competitors definition of segments often differ Draft template early in the analysis process: –Use as a framework for data capture and to direct further analysis Be clear about what information is necessary: –Keep in mind why you are conducting this analysis, and structure and collect data accordingly Display findings to create an impact: –Use symbols and graphics to display the message –Shade the key findings on the template Dont: Give unnecessary excessive detail: –Avoid including irrelevant data Indulge in data dumping Make template unnecessarily complex Fail to include all relevant competitors Take for given what the company says are its strengths: –May not be in reality –May be associated with corollary weaknesses Do: Use creativity in data gathering if information is not readily available Ensure you use an 80/20 rule: –You can do much of the analysis very quickly, then fill only critical gaps after that Gain basic knowledge about the company at a very early stage: –Obtain/produce an overview of the companys activities –Pay particular attention to revenue Check with your client if you have not used the clients own data Consider outsourcing to shop or institute Focus on major players if the market is highly fragmented, Remember that competitors definition of segments often differ Draft template early in the analysis process: –Use as a framework for data capture and to direct further analysis Be clear about what information is necessary: –Keep in mind why you are conducting this analysis, and structure and collect data accordingly Display findings to create an impact: –Use symbols and graphics to display the message –Shade the key findings on the template Dont: Give unnecessary excessive detail: –Avoid including irrelevant data Indulge in data dumping Make template unnecessarily complex Fail to include all relevant competitors Take for given what the company says are its strengths: –May not be in reality –May be associated with corollary weaknesses COMPETITORS/INDUSTRY STREAMCORE ANALYTICS

83 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Company/competitor analysisdata sources, case examples, and related analytics Data Sources Annual report Analysts reports Internet sites On-line searches Internal company data (if available) Interviews Trade associations Industry overview Industry journals Industry experts (Gemini and external) Annual report Analysts reports Internet sites On-line searches Internal company data (if available) Interviews Trade associations Industry overview Industry journals Industry experts (Gemini and external) Case Examples Case Examples Strategic Research Kbase, Understanding the Strategies of Mobile Operators in Hong Kong, Sweden, and the UK. three documents (London Shop, October 1997): –Basic company profiles of major mobile operators Financial services Kbase, Global Transaction Services (Competitor Analysis) The following documents contain good case examples of competitors comparison analysis and output: –Michael M. Kaiser, Associates Inc., Understanding the Competition: A Practical Guide to Competitive Analysis. –Strategic Research K Base, Succeeding in the UK Private Banking Market, (London Shop, 20/02/98) pp –Telcos in US market (VIAG), Cambridge Shop Strategic Research Kbase, Understanding the Strategies of Mobile Operators in Hong Kong, Sweden, and the UK. three documents (London Shop, October 1997): –Basic company profiles of major mobile operators Financial services Kbase, Global Transaction Services (Competitor Analysis) The following documents contain good case examples of competitors comparison analysis and output: –Michael M. Kaiser, Associates Inc., Understanding the Competition: A Practical Guide to Competitive Analysis. –Strategic Research K Base, Succeeding in the UK Private Banking Market, (London Shop, 20/02/98) pp –Telcos in US market (VIAG), Cambridge Shop Related Analytics Related Analytics Company/competitor analysis is often the centre-piece of strategic position assessment However, it can be complemented and supplemented by the following analytics: –Financial analysis/ratios analysis –Porters five forces –SWOT –Scenario planning/war gaming Company/competitor analysis is often the centre-piece of strategic position assessment However, it can be complemented and supplemented by the following analytics: –Financial analysis/ratios analysis –Porters five forces –SWOT –Scenario planning/war gaming COMPETITORS/INDUSTRY STREAM–CORE ANALYTICS

84 Competitors/Industry Stream Analytics Introduction Value Chain Market/Sizing and Share Financial/Ratio Analysis Company/Competitor Analysis SWOT Analysis PEST Analysis Porters Five Forces Growth Share Matrix Key Success Factors Conclusions

85 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT SWOT analysisintroduction What It Is The SWOT (Strengths-Weaknesses/ Opportunities and Threats) analysis is one of the earliest strategy frameworks: –Developed in the 1960s at Harvard Business School by Learned, Christensen, Andrews, and Guth. –Gives basic directions for structuring strategic analysis. The underlying theory is that assessment of competitive position should combine both an external and an internal analysis: The SWOT (Strengths-Weaknesses/ Opportunities and Threats) analysis is one of the earliest strategy frameworks: –Developed in the 1960s at Harvard Business School by Learned, Christensen, Andrews, and Guth. –Gives basic directions for structuring strategic analysis. The underlying theory is that assessment of competitive position should combine both an external and an internal analysis: Why We Use It Derives insight into a companys competitive position. Strengths & Limitations Strengths: –Provides a good summary. –Efficient for expository purpose. Limitations: –Needs to be compared to how industries create value i.e. what are the industry CSFs –Better as a facilitative tool than analytic –Client has often already done this analysis Strengths: –Provides a good summary. –Efficient for expository purpose. Limitations: –Needs to be compared to how industries create value i.e. what are the industry CSFs –Better as a facilitative tool than analytic –Client has often already done this analysis Internal Assessment External Assessment –Weaknesses –Strengths –Opportunities –Threats Strategic Choices COMPETITORS/INDUSTRY STREAM–SUPPLEMENTARY ANALYTICS

86 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT COMPETITORS/INDUSTRY STREAM–SUPPLEMENTARY ANALYTICS SWOT analysishow to apply it Relying on findings from related analytics, produce an overview of: –The companys strengths and weaknesses, regarding in particular: Value chain Financials Organisation Capabilities Portfolio –Opportunities/threats in the industry, focusing in particular on: Competitors moves (past/current/forecasted). Prioritise each element after validation with JTMs and industry experts: –Greatest strengths and opportunities. –Most important weaknesses and threats.

87 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT SWOT analysisillustrative output COMPETITORS/INDUSTRY STREAM–SUPPLEMENTARY ANALYTICS StrengthsWeaknesses OpportunitiesThreats 2 strong products Dynamic management team High production costs Geographical position Growing Asian markets Diversification into service –Increasing demand for service Competition in ex-USSR Company: A

88 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT SWOT Analysistop tips Potential Insights Analytic key to obtain a quick grasp of the companys position in its industry: –Highlight areas for development. Analytic key to obtain a quick grasp of the companys position in its industry: –Highlight areas for development. Hints and Pitfalls Do: Start by defining the market and boundaries. Access all client data. Call market research firms for free contents pages of their reports. Focus on trends (what's changing? why?) Limit the number of elements in each section (max 5) Do: Start by defining the market and boundaries. Access all client data. Call market research firms for free contents pages of their reports. Focus on trends (what's changing? why?) Limit the number of elements in each section (max 5) Data Sources Competitors analysis sources. Clients market research data. Market research firms. Focused market interviews. Database searches. Competitors analysis sources. Clients market research data. Market research firms. Focused market interviews. Database searches. Case Examples Case Examples The following documents contain good examples of SWOT analysis and output: Related Analytics Related Analytics Porters five forces PEST Competitors comparison Capabilities analysis Porters five forces PEST Competitors comparison Capabilities analysis Value chain Financial/ratio analysis Break-even analysis Scenario modelling COMPETITORS/INDUSTRY STREAM–SUPPLEMENTARY ANALYTICS

89 Competitors/Industry Stream Analytics Introduction Value Chain Market/Sizing and Share Financial/Ratio Analysis Company/Competitor Analysis SWOT Analysis PEST Analysis Porters Five Forces Growth Share Matrix Key Success Factors Conclusions

90 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT PEST (Political, Economic, Sociodemographic and technology) analysisintroduction What It Is An analytical framework that assesses the impact of four major forces that shape an industry, i.e.: –Political forces –Economic forces –Socio-demographic forces –Technology forces The PEST framework: –Presents the characteristics of each of these forces (as well as their evolutions). –Explains how those forces affect: ·Competitive environment (as described by Porter through his five forcessee related analytics). ·Industry value chain. ·Industry financials. An analytical framework that assesses the impact of four major forces that shape an industry, i.e.: –Political forces –Economic forces –Socio-demographic forces –Technology forces The PEST framework: –Presents the characteristics of each of these forces (as well as their evolutions). –Explains how those forces affect: ·Competitive environment (as described by Porter through his five forcessee related analytics). ·Industry value chain. ·Industry financials. Why We Use It Complement other industry analysis frameworks. Explain ongoing changes in the industry. Complement other industry analysis frameworks. Explain ongoing changes in the industry. Strengths & Limitations Strengths: Deals with dimensions such as socio- demographics or policies that may be key to some industries. Limitations: Needs to be seen against how industries create value i.e. what are the industry CSFs Better as a facilitative tool than analytic Strengths: Deals with dimensions such as socio- demographics or policies that may be key to some industries. Limitations: Needs to be seen against how industries create value i.e. what are the industry CSFs Better as a facilitative tool than analytic COMPETITORS/INDUSTRY STREAM–SUPPLEMENTARY ANALYTICS

91 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT PEST analysistop tips Potential Insights Reveals key trends and issues in the industry, e.g.: –Emerging/declining constraints. –New rules of the game. Reveals key trends and issues in the industry, e.g.: –Emerging/declining constraints. –New rules of the game. Hints and Pitfalls Do: Focus on the most significant aspect if you do not intend to deliver a thorough industry analysis. Dont: Lose sight of factors that truly influence your clients business Do: Focus on the most significant aspect if you do not intend to deliver a thorough industry analysis. Dont: Lose sight of factors that truly influence your clients business Data Sources Analysts reports Industry reports Database searches Industry experts Analysts reports Industry reports Database searches Industry experts Case Examples Case Examples The following documents contain good examples of PEST analysis and output: Related Analytics Related Analytics Porters five forces Value chain analysis Porters five forces Value chain analysis COMPETITORS/INDUSTRY STREAM–SUPPLEMENTARY ANALYTICS

92 Competitors/Industry Stream Analytics Introduction Value Chain Market/Sizing and Share Financial/Ratio Analysis Company/Competitor Analysis SWOT Analysis PEST Analysis Porters Five Forces Growth Share Matrix Key Success Factors Conclusions

93 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Porters five forcesintroduction What It Is Porters five forces constitutes a framework for analysing a companys environment (or industry structure): –Porter first structured the framework in his 1980 book Competitive Strategy. Porter assumes that competition in an industry depends on five basic forces: The collective strength of these forces determines the ultimate profit potential and allocation in the industry. Porters five forces constitutes a framework for analysing a companys environment (or industry structure): –Porter first structured the framework in his 1980 book Competitive Strategy. Porter assumes that competition in an industry depends on five basic forces: The collective strength of these forces determines the ultimate profit potential and allocation in the industry. Why We Use It Assess attractiveness on the basis of competition in an industry. Highlight areas in which industry trends may pose opportunities or threats. Analyse where the company stands vis-a-vis the underlying causes of each competitive force. To understand/diagnose levels of return. Assess attractiveness on the basis of competition in an industry. Highlight areas in which industry trends may pose opportunities or threats. Analyse where the company stands vis-a-vis the underlying causes of each competitive force. To understand/diagnose levels of return. Strengths & Limitations Strengths: Quite comprehensive framework. Good starting point to understand key drivers and trends. Limitations: Very often used strictly qualitatively. Strengths: Quite comprehensive framework. Good starting point to understand key drivers and trends. Limitations: Very often used strictly qualitatively. Industry Competitors Substitutes Potential Entrants BuyersSuppliers Rivalry Among Existing Firms Bargaining power of buyers Bargaining power of suppliers Threat of substitute products or services Threat of new entrants Source: M.E. Porter, Competitive Strategy, 1980, p. 4 Free Press. COMPETITORS/INDUSTRY STREAM–SUPPLEMENTARY ANALYTICS

94 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Porters five forcespotential insight/output Threat of New Entrants Barriers to entry: Economies of scale (including shared resources) Product differentiation (proprietary) Capital requirements Switching costs Access to distribution channels Cost disadvantages independent of scale Government policy Expected reaction of incumbent Intensity of Rivalry Intense rivalry results from: Numerous or equally balanced competitors Slow industry growth High fixed or storage costs Lack of differentiation or switching costs Capacity augmented in large increments Diverse competitors High strategic stakes High exit barriers Exit Barriers Entry Barriers L H LH Low, stable returns Low, risky returns High, risky returns High, stable returns Pressure from Substitute Products Bargaining Power of BuyersBargaining Power of Suppliers Search for products that can perform the same function. Assess buyers propensity to substitute. Focus on those that: Are improving their price performance trade-off compared with the industries products. Require low switching costs. Are produced by industries earning high profits. A buyer group is powerful when: It is concentrated or purchases large volumes relative to seller sales. The products represent a significant fraction of the buyers costs or purchases. The products are standard or undifferentiated. It faces few switching costs. It earns low profits. It poses a credible threat of backward integration. The bought product is unimportant. It has full information. A supplier group is powerful when: It is dominated by a few companies and is more concentrated than the industry it sells to. There are no substitute products. The industry is not an important customer. Its products are important to the industry. Products are differentiated or suppliers have built up switching costs. It poses a credible threat of forward integration. Take offensive or defensive actions to create a defensible position against the forces: Competitive Advantage Competitive Scope Broad Narrow Lower CostDifferentiation Cost Leadership Differentiation Cost Focus Differentiation Focus Positioning the firm so its capabilities provide the best defence. Influencing the balance of forces through strategic moves. Anticipating shifts in the factors underlying the forces and responding to them. Several important economic and technical characteristics of an industry are critical to the strengths of each competitive force: COMPETITORS/INDUSTRY STREAM–SUPPLEMENTARY ANALYTICS

95 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Porters five forcestop tips Hints and Pitfalls Do: Define precisely the industry before conducting analysis. Quantify your findings where possible. Don't: Just use as a static toolshow trends in each of the areas. Do: Define precisely the industry before conducting analysis. Quantify your findings where possible. Don't: Just use as a static toolshow trends in each of the areas. Data Sources Industry reports Analysts reports Database searches See also related analytics sources Industry reports Analysts reports Database searches See also related analytics sources Case Examples Case Examples The following documents contain good examples of Porters five forces analysis and output: Related Analytics Related Analytics PEST SWOT Segment attractiveness Product life cycle Product substitution Competitors comparison PEST SWOT Segment attractiveness Product life cycle Product substitution Competitors comparison COMPETITORS/INDUSTRY STREAM–SUPPLEMENTARY ANALYTICS

96 Competitors/Industry Stream Analytics Introduction Value Chain Market/Sizing and Share Financial/Ratio Analysis Company/Competitor Analysis SWOT Analysis PEST Analysis Porters Five Forces Growth Share Matrix Key Success Factors Conclusions

97 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Growth share matrixintroduction What It Is Developed by BCG, the growth share matrix displays graphically in a 2-by-2 matrix the position of each business of a companys portfolio or compares the position of players in one industry. The growth share matrix is based on the use of industry growth and relative market share (RMS) as proxies for: –The competitive position of a firm in its industry (RMS). –The attractiveness of the segment (growth) The matrix has the following quadrants which have different cash flow characteristics and implications: –StarHighHigh –Cash cowsHighLow –DogsLowLow –Question marksLowHigh The key idea is that business units located in each of the quadrants will be in fundamentally different cash flow positions and should be managed differently. Developed by BCG, the growth share matrix displays graphically in a 2-by-2 matrix the position of each business of a companys portfolio or compares the position of players in one industry. The growth share matrix is based on the use of industry growth and relative market share (RMS) as proxies for: –The competitive position of a firm in its industry (RMS). –The attractiveness of the segment (growth) The matrix has the following quadrants which have different cash flow characteristics and implications: –StarHighHigh –Cash cowsHighLow –DogsLowLow –Question marksLowHigh The key idea is that business units located in each of the quadrants will be in fundamentally different cash flow positions and should be managed differently. Why We Use It Provides a framework to suggest the kind of investment strategy to follow for each business. Assess trends in the evolution of a companys portfolio of business (when matrix is drawn for both the current year and past years). Understand the competitive position of each business, possible cash requirements and focus attention on key issues. Provides a framework to suggest the kind of investment strategy to follow for each business. Assess trends in the evolution of a companys portfolio of business (when matrix is drawn for both the current year and past years). Understand the competitive position of each business, possible cash requirements and focus attention on key issues. Strengths & Limitations Strengths: –Coherent and simple framework. –Good starting point for thinking about a firms portfolio. Limitations: –May fuel simplistic conclusions: ·The matrix assumes that high relative market share automatically results in high cash generation. ·This is not true in all industries. –Can lead to the interpretation that cash generation is more important than profit generation. –Can also lead to wrong behaviour, i.e. milking of cash cow when it needs investment (typically when industry changes). –Very rare that a companys businesses are truly independent. –May neglect niche strategies. Strengths: –Coherent and simple framework. –Good starting point for thinking about a firms portfolio. Limitations: –May fuel simplistic conclusions: ·The matrix assumes that high relative market share automatically results in high cash generation. ·This is not true in all industries. –Can lead to the interpretation that cash generation is more important than profit generation. –Can also lead to wrong behaviour, i.e. milking of cash cow when it needs investment (typically when industry changes). –Very rare that a companys businesses are truly independent. –May neglect niche strategies. Relative Share Market Growth Quadrant COMPETITORS/INDUSTRY STREAM–SUPPLEMENTARY ANALYTICS

98 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Growth share matrixhow to do it Steps: 1.Isolate business by defining the appropriate business segments. a 2.For each business, determine: –Dollar scale. –Market shares of the business and of its biggest competitors. –Growth rate of the market in which the business operates. 3.For each business, calculate its relative market share (RMS): RMS = Company market share Market share of biggest competitors 4.Draw the matrix, with a log scale on the horizontal axis and a regular scale on the vertical axis: –Divide into quadrants, with the vertical line at 1.0 relative market share and the horizontal line at nominal GNP growth (12.5% in the example set out below). 5.Place each business in the matrix: –The centre of the circle is at the intersection of the businesss relative share and its industry growth rate. –The area of the circle is proportional to the businesss size. 6.If you wish to understand any trend, repeat steps 1 to 5 with data from previous years. COMPETITORS/INDUSTRY STREAM–SUPPLEMENTARY ANALYTICS a. See R Koch training material in South African POA for further analysis of business segment definition.

99 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Growth share matrixillustrative output % 25% 20% 15% 10% 5% Apparel Tubular Steel Beverages Batteries Connecting Devices Chemicals Lamp Ballasts Growth/Share Matrix Industry Growth (%) Relative Share Example: Northwest Industries Major Business Area 1980 Revenues $ 3-Year Business Growth % 3-Year Industry Growth % 1980 Revenues of Largest Competitor $ Relative Share Industrial Group: Tubular steel and ingot moulds Component parts: –Connecting devices –Lamp Ballasts Chemical Group: Consumer Group: Manufactured consumer products: –Apparel –Batteries Beverages Source: Mac Group Core Practice manual, adapted from Michael M. Kaiser Associates..25 COMPETITORS/INDUSTRY STREAM–SUPPLEMENTARY ANALYTICS Total2,876.4

100 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Growth share matrixtop tips Potential Insight The growth share matrix suggests the following strategies for each business unit type: Hints and Pitfalls Do: Validate your market definition with your client: –It is critical in measuring both relative market share and industry growth rate. Dont: –Use as the only generic modeluse in conjunction with other analytics (e.g. scenario modelling) Do: Validate your market definition with your client: –It is critical in measuring both relative market share and industry growth rate. Dont: –Use as the only generic modeluse in conjunction with other analytics (e.g. scenario modelling) Star Cash in Balance (some + some -) Dilemma Cash Users Cash cows Cash generators Dogs Cash in Balance (some + some -) Build/ hold share Build Market Share selectively Hold share/ harvest Withdraw Harvest Share Expected Cash Characteristics of Each Quadrant of the Market Typical Strategic Prescriptions Typical Strategic Movement Prescriptions High Low High Rate of market growth Relative market share (log scale) Strategic movements Cash movements Use to invest in other units Do nothing if cash is positive Invest or turn to a star Divest if not critical SBU COMPETITORS/INDUSTRY STREAM–SUPPLEMENTARY ANALYTICS

101 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Growth share matrixdata source, case examples, and related analytics Data Sources Publicly available data for market growth (see market sizing) and competitors market share. Clients internal data: –Sales –Market share Publicly available data for market growth (see market sizing) and competitors market share. Clients internal data: –Sales –Market share Case Examples The following document contains goods examples of growth share analysis and output: Related Analytics Segment attractiveness. Market-sizing. Market share measures. Segment attractiveness. Market-sizing. Market share measures. COMPETITORS/INDUSTRY STREAM–SUPPLEMENTARY ANALYTICS

102 Competitors/Industry Stream Analytics Introduction Value Chain Market/Sizing and Share Financial/Ratio Analysis Company/Competitor Analysis SWOT Analysis PEST Analysis Porters Five Forces Growth Share Matrix Key Success Factors Conclusions

103 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Key success factors and index of key success factors introduction What They Are Key Success Factor (KSF): Any dimension in which excellence is crucial for competitive success, for example: –Parts of the marketing mix –Research and development –Low-cost manufacturing Also known as a critical success factor (CSF) Analysis of KSFs is crucial in most studies of competitive strategies: –Skill is in identifying appropriate KSFs Index of key success factors: A summary table that scores and ranks each competitor against the KSFs for the business or segment Note: The important insights come from understanding what is key to success in the industry or segment: –The index is simply a device to display the output –Refer to section on industry dynamics Key Success Factor (KSF): Any dimension in which excellence is crucial for competitive success, for example: –Parts of the marketing mix –Research and development –Low-cost manufacturing Also known as a critical success factor (CSF) Analysis of KSFs is crucial in most studies of competitive strategies: –Skill is in identifying appropriate KSFs Index of key success factors: A summary table that scores and ranks each competitor against the KSFs for the business or segment Note: The important insights come from understanding what is key to success in the industry or segment: –The index is simply a device to display the output –Refer to section on industry dynamics Why We Use Them Key success factors: Determines at what companies must excel to be successful in a business or segment They should be the logical outcome (the so what) of PEST, Porter etc. analysis Index of key success factors: Evaluate competitors strengths and weaknesses in areas that are critical to success To position our client relative to competitors Key success factors: Determines at what companies must excel to be successful in a business or segment They should be the logical outcome (the so what) of PEST, Porter etc. analysis Index of key success factors: Evaluate competitors strengths and weaknesses in areas that are critical to success To position our client relative to competitors Strengths & Limitations Benefits: If rigorously applied, clarifies what capabilities or skills companies need to compete successfully Index allows us to quantify competitors relative strengths against KSFs Index provides a structured, concise technique for comparing competitors Drawbacks: The KSFs and comparative index are only as good as the business understanding and judgement used to develop them Benefits: If rigorously applied, clarifies what capabilities or skills companies need to compete successfully Index allows us to quantify competitors relative strengths against KSFs Index provides a structured, concise technique for comparing competitors Drawbacks: The KSFs and comparative index are only as good as the business understanding and judgement used to develop them COMPETITORS/INDUSTRY STREAM–SUPPLEMENTARY ANALYTICS

104 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Key success factors and index of key success factors how to apply them Key Success Factors Determining KSFs requires a thorough understanding of a business or segment, and therefore draws on several of other analytics in the toolkit. Relevant issues in understanding the business or segment are: –How customers buy, and whats important to them in the purchase decision: See key purchase criteria –Whos successful in the business or analytic segment, and why. See: Company analysis Financial analysis –Trends within the business or segment Other sources of insights into key success factors are: –Clients executives/staff –Industry analysts or commentators Determining KSFs is an iterative process: initial research, developing draft hypotheses, testing and, refining these hypotheses Determining KSFs requires a thorough understanding of a business or segment, and therefore draws on several of other analytics in the toolkit. Relevant issues in understanding the business or segment are: –How customers buy, and whats important to them in the purchase decision: See key purchase criteria –Whos successful in the business or analytic segment, and why. See: Company analysis Financial analysis –Trends within the business or segment Other sources of insights into key success factors are: –Clients executives/staff –Industry analysts or commentators Determining KSFs is an iterative process: initial research, developing draft hypotheses, testing and, refining these hypotheses Index of Key Success Factors The purpose of developing an index of KSFs is to understand: –Which ones are most important –How competitors perform relative to each key success factor Ranking KSFs, and scoring competitors, requires a good understanding of the business or segments Key steps in the process for ranking and weighting KSFs: –Identify KSFs (see box, left) –Give each KSFs a weighting reflecting its relative importance (this is a non-trivial task): How would you allocate investment resources for a competitor? –Score each competitor against each key success factor: Document the rationale for each score –Add up the total scores for each competitor –Convert the total for each competitor into a percentage (i.e. what proportion of the perfect score it achieved?) The resulting percentages indicate the relative performance of each competitor The purpose of developing an index of KSFs is to understand: –Which ones are most important –How competitors perform relative to each key success factor Ranking KSFs, and scoring competitors, requires a good understanding of the business or segments Key steps in the process for ranking and weighting KSFs: –Identify KSFs (see box, left) –Give each KSFs a weighting reflecting its relative importance (this is a non-trivial task): How would you allocate investment resources for a competitor? –Score each competitor against each key success factor: Document the rationale for each score –Add up the total scores for each competitor –Convert the total for each competitor into a percentage (i.e. what proportion of the perfect score it achieved?) The resulting percentages indicate the relative performance of each competitor COMPETITORS/INDUSTRY STREAM–SUPPLEMENTARY ANALYTICS

105 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Key success factors and index of key success factorsillustrative output Note: The scale does not matter. A five-point maximum per factor is convenient because people are used to making five-point scale evaluations. Relative Importance forAs National MarketerAs Regional Marketer Effective Distribution Strong Brand National Marketer 5 Regional Marketer 4 Competitor A Competitor B 2 Competitor A 4 Competitor B Innovative Product Tiered Pricing Multiple Segment Participation Low Cost Manufacturing High R&D spend Total /21 = 90% 11/2118/1816/18 = 52%= 100%= 89% Index of Key Success FactorsHypothetical Example Source: MAC Group, Core Practice Manual. COMPETITORS/INDUSTRY STREAM–SUPPLEMENTARY ANALYTICS

106 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Key success factors & index of key success factorsguidelines Key Success FactorsIdentification Techniques Source: Leidecker and Bruno, Identifying and using Critical Success Factors, Note: CSFs = Critical Success Factors. I I II III IV Technique Focus Environmental analysis (e.g. PEST) Macro Analysis of industry structure (e.g. Porter, Value Chain) Industry Macro Industry/business experts Industry Micro Analysis of competition (focus is limited to the competitive environment, how firms compete) Industry Micro Sources Advantages Disadvantages Environment scanning (Corp. Staff) Econometric models Socio-political consulting services Environment scanning (Corp. Staff) Econometric models Socio-political consulting services Future orientation Macro orientation: analysis goes beyond industry-firm focus Can be linked to threats/ opportunity evaluation Future orientation Macro orientation: analysis goes beyond industry-firm focus Can be linked to threats/ opportunity evaluation More difficult to operationalise into specific industry or firm KSFs Results may not lend themselves to incorporate usage in current timeframe (todays KSFs) More difficult to operationalise into specific industry or firm KSFs Results may not lend themselves to incorporate usage in current timeframe (todays KSFs) A variety of industry structure frameworks Specific focus is on industry Frameworks allow user to understand interrelationships between industry structural components Can force more macro level focus (beyond industry boundaries) Specific focus is on industry Frameworks allow user to understand interrelationships between industry structural components Can force more macro level focus (beyond industry boundaries) While excellent source for industry-wide KSFs not so useful in determining firm- specific KSFs Industry association executives Financial analysts specialising in industry Outsider familiar with firms in industry Knowledgeable insiders who work in industry Industry association executives Financial analysts specialising in industry Outsider familiar with firms in industry Knowledgeable insiders who work in industry Means of soliciting conventional wisdom about industry and firms Subjective information often not discovered with more objective, formal and analytical approaches Means of soliciting conventional wisdom about industry and firms Subjective information often not discovered with more objective, formal and analytical approaches Lack of objectivity often leads to questions in verifying/justifying Staff specialities Line managers Internal consultants External consultants Staff specialities Line managers Internal consultants External consultants Narrowness of focus, offers, advantage of detailed, specific data Depth of analysis leads to better means of justification Narrowness of focus, offers, advantage of detailed, specific data Depth of analysis leads to better means of justification Narrowness of focus KSF development limited to competitive arena (as opposed to industry structure approach) COMPETITORS/INDUSTRY STREAM–SUPPLEMENTARY ANALYTICS

107 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Key success factors & index of key success factorsguidelines (cont.) Key Success Factors Identification Techniques Source: Leidecker and Bruno, Identifying and using Critical Success Factors, V V VI VII VIII Technique Focus Analysis of dominant firm in the industry Industry Micro Company assessment (comprehensive firm- specific) Micro Temporal/intuitive factors (firm-specific) Micro PIMS results Industry Micro Sources Advantages Disadvantages Staff specialities Line managers Internal consultants External consultants Staff specialities Line managers Internal consultants External consultants Dominant competitor may set industry KSFs Understanding of No. 1 may assist in co-ordinating firms specific KSFs Dominant competitor may set industry KSFs Understanding of No. 1 may assist in co-ordinating firms specific KSFs Narrow focus may preclude seeking alternative explanations of success May limit individual firms strategic response and focus Narrow focus may preclude seeking alternative explanations of success May limit individual firms strategic response and focus Internal staff line organisations (detailed analyses by organisation functionchecklist approach) Thorough functional area screening reveals internal/external strengths and weaknesses that may assist KSF development Narrow focus of analysis precludes inputs of more macro approaches Check-list approach can be very time consuming and become data bound Narrow focus of analysis precludes inputs of more macro approaches Check-list approach can be very time consuming and become data bound Internal staff Brainstorming CEO/general management observation Internal staff Brainstorming CEO/general management observation More subjective and not limited to functional analysis approach Leads to identification of important short-run KSFs that may go unnoticed in more formal reviews More subjective and not limited to functional analysis approach Leads to identification of important short-run KSFs that may go unnoticed in more formal reviews Difficulty in justifying as KSF if only of short term Important may be overstated, if in fact a short-lived phenomenon Difficulty in justifying as KSF if only of short term Important may be overstated, if in fact a short-lived phenomenon Articles on PIMS Project results Empirically based Excellent starting point Empirically based Excellent starting point General nature Applicability to your firm or industry Determination of relative importance General nature Applicability to your firm or industry Determination of relative importance COMPETITORS/INDUSTRY STREAM–SUPPLEMENTARY ANALYTICS

108 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Key success factors and index of key success factors top tips Potential Insights Determining key success factors, based on a thorough understanding of a business or segment, can highlight areas on which clients should focus: –Strengthen capabilities –Defend capabilities Helps determine which competitors are well positioned to compete successfully, and estimate the relative performance of competitors Determining key success factors, based on a thorough understanding of a business or segment, can highlight areas on which clients should focus: –Strengthen capabilities –Defend capabilities Helps determine which competitors are well positioned to compete successfully, and estimate the relative performance of competitors Hints and Pitfalls Do: Focus on drawing up the right key success factors Choose a simple scale for weighting criteria Recognise that the index largely involves quantifying judgements: –Where possible, try to obtain quantitative data on each competitors performance against each key success factor Do: Focus on drawing up the right key success factors Choose a simple scale for weighting criteria Recognise that the index largely involves quantifying judgements: –Where possible, try to obtain quantitative data on each competitors performance against each key success factor COMPETITORS/INDUSTRY STREAM–SUPPLEMENTARY ANALYTICS

109 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Key success factors and index of key success factorsdata sources, case examples, and related analytics Data Sources Key success factors: Publicly -available data on business or segment, and competitors, i.e.: –Investment analysts reports, annual reports, databases Gemini analyses on business or segment, and competitors Clients data on business or segment, and competitors Interviews with client, industry experts, and customers Key success factors: Publicly -available data on business or segment, and competitors, i.e.: –Investment analysts reports, annual reports, databases Gemini analyses on business or segment, and competitors Clients data on business or segment, and competitors Interviews with client, industry experts, and customers Case Examples The following documents contain a checklist of potential approaches for identifying key success factors: –Attach Leidedner & Bruno material Also attached are good examples of key success factor analysis and reports The following documents contain a checklist of potential approaches for identifying key success factors: –Attach Leidedner & Bruno material Also attached are good examples of key success factor analysis and reports Related Analytics Analytics required to develop key success factors: –Key purchase criteria –Company/competitor analysis –Financial analysis/ratios analysis –PEST and Porter Analytics required to develop key success factors: –Key purchase criteria –Company/competitor analysis –Financial analysis/ratios analysis –PEST and Porter COMPETITORS/INDUSTRY STREAM–SUPPLEMENTARY ANALYTICS

110 Competitors/Industry Stream Analytics Introduction Value Chain Market/Sizing and Share Financial/Ratio Analysis Company/Competitor Analysis SWOT Analysis PEST Analysis Porters Five Forces Growth Share Matrix Key Success Factors Conclusions

111 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT The industry/competitors analysis should start to determine some key facts How firms are creating value. Who is successful/unsuccessful, and why. What our clients situation is compared with what it believes its situation to be. Whether the business or segments are attractive. Whether any competitors dominate the value chain. Relative power at key stages within the industry. COMPETITORS/INDUSTRY STREAM–CONCLUSIONS

112 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT But you must keep in mind a few guiding principles Start with the Analytical Problem Solving Process to generate some initial hypotheses. Always constructively question a clients paradigm about the business. Defining the business and segments may take several stages and you may have to refine your definition in the light of further analysis. Do not rely on either the clients or brokers definitions of the business and sub-segments: –Unless doing a quick-and-dirty industry analysis. The solution is not in the analysis alonetake time to think about the findings: –Solutions come from drawing insights. COMPETITORS/INDUSTRY STREAM–CONCLUSIONS

113 Customer Needs Stream Analytics Introduction Segmentation and Targeting Cluster Analysis Customer Experience Key Purchase Criteria Product Life Cycle Product Substitution Adoption Cycle Conclusions

114 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT What are the (economic) boundaries of the businesses the company is in? How are they changing? How do companies create value in each of the businesses? How is this changing? How is the client company positioned relative to the competition to create value? How is it changing? Main AnalyticsStrategic Position Core AnalyticSupplementary Analytic How and why do customers purchase? What is the trigger? What different needs-based segments exist? What substitute products are there? What is the underlying customer need? What trends are emerging? How and why do customers purchase? What is the trigger? What different needs-based segments exist? What substitute products are there? What is the underlying customer need? What trends are emerging? What are the key purchase criteria by segment? Are purchase behaviours changing? How? Why? What are the key purchase criteria by segment? Are purchase behaviours changing? How? Why? How does our client meet the key purchase criteria compared with its competitors? Segmentation and targeting Cluster analysis Customer experience Product substitution Adoption cycle Key purchase criteria Product life cycle Customer Needs Stream Strategic Questions Customer Needs Stream: Questions and Analytics ANALYTICS TO UNDERSTAND A CLIENTS STRATEGIC POSITION

115 Customer Needs Stream Analytics Introduction Segmentation and Targeting Cluster Analysis Customer Experience Key Purchase Criteria Product Life Cycle Product Substitution Adoption Cycle Conclusions

116 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT The customer needs stream aims to analyse the three fundamental dimensions of a customer analysis Elements of Customer Analysis The purpose is both to determine what customers to target and how to acquire and retain them. Customer Analysis What needs?What needs? –What purchase criteria? –What behaviours? What needs?What needs? –What purchase criteria? –What behaviours? How well are we serving the customer?How well are we serving the customer? What differentiators? (what segments)What differentiators? (what segments) Customer experience Key purchase criteria Adoption cycle Product life cycle Product substitution Segmentation and targeting Cluster analysis CUSTOMER NEEDS STREAM INTRODUCTION Core Analytics Supplementary Analytics

117 Customer Needs Stream Analytics Introduction Segmentation and Targeting Cluster Analysis Customer Experience Key Purchase Criteria Product Life Cycle Product Substitution Adoption Cycle Conclusions

118 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Segmentation & targetingintroduction Overview of Segmentation Process of dividing markets into groups of potential customers with similar characteristics: –The underlying assumption is that these customers are likely to exhibit similar purchase behaviours. Segmentation aims to answer the following questions: –What are the characteristics of my customers? –How can they be differentiated (segmented)? –How well are competitors serving each segment? –Which segment should I target and how? There are a number of ways to segment customers: –Choice of products or brand. –Demographics e.g. by age, life stage, social class. –Psychographicsusing attitudes and behaviours. –Needs (see opposite). –Channels. –Financial assets (good for personal finance market). –Etc. Segmentation can be developed by a combination of a quantitative or qualitative approach: –Cluster analysis involves a very quantitative approach. –Needs based/BMFO is more qualitative. Process of dividing markets into groups of potential customers with similar characteristics: –The underlying assumption is that these customers are likely to exhibit similar purchase behaviours. Segmentation aims to answer the following questions: –What are the characteristics of my customers? –How can they be differentiated (segmented)? –How well are competitors serving each segment? –Which segment should I target and how? There are a number of ways to segment customers: –Choice of products or brand. –Demographics e.g. by age, life stage, social class. –Psychographicsusing attitudes and behaviours. –Needs (see opposite). –Channels. –Financial assets (good for personal finance market). –Etc. Segmentation can be developed by a combination of a quantitative or qualitative approach: –Cluster analysis involves a very quantitative approach. –Needs based/BMFO is more qualitative. CUSTOMER NEEDS STREAM CORE ANALYTICS Focus on Needs-based Segmentation Specific type of segmentation, which splits current and/or prospective customers into homogeneous groups based on product and/or service needs. Thus, needs-based segmentation is a means to: –Analyse what customers key needs are. –Understand how to serve the different emerging segments. –Determine the attractiveness of these segments. Gemini often uses an needs-based approach as it is linked heavily with Geminis Building Market Focused Organisation (BMFO) methodology: –See strategy kbase on Gemini Compass for detailed material. A needs-based approach is used to ensure a customer is more likely to respond to a proposition: –Specific needs are addressed and targeted. Specific type of segmentation, which splits current and/or prospective customers into homogeneous groups based on product and/or service needs. Thus, needs-based segmentation is a means to: –Analyse what customers key needs are. –Understand how to serve the different emerging segments. –Determine the attractiveness of these segments. Gemini often uses an needs-based approach as it is linked heavily with Geminis Building Market Focused Organisation (BMFO) methodology: –See strategy kbase on Gemini Compass for detailed material. A needs-based approach is used to ensure a customer is more likely to respond to a proposition: –Specific needs are addressed and targeted. Guidance should be sought as to what type of segmentation to use Gemini contacts Shirley Lo, Julia Beck.

119 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Segmentation & targetingintroduction (cont.) Why We Use It Isolates sections of market for which strategy needs to be uniquely defined: –Finds niche opportunities. –Identifies customers more likely to undertake a given attitude. Evaluates segments and chooses one or more for target activity. Identifies which customer groups the company should focus. Identifies appropriate products, services, and marketing for different segments. Isolates sections of market for which strategy needs to be uniquely defined: –Finds niche opportunities. –Identifies customers more likely to undertake a given attitude. Evaluates segments and chooses one or more for target activity. Identifies which customer groups the company should focus. Identifies appropriate products, services, and marketing for different segments. Strengths & Limitations Strengths: Focused approach which helps increase revenue and margin. Foundation on which all other marketing actions can be based. Provides greater customer-focus: –Allows the organisation to gain a clear picture of each segment and its service needs. Limitations: Requires a major corporate commitment. Can become too reliant on statistically significant segments at the expense of industry experience and business sense. Can cost more than a mass marketing approach. For needs-based segmentation, it is unlikely that customer needs data is already available: –Time consuming to collect information required. A considerable amount of time is required to collate data (minimum 2 weeks): –Careful consideration of use of analytic must be given. Strengths: Focused approach which helps increase revenue and margin. Foundation on which all other marketing actions can be based. Provides greater customer-focus: –Allows the organisation to gain a clear picture of each segment and its service needs. Limitations: Requires a major corporate commitment. Can become too reliant on statistically significant segments at the expense of industry experience and business sense. Can cost more than a mass marketing approach. For needs-based segmentation, it is unlikely that customer needs data is already available: –Time consuming to collect information required. A considerable amount of time is required to collate data (minimum 2 weeks): –Careful consideration of use of analytic must be given. CUSTOMER NEEDS STREAM CORE ANALYTICS

120 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Segmentation & targetinghow to do it Conducting segmentation requires the following steps: Define Scope Select Segmentation Bases Gather DataAnalyse DataTarget Establish research objectives Review segmentation viability/segment formation criteria: –Time available –Level of detail required Seek guidance from experts or books –Contact Shirley Lo or Julia Beck Choose type of market segmentation: –Generate hypothesis about market Determine, criteria/variables for segmentation Design and choose data gathering approach, e.g.: –Identify information required –Test approach with joint team Plan/conduct data gathering: –Phone surveys –Day in life of studies –Workshops –Focus/groups –Sampling Identify attributes captured during customer interviews Use statistical techniques to groups respondents, including: –Cluster analysis Group the attributes in a manageable number of segments: –Profile each segment –Can segment be ranked? –Can segment be reached? –Will segment respond? Evaluate the attractiveness of each segment (see example overleaf): –Size and growth (on the basis of your sampling procedure assumptions, infer segment size) –Key Purchase Criteria vs. your value proposition –Profitability vs. efforts needed to serve segment –Accessibility Select the target segment for your activities: –Validate segments –Conduct gap analysis Assess capabilities/ability to serve potential segments: –Existing v. required CUSTOMER NEEDS STREAM CORE ANALYTICS CUSTOMER DATABASE Use checklist of segmentation criteria (see below)

121 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Segmentation & targetingselection criteria Selection Criteria 1.Targetability: Can you easily reach your customers? 2.Measurability: Can you quantify the segment by size and product usage? Can you rank the buying factors that are meaningful to your customers? 3.Accessibility: How efficient are the channels at serving each segment? 4.Sustainability: How many segments are reasonable? Are the segments large enough to warrant the resources and effort necessary for a targeted marketing effort? Is cluster membership stable? Is the solution stable? 5.Profitability: Is the segment potentially profitable enough to make the effort worthwhile? 6.Compatibility with competition: How interested in the segment are your major competitors? Are they actively pursuing it, or are they showing only a mild interest? 7.Effectiveness: Does your sales force have the skills and resources needed to serve the segment effectively for the long haul? Do clusters offer actionable opportunities? 8.Defendability: Can your company defend this segment against attack by a major competitor? 1.Targetability: Can you easily reach your customers? 2.Measurability: Can you quantify the segment by size and product usage? Can you rank the buying factors that are meaningful to your customers? 3.Accessibility: How efficient are the channels at serving each segment? 4.Sustainability: How many segments are reasonable? Are the segments large enough to warrant the resources and effort necessary for a targeted marketing effort? Is cluster membership stable? Is the solution stable? 5.Profitability: Is the segment potentially profitable enough to make the effort worthwhile? 6.Compatibility with competition: How interested in the segment are your major competitors? Are they actively pursuing it, or are they showing only a mild interest? 7.Effectiveness: Does your sales force have the skills and resources needed to serve the segment effectively for the long haul? Do clusters offer actionable opportunities? 8.Defendability: Can your company defend this segment against attack by a major competitor? Source: Adapted from Norton Paley, Cut Out For Success, Sales and Marketing Management, Vol. 146, No. 11, CUSTOMER NEEDS STREAM CORE ANALYTICS

122 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Segmentation & targetingillustrative output Example Segment Profile: CUSTOMER NEEDS STREAM CORE ANALYTICS Needs CharacteristicsLow priorities Need Importance Lever Performance Competitor Performance Importance and Performance Ratings Availability and reliability dominate all other needs Reliability deliveries Mixed pallets not required Few display pallets Promotions are important for some Understanding of needs is important Most will have EDI and scanning Cross-docking and back-hauling unlikely in 3-5 years time Many will require non-standard pack sizes Chiefly supermarket chains Few delivery points Warehouse deliveries Handling of returns and credits Secondary packaging specification Multi-functional contact Key Performance Gaps (Competitor Performance vs. Lever Performance) Note: Figures are average for each segment. Delivery reliability –from Lever today: +/- 2.5 hours –from best in class today: +/- 2.5 hour –future need: +/- 1 hour Product availability –from Lever today: 97% –from best in class today: 99% –future need: 100% Understanding of needs Promotion type and exclusivity –some require twice as many exclusive promotions Delivery lead time –from Lever today: 3.5 days –from best in class today: 3.5 days –future need: 1 day

123 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Potential Insights May reveal new opportunities Segmentation is a critical aspect of customer analysis Analytic helps determine: –What the characteristics of your customers are –How these customers can be differentiated based on their characteristics –Where niche opportunities lie: Existing unsatisfied needs Opportunities to create new needs May reveal new opportunities Segmentation is a critical aspect of customer analysis Analytic helps determine: –What the characteristics of your customers are –How these customers can be differentiated based on their characteristics –Where niche opportunities lie: Existing unsatisfied needs Opportunities to create new needs Segmentation & targetingtop tips Hints and Pitfalls Do: Consider needs along the whole value chain Ensure segments are targetableensure sufficient demographic data Spend sufficient time hypothesising needs, listing other information required, and writing and testing survey Consider conducting a preliminary surveymay be useful to identify a full set of customer needs Consider using a market research agency to carry out survey, tabulate results, and perform cluster analysis Make sure you validate your segmentation criteriatest with people who will use it Be specific about how you are going to reach and serve each segment Dont: Collect too little relevant information Use an insufficient sample size Use non-uniform information collected across all product categories Rely on information systems incapable of cross communication Try to do this in a limited timeframe Be side-tracked by recent ups or downs in the clients service level, and how this impacts customer perception Do: Consider needs along the whole value chain Ensure segments are targetableensure sufficient demographic data Spend sufficient time hypothesising needs, listing other information required, and writing and testing survey Consider conducting a preliminary surveymay be useful to identify a full set of customer needs Consider using a market research agency to carry out survey, tabulate results, and perform cluster analysis Make sure you validate your segmentation criteriatest with people who will use it Be specific about how you are going to reach and serve each segment Dont: Collect too little relevant information Use an insufficient sample size Use non-uniform information collected across all product categories Rely on information systems incapable of cross communication Try to do this in a limited timeframe Be side-tracked by recent ups or downs in the clients service level, and how this impacts customer perception CUSTOMER NEEDS STREAM CORE ANALYTICS

124 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Segmentation & targetingdata sources, case examples, related analytics Data Sources Primary sources: –Focus groups –Personal interviews –Telephone interviews Secondary sources: –Publicly available data –Market research –Consumer surveys Primary sources: –Focus groups –Personal interviews –Telephone interviews Secondary sources: –Publicly available data –Market research –Consumer surveys Case Example The following documents contain good case examples of needs-based segmentation and output: –Lever: Understanding Customer Service Requirements; Part 2 Customer Segmentation by Needs –British Steel, London Server The following documents contain good case examples of needs-based segmentation and output: –Lever: Understanding Customer Service Requirements; Part 2 Customer Segmentation by Needs –British Steel, London Server Related Analysis Cluster analysis Segment attractiveness BMFO methodology (see Strategy Kbase on Gemini Compass) Cluster analysis Segment attractiveness BMFO methodology (see Strategy Kbase on Gemini Compass) CUSTOMER NEEDS STREAM CORE ANALYTICS

125 Customer Needs Stream Analytics Introduction Segmentation and Targeting Cluster Analysis Customer Experience Key Purchase Criteria Product Life Cycle Product Substitution Adoption Cycle Conclusions

126 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Cluster analysisintroduction What It Is Cluster analysis is part of a statistical process which aims to generate segments: –A cluster (or segment) consists in the grouping of customers presenting similar features (I.e. needs, buying criteria, etc.) –A cluster results from the extraction within a wide statistical population of similar individuals The cluster analysis process is a data crunch process: Allows you to interpret any market as the sum of several clusters: –Each cluster presents a specific profile Can be used to help develop needs-based segments Cluster analysis is part of a statistical process which aims to generate segments: –A cluster (or segment) consists in the grouping of customers presenting similar features (I.e. needs, buying criteria, etc.) –A cluster results from the extraction within a wide statistical population of similar individuals The cluster analysis process is a data crunch process: Allows you to interpret any market as the sum of several clusters: –Each cluster presents a specific profile Can be used to help develop needs-based segments Why We Use It To build a strong fact-based segmentation: –Identifying of segments –Characterising of segments –Relatively sizing clusters Note: We generally use the output of cluster analysisthe data mining and crunching aspect being frequently outsourced to service providers To build a strong fact-based segmentation: –Identifying of segments –Characterising of segments –Relatively sizing clusters Note: We generally use the output of cluster analysisthe data mining and crunching aspect being frequently outsourced to service providers Strengths & Limitations Strengths Indispensable to achieve rigorous segmentation Limitations Cumbersome process when criteria for segmentation are complex Strengths Indispensable to achieve rigorous segmentation Limitations Cumbersome process when criteria for segmentation are complex 1. Identify key dimensions which explain variance in data set 2.Cluster respondents according to how they scored against the key dimensions Develop segment profiles from statistical clusters Cluster Analysis CUSTOMER NEEDS STREAM CORE ANALYTICS –Apply hypotheses –Apply factor analysis

127 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Cluster analysishow to do it CUSTOMER NEEDS STREAM CORE ANALYTICS 2.Determine criteria for clustering Set your targets: –What do you need to understand from your population –What dimensions characterise/ influence your market: Focus on explanatory dimensions Validate your target criteria: –Workshops –Focus groups –Analysis of customer surveys Clusters are chosen by looking at a number of different criteria to see which result in the most distinct segments Set your targets: –What do you need to understand from your population –What dimensions characterise/ influence your market: Focus on explanatory dimensions Validate your target criteria: –Workshops –Focus groups –Analysis of customer surveys Clusters are chosen by looking at a number of different criteria to see which result in the most distinct segments 3.Choose clusters Using either a spreadsheet or specific software, clusters are extracted from a customer database Group individuals according to their scores in the dimensions previously identified: –Anyone within a cluster is nearer to the mid-point of that cluster than any other The number of clusters is ultimately a matter of judgement: –Can in theory be limitless –See segmentation Using either a spreadsheet or specific software, clusters are extracted from a customer database Group individuals according to their scores in the dimensions previously identified: –Anyone within a cluster is nearer to the mid-point of that cluster than any other The number of clusters is ultimately a matter of judgement: –Can in theory be limitless –See segmentation 4.Flesh out segment profiles Run cluster breaks against all statements Examine the hard demographic data available for each cluster Develop pen-portraits for each segment Run cluster breaks against all statements Examine the hard demographic data available for each cluster Develop pen-portraits for each segment 1.Analyse potential criteria Conduct upfront factor analysis to determine factors Apply industry hypotheses Conduct upfront factor analysis to determine factors Apply industry hypotheses Iterative Loop Why are clusters emerging? Can we act on these clusters? Iterative Loop Why are clusters emerging? Can we act on these clusters?

128 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Potential Insights Critical step in the segmentation process Allows client to determine parameters which differentiate their market Enables understanding of how different parts of the market operate Critical step in the segmentation process Allows client to determine parameters which differentiate their market Enables understanding of how different parts of the market operate Hints and Pitfalls Do: Make sure that your example is statistically significant Try multiple criteria to see which form the best cluster Try to outsource where possibleCap Gemini have a group that perform this function Dont: Rely totally on the analysis use judgement and knowledge to choose the best cluster Do: Make sure that your example is statistically significant Try multiple criteria to see which form the best cluster Try to outsource where possibleCap Gemini have a group that perform this function Dont: Rely totally on the analysis use judgement and knowledge to choose the best cluster Data Sources Customer surveys Workshops Interviews Clients customer database Customer surveys Workshops Interviews Clients customer database Cluster analysistop tips Case Examples The following documents contain good examples of cluster analysis and output Related Analytics Segmentation Multi-variant statistical analysis, e.g. Conjoint analysis (see Strategy Kbase on Gemini Compass for detailed material) Key purchase criteria Segmentation Multi-variant statistical analysis, e.g. Conjoint analysis (see Strategy Kbase on Gemini Compass for detailed material) Key purchase criteria CUSTOMER NEEDS STREAM CORE ANALYTICS

129 Customer Needs Stream Analytics Introduction Segmentation and Targeting Cluster Analysis Customer Experience Key Purchase Criteria Product Life Cycle Product Substitution Adoption Cycle Conclusions

130 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Customer experienceintroduction What It Is Illustrates key areas of customers interactions with a business: –Usually shown as a succession of interaction with a company –Should account for what the customer goes through from the time they first become aware of a product to the point they stop using it –Can be generic for an industry or specific for a given company Provides a starting point to identify areas of potential differentiation Answers a series of questions as to what, where, when, how and why customers buy, e.g.: –How do consumers become aware of their needs? –How do consumers order and purchase? –How is your product repaired or serviced? Highlights what criteria are important to customers in purchase and discontinuation decisions A variant of the value chain concept: –Plots customer interaction against it Illustrates key areas of customers interactions with a business: –Usually shown as a succession of interaction with a company –Should account for what the customer goes through from the time they first become aware of a product to the point they stop using it –Can be generic for an industry or specific for a given company Provides a starting point to identify areas of potential differentiation Answers a series of questions as to what, where, when, how and why customers buy, e.g.: –How do consumers become aware of their needs? –How do consumers order and purchase? –How is your product repaired or serviced? Highlights what criteria are important to customers in purchase and discontinuation decisions A variant of the value chain concept: –Plots customer interaction against it Why We Use It Understand what events affect the customers relationship to decide what levers the client should manage strategically and operationally to retain the customer Highlight what processes are key to efficiently serve and retain the customer: –Both practical (eg. switchboard) and technical (eg. R&D) Help focus creativity on areas where opportunities to create a competitive advantage appear Understand what events affect the customers relationship to decide what levers the client should manage strategically and operationally to retain the customer Highlight what processes are key to efficiently serve and retain the customer: –Both practical (eg. switchboard) and technical (eg. R&D) Help focus creativity on areas where opportunities to create a competitive advantage appear Strengths & Limitations Strengths: –Interprets the industry/company value chain from customers perspective Helps put them in their customers shares: –Can help make understanding very tangible for clients: Puts them in their customers shoes. Limitations: –Lengthy process: Requires wide ranging customer surveys Strengths: –Interprets the industry/company value chain from customers perspective Helps put them in their customers shares: –Can help make understanding very tangible for clients: Puts them in their customers shoes. Limitations: –Lengthy process: Requires wide ranging customer surveys CUSTOMER NEEDS STREAM CORE ANALYTICS

131 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Customer experiencehow to do it 1.Get a rough understanding of how and why consumers are buying: –Analyse consumer surveys. –Talk to experts in the client company. –For each key dimension of the customer experience, capture: What takes place, where, with whom, and how. What influences the customer and why. What customers are satisfied/dissatisfied with and why. –Validate your understanding with customers: –Conduct customer focus groups and customer interviews. 2.Map the customers experience to the clients processes. 3.Identify associated activitiesto deliver the customers experience. 4.Use focus groups to analyse where areas exist for potential improvement. CUSTOMER NEEDS STREAM CORE ANALYTICS

132 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Customer experienceillustrative output Ease of buying Ease of connection The First Experience Quality of service Ease of leaving Usage quality Product Development Product Development Sales Credit Checking Credit Checking Set-up & Activation Set-up & Activation Delivery Usage Customer Services Customer Services Billing & Collection Billing & Collection Service Termination Service Termination Branding & Positioning Branding & Positioning Brandawareness Product & serviceavailability An Illustration of Customer Experience in the Telcos Source: London Shop Training Module: Production Market/Industry Analyses and Using Strategic Frameworks, 27/2/98, p. 14. CUSTOMER NEEDS STREAM CORE ANALYTICS The Customer Experience Delivering the Customer Experience Activities to Deliver the Customer Experience Company/Industry Value Chain

133 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Customer experiencetop tips Potential Insights Hints and Pitfalls Highlights typical source of customer satisfaction and retention by appreciating the context within which each step of the consumption chain unfolds Suggests levers for differentiation Provides a basis for exploring many non-traditional ways to create value Highlights typical source of customer satisfaction and retention by appreciating the context within which each step of the consumption chain unfolds Suggests levers for differentiation Provides a basis for exploring many non-traditional ways to create value Do: Perform the exercise for each important customer segment Compare customers actual experience with your clients perception of what that experience is Link to functions and processes Use personal experience a a starting point to understand the process Dont: Over simplify the customer experience: –Its complexity may suggest levers for differentiation Develop your point of view from a too limited set of specific experiences Do: Perform the exercise for each important customer segment Compare customers actual experience with your clients perception of what that experience is Link to functions and processes Use personal experience a a starting point to understand the process Dont: Over simplify the customer experience: –Its complexity may suggest levers for differentiation Develop your point of view from a too limited set of specific experiences CUSTOMER NEEDS STREAM CORE ANALYTICS

134 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Customer experiencedata sources, case examples and related analytics Data Sources Personal experience Customer survey Interviews: –Customer –Experts Focus groups Market research Experience on other projects Personal experience Customer survey Interviews: –Customer –Experts Focus groups Market research Experience on other projects Case Examples Case Examples The following documents contain good case examples of customer experience: – The following documents contain good case examples of customer experience: – Related Analytics Related Analytics Most useful when conducting a customer analysis Can be complemented by the following analytics: –Needs based segmentation Most useful when conducting a customer analysis Can be complemented by the following analytics: –Needs based segmentation CUSTOMER NEEDS STREAM CORE ANALYTICS

135 Customer Needs Stream Analytics Introduction Segmentation and Targeting Cluster Analysis Customer Experience Key Purchase Criteria Product Life Cycle Product Substitution Adoption Cycle Conclusions

136 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Key purchase criteriaintroduction CUSTOMER NEEDS STREAM CORE ANALYTICS What It Is Key purchase criteria: Criteria that are most important to customers in the buying process: –Aim is to understand the most important drivers of purchase behaviour –Usually learned via structured customer interviews A technique for scoring competitors against customers key purchase criteria: –Outlined by Richard Koch in his Guide to Strategy a –Koch describes a four-step process to evaluate competitors against the key purchase criteria Typically there are three elements: 1.Assessment of customers key purchase criteria 2.Rating of clients against those criteria 3.Rating of competitors against those criteria Key purchase criteria: Criteria that are most important to customers in the buying process: –Aim is to understand the most important drivers of purchase behaviour –Usually learned via structured customer interviews A technique for scoring competitors against customers key purchase criteria: –Outlined by Richard Koch in his Guide to Strategy a –Koch describes a four-step process to evaluate competitors against the key purchase criteria Typically there are three elements: 1.Assessment of customers key purchase criteria 2.Rating of clients against those criteria 3.Rating of competitors against those criteria Why We Use It Understand what drives customers purchase decisions Identify opportunities from unmet needs Determine how client is rated against competitors Understand what drives customers purchase decisions Identify opportunities from unmet needs Determine how client is rated against competitors Strengths & Limitations Strengths: –Provides a quantitative assessment of how competitors perform against criteria and with respect to each other Limitations: –Criteria and analysis are only as good as the thinking and business judgement that went into them! Strengths: –Provides a quantitative assessment of how competitors perform against criteria and with respect to each other Limitations: –Criteria and analysis are only as good as the thinking and business judgement that went into them! a. FT Pitman Publishing, 1995

137 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Key purchase criteriahow to apply it Key Purchase Criteria Set-up a solid questionnaire based on your target customer purchase criteria: –Brainstorm the potential criteria with industry/market experts –Test them with focus groups Select target customers and conduct interviews: –Establish a clear list of selection criteria based on target customer profiles (see segmentation) –Ask interviewees to rank their purchase criteria on a scale from 1 (unimportant) to 5 (essential) –Record answers in a spreadsheet and display the average result graphically (see illustrative output) Ask customers to score client on each of the purchase criteria, on a 1 to 5 scale. Then ask customers to score clients competitors on a similar scale on each of the criteria: –Overlay results on the same graph Set-up a solid questionnaire based on your target customer purchase criteria: –Brainstorm the potential criteria with industry/market experts –Test them with focus groups Select target customers and conduct interviews: –Establish a clear list of selection criteria based on target customer profiles (see segmentation) –Ask interviewees to rank their purchase criteria on a scale from 1 (unimportant) to 5 (essential) –Record answers in a spreadsheet and display the average result graphically (see illustrative output) Ask customers to score client on each of the purchase criteria, on a 1 to 5 scale. Then ask customers to score clients competitors on a similar scale on each of the criteria: –Overlay results on the same graph CUSTOMER NEEDS STREAM CORE ANALYTICS

138 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Key purchase criteriaillustrative output CUSTOMER NEEDS STREAM CORE ANALYTICS Importance and Performance Ratings Source: Internal Interviews. N= 33. Lever Performance Need Importance Rating Competitor Performance ,000 Delivery Reliability Product Availability Needs Understanding Promotion Type Promotion Exclusivity Delivery Lead Time Innovation Lead Time Promotion Frequency Partnership Approach EDI Capability Content Accuracy Regular Range Rationalisation Promotion Lead Time Information Provision Low DPC Complaints Response Communications Frequency Order Taking Efficiency Efficient Invoicing Good Arrival Condition Delivery Configuration Multi-Functional Contact Efficiency of Off-Loading Spec. of Secondary Packaging Handling of Returns / Credits

139 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Key purchase criteriatop tips Potential Insights Highlights potential levers for pursuing competitive advantage Show how well the client company is meeting the segment purchasing criteria Highlights potential levers for pursuing competitive advantage Show how well the client company is meeting the segment purchasing criteria Hints and Pitfalls Do: –Try to understand peoples subconcious needs (one-third are rational, two-thirds are emotional) –Understand the drivers of market share –Make sure that your sample is statistically significant (size, characteristics, etc.) Dont: –Confuse price as being a key factor - identify value for money benefits –Take information at face value in a commodity market - question and challenge it Do: –Try to understand peoples subconcious needs (one-third are rational, two-thirds are emotional) –Understand the drivers of market share –Make sure that your sample is statistically significant (size, characteristics, etc.) Dont: –Confuse price as being a key factor - identify value for money benefits –Take information at face value in a commodity market - question and challenge it Data Sources Key Purchase Criteria: –Customers surveys (questionnaire) Key Purchase Criteria: –Customers surveys (questionnaire) Case Examples Case Examples The following documents contain good examples of output of business definition analysis: –Lever: London Project Archive –T&N: London Project Archive –Cellnet: London Project Archive Also refer to Richard Kochs book Guide to Strategy The following documents contain good examples of output of business definition analysis: –Lever: London Project Archive –T&N: London Project Archive –Cellnet: London Project Archive Also refer to Richard Kochs book Guide to Strategy Related Analytics Related Analytics Customer experience Price elasticity Adoption cycle Customer experience Price elasticity Adoption cycle CUSTOMER NEEDS STREAM CORE ANALYTICS

140 Customer Needs Stream Analytics Introduction Segmentation and Targeting Cluster Analysis Customer Experience Key Purchase Criteria Product Life Cycle Product Substitution Adoption Cycle Conclusions

141 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Product life cycleintroduction What It Is Based on the age of a product category, predicts how sales will develop Distinguishes five stages of development: –Introduction –Growth –Maturity –Saturation –Decline/termination Length of time in each period varies tremendously: –Some products have very short cycles, others take decades or even centuries to go through the cycle Growth is still possible in mature categories, but typically will require greater investment or greater creativity than in less mature categories Based on the age of a product category, predicts how sales will develop Distinguishes five stages of development: –Introduction –Growth –Maturity –Saturation –Decline/termination Length of time in each period varies tremendously: –Some products have very short cycles, others take decades or even centuries to go through the cycle Growth is still possible in mature categories, but typically will require greater investment or greater creativity than in less mature categories Why We Use It Predict sales growth, and associated customer and competitor behaviours Prescribe appropriate marketing strategy Assess strengths/weaknesses of product portfolio Predict sales growth, and associated customer and competitor behaviours Prescribe appropriate marketing strategy Assess strengths/weaknesses of product portfolio Strengths & Limitations Strengths: –Most useful as one of several sources of evidence, e.g. with conjoint analysis Limitations: –Any prediction is tricky –Companies can affect the shape of the growth curve through product innovation and repositioning Strengths: –Most useful as one of several sources of evidence, e.g. with conjoint analysis Limitations: –Any prediction is tricky –Companies can affect the shape of the growth curve through product innovation and repositioning Phases of sales growth Phases of sales decline CUSTOMER NEEDS STREAM SUPPLEMENTARY ANALYTICS

142 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Product life cyclehow to use it Establish if the concept is applicable Data required: –Sales figures/timeframe: Either actual past/current sales Or forecasted figures Use statistical/graphical analysis: –Plot past category sales data in a spreadsheet, in such a way that a long term pattern is easily shown Use strategic/judgmental analysis: –Use the theoretical curve to evaluate where the category stands Consider use of conjoint analysis Data required: –Sales figures/timeframe: Either actual past/current sales Or forecasted figures Use statistical/graphical analysis: –Plot past category sales data in a spreadsheet, in such a way that a long term pattern is easily shown Use strategic/judgmental analysis: –Use the theoretical curve to evaluate where the category stands Consider use of conjoint analysis Predict how sales will develop It is important to predict the highest level that sales will reach, e.g. for a household appliance the simplified formula might be: Annual Sales = (Number of new households) x (percentage who will buy) + (Number of existing owners) x (percentage who replace each year) The uptake percentage must be established using: –Customer surveys –Industry forecasting models where available It is important to predict the highest level that sales will reach, e.g. for a household appliance the simplified formula might be: Annual Sales = (Number of new households) x (percentage who will buy) + (Number of existing owners) x (percentage who replace each year) The uptake percentage must be established using: –Customer surveys –Industry forecasting models where available Predict the timing of future developments Look to the categorys past behaviour and compare with similar products Look out for: –Technology shifts –Lead markets –Substitute products –Telecoms/e-commerce Look to the categorys past behaviour and compare with similar products Look out for: –Technology shifts –Lead markets –Substitute products –Telecoms/e-commerce CUSTOMER NEEDS STREAM SUPPLEMENTARY ANALYTICS

143 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Product life cycleillustrative output Source: Mac Group Core Practice Manual. Time Household Durables in Early 1970s Saturation/Sales Introduction GrowthMaturitySaturation Decline/ Termination Compactor Dishwasher Colour TV Room A/C Automatic Washers Freezers Refrigerators Ranges & Ovens B&W TV Wringer Adoption Innovators 2.5% Early Majority 34% Late Majority 34% Laggards 16% Early Adopters 13.5% CUSTOMER NEEDS STREAM SUPPLEMENTARY ANALYTICS

144 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Product life cyclepotential insight Source: M.E. Porter, Competitive Strategy, 1980, pp. 159–161. Buyers and Buyer Behaviour Introduction High-income purchaser Buyer inertia Buyers must be convinced to try the product High-income purchaser Buyer inertia Buyers must be convinced to try the product Growth Widening buyer groups uneven quality Maturity Mass market Saturation Repeat buying Choosing among brands is the rule Mass market Saturation Repeat buying Choosing among brands is the rule Decline Customers are sophisticated buyers of the product Products and Product Change Poor quality Product design and development key Many different product variations; no standards Frequent design changes Basic product designs Poor quality Product design and development key Many different product variations; no standards Frequent design changes Basic product designs Products have technical and performance differentiation Reliability key for complex products Competitive product improvements Good quality Products have technical and performance differentiation Reliability key for complex products Competitive product improvements Good quality Superior quality Less product differentiation Standardisation Less rapid product changesmore minor annual model changes Trade-ins become significant Superior quality Less product differentiation Standardisation Less rapid product changesmore minor annual model changes Trade-ins become significant Little product differentiation Spotty product quality Little product differentiation Spotty product quality Marketing Very high advertising/sales (a/s) Creaming prices strategy High marketing costs Very high advertising/sales (a/s) Creaming prices strategy High marketing costs High advertising, but lower percent of sales than introductory Most promotion of ethical drugs Advertising and distribution key for non- technical products High advertising, but lower percent of sales than introductory Most promotion of ethical drugs Advertising and distribution key for non- technical products Market segmentation Efforts to extend life cycle Broaden line Service and deals more prevalent Packaging important Advertising competition Lower a/s Market segmentation Efforts to extend life cycle Broaden line Service and deals more prevalent Packaging important Advertising competition Lower a/s Low a/s and other marketing Manufacturing and Distribution Over capacity Short production runs High skilled-labour content High production costs Specialised channels Over capacity Short production runs High skilled-labour content High production costs Specialised channels Under capacity Shift toward mass production Scramble for distribution Mass channels Under capacity Shift toward mass production Scramble for distribution Mass channels Some over capacity Optimum capacity Increasing stability of manufacturing process Lower labour skills Long production runs with stable techniques Distribution channels pare down their lines to improve their margins High physical distribution costs due to broad lines Mass channels Some over capacity Optimum capacity Increasing stability of manufacturing process Lower labour skills Long production runs with stable techniques Distribution channels pare down their lines to improve their margins High physical distribution costs due to broad lines Mass channels Substantial over capacity Mass production Speciality channels Substantial over capacity Mass production Speciality channels Typical Insight Provided by Product Life Cycle Analysis CUSTOMER NEEDS STREAM–SUPPLEMENTARY ANALYTICS

145 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Product life cyclepotential insight (cont.) Source: M.E. Porter, Competitive Strategy, 1980, pp. 159–161. R&D Introduction Changing production Growth Maturity Decline Typical Insight Provided by Product Life Cycle Analysis Foreign Trade Some exports Significant exports Few imports Significant exports Few imports Falling exports Significant imports Falling exports Significant imports No exports Significant imports No exports Significant imports Overall Strategy Best period to increase market share R&D engineering are key functions Best period to increase market share R&D engineering are key functions Practical to change price or quality image Marketing the key function Practical to change price or quality image Marketing the key function Bad time to increase market share particularly if low-share company Having competitive costs becomes key Bad time to change price image or quality image Marketing effectiveness keys Bad time to increase market share particularly if low-share company Having competitive costs becomes key Bad time to change price image or quality image Marketing effectiveness keys Cost control key Competition Few companies Entry Many competitors Lots or mergers and casualties Entry Many competitors Lots or mergers and casualties Price competition Shakeout Increase in private brands Price competition Shakeout Increase in private brands Exits Fewer competitions Exits Fewer competitions Risk High risk Risks can be taken here because growth covers them up Cyclically sets in Margins and Profits High prices and margins Low profits Price elasticity to individual seller not as great as in maturity High prices and margins Low profits Price elasticity to individual seller not as great as in maturity High profits Highest profits Fairly high prices Lower prices than introductory phase Recession resistant High P/Es Good acquisition climate High profits Highest profits Fairly high prices Lower prices than introductory phase Recession resistant High P/Es Good acquisition climate Falling prices Lower profits/lower margins Lower dealer margins Increased stability of market shares and price structure Poor acquisition climate: –Tough to sell companies Lowest prices and margins Falling prices Lower profits/lower margins Lower dealer margins Increased stability of market shares and price structure Poor acquisition climate: –Tough to sell companies Lowest prices and margins Low prices and margins Falling prices Prices might rise in late decline Low prices and margins Falling prices Prices might rise in late decline CUSTOMER NEEDS STREAM–SUPPLEMENTARY ANALYTICS

146 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Product life cycletop tips Hints and Pitfalls Data Sources Do: When creating the curve, beware of seasonal, non-recurring sources of fluctuations: –May be necessary to smooth those fluctuations Ensure you understand if life cycle of a product has been extended by line extensions/modifications Dont: Ignore version change Do: When creating the curve, beware of seasonal, non-recurring sources of fluctuations: –May be necessary to smooth those fluctuations Ensure you understand if life cycle of a product has been extended by line extensions/modifications Dont: Ignore version change Market surveys, Nielsen databases for: –Benchmarks against similar products –Consumer take up –Segment sales Client sales data Market surveys, Nielsen databases for: –Benchmarks against similar products –Consumer take up –Segment sales Client sales data Case Examples The following documents contain good examples of product life cycle analysis: –Various documents on C4 Kbase, Gemini Compass The following documents contain good examples of product life cycle analysis: –Various documents on C4 Kbase, Gemini Compass Related Analytics Key purchase criteria and comb analysis Needs-based segmentation Product portfolio analysis Scenario modelling Key purchase criteria and comb analysis Needs-based segmentation Product portfolio analysis Scenario modelling CUSTOMER NEEDS STREAM–SUPPLEMENTARY ANALYTICS

147 Customer Needs Stream Analytics Introduction Segmentation and Targeting Cluster Analysis Customer Experience Key Purchase Criteria Product Life Cycle Product Substitution Adoption Cycle Conclusions

148 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Product substitutionS-curve: introduction What It Is Substitution is the process by which one product or service supersedes another in performing a particular function for a buyer Successful substitution often follows the shape of an S-curve: –Along the S-curve, the substitution process gradually intensifies as it goes through the three typical phases: Testing phase Take-off phase Peak At each stage the competitive environment evolves Usually linked to product functionality or customer need Often used in conjunction with conjoint analysis Substitution is the process by which one product or service supersedes another in performing a particular function for a buyer Successful substitution often follows the shape of an S-curve: –Along the S-curve, the substitution process gradually intensifies as it goes through the three typical phases: Testing phase Take-off phase Peak At each stage the competitive environment evolves Usually linked to product functionality or customer need Often used in conjunction with conjoint analysis Why We Use It To understand/forecast markets reaction to new product introduction To assist in directing adaptation of strategy to market dynamics: –Generally used qualitatively To understand/forecast markets reaction to new product introduction To assist in directing adaptation of strategy to market dynamics: –Generally used qualitatively Strengths & Limitations Strengths: Useful qualitative tool Limitations: Assessing quantitatively the threat of substitution can be laborious and time consuming Listing all substitutes requires lateral thinking Strengths: Useful qualitative tool Limitations: Assessing quantitatively the threat of substitution can be laborious and time consuming Listing all substitutes requires lateral thinking CUSTOMER NEEDS STREAM–SUPPLEMENTARY ANALYTICS

149 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Product substitutiontypical S-curve CUSTOMER NEEDS STREAM–SUPPLEMENTARY ANALYTICS Source: Strategy Discipline Core Skills Learning Module, Substitution, September Uncertainty decreases due to precedents Pressure to switch arises from creation of competitive gap Costs of switching decrease Competition in new supply industry lowers prices and increases value Uncertainty decreases due to precedents Pressure to switch arises from creation of competitive gap Costs of switching decrease Competition in new supply industry lowers prices and increases value High prices Low supply High uncertainty Low awareness High prices Low supply High uncertainty Low awareness Pioneer switching Awareness increases Successful precedents are set Flaws appear and are fixed Pioneer switching Awareness increases Successful precedents are set Flaws appear and are fixed Substitution as % of total demand Time Eventual upper bound may be higher than original market INFORMING AND TESTING PHASE TAKE-OFF PHASE UPPER BOUND

150 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Product substitutionS-curve: how to do it Understanding product substitution requires several stages of analysis: List all potential substitutes Focus on products/ process that could fulfil similar function(s) Consider options such as: –Not performing the function at all –Reducing usage rate Focus on products/ process that could fulfil similar function(s) Consider options such as: –Not performing the function at all –Reducing usage rate Assess the threat of substitutes Consider both quantitative and qualitative factors, i.e.: –Relative value/price, affected by: usage rate, financing cost, value proposition, etc. –Propensity to switch, affected by: resources/risk profile, etc. –Barriers to switching, affected by: cost, retaining and relearning, etc. ñQuantify where possible and make value judgement Consider both quantitative and qualitative factors, i.e.: –Relative value/price, affected by: usage rate, financing cost, value proposition, etc. –Propensity to switch, affected by: resources/risk profile, etc. –Barriers to switching, affected by: cost, retaining and relearning, etc. ñQuantify where possible and make value judgement Model the S-curve Several functions exist to model this curve. The most widely used is the logistic curve. This curve has the function: –To find K and c, plot known values of F/(1-F) on a log scale against time on a linear scale –The points should lie on a straight line with equation: –Solve the simultaneous equation to get K, c and plot F against t to draw the S-curve Several functions exist to model this curve. The most widely used is the logistic curve. This curve has the function: –To find K and c, plot known values of F/(1-F) on a log scale against time on a linear scale –The points should lie on a straight line with equation: –Solve the simultaneous equation to get K, c and plot F against t to draw the S-curve Identify substitutes Understand the economics Understand the dynamics Offensive Strategies 123 Define the ThreatPredict Evolution Defensive Strategies F (1 -F) = K.(t+c)1n1n CUSTOMER NEEDS STREAM–SUPPLEMENTARY ANALYTICS

151 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Product substitutionS-curve: top tips Potential Insights Can account for industry/firm growth or decline Hints and Pitfalls Do: Assess factors for each of the individual segments within the target market: – Substitution follows different paths in different segments Dont: Restrict the market too much: –Risk overlooking an impending threat of substitution from outside Do: Assess factors for each of the individual segments within the target market: – Substitution follows different paths in different segments Dont: Restrict the market too much: –Risk overlooking an impending threat of substitution from outside Data Sources Market surveys Industry reports Focus groups Market surveys Industry reports Focus groups Case Example The following documents include good examples of product substitution analysis: –Various documents on C4 Kbase, Gemini Compass The following documents include good examples of product substitution analysis: –Various documents on C4 Kbase, Gemini Compass Related Analytics Product life cycle Adoption cycle Scenario modelling Product life cycle Adoption cycle Scenario modelling To determine economies and substitutes To validate substitutes CUSTOMER NEEDS STREAM–SUPPLEMENTARY ANALYTICS

152 Customer Needs Stream Analytics Introduction Segmentation and Targeting Cluster Analysis Customer Experience Key Purchase Criteria Product Life Cycle Product Substitution Adoption Cycle Conclusions

153 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Adoption cycleintroduction What It Is Adoption is an individuals decision to become a regular user of a product or service The adoption cycle accounts for the process through which a potential consumer passes from first hearing about product/brand to final adoption That process can be divided into 4 stages: –Awareness: the consumer becomes aware of the product/brand but lacks information about it –Qualification: the consumer is informed and considers whether to try the product/brand –Trial: the consumer tries the product/brand to improve his estimate of its value –Adoption: the consumer decides to make full and regular use of the innovation Often used in conjunction with conjoint analysis Adoption is an individuals decision to become a regular user of a product or service The adoption cycle accounts for the process through which a potential consumer passes from first hearing about product/brand to final adoption That process can be divided into 4 stages: –Awareness: the consumer becomes aware of the product/brand but lacks information about it –Qualification: the consumer is informed and considers whether to try the product/brand –Trial: the consumer tries the product/brand to improve his estimate of its value –Adoption: the consumer decides to make full and regular use of the innovation Often used in conjunction with conjoint analysis Why We Use It We generally use it qualitatively to help build an effective strategy for early market penetration: –The new product/brand marketer should induce consumer transition from one stage to the next We generally use it qualitatively to help build an effective strategy for early market penetration: –The new product/brand marketer should induce consumer transition from one stage to the next Strengths & Limitations Strengths: –Supplements segmentation to help further focus marketing efforts Limitations: –n/a Strengths: –Supplements segmentation to help further focus marketing efforts Limitations: –n/a CUSTOMER NEEDS STREAM–SUPPLEMENTARY ANALYTICS

154 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Adoption cyclehow to apply it Establish at which stage of a cycle your market stands Work on the basis of market researchers asking a significant sample of consumers the following questions: –Are you aware of product/brand X? –Would you bury product/brand X? –Have you tried product/brand X? –Have you purchased product/brand X within the last month? –Etc. ñNote that the first group necessary Aware but have not tried is derived by singling out those respondents who answered yes to the first question and no to the second. The same procedure is followed for the subsequent groups. Record findings in a spreadsheet and present average results graphically Analyse against theoretical curve Work on the basis of market researchers asking a significant sample of consumers the following questions: –Are you aware of product/brand X? –Would you bury product/brand X? –Have you tried product/brand X? –Have you purchased product/brand X within the last month? –Etc. ñNote that the first group necessary Aware but have not tried is derived by singling out those respondents who answered yes to the first question and no to the second. The same procedure is followed for the subsequent groups. Record findings in a spreadsheet and present average results graphically Analyse against theoretical curve Predict future developments Determine likely timing through benchmarking with similar products/services categories Develop marketing scenarios and test impact on adoption cycle with customer focus groups: –Objective being to identify the most efficient scenario to speed up adoption Determine likely timing through benchmarking with similar products/services categories Develop marketing scenarios and test impact on adoption cycle with customer focus groups: –Objective being to identify the most efficient scenario to speed up adoption CUSTOMER NEEDS STREAM–SUPPLEMENTARY ANALYTICS

155 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Adoption cycletop tips Potential Insight Key factors to manage at each stage include: To determine potential problem areas, it is useful to study the clients relative position in each of these stages Key factors to manage at each stage include: To determine potential problem areas, it is useful to study the clients relative position in each of these stages Hints & Pitfalls Dos Define the groupsto avoid double counting, as the consumers who drop out of each stage: –Thus each group consist of those customers who are at a certain stage, e.g. Aware, but not at the next, e.g. Have tried (see below) –Check the methodology of the market research for typical errors: –Poor sampling procedure –Vague questions or questions that are difficult to interpret Donts Few market research surveys segment the categories as neatly as Aware, Qualify, etc.: –A good substitute is level of consumption (Aware, Have tried, Buy occasionally, Buy frequently) Dos Define the groupsto avoid double counting, as the consumers who drop out of each stage: –Thus each group consist of those customers who are at a certain stage, e.g. Aware, but not at the next, e.g. Have tried (see below) –Check the methodology of the market research for typical errors: –Poor sampling procedure –Vague questions or questions that are difficult to interpret Donts Few market research surveys segment the categories as neatly as Aware, Qualify, etc.: –A good substitute is level of consumption (Aware, Have tried, Buy occasionally, Buy frequently) Awareness Qualification Trial Adoption Advertising volume Brand image (produced by advertising and packaging) Product characteristics, packaging and distribution efforts such as merchandising Similar to selection, plus after-sales services, etc. CUSTOMER NEEDS STREAM–SUPPLEMENTARY ANALYTICS

156 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Adoption cycledata sources, case examples and related analytics Data Sources To estimate where your target market falls you can refer to: –Market surveysusually client driven –Nielsen data To estimate where your target market falls you can refer to: –Market surveysusually client driven –Nielsen data Case Examples The following documents contain good examples of adoption cycle analysis and output: –Various documents on C4 Kbase, Gemini Compass The following documents contain good examples of adoption cycle analysis and output: –Various documents on C4 Kbase, Gemini Compass Related Analytics Key purchase criteria Segmentation Product life cycle Key purchase criteria Segmentation Product life cycle CUSTOMER NEEDS STREAM–SUPPLEMENTARY ANALYTICS

157 Customer Needs Stream Analytics Introduction Segmentation and Targeting Cluster Analysis Customer Experience Key Purchase Criteria Product Life Cycle Product Substitution Adoption Cycle Conclusions

158 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT CUSTOMER NEEDS STREAM–CONCLUSIONS When conducting a customer analysis, always keep in mind fundamental caveats Top tips for conducting good customer analysis: Know what the segmentation will be used for and design questionnaires around strong hypotheses: –Make sure that the research agency understands this process. You will always get best cluster definitions with thousands of samples and few well thought out questionsas opposed to hundreds of samples and long questionnaires: –Respondents of interviews get bored with long and complex questionnairesresponse quality quickly drops. When setting up your questionnairesee document on interviewing training (Cambridge Shop New Analyst Training) on Gemini Compass: –Make sure that wording is totally unambiguous: Test on idiots first! –Use 4 or 6 point scales: Forces negative or positive responses (as opposed to neutral ones) Find a research agency that specialises in your industry sector and carefully manage the quality of the sample, data handling and analysis: –Agencies can make basic mistakesand no one usually notices –They dont like you doing thisbut you need to! –Plan to analyse the analysis output yourself: Research agencies dont achieve good insightwhatever they say Manage client expectations versus cost of research(could be £100,000+!)

159 Profitability Stream Analytics Introduction Cost Structure Analysis Relative Cost Positioning Break-even Analysis Economies of Scale Experience Curve Price Elasticity Business/Unit Profitability Conclusion

160 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Profitability Stream Strategic Questions Main AnalyticsStrategic Position Break-even analysis Economies of scale Experience curve Value chain Cost structure Relative cost-positioning Price elasticity Core AnalyticSupplementary Analytic Business/Unit profitability What are the (economic) boundaries of the businesses the company is in? How are they changing? How do companies create value in each of the businesses? How is this changing? How is the client company positioned relative to the competition to create value? How is it changing? How is pricing determined? What are the natural boundaries of unit cost drivers (by product/geography)? How is pricing determined? What are the natural boundaries of unit cost drivers (by product/geography)? How do companies make money? How is pricing determined in each business? What are the major areas of unit cost position? What are their drivers? How is the cost structure changing? Why? How do companies make money? How is pricing determined in each business? What are the major areas of unit cost position? What are their drivers? How is the cost structure changing? Why? How well is our client positioned to set prices versus the competitors? What is the cost position of our client relative to its competitors? Is it changing? How well is our client positioned to set prices versus the competitors? What is the cost position of our client relative to its competitors? Is it changing? Profitability Stream: Questions and Analytics ANALYTICS TO UNDERSTAND A CLIENTS STRATEGIC POSITION

161 Profitability Stream Analytics Introduction Cost Structure Analysis Relative Cost Positioning Break-even Analysis Economies of Scale Experience Curve Price Elasticity Business/Unit Profitability Conclusion

162 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Profitability streamintroduction This section provides some basic analytics to understand the revenues and cost drivers: –For the client. –For the industry. Analytics complement, but do not detail how to construct economic models: –See key documents in the A&D Kbase, Gemini Compass. It does not detail approaches for business/benefits cases: –See key documents in the A&D Kbase, Gemini Compass. It does not cover Activity Based Costing/Management: –See the Guiding and Measuring Success competency group, and other material on the Gemini Compass. Financial accounts and ratio analysis can be found in the industry/competitors stream analytics. Net present value calculation can be found in the Developing and Evaluating options section. PROFITABILITY STREAMINTRODUCTION

163 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT The profitability streamintroduction (cont.) Analytics useful to understand these drivers are detailed as the following pages. Understanding Revenue/Cost Drivers? Cost structure analysis Break even analysis Experience curve Relative cost positioning Economies of scale Price elasticity Profitability Stream Analytics PROFITABILITY STREAMINTRODUCTION Core Analytics Supplementary Analytics

164 Profitability Stream Analytics Introduction Cost Structure Analysis Relative Cost Positioning Break-even Analysis Economies of Scale Experience Curve Price Elasticity Business/Unit Profitability Conclusion

165 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Cost structure analysisintroduction PROFITABILITY STREAMCORE ANALYTICS What It Is Graphically presents a companys cost structure Builds cost bars taking account of: –The various components of the cost structure –The importance (relative or in absolute terms) of the components in the cost structure Graphically presents a companys cost structure Builds cost bars taking account of: –The various components of the cost structure –The importance (relative or in absolute terms) of the components in the cost structure Why We Use It Understand where revenues, costs and profits are incurred Establish comparisons between cost structures for: –A product/business over time –A product/business in each of several companies –Several product lines in the same company for one time period Understand where revenues, costs and profits are incurred Establish comparisons between cost structures for: –A product/business over time –A product/business in each of several companies –Several product lines in the same company for one time period Strengths & Limitations Strengths: –Allows a quick appreciation of trends and differences. –Provides a homogeneous basis for comparison. Limitations: –None Strengths: –Allows a quick appreciation of trends and differences. –Provides a homogeneous basis for comparison. Limitations: –None

166 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Cost structure analysishow to apply it Identify the different components of the cost structure by analysing the building blocks of the business/products: –Do not forget to take into account overheads. Allocate direct costs as they are. Allocate indirect costs in proportion. When building the graphs, many measures are available for the vertical axis, e.g.: –Current currency value. –Constant currency value. –Percentage of sales. PROFITABILITY STREAMCORE ANALYTICS

167 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Cost structure analysisIllustrative output Cost Structure for One Product over Time Cost Structures for Same Product in Different Companies Cost Structure for Different Products in One Company OverheadMaterialsAdvertisingSalesR&D Annual sales ($mm) Percentage of total sales Cost components as percent of sales Current Dollars Source: MAC Group Core Practice Manual. PROFITABILITY STREAMCORE ANALYTICS

168 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Cost structure analysistop tips Potential Insights Assesses cost drivers: –Helps identify which cost components have increased or decreased the most –Triggers questions for further research and analysis Identifies potential areas for value differentiation Assesses cost drivers: –Helps identify which cost components have increased or decreased the most –Triggers questions for further research and analysis Identifies potential areas for value differentiation Hints and Pitfalls Do: –Make sure you use correct measures of a companys costs (especially with costs shared among products or business units) –Check accuracy of competitors data –Consider pure play benchmarks from other markets if competitor example not available Dont: –Compare competing products that are not truly comparable Do: –Make sure you use correct measures of a companys costs (especially with costs shared among products or business units) –Check accuracy of competitors data –Consider pure play benchmarks from other markets if competitor example not available Dont: –Compare competing products that are not truly comparable Data Sources Clients internal data: –Accounting systems Competitors cost data are generally much more difficult to obtainyou will probably have to use an estimate Look at US data for benchmarks which often has costs split out Clients internal data: –Accounting systems Competitors cost data are generally much more difficult to obtainyou will probably have to use an estimate Look at US data for benchmarks which often has costs split out Case Examples Case Examples The following documents contain good examples of cost structure analysis and output: –Cinven: Paris project archive –Dawson International: London project archive The following documents contain good examples of cost structure analysis and output: –Cinven: Paris project archive –Dawson International: London project archive Related Analytics Related Analytics Value chain Competitors/company comparison Break-even analysis Value chain Competitors/company comparison Break-even analysis PROFITABILITY STREAMCORE ANALYTICS

169 Profitability Stream Analytics Introduction Cost Structure Analysis Relative Cost Positioning Break-even Analysis Economies of Scale Experience Curve Price Elasticity Business/Unit Profitability Conclusion

170 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Relative cost positioningintroduction What It Is Assesses the cost position of a firm for a product relative to that of a competitor: –Measure of a firm cost advantage/disadvantage Should be assessed at each stage of the value chain Breaks down inputs and outputs: –Volume/value of outputs: Raw materials Labour Overheads –Maps physical production process Tends to be correlated with relative market share (RMS) Assesses the cost position of a firm for a product relative to that of a competitor: –Measure of a firm cost advantage/disadvantage Should be assessed at each stage of the value chain Breaks down inputs and outputs: –Volume/value of outputs: Raw materials Labour Overheads –Maps physical production process Tends to be correlated with relative market share (RMS) Why We Use It Highlights differences between competitors, and in particular, determines sources of cost advantage: –Can lead to cost saving through imitation Highlights differences between competitors, and in particular, determines sources of cost advantage: –Can lead to cost saving through imitation Strengths & Limitations Strengths: –Remains effective even when comparing products of different brands or quality levels: The cost position can be locked with the price realisation of each supplier indexed at 100 Limitations: –Can be difficult to establish –Expensive and worth doing only when the products being compared have a high turnover Strengths: –Remains effective even when comparing products of different brands or quality levels: The cost position can be locked with the price realisation of each supplier indexed at 100 Limitations: –Can be difficult to establish –Expensive and worth doing only when the products being compared have a high turnover PROFITABILITY STREAMCORE ANALYTICS

171 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Relative cost positioninghow to do it If competitors compete in the same segment, and you know their profits and prices, you can infer the relative cost position (RCP): RPP a ROSRCP Client1002%100 (98) Competitor955%92 (90) RPP a ROSRCP Client1002%100 (98) Competitor955%92 (90) Source: Richard Koch, Training Session 4, February 1998, South African POA. a. Relative price position. Calculation example: Price of competitor = 95% of client ROS for competitor = 5% Competitor costs = 95% x 95% = 90% Client cost position = 98% Competitor cost position = 90/98 x 100 = 92% Calculation example: Price of competitor = 95% of client ROS for competitor = 5% Competitor costs = 95% x 95% = 90% Client cost position = 98% Competitor cost position = 90/98 x 100 = 92% PROFITABILITY STREAMCORE ANALYTICS

172 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Relative cost positioningillustrative output PROFITABILITY STREAMCORE ANALYTICS a. Includes quota cost. Relative Cost of Production of Mens Placket Shirt (High Labour Content) (in US$/Dozen) $ Store Advertising Irregulars/Carry Cost Additional Freight and Duty Product Cost $37.77 $33.72 a

173 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Relative cost positioningpotential insight Explaining a Companys Cost Advantage Lower input costs: –Raw materials –Labour –Overhead Greater productivity: –Technology –Know-how –Operating skill Costs shared with other segment(s) Company is leader in focused segment Lower input costs: –Raw materials –Labour –Overhead Greater productivity: –Technology –Know-how –Operating skill Costs shared with other segment(s) Company is leader in focused segment What to Do? Cost reduction essential Relative cost position analysis valuable Cost reduction essential Relative cost position analysis valuable Sell/JV or Harvest Sell/JV or Harvest Reinforce market leadership Reinforce cost leadership Reinforce market leadership Reinforce cost leadership Gain market share quickly Buy leader Gain market share quickly Buy leader Not lowest Cost Lowest Cost Segment Leader Segment Follower PROFITABILITY STREAMCORE ANALYTICS

174 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Relative cost positioningtop tips Hints and Pitfalls Do: Remember that clients do not generally have costs equal to competitors Do: Remember that clients do not generally have costs equal to competitors Data Sources Clients and competitors cost data: –Ex-employees of competitors (qualitative survey) Industry reports Clients and competitors cost data: –Ex-employees of competitors (qualitative survey) Industry reports Case Examples The following documents contain good examples of relative cost positioning and output: –Dawson International: London project archive See also Richard Koch Training Session (South Africa POA) The following documents contain good examples of relative cost positioning and output: –Dawson International: London project archive See also Richard Koch Training Session (South Africa POA) Related Analytics Break-even analysis Cost structure analysis Break-even analysis Cost structure analysis PROFITABILITY STREAMCORE ANALYTICS

175 Profitability Stream Analytics Introduction Cost Structure Analysis Relative Cost Positioning Break-even Analysis Economies of Scale Experience Curve Price Elasticity Business/Unit Profitability Conclusion

176 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Break-even analysisintroduction What It Is Break-even level is the level of output at which the company makes neither a loss nor a profitjust covers its costs Important cross-over point: –Any lower and the company makes a loss The analytic establishes a relationship between: –Fixed costs –Variable costs –Revenues Applies to: –Entire company –Individual product line –Particular manufacturing operation Break-even level is the level of output at which the company makes neither a loss nor a profitjust covers its costs Important cross-over point: –Any lower and the company makes a loss The analytic establishes a relationship between: –Fixed costs –Variable costs –Revenues Applies to: –Entire company –Individual product line –Particular manufacturing operation Why We Use It Helps set minimum sales targets Helps set price levels, but is not the only determinant: –Driven by other factors such as customer needs and competitor actions Helps set minimum sales targets Helps set price levels, but is not the only determinant: –Driven by other factors such as customer needs and competitor actions Strengths & Limitations Strengths: Useful tool for presenting information and explaining the dynamics of a production unit Limitations: Static analytic: –Many costs are considered fixed in the short run but variable over the long term Very often the relationship between profit and volume is not linear: –Assumptions underlying the chart may not be 100% accurate Strengths: Useful tool for presenting information and explaining the dynamics of a production unit Limitations: Static analytic: –Many costs are considered fixed in the short run but variable over the long term Very often the relationship between profit and volume is not linear: –Assumptions underlying the chart may not be 100% accurate PROFITABILITY STREAMCORE ANALYTICS

177 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT 1.Gather data needed, i.e.: Total costs Break down of total costs into fixed and variable Associated volumes Associated revenue 2.Plot the costs and revenue lines on a graph: Start with the fixed costs line which has function: y = (value of fixed costs) Determine what function governs variable costs and represent it graphically on top of the fixed cost line 3.The break-even point stands at the intersection of cost and revenues lines: The break-even point is the number of units sold for which operating profit = 0 in the following equation: OP = [(USP) x (NUS)] - [FOC + (UVC) x (NUS)] where: –OP: operating profit –USP: unit selling price –NUS: number of units sold –FOC: fixed operating costs –UVC: unit variable costs 1.Gather data needed, i.e.: Total costs Break down of total costs into fixed and variable Associated volumes Associated revenue 2.Plot the costs and revenue lines on a graph: Start with the fixed costs line which has function: y = (value of fixed costs) Determine what function governs variable costs and represent it graphically on top of the fixed cost line 3.The break-even point stands at the intersection of cost and revenues lines: The break-even point is the number of units sold for which operating profit = 0 in the following equation: OP = [(USP) x (NUS)] - [FOC + (UVC) x (NUS)] where: –OP: operating profit –USP: unit selling price –NUS: number of units sold –FOC: fixed operating costs –UVC: unit variable costs Break-even analysishow to do it and illustrate output How to do it Illustrative Break-even Chart a Units Revenue and Costs ($000s) Fixed Costs Loss Variable Costs Break-even point Budget Values Profit Total Revenue Line Total Cost Line Capacity a. Ciaran Walsh, Key Management Ratios, How to Analyse, Compare and Control the Figures that Drive Company Value, 1996, p. 223 FT Pitman Publishing. Illustrative output PROFITABILITY STREAMCORE ANALYTICS

178 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Break-even analysistop tips Potential Insights States the target output above which the company becomes profitable Hints and Pitfalls Do: Take sufficient care to distinguish between fixed, variable, and semi-variable costs Consult a textbook on cost accounting of managerial economies Dont: Use break-even analysis as the only measure of the viability of a business, division, or project Do: Take sufficient care to distinguish between fixed, variable, and semi-variable costs Consult a textbook on cost accounting of managerial economies Dont: Use break-even analysis as the only measure of the viability of a business, division, or project PROFITABILITY STREAMCORE ANALYTICS

179 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Break-even analysisdata sources, case examples, and related analytics Data Sources Companys internal cost and revenue data: –Divisional accounts Companys internal cost and revenue data: –Divisional accounts Case Examples The following documents contain good examples of break-even analysis and output: Related Analytics Break-even analysis is a critical step within profitability analysis and is often used in conjunction with: –Relative cost position –Economies of scale Break-even analysis is a critical step within profitability analysis and is often used in conjunction with: –Relative cost position –Economies of scale PROFITABILITY STREAMCORE ANALYTICS

180 Profitability Stream Analytics Introduction Cost Structure Analysis Relative Cost Positioning Break-even Analysis Economies of Scale Experience Curve Price Elasticity Business/Unit Profitability Conclusion

181 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Economies of scaleintroduction What It Is A company or industry benefits from economies of scale a when the unit cost of a product declines as the number of units produced per period increases: Typically, we use the concept qualitatively not quantitatively: –To understand the nature of competition in a business market or segment –We are unlikely to quantify economies of scale across an industry A company or industry benefits from economies of scale a when the unit cost of a product declines as the number of units produced per period increases: Typically, we use the concept qualitatively not quantitatively: –To understand the nature of competition in a business market or segment –We are unlikely to quantify economies of scale across an industry Why We Use It Understand the importance of relative size and relative cost within an industry Highlight the existence of a minimum efficient size: –Below this, it is not cost-effective to compete Determine whether scale acts as a barrier to entry Understand the importance of relative size and relative cost within an industry Highlight the existence of a minimum efficient size: –Below this, it is not cost-effective to compete Determine whether scale acts as a barrier to entry Strengths & Limitations Strengths: –Fundamental economic concept relevant at both a company and industry level –Helps build understanding of the structural characteristics of an industry –Can provide a quantitative measure of the benefit of scale, and an estimate of optimum size Limitations: –None Strengths: –Fundamental economic concept relevant at both a company and industry level –Helps build understanding of the structural characteristics of an industry –Can provide a quantitative measure of the benefit of scale, and an estimate of optimum size Limitations: –None A B Unit Cost Company A Company B Number of Units Produced Company B has a much lower unit cost because it produces a much higher value a. It is also possible to have dis-economies of scale, i.e. as more units are produced, the unit cost increases. PROFITABILITY STREAMSUPPLEMENTARY ANALYTICS

182 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT To Determine Whether Scale is Critical to Success Identify competitors in the market or segment Determine absolute and relative size of competitors, and absolute and relative returns (profit, ROCE, ROE): –See company analysis and financial analysis Determine absolute and relative share: –See market-sizing Identify type of products produced, and number of units produced Identify key success factors: –See key success factors Review all of the above to determine: –Whether scale of operation is critical to success in this market or segment –If so, why? –Minimum scale? Identify competitors in the market or segment Determine absolute and relative size of competitors, and absolute and relative returns (profit, ROCE, ROE): –See company analysis and financial analysis Determine absolute and relative share: –See market-sizing Identify type of products produced, and number of units produced Identify key success factors: –See key success factors Review all of the above to determine: –Whether scale of operation is critical to success in this market or segment –If so, why? –Minimum scale? a. Given that average unit cost is unlikely to be available for all competitors, you could use average unit price as a substitute for cost. Economies of scalehow to apply it Gemini practice usually unfolds in two steps: Quantify Economies of Scale By competitor, plot: –Average unit cost a (y axis) over a specified period –Number of units produced over same period (x axis) By competitor, plot: –Average unit cost a (y axis) over a specified period –Number of units produced over same period (x axis) PROFITABILITY STREAMSUPPLEMENTARY ANALYTICS

183 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Economies of scaleillustrative output In this case, economies of scale are present, but not of major importance: –A doubling of volume, from 1 million leads to only a 2–3% decrease in cost Production Economies of Scale German Soft Drink Bottlers Production Costs per Unit DM/Case Source: MAC Group, Core Practice Manual. Total Productions (Cases) Millions PROFITABILITY STREAMSUPPLEMENTARY ANALYTICS

184 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Economies of scaletop tips Potential Insight Analytic helps determine: Minimum efficient size Whether the presence of scale deters market or segment entry by: –Forcing the entrant to produce on a large scale and risk strong reaction, or produce on a small scale and accept a cost disadvantage Some limits to economies of scale as an entry barrier are as follows: –Large sale business may involve making trade-offs with other potentially valuable barriers to entry such as product differentiation –Technological change may be catastrophic for a large-scale firm if its facilities are more specialised Analytic helps determine: Minimum efficient size Whether the presence of scale deters market or segment entry by: –Forcing the entrant to produce on a large scale and risk strong reaction, or produce on a small scale and accept a cost disadvantage Some limits to economies of scale as an entry barrier are as follows: –Large sale business may involve making trade-offs with other potentially valuable barriers to entry such as product differentiation –Technological change may be catastrophic for a large-scale firm if its facilities are more specialised Hints and Pitfalls Do: Make sure you use comparable data when plotting different companies Examine carefully cause and effect relationships when the number of data points is limited Ensure the concept is applicable by comparing the individual plants along several dimensions other than scale: –Decreasing costs may be due to factors other than scale, such as labour rates, age of equipment, etc. Dont: Use data from different periods: –Experience effect will distort the data Do: Make sure you use comparable data when plotting different companies Examine carefully cause and effect relationships when the number of data points is limited Ensure the concept is applicable by comparing the individual plants along several dimensions other than scale: –Decreasing costs may be due to factors other than scale, such as labour rates, age of equipment, etc. Dont: Use data from different periods: –Experience effect will distort the data PROFITABILITY STREAMSUPPLEMENTARY ANALYTICS

185 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Economies of scaledata sources, case examples and related analytics Data Source Industry reports Brokers reports Competitors financial statements Companies internal cost data Database searches Industry reports Brokers reports Competitors financial statements Companies internal cost data Database searches Case Examples The following documents contain goods examples of economy of scale analysis: – The following documents contain goods examples of economy of scale analysis: – Related Analytics Experience curve Value chain Economies of scope Experience curve Value chain Economies of scope PROFITABILITY STREAMSUPPLEMENTARY ANALYTICS

186 Profitability Stream Analytics Introduction Cost Structure Analysis Relative Cost Positioning Break-even Analysis Economies of Scale Experience Curve Price Elasticity Business/Unit Profitability Conclusion

187 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Experience curveintroduction What It Is Quantifies the effect of a companys accumulated experience on unit costs: –Also known as the learning curve The hypothesis underpinning the experience curve is that, over time, companies become faster or better at producing their goods or services: –Where this is true, over time, the unit cost to produce a product declines In some industries, accumulated experience or knowledge can create significant competitive advantage: –Incumbents can be significantly faster or cheaper than new entrants because they effectively apply knowledge based on experience Developed by the Boston Consulting Group in 1926 as the Learning Curve, less frequently used as quantitative tool Typically we use the concept qualitatively, not quantitatively, to understand relative competitive advantages within a business market or segment Quantifies the effect of a companys accumulated experience on unit costs: –Also known as the learning curve The hypothesis underpinning the experience curve is that, over time, companies become faster or better at producing their goods or services: –Where this is true, over time, the unit cost to produce a product declines In some industries, accumulated experience or knowledge can create significant competitive advantage: –Incumbents can be significantly faster or cheaper than new entrants because they effectively apply knowledge based on experience Developed by the Boston Consulting Group in 1926 as the Learning Curve, less frequently used as quantitative tool Typically we use the concept qualitatively, not quantitatively, to understand relative competitive advantages within a business market or segment Why We Use It Determines whether accumulated knowledge gives a competitive advantage to incumbents Determines relative cost advantages of competitors Potentially, to develop share-gain strategies that exploit the experience curve Determines whether accumulated knowledge gives a competitive advantage to incumbents Determines relative cost advantages of competitors Potentially, to develop share-gain strategies that exploit the experience curve Strengths & Limitations Strengths: –As a concept, describes importance of accumulated, applied knowledge in building advantage –Can be very relevant in certain industries where experience can build competitive advantage Limitations: –Assembling the data for an experience curve analysis is often time-consuming –Product innovation can render the current experience curve useless as a strategy tool –You should question whether you need to quantify the effect for your client, and if it is feasible to do so –As a quantitative tool, is less frequently used today, because of difficulty establishing accumulated production volume Strengths: –As a concept, describes importance of accumulated, applied knowledge in building advantage –Can be very relevant in certain industries where experience can build competitive advantage Limitations: –Assembling the data for an experience curve analysis is often time-consuming –Product innovation can render the current experience curve useless as a strategy tool –You should question whether you need to quantify the effect for your client, and if it is feasible to do so –As a quantitative tool, is less frequently used today, because of difficulty establishing accumulated production volume PROFITABILITY STREAMSUPPLEMENTARY ANALYTICS

188 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Experience curvehow to do it The experience curve is based on: –Accumulated production data. –Unit cost data for the entire industry and individual competitors. Accumulated production is often difficult to calculate: –It is the total number of units of a product made by the company (or the total number of units of a product made by all players in the market). –Plot accumulated volume against unit cost on graph. PROFITABILITY STREAMSUPPLEMENTARY ANALYTICS

189 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Experience curveillustrative output The slope of this curve is 20%, meaning that with each doubling in volume, unit cost decreases by 20%. The curve has been extrapolated to predict future cost levels. We could plot various competitors against the curve. Illustrative Experience Curve ,0002,0004, Slope 20% Accumulated Unit Volume (log) (000s) Log Unit cost ($) Source: MAC Group, Core Practice Manual. PROFITABILITY STREAMSUPPLEMENTARY ANALYTICS

190 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Experience curveillustrative output (cont.) The Experience Curve as a Diagnostic Tool Firm Accumulated Experience Firm Real Unit Costs Observed 93% curve Theoretical 80% curve Catch-up Source: R. Koch Training Session 4, February 1998, South African POA. The theoretical curve represents the industry standard The observed company seems to learn at a lower speed than average competitor A simple gap analysis highlights opportunities to drive down cost to industry standards PROFITABILITY STREAMSUPPLEMENTARY ANALYTICS

191 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Experience curvetop tips Potential Insight Strategies based on experience curve analysis are particularly effective industries where: –Cost is a significant competitive factor –Expertise is developed through experience A whole set of strategic options can be derived from the experience curve (see indicative outputs): –In relation to competitors relative cost position –In relation to competitors relative price position The experience curve is no guarantee that costs will decrease: –The company must actively manage costs down Theoretically, experience curve effects decrease in relative importance over time: –The greatest effects occur in the early stages Strategies based on experience curve analysis are particularly effective industries where: –Cost is a significant competitive factor –Expertise is developed through experience A whole set of strategic options can be derived from the experience curve (see indicative outputs): –In relation to competitors relative cost position –In relation to competitors relative price position The experience curve is no guarantee that costs will decrease: –The company must actively manage costs down Theoretically, experience curve effects decrease in relative importance over time: –The greatest effects occur in the early stages Hints and Pitfalls Do: Use it as a concept rather than try to quantify an experience curve for your client Use price data if cost data is not available Dont: Use cost data that are not defined in the same manner Take into account overheads and costs not related to what you are studying when using company cost-accounting data Do: Use it as a concept rather than try to quantify an experience curve for your client Use price data if cost data is not available Dont: Use cost data that are not defined in the same manner Take into account overheads and costs not related to what you are studying when using company cost-accounting data Average industry price = Total market revenue Total market volume [ ] PROFITABILITY STREAMSUPPLEMENTARY ANALYTICS

192 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Experience curvedata sources, case examples, and related analytics Data Sources Company internal data for: –Costs –Accumulated production Government agencies and trade associations for historical accumulated industry production Company internal data for: –Costs –Accumulated production Government agencies and trade associations for historical accumulated industry production Case Examples The following documents contain good examples of experience curve analysis: Related Analysis Economies of scale PROFITABILITY STREAMSUPPLEMENTARY ANALYTICS

193 Profitability Stream Analytics Introduction Cost Structure Analysis Relative Cost Positioning Break-even Analysis Economies of Scale Experience Curve Price Elasticity Business/Unit Profitability Conclusion

194 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Price elasticityintroduction What It Is Measure of the responsiveness of demand to changes in price: –If demand is elastic, it is responsive to changes in price –If demand is inelastic, it is unresponsive to changes in price Price elasticity of demand is measured as: In general, two factors determine elasticity: –Availability of substitute goods –Number of uses to which goods may be put Long-term price elasticity may differ from short-term price elasticity: –See adoption cycle p.xx and product life cycle. Measuring price elasticity of demand may be a key analytic in marketing strategy work Measure of the responsiveness of demand to changes in price: –If demand is elastic, it is responsive to changes in price –If demand is inelastic, it is unresponsive to changes in price Price elasticity of demand is measured as: In general, two factors determine elasticity: –Availability of substitute goods –Number of uses to which goods may be put Long-term price elasticity may differ from short-term price elasticity: –See adoption cycle p.xx and product life cycle. Measuring price elasticity of demand may be a key analytic in marketing strategy work Why We Use It Helps to understand customer purchase behaviour Determines customer sensitivity to price changes: –Model of likely demand under different pricing situations Helps to understand customer purchase behaviour Determines customer sensitivity to price changes: –Model of likely demand under different pricing situations Strengths & Limitations Strengths: –Provides a quantitative measure of customer responsiveness to price changes –Helps to understand better customer buying decisions on a particular product Limitations: –Factors other than price can influence demandneed to understand the impact of these variables –Can be difficult to obtain measures of price and volume changes –Considerable skills needed to build the appropriate model and fit the data with the proper statistical techniques –Provides only an historical perspective Strengths: –Provides a quantitative measure of customer responsiveness to price changes –Helps to understand better customer buying decisions on a particular product Limitations: –Factors other than price can influence demandneed to understand the impact of these variables –Can be difficult to obtain measures of price and volume changes –Considerable skills needed to build the appropriate model and fit the data with the proper statistical techniques –Provides only an historical perspective e = V% P% = Volume change Price change [] PROFITABILITY STREAMSUPPLEMENTARY ANALYTICS

195 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Price elasticityhow to apply it Approach Agree scope of analysis: –Product –Market (e.g. which country? National or regional?) –Period to cover (and time intervals between price data) Identify and gather appropriate price and volume data: –May need to make judgements on issues about price differentials between stores and/or geographic regions Check data to ensure it is accurate Calculate elasticity over the specified period using the formula: –Repeat formula –Give example of calculation Interpret results: –If elasticity is greater than 1, a 1% decrease in price will lead to more than a 1% increase in volume –If elasticity is less than 1, a 1% decrease in price will lead to less than a 1% increase in volume Agree scope of analysis: –Product –Market (e.g. which country? National or regional?) –Period to cover (and time intervals between price data) Identify and gather appropriate price and volume data: –May need to make judgements on issues about price differentials between stores and/or geographic regions Check data to ensure it is accurate Calculate elasticity over the specified period using the formula: –Repeat formula –Give example of calculation Interpret results: –If elasticity is greater than 1, a 1% decrease in price will lead to more than a 1% increase in volume –If elasticity is less than 1, a 1% decrease in price will lead to less than a 1% increase in volume Overcoming Data Gaps If price data is not available, consider running a price experiment: –Gather required price and volume data in a pilot study –Test impact of price reductions or increases Results from a price experiment should be viewed as only indicative guidance: –Timeframe likely to be too short –Could be other variables influencing results that would have less impact over a longer period Look for comparable studies: –Price and volume data for similar companies –Price and volume data for similar industries If price data is not available, consider running a price experiment: –Gather required price and volume data in a pilot study –Test impact of price reductions or increases Results from a price experiment should be viewed as only indicative guidance: –Timeframe likely to be too short –Could be other variables influencing results that would have less impact over a longer period Look for comparable studies: –Price and volume data for similar companies –Price and volume data for similar industries e = V% P% = Volume change Price change [] PROFITABILITY STREAMSUPPLEMENTARY ANALYTICS

196 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Price elasticityillustrative output Observation of the Elasticity of Beer Volume to Its Price Calculation of the Elasticity of Beer Volume to its Price Price change Volume change Example of Elasticity Calculation for Beer Market Source: Bossard/United Distillers, Impact of Taxation Rates on Government Revenues, October Elasticity Beer Volume Beer price elasticity is: A 10% price decrease leads to a 6.2% volume increase PROFITABILITY STREAMSUPPLEMENTARY ANALYTICS

197 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Example of Multiple Regression on Cider Market Source: Bossard/United Distillers, Impact of Taxation Rates on Government Revenues, October Regression enables us to discover complex multiple relationships. Data Available to Explain Cider Market Behaviour Cider Volume =B + A1 * Cider Price + A2 * Beer Price + A3 * Wine Price + A4 * Temperature ESTIMATED B = A1 = A2 = 3.16 A3 = 1.05 A4 = 0.70 Explanation of Changes in Cider Volume Example of Multiple Regression Explained Cider Volume Beer price Cider price Wine price Temperature Price elasticityillustrative output (cont.) Note: Variables are indexed. PROFITABILITY STREAMSUPPLEMENTARY ANALYTICS

198 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Price elasticitytop tips Potential Insights Analytic can help: –Forecast the likely revenue impact of price changes –Determine an appropriate pricing strategy Analytic can help: –Forecast the likely revenue impact of price changes –Determine an appropriate pricing strategy Hints and Pitfalls Do: Use logarithmic scales on both axes Price sensitivity will often vary considerably by customer and product segment: –Be careful to define accurately the market segment for which price sensitivity is to be estimated Do not: Overlook the fact that if the company changes marketing-mix factors other than price, the effect of the price change itself will be hard to isolateconjoint analysis will help do this Do: Use logarithmic scales on both axes Price sensitivity will often vary considerably by customer and product segment: –Be careful to define accurately the market segment for which price sensitivity is to be estimated Do not: Overlook the fact that if the company changes marketing-mix factors other than price, the effect of the price change itself will be hard to isolateconjoint analysis will help do this Data Sources Internal company data: –Values – Prices Publicly available data: –Market research price levels and volumes –Studies of comparable companies or industries Internal company data: –Values – Prices Publicly available data: –Market research price levels and volumes –Studies of comparable companies or industries Case Examples The following documents contain good examples of analysis of price elasticity of demand: Related Analytics Conjoint analysis (see Competency Group): –Good for estimating future potential Conjoint analysis (see Competency Group): –Good for estimating future potential PROFITABILITY STREAMSUPPLEMENTARY ANALYTICS

199 Profitability Stream Analytics Introduction Cost Structure Analysis Relative Cost Positioning Break-even Analysis Economies of Scale Experience Curve Price Elasticity Business/Unit Profitability Conclusion

200 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Business/unit profitabilityintroduction What It Is Measures the profitability of: –Businesses across a companys portfolio, or –Competitors in a business or segment Profitability measured as: –Return on sales (ROS), or –Return on capital employed (ROCE) Measures the profitability of: –Businesses across a companys portfolio, or –Competitors in a business or segment Profitability measured as: –Return on sales (ROS), or –Return on capital employed (ROCE) Why We Use It Input to developing business segment strategy: –Used, in particular, with competitive position and segment attractiveness analyses. At a corporate level, provides data on relative performance of business units. At a business segment level, provides data on returns generated within the segment. Input to developing business segment strategy: –Used, in particular, with competitive position and segment attractiveness analyses. At a corporate level, provides data on relative performance of business units. At a business segment level, provides data on returns generated within the segment. Strengths & Limitations Strengths: –Quantifies relative performance of business units, or –Quantifies relative returns (and hence attractiveness) of a business or segment. Limitations: –For accurate results at segment level, requires significant time, effort, and data. –Estimating ROS or ROCE for a business unit takes time if good internal data is not available. Strengths: –Quantifies relative performance of business units, or –Quantifies relative returns (and hence attractiveness) of a business or segment. Limitations: –For accurate results at segment level, requires significant time, effort, and data. –Estimating ROS or ROCE for a business unit takes time if good internal data is not available. PROFITABILITY STREAMCORE ANALYTICS

201 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT At Corporate Level (Portfolio of Businesses) At Business or Unit Level See financial analysis for how to calculate ROS and ROCE Business/unit profitabilityhow to apply it Identify products per business segment Calculate turnover, direct costs, indirect costs, and overheads for each product Operating Profit Sales Full Allocated Costs =- Operating Profit for Segment Product Sales = - Product Direct Costs - Product Indirect Costs ROS = Operating profit Sales ROCE = Operating profit Capital Employed Indirect costs and overheads should be allocated proportionally to resource All costs must be allocated across the full set of business segments PROFITABILITY STREAMCORE ANALYTICS

202 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Business/unit profitabilityillustrative output Business Unit Gross Sales Operating Profit Interest Overhead Expenses R&D Costs Admin. Expenses Direct Expense Gross Margin Business Unit ROS % 1234 Business Units Return on Capital Employed ROCE % 1234 Business Units PROFITABILITY STREAMCORE ANALYTICS

203 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Business/unit profitabilitytop tips Potential Insights Reveals levers for improving business segment returns. Disaggregates company performance: –Allows informed decision about individual business segments Reveals levers for improving business segment returns. Disaggregates company performance: –Allows informed decision about individual business segments Hints and Pitfalls Do: –Take into account all relevant players when assessing segment profitability Dont: – Do: –Take into account all relevant players when assessing segment profitability Dont: – Data Sources Companies financial statements Case Examples Case Examples The following documents contain good examples of business/segment profitability analysis and output: –Dawson International: London project archive The following documents contain good examples of business/segment profitability analysis and output: –Dawson International: London project archive Related Analytics Related Analytics Business/segment attractiveness Company/competitors comparison Business/segment attractiveness Company/competitors comparison PROFITABILITY STREAMCORE ANALYTICS

204 Profitability Stream Analytics Introduction Cost Structure Analysis Relative Cost Positioning Break-even Analysis Economies of Scale Experience Curve Price Elasticity Business/Unit Profitability Conclusion

205 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Profitability stream: Conclusions The main focus of the profitability stream is often the building of an economic model: –Helps predict and model future profitability, depending on strategic options generated (see A&D Kbase, Gemini Compass for further material). –Often linked with an activity based costing analysis to understand true costs of products/customers (see Strategy Kbase, Gemini Compass for detailed material). –Analytics detailed in this section are an excellent starting point to help understand the drivers of profitability: –Providing valuable insight in themselves. –But also as a starting point for a more detailed economic model. PROFITABILITY STREAMCONCLUSIONS

206 Capabilities Stream Analytics Introduction Strength and Weaknesses Analysis Venkat Matrix Conclusions

207 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Capabilities Stream Strategic Questions Main AnalyticsStrategic Position Core Analytic What are the (economic) boundaries of the businesses the company is in? How are they changing? How do companies create value in each of the businesses? How is this changing? How is the client company positioned relative to the competition to create value? How is it changing? What are the boundaries of the capabilities required to compete successfully? What capabilities are required to deliver value? How is this changing? How strong are our clients key capabilities relative to its competitors? Capabilities Stream: Questions and Analytics ANALYTICS TO UNDERSTAND A CLIENTS STRATEGIC POSITION Strengths and Weaknesses Venkatramen Matrix

208 Capabilities Stream Analytics Introduction Strength and Weaknesses Analysis Venkat Matrix Conclusions

209 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Capabilities stream analyticsintroduction Capabilities are bundles of expertise, technology and skills that are critical factors (i.e. differentiated) for current of future business success. There are two high level elements to a capabilities analysis: Capabilities analysis can be done quick and dirty or in-depth, depending on time available: –Trade-off comes in level of detail and number of surveys carried out. CAPABILITIES STREAMINTRODUCTION Identify Client Strengths and Weaknesses With respect to the competition That are/are not sustainable and leverageable in future That are potentially exportable (key for overseas/new market expansion) Establish Gaps in Capabilities Required for Future Strategic Options What to compete on What not to compete on

210 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Capabilities analysishierarchy of capabilities Capabilities assessment can be conducted on several levels: Generally, we focus on organisational capabilities. Capabilities Hierarchy Core Organisation Individual Level I: An aggregated level of up to 8–10 core capabilities that underpin a companys success and performance, but are not easily seen by the organisation or its customers (e.g. miniaturisation of Sony). Level II: A summarised number of capabilities (40–70) that an organisation demonstrates across functional barriers that tend to be visible to the organisation and its customers (e.g. Virgins ability to leverage its brand, bringing new products to market). Level III: A large number (many thousands) of capabilities relating to individual employees skills (e.g. Telcos engineers ability to repair faults quickly). CAPABILITIES STREAMINTRODUCTION

211 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Geminis new change model a defines capabilities at a number of levels Assessment of capability and design of change strategies to develop these will form a key element of our A&D approach. Environmental Intelligence Asset Management Process Alignment Learning/ Innovation IndividualKey GroupOrganisation Capability Dimensions Development Levels Client Issues The process of changeThe development of capabilities CAPABILITIES STREAMINTRODUCTION a. See Geminis New Change Model, Tracker InnovL8Sep98Rpassr.ppt, on London Server.

212 Capabilities Stream Analytics Introduction Strength and Weaknesses Analysis Venkat Matrix Conclusions

213 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Strengths and weaknesses analysisintroduction CAPABILITIES STREAMCORE ANALYTICS What It Is Identification of a clients strengths and weaknesses that impact its ability to implement a strategic option. Assess strengths and weaknesses: –With respect to the competition –That are/are not sustainable and leverageable in the future –That are potential exportable (new market expansion) Identification of a clients strengths and weaknesses that impact its ability to implement a strategic option. Assess strengths and weaknesses: –With respect to the competition –That are/are not sustainable and leverageable in the future –That are potential exportable (new market expansion) Why We Use It Validates opportunities for developing a company Determines a strategic direction consistent with: –Companys capabilities –Industry requirements Validates opportunities for developing a company Determines a strategic direction consistent with: –Companys capabilities –Industry requirements Strengths & Limitations Strengths: –Comprehensive process (depending on time taken for analysis) –Can engage client early on in assignment with a familiar topic Limitations: –Time-consuming process Strengths: –Comprehensive process (depending on time taken for analysis) –Can engage client early on in assignment with a familiar topic Limitations: –Time-consuming process

214 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Strengths and weaknesses analysishow to do it Conduct Capabilities Survey Agree with your client the definition of capabilities List capabilities using: –Previous capabilities studies –Internal survey for clients –Expert studies –Etc. Test list on sample of client personnel and refine Conduct a survey: –Choose group for distribution: Ensure it is significant in terms of size and scope –Consider best use/coverage of: Focus interviews Postal/fax surveys Workshops Ask respondents to assess current and future importance of the surveyed capabilities in your industry: –Establish ranking categories Map capabilities onto the value chain, differentiating: –Top 10, bottom 10 –Most important 10, least important 10 Agree with your client the definition of capabilities List capabilities using: –Previous capabilities studies –Internal survey for clients –Expert studies –Etc. Test list on sample of client personnel and refine Conduct a survey: –Choose group for distribution: Ensure it is significant in terms of size and scope –Consider best use/coverage of: Focus interviews Postal/fax surveys Workshops Ask respondents to assess current and future importance of the surveyed capabilities in your industry: –Establish ranking categories Map capabilities onto the value chain, differentiating: –Top 10, bottom 10 –Most important 10, least important 10 Benchmark Against External Sources Choose external constituents (recognised for their knowledge of the industry) Identify best practices against which you can test your clients capabilities: –Ask interviewees to rank companys performance against these Choose external constituents (recognised for their knowledge of the industry) Identify best practices against which you can test your clients capabilities: –Ask interviewees to rank companys performance against these Analyse Findings Identify capabilities in the required industry Position your client on a capabilities spectrum relative to competitors Assess gaps Brainstorm to drive insight Identify capabilities in the required industry Position your client on a capabilities spectrum relative to competitors Assess gaps Brainstorm to drive insight CAPABILITIES STREAMCORE ANALYTICS

215 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Strengths and weaknesses analysishow to do it Source: Gemini Consulting, C4 K.Base, Capabilities AnalysisA How to Guide, CAPABILITIES STREAMCORE ANALYTICS Validate results with strategy group & executive managers Review analysis regarding capability identification Gemini industry experts develop capabilities along value chain Develop list of industry capabilities Capabilities validation: questionnaire (100 internal) List of capabilities Design capabilities survey Choose competitors to compare Conduct capabilities survey internally and externally Validation by strategy group Gemini consultants (who have worked on similar projects) Analysts, head hunters & journalists Selected 400 in company Interviews with top managers Analyse capabilities survey results Validated capabilities Internal Input External Input Analysis Process

216 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Strengths and weaknesses analysisillustrative output (1) CAPABILITIES STREAMCORE ANALYTICS XYZs Above-Average Capabilities Understanding client financial needs Understanding local markets (international) Managing brand image Pricing Communicating financial product offering Marketing Product Development Sales & Distribution Channel Management Execution & Control Developing innovative products Width / depth of the product range Designing bundles of products Repackaging existing products Corporate finance skills Size of the branch network Size of investor base Local presence (international) Efficient salesforce Long-term oriented selling culture Consultative selling (including assets and liabilities, business and personal matters) Managing risk Trading global debt, equity, currencies Processing transactions Making OTC transactions Compliance Credit / underwriting skills Managing Information Leadership / People Development Managing External Relationships International communication network Equity and economic research Funding and Financing Quote and brokerage information system Risk management system Sales support system Recruiting & retaining talented people Managing incentives Training and managing the sales force Effective teamwork Identifying and exploiting new business opportunities Allocating resources to meet strategic objectives Managing government relations Managing professional advisors Ethical and trustworthy public image Building institutional relationships Managing local funding Strong capital base Debt ratings

217 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Strengths and weaknesses analysisillustrative output (2) CAPABILITIES STREAMCORE ANALYTICS Overall Capabilities Summary Percentage of respondents rating capability as Good, Best in Industry or World Class Across Industry Source: Internal capabilities survey based on 171 responses. Note: Capability is listed to the right of the dot. Strong Weak

218 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Strengths and weaknesses analysistop tips Potential Insights Highlights capabilities necessary to become best-in-class player in industry: – Summarises discrepancies between external and internal views – Summarises capabilities by section in value chain Groups stronger capabilities to highlight business opportunities Highlights capabilities necessary to become best-in-class player in industry: – Summarises discrepancies between external and internal views – Summarises capabilities by section in value chain Groups stronger capabilities to highlight business opportunities Hints and Pitfalls Do: Spend time building a solid list of capabilitiesit provides the basis for a powerful analysis Build a hypothesis of likely output before sending out the survey (can be derived from analyst reports) Stick to a generic value chain when breaking down capabilities along it (unless the client has a broadly accepted view of its industry and its value chain) Do not: Mistake capabilities with: – Record of achievements – Long list of the basics necessary to compete in market – Summary of individual strengths Do: Spend time building a solid list of capabilitiesit provides the basis for a powerful analysis Build a hypothesis of likely output before sending out the survey (can be derived from analyst reports) Stick to a generic value chain when breaking down capabilities along it (unless the client has a broadly accepted view of its industry and its value chain) Do not: Mistake capabilities with: – Record of achievements – Long list of the basics necessary to compete in market – Summary of individual strengths Data Sources Gemini expertsInterviews with clients and competitors are a key source Joint team/company executives Previous capabilities studies SICC database on Lotus Notes Gemini expertsInterviews with clients and competitors are a key source Joint team/company executives Previous capabilities studies SICC database on Lotus Notes Case Example The following projects are good examples of capabilities analysis : –Abbey National (Tamsen Wallis, Penney Frohling) – BT (Tim Bradshaw) – Ericsson The following projects are good examples of capabilities analysis : –Abbey National (Tamsen Wallis, Penney Frohling) – BT (Tim Bradshaw) – Ericsson Related Analytics Key success factors and index of key success factorsVenKat Matrix See also London Shop training material onBuild, Buy, Ally options (Gemini Compass): –Benchmarking –Interviewing Key success factors and index of key success factorsVenKat Matrix See also London Shop training material onBuild, Buy, Ally options (Gemini Compass): –Benchmarking –Interviewing CAPABILITIES STREAMCORE ANALYTICS

219 Capabilities Stream Analytics Introduction Strength and Weaknesses Analysis Venkat Matrix Conclusions

220 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Venkat matrixintroduction CAPABILITIES STREAMCORE ANALYTICS What It Is Helps identify differentiating versus parity capabilities on which client can compete A tool developed by Professor N. VenKatraman (Gemini faculty) Helps identify differentiating versus parity capabilities on which client can compete A tool developed by Professor N. VenKatraman (Gemini faculty) Why We Use It To identify: –Best-in-class capabilities –Parity capabilities –Differentiating capabilities Helps prioritise what to do with key capabilities for strategic options To identify: –Best-in-class capabilities –Parity capabilities –Differentiating capabilities Helps prioritise what to do with key capabilities for strategic options Strengths & Limitations Strengths: –Provides focus on key capabilities for strategic options –Engages client in implementation needs Limitations: –No major Strengths: –Provides focus on key capabilities for strategic options –Engages client in implementation needs Limitations: –No major

221 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Venkat matrixhow to apply it Rank identified capabilities by: Strategic importance to future option: –Core... to achieve competitive differentiation. –Necessity... to be the business. –Support... to be in any business. Relative position (vis-à-vis competitors): –Stronger: best-in-class. –Equal: as good as most. –Weaker: needs catching up. Plot on Venkat matrix. CAPABILITIES STREAMCORE ANALYTICS Step 1 Step 2 Relative Position Strategic Importance Core... to achieve competitive differentiation Necessity... to be in business Support... to be in nay business Weaker (Needs catching up) Equal (As good as most) Stronger (Best-in-class) Differentiation Zone Investment Centre Profit Centre Cost Centre Parity Zone The Venkartraman Model

222 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Venkat matrixillustrative output CAPABILITIES STREAMCORE ANALYTICS Relative Position Strategic Importance Core... to achieve competitive differentiation Necessity... to be in business Support... to be in nay business Weaker (Needs catching up) Equal (As good as most) Stronger (Best-in-class) Differentiation Zone Investment Centre Profit Centre Cost Centre Parity Zone UK Mortgages Company Example u Funding and financing u Leadership and people development u Processing information/ customer service u Product development u Sales and distribution channel management u Managing information u Marketing u Risk management/ control u External relationships

223 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Venkat matrixtop tips Potential Insights Best-in-class core capabilities allow us to: – Reinvent rules, generate significant revenue at high margins, create barriers to entry/exit Parity zone capabilities are: –Non–value-adding, business as usual functionpotential to outsource or get rid of Differentiating zone capabilities are: –Potential focus for investment Best-in-class core capabilities allow us to: – Reinvent rules, generate significant revenue at high margins, create barriers to entry/exit Parity zone capabilities are: –Non–value-adding, business as usual functionpotential to outsource or get rid of Differentiating zone capabilities are: –Potential focus for investment Hints and Pitfalls Do: Validate all data with client Run workshops to develop and validate matrix Use expert resources to help develop options Do not: Do: Validate all data with client Run workshops to develop and validate matrix Use expert resources to help develop options Do not: Data Sources Capabilities survey analysis Analysts Industry experts Penney Frohling, VMS Capabilities survey analysis Analysts Industry experts Penney Frohling, VMS Case Example The following are good case examples : – ABN AMRO GTS –Abbey National expansion opportunities The following are good case examples : – ABN AMRO GTS –Abbey National expansion opportunities Related Analytics Strengths and weaknesses analytic Build, buy, ally options See also M&A/Alliances CoE, Gemini Compass Strengths and weaknesses analytic Build, buy, ally options See also M&A/Alliances CoE, Gemini Compass CAPABILITIES STREAMCORE ANALYTICS

224 Capabilities Stream Analytics Introduction Strength and Weaknesses Analysis Venkat Matrix Conclusions

225 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Capabilities analysis streamconclusions Provides a vital insight to a companys ability to follow or implement a potential strategic option. Helps client prioritise and focus on key capabilities for strategic options. Is a key input to the option development and evaluation process: –Options to fill capability gaps are often resource constrained. –The chosen route to fill gaps, e.g. build, buy, ally has implications for time, cost and ease of implementation. Many clients overlook the importance of a capabilities analysisit is key to demonstrate implications for the chosen strategy. CAPABILITIES STREAMCORE ANALYTICS

226 Developing and Evaluating Options Introduction Segment Attractiveness Net Present Value

227 Developing and Evaluating Options Introduction Segment Attractiveness Net Present Value

228 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Developing strategic options is more of an art than a science Option development is not prescriptive: –It is heavily reliant on experience and expertise –Creativity is required The process and solution is unique to each client: –Dependent on the clients unique position and set of capabilities Scenario modelling and vision engineering can sometimes help generate options, but is not included in the scope of this toolkit: See strategy discipline Kbase, Gemini Compass There are no pure analytics to enable us to arrive at the answer (although tools do exist to help evaluate them). There are however a few guidelines to help the process. DEVELOPING AND EVALUATING OPTIONSINTRODUCTION

229 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT In developing options, there are some important factors to bear in mind Link back to the initial issues and hypotheses in the APSP a : –Do options address the clients problem? –What additional options would help? Link back to the initial issues and hypotheses in the APSP a : –Do options address the clients problem? –What additional options would help? DEVELOPING AND EVALUATING OPTIONSINTRODUCTION Examine the insights and answers from the analytics performed: –What specific answers have been derived? –How is the clients strategic position impacted? –How is this likely to change? Examine the insights and answers from the analytics performed: –What specific answers have been derived? –How is the clients strategic position impacted? –How is this likely to change? Brainstorm (using experience and expertise) potential options for how the client should position itself in the future vis-à-vis: Industry dynamics Competitors Customers Brainstorm (using experience and expertise) potential options for how the client should position itself in the future vis-à-vis: Industry dynamics Competitors Customers Factor-in what capabilities exist to implement the proposed options: –What are the gaps? –What would it cost to fill gaps? Factor-in what capabilities exist to implement the proposed options: –What are the gaps? –What would it cost to fill gaps? Evaluate options: –Financially: are hurdle rates met? –Practically: what is the ease/risk of implementation? Evaluate options: –Financially: are hurdle rates met? –Practically: what is the ease/risk of implementation? IMPLEMENTATIONIMPLEMENTATION IMPLEMENTATIONIMPLEMENTATION Option Development and Evaluation a. Analytical Problem Solving Process: See Strategy Core Skills, GU Kbase, Gemini Compass.

230 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Strategic Position Dependent on strategic position, there are eight generic options DEVELOPING AND EVALUATING OPTIONSINTRODUCTION Competitive position Profitability Future attractiveness (Industry Dynamics, Customer Demand) Future Positioning Invest in segment and grow market share Improve profitability (lower costs, increase price) Hold position and grow if possible Invest and grow market share/sell Alliance or JV Increase profitability/harvest Investigate new technology and/or capabilities to gain market share Hold position for as long as possible Harvest or exit/avoid In each case we need to establish whether the necessary capabilities can be developed. Key: 4 = Favourable, 8 = unfavourable Generic Strategies

231 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT New opportunities can be assessed in terms of capabilities and core business DEVELOPING AND EVALUATING OPTIONSINTRODUCTION Total Solution / Capabilities Matrix Core Business Non-Core Business Completely new capabilities Leveraging Existing Capabilities Completely new capabilities Pursue if profitable in short term Invest and grow Substantial investment in capabilities or Alliances and JVs Non-Starter Source: R. Koch.

232 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT There are some tools which supplement the stream analytics Stream a analytics will provide insight and answers to help understand a clients strategic position. Two tools however, help evaluate options: –Segment attractiveness: helps quantify future attractiveness of options –Net present value: helps quantify financial impact of options DEVELOPING AND EVALUATING OPTIONSINTRODUCTION These tools are detailed in this section. a. See competitor/industry, customer, cost, capabilities stream analytics section of tool kit.

233 Developing and Evaluating Options Introduction Segment Attractiveness Net Present Value

234 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Segment attractivenessintroduction What It Is Segment attractiveness assesses the benefits of being in (or entering) a given segment. It is defined by a set of quantitative and qualitative factors: –Each factor is weighted according to its importance and to your own requirements. –Segment attractiveness is derived by the sum of the factors. Although there are different approaches for evaluating segment attractiveness, all assess the pitfalls and opportunities of the segment analysed. Segment attractiveness assesses the benefits of being in (or entering) a given segment. It is defined by a set of quantitative and qualitative factors: –Each factor is weighted according to its importance and to your own requirements. –Segment attractiveness is derived by the sum of the factors. Although there are different approaches for evaluating segment attractiveness, all assess the pitfalls and opportunities of the segment analysed. Why We Use It Help make decisions in portfolio management: –Identify where to invest/divest. Provides an input to evaluating strategic options. Helps quantify future attractiveness of markets/segments. Help make decisions in portfolio management: –Identify where to invest/divest. Provides an input to evaluating strategic options. Helps quantify future attractiveness of markets/segments. Strengths & Limitations Strengths: –Provides a structure for opportunities assessment. –Objective assessment. Limitations: –Reliable data-driven analysis is time-consuming. –It is qualitative, and vulnerable to poor judgement. –Does not factor in capabilities/ease implementation. Strengths: –Provides a structure for opportunities assessment. –Objective assessment. Limitations: –Reliable data-driven analysis is time-consuming. –It is qualitative, and vulnerable to poor judgement. –Does not factor in capabilities/ease implementation. DEVELOPING AND EVALUATING OPTIONS–CORE ANALYTICS

235 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Segment attractivenesshow to apply it On the basis of discussions with industry experts and JTMs, identify the factors that should be taken into account for a given segment, e.g.: Market size/market growth. –Capacity/demand balance. –Barriers to entry. –Returns, NPV. Find a way to measure qualitative factors, and combine quantitative and qualitative factors in an index. Rate each factor from: 1 (very unattractive), to 5 (very attractive). –This is not a trivial exercise. –Requires expertise and validation to assign ratings. Multiply the ratings by weightings reflecting the factors relative importance. Calculate the total value for each dimension. DEVELOPING AND EVALUATING OPTIONS–CORE ANALYTICS

236 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Segment attractivenessillustrative output Market Attractiveness Overall market size Predicted customer demand Historical profit margin Competitive intensity Technological requirements Inflationary vulnerability Energy requirements Environmental impact Social/political/legal Overall market size Predicted customer demand Historical profit margin Competitive intensity Technological requirements Inflationary vulnerability Energy requirements Environmental impact Social/political/legal Factor Weight Must be acceptable Must be acceptable 1.00 Score Value (Factor x Score) DEVELOPING AND EVALUATING OPTIONS–CORE ANALYTICS Segment Evaluation Option A Total3.70

237 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Segment attractivenesstop tips Potential Insights Combined with an analysis of a companys competitiveness in each segment, it helps decide how best to distribute financial and managerial resources between segments. Hints and Pitfalls Do: –Quantify each factors. –Define the time period being scored: A segment that is attractive today may not remain so, and vice versa. Dont: – Over engineer/make too complex Do: –Quantify each factors. –Define the time period being scored: A segment that is attractive today may not remain so, and vice versa. Dont: – Over engineer/make too complex Data Sources Industry reports Analysts reports Industry experts Client internal data Industry associations Industry reports Analysts reports Industry experts Client internal data Industry associations Related Analytics Related Analytics Business/segment profitability Company/competitor analysis Capability analysis Cost analysis Business/segment profitability Company/competitor analysis Capability analysis Cost analysis DEVELOPING AND EVALUATING OPTIONS–CORE ANALYTICS

238 Developing and Evaluating Options Introduction Segment Attractiveness Net Present Value

239 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Net present valueintroduction What It Is A technique to evaluate an investment decision (e.g. whether to invest £x m in a new venture) There are other techniques to evaluate investment decisions, however they are inferior to the net present value technique: –Interior rate of return (IRR). –Payback. –Average-return-on book. The key stages in determining net present value of a project are to: –Forecast cash flows generated by the project. –Determine the opportunity cost of having capital tied up in the project. –Discount the cash flows to determine their present value (PV), and –Deduce the projects investment cost to get the net present value (NPV) If the NPV is greater than zero, the company should invest in the project A technique to evaluate an investment decision (e.g. whether to invest £x m in a new venture) There are other techniques to evaluate investment decisions, however they are inferior to the net present value technique: –Interior rate of return (IRR). –Payback. –Average-return-on book. The key stages in determining net present value of a project are to: –Forecast cash flows generated by the project. –Determine the opportunity cost of having capital tied up in the project. –Discount the cash flows to determine their present value (PV), and –Deduce the projects investment cost to get the net present value (NPV) If the NPV is greater than zero, the company should invest in the project Why We Use It To make decisions in whether to invest in particular project: –Part of process to evaluate strategic options Methodology can also be applied to determine the value of: –A company or enterprise. –Part of a company or enterprise (e.g. part of a business to be sold) To make decisions in whether to invest in particular project: –Part of process to evaluate strategic options Methodology can also be applied to determine the value of: –A company or enterprise. –Part of a company or enterprise (e.g. part of a business to be sold) Strengths & Limitations Strengths: –The most correct and rigorous methodology to evaluate an investment decision Limitations: –Forecasting cash flows requires enormous care and skill, and may prove impossible to derive an accurate result –Some clients are more comfortable with other methodologies (e.g. payback) –Very sensitive to the terminal value Strengths: –The most correct and rigorous methodology to evaluate an investment decision Limitations: –Forecasting cash flows requires enormous care and skill, and may prove impossible to derive an accurate result –Some clients are more comfortable with other methodologies (e.g. payback) –Very sensitive to the terminal value DEVELOPING AND EVALUATING OPTIONS–CORE ANALYTICS

240 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Net present valuehow to apply it Determining the Value of a Project Involves Six Steps Define Time Period Determine period over which you will estimate future cash flows: –e.g. 3 years, 5 years, 10 years Determine period over which you will estimate future cash flows: –e.g. 3 years, 5 years, 10 years Forecast Cash Flows Forecast the size and timing of future cash flows Estimate Terminal Value Estimate the likely cash flows beyond the forecast period Determine Opportunity Cost Determine the rate at which you will discount future cash flows to derive their present value Calculate Present Value & Net Present Value Calculate the present value of those future cash flows Conduct Sensitivity Analysis Test the sensitivity of the present value to key assumptions Define Time Period etc Today Forecast Period (years) Estimate Terminal Value 3 Forecast Cash Flows 2 Conduct Sensitivity Analysis 6 Calculate Present Value 5 Determine Discount Rate 4 XX YY Step 1 DEVELOPING AND EVALUATING OPTIONS–CORE ANALYTICS

241 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Net present valuehow to apply it (cont.) Determining the Value of a Company or Project Involves Six Steps Define Time Period Determine period over which you will estimate future cash flows: –e.g. 3 years, 5 years, 10 years Determine period over which you will estimate future cash flows: –e.g. 3 years, 5 years, 10 years Forecast Cash Flows Forecast the size and timing of future cash flows Estimate Terminal Value Estimate the likely cash flows beyond the forecast period Determine Opportunity Cost Determine the rate at which you will discount future cash flows to derive their present value Calculate Present Value & Net Present Value Calculate the present value of those future cash flows Conduct Sensitivity Analysis Test the sensitivity of the present value to key assumptions Forecast Cash Flow Cash flow is the difference between money received and money paid out: –However, one common pitfall is confusing cash flow with accounting profit: they are not the same –Accounting profit reflects when money is earned or expensed, rather than when the cash flows actually occur –In addition, depreciation (which is not cash out) is deducted from accounting profits When identifying cash flows, we should include all additional, or incremental cash flows that are generated from acceptance of the project Forecasting future cash flows requires making multiple assumptions about future revenues (and sources of future revenues) and future costs: The forecasts are only as strong as the underlying logic Forecasting incremental cash flows is a relatively difficult processwhich we do not detail here: –For more information on how to do it see data source p.xx –the key areas to look-out for, however, are: Incremental (not average) cash flows Changes in working capital Consistent treatment of inflation Adjustments for depreciation Adjustments for taxes Cash flow is the difference between money received and money paid out: –However, one common pitfall is confusing cash flow with accounting profit: they are not the same –Accounting profit reflects when money is earned or expensed, rather than when the cash flows actually occur –In addition, depreciation (which is not cash out) is deducted from accounting profits When identifying cash flows, we should include all additional, or incremental cash flows that are generated from acceptance of the project Forecasting future cash flows requires making multiple assumptions about future revenues (and sources of future revenues) and future costs: The forecasts are only as strong as the underlying logic Forecasting incremental cash flows is a relatively difficult processwhich we do not detail here: –For more information on how to do it see data source p.xx –the key areas to look-out for, however, are: Incremental (not average) cash flows Changes in working capital Consistent treatment of inflation Adjustments for depreciation Adjustments for taxes Step 2 DEVELOPING AND EVALUATING OPTIONS–CORE ANALYTICS

242 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Net present valuehow to apply it (cont.) Determining the Value of a Company or Project Involves Six Steps Define Time Period Determine period over which you will estimate future cash flows: –e.g. 3 years, 5 years, 10 years Determine period over which you will estimate future cash flows: –e.g. 3 years, 5 years, 10 years Forecast Cash Flows Forecast the size and timing of future cash flows Estimate Terminal Value Estimate the likely cash flows beyond the forecast period Determine Opportunity Cost Determine the rate at which you will discount future cash flows to derive their present value Calculate Present Value & Net Present Value Calculate the present value of those future cash flows Conduct Sensitivity Analysis Test the sensitivity of the present value to key assumptions Estimate Terminal Value The terminal value is the value of the project beyond the forecast period: –Also known as the residual value For example, the anticipated project could be launched into a new market: –The forecast period may be 5 years, –However, we would expect an impact of the market entry to continue beyond those 5 years. –The terminal value should reflect the financial impact beyond the 5 year forecast period To determine the terminal value, you would review the planned project, and anticipate the likely cash flows generated from that project Typically there are 2 principal ways to estimate the terminal value: –Assume small incremental cash flow out over a long period (10-20 years) –Assume incremental cash flows tail off to zero (over years) The terminal value is the value of the project beyond the forecast period: –Also known as the residual value For example, the anticipated project could be launched into a new market: –The forecast period may be 5 years, –However, we would expect an impact of the market entry to continue beyond those 5 years. –The terminal value should reflect the financial impact beyond the 5 year forecast period To determine the terminal value, you would review the planned project, and anticipate the likely cash flows generated from that project Typically there are 2 principal ways to estimate the terminal value: –Assume small incremental cash flow out over a long period (10-20 years) –Assume incremental cash flows tail off to zero (over years) Step 3 DEVELOPING AND EVALUATING OPTIONS–CORE ANALYTICS

243 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Net present valuehow to apply it (cont.) Determining the Value of a Company or Project Involves Six Steps Define Time Period Determine period over which you will estimate future cash flows: –e.g. 3 years, 5 years, 10 years Determine period over which you will estimate future cash flows: –e.g. 3 years, 5 years, 10 years Forecast Cash Flows Forecast the size and timing of future cash flows Estimate Terminal Value Estimate the likely cash flows beyond the forecast period Determine Opportunity Cost Determine the rate at which you will discount future cash flows to derive their present value Calculate Present Value & Net Present Value Calculate the present value of those future cash flows Conduct Sensitivity Analysis Test the sensitivity of the present value to key assumptions Determine Discount Rate The discount rate should reflect: –The time value of money (i.e. £1 in 10 years from today is not worth as much as £1 today); and –The risk involved in the particular project being considered. To determine the discount rate we calculate the weighted average cost of capital (WACC) of the firm: –WACC = The hard part is to estimate r E. –Use client guidance –Use Fruhan matrix The discount rate should reflect: –The time value of money (i.e. £1 in 10 years from today is not worth as much as £1 today); and –The risk involved in the particular project being considered. To determine the discount rate we calculate the weighted average cost of capital (WACC) of the firm: –WACC = The hard part is to estimate r E. –Use client guidance –Use Fruhan matrix DVDV X r D + EVEV X r E Where: D = Outstanding debt E= Number of share x share price (Equity) V = D+E r D = Current borrowing rate r E = Expected return on equity Step 4 DEVELOPING AND EVALUATING OPTIONS–CORE ANALYTICS

244 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Net present valuehow to apply it (cont.) Determining the value of a company or project involves six steps Define Time Period Determine period over which you will estimate future cash flows: –e.g. 3 years, 5 years, 10 years Determine period over which you will estimate future cash flows: –e.g. 3 years, 5 years, 10 years Forecast Cash Flows Forecast the size and timing of future cash flows Estimate Terminal Value Estimate the likely cash flows beyond the forecast period Determine Opportunity Cost Determine the rate at which you will discount future cash flows to derive their present value Calculate Present Value & Net Present Value Calculate the present value of those future cash flows Conduct Sensitivity Analysis Test the sensitivity of the present value to key assumptions Calculate Present Value and Net Present Value To calculate PV apply the following formula: To calculate NPV apply the following formula: If the NPV is less than zero, the project should not go ahead: –It will destroy value If the NPV is greater than zero, the project should go ahead To calculate PV apply the following formula: To calculate NPV apply the following formula: If the NPV is less than zero, the project should not go ahead: –It will destroy value If the NPV is greater than zero, the project should go ahead PV = discount factor x C 1 = X 1 1+r X C 1 Where: r = rate of return (or opportunity cost) C 1 = expected pay-off at time period 1 NPV = PV-required investment NPV = C 0 + C 1 1+r Where C 0 = Cash flow at time period 0 Step 5 DEVELOPING AND EVALUATING OPTIONS–CORE ANALYTICS

245 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Net present valuehow to apply it (cont.) Determining the value of a company or project involves six steps Define Time Period Determine period over which you will estimate future cash flows: –e.g. 3 years, 5 years, 10 years Determine period over which you will estimate future cash flows: –e.g. 3 years, 5 years, 10 years Forecast Cash Flows Forecast the size and timing of future cash flows Estimate Terminal Value Estimate the likely cash flows beyond the forecast period Determine Opportunity Cost Determine the rate at which you will discount future cash flows to derive their present value Calculate Present Value & Net Present Value Calculate the present value of those future cash flows: –Formula Calculate the present value of those future cash flows: –Formula Conduct Sensitivity Analysis Test the sensitivity of the present value to key assumptions Conduct Sensitivity Analysis Sensitivity analysis is simply testing how sensitive the final result (i.e. the NPV value) is to key assumptions To run a sensitivity analysis, one-by-one change each key assumption by see 5% (or 10%, or 15%), and capture the revised NPV This should identify two things: –The impact of being % out on forecasts underlying those key assumptions; and –Which are the key assumptions that influence the NPV output You should ensure that these most influential assumptions are robust, and are fully validated Sensitivity analysis is simply testing how sensitive the final result (i.e. the NPV value) is to key assumptions To run a sensitivity analysis, one-by-one change each key assumption by see 5% (or 10%, or 15%), and capture the revised NPV This should identify two things: –The impact of being % out on forecasts underlying those key assumptions; and –Which are the key assumptions that influence the NPV output You should ensure that these most influential assumptions are robust, and are fully validated Step 6 DEVELOPING AND EVALUATING OPTIONS–CORE ANALYTICS

246 StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential DRAFT Net present valueconclusions Although we have focused here on applying net present value to investment projects, the methodology can also be applied to: –Value entire companies. –Value parts of businesses. DEVELOPING AND EVALUATING OPTIONS–CORE ANALYTICS