Strategy Toolkit Welcome to the “Strategy Toolkit”. Good strategy is by fanzhongqing


									Strategy Toolkit

   Welcome to the “Strategy Toolkit”.

   Good strategy is based upon structured thinking. Subsequent action based upon that strategy is
   dependent upon the clear communication of your structured thinking. Accordingly, this booklet has
   been put together to help support you in structuring and communicating your thoughts as you help
   clients address their (often complex and ill-defined) problems.

   Hopefully this booklet will:
           • act as a reminder (or an introduction) to a range of useful structuring tools;
           • give a clear description of each tool and indicate where it may be most fruitfully employed;
           • highlight some of the short-cuts (and pitfalls) when using those tools;
           • provide a best practice example which can be adapted to your own situation; and

   The aims of the toolkit are simple:
          • to increase the quality and insightfulness of the work we do for our clients;
          • to improve our efficiency by avoiding reinvention of standard tools;
          • to support ongoing training programmes;
          • to create an ongoing store of intellectual capital; and
          • to help communicate with all our colleagues in the firm, helping them understand what we

   Perhaps the biggest intellectual challenge in compiling this booklet was defining what we mean by a
   tool. I am not convinced this issue has been fully solved, and you may discern three types of
            • widely accepted strategy consulting tools (e.g. growth share matrix);
            • approaches to particular types of issue which are less prescriptive; and
            • presentational devices, applicable to many situations
   All, however, should support you in generating strategic insight for your client.

   This booklet is intended to be your back-pocket guide to the tools most commonly used on strategy
   projects. It does not claim to be exhaustive or even comprehensive. However, you will find over 50
   tools on the following pages, each one selected for its usefulness and general applicability to the
   types of client engagements we work on. I am sure that some of your favourites will be missing –
   but this is only version one and the toolkit will evolve through time. It is intended that this booklet will
   be updated regularly and your input is most welcome.

   We believe that development of this Strategy Toolkit is an essential element in building a world-
   class strategy practice within CONSULTANT. However, it is not a substitute for hard work and
   creative thinking, so do not limit yourself to the tools in this book.

   Finally, some acknowledgments. This toolkit is not the first to be produced by the practice. It draws
   heavily on previous versions, whose authors I would like to thank. I am also very grateful to those of
   you who have submitted best practice examples and suggested entries – keep them coming.
Table of contents
  Strategy at D&T               ................................ ................................ ................................ ...... 5
  An indicative guide to using the tools                    ................................ ................................ ..............  6
  Data sources ................................ ................................ ................................ ...................         7
  100% bars ................................ ................................ ................................ .......................        8
  Activity maps ................................ ................................ ................................ ................... 10
  Answer first hypothesis ................................ ................................ ................................ ... 12
  Asset extension modelling ................................ ................................ ...............................                14
  Business definition ................................ ................................ ................................ .......... 16
  Capability assessment ................................ ................................ ................................ .... 18
  Competitor analysis template                ................................ ................................ ..........................   20
  Conversion waterfall ................................ ................................ ................................ ........ 22
  Customer experience analysis                  ................................ ................................ ........................   24
  Customer segmentation ................................ ................................ ................................ .. 26
  Customer segmentation analysis                     ................................ ................................ .................... 28
  Dupont analysis ................................ ................................ ................................ .............. 30
  Economies of scale ................................ ................................ ................................ ......... 32
  Executive dashboard ................................ ................................ ................................ ....... 34
  Forecasting techniques ................................ ................................ ................................ ... 36
  Free cash flow diagram ................................ ................................ ................................ ... 38
  Gantt charts ................................ ................................ ................................ .................... 40
  Growth share matrix ................................ ................................ ................................ ........ 42
  Growth spread matrix ................................ ................................ ................................ ...... 44
  KPC comb charts ................................ ................................ ................................ ............ 46
  Marimekko charts ................................ ................................ ................................ ............ 48
  Market definition ................................ ................................ ................................ ............. 50
  Market entry and exit ................................ ................................ ................................ ....... 52
  Market sizing ................................ ................................ ................................ ................... 54
  Model front panel ................................ ................................ ................................ ............ 56
  Parfait charts ................................ ................................ ................................ ................... 58
  Partnering maps ................................ ................................ ................................ .............. 60
  PEST analysis ................................ ................................ ................................ ................. 62
  Porter’s five forces ................................ ................................ ................................ .......... 64
  Portfolio matrix ................................ ................................ ................................ ................ 66
  Prioritisation funnel ................................ ................................ ................................ .......... 68
  RACI analysis ................................ ................................ ................................ ................. 70
  Reverse costing ................................ ................................ ................................ .............. 72
  Risk matrix ................................ ................................ ................................ ...................... 74
  RONA charts ................................ ................................ ................................ ................... 76
  Root cause analysis ................................ ................................ ................................ ........ 78
  ROS/RMS ................................ ................................ ................................ ....................... 80
  Scatter graphs ................................ ................................ ................................ ................. 82
  Scenario development ................................ ................................ ................................ .... 84
  Sector charts ................................ ................................ ................................ ................... 86
  Sensitivity charts ................................ ................................ ................................ ............. 88
  Shareholder value analysis              ................................ ................................ .............................    90
  Share momentum charts ................................ ................................ ................................ . 92
  Sources of value waterfall ................................ ................................ ...............................               94
  Strategy articulation map ................................ ................................ ................................               96
  SWOT analysis ................................ ................................ ................................ ............... 98
  Traffic light charts ................................ ................................ ................................ ............ 100
  Value chain analysis ................................ ................................ ................................ ....... 102
  Value disciplines ................................ ................................ ................................ ............ 104
  Weighted column chart ................................ ................................ ................................ ... 106
  Feedback form ................................ ................................ ................................ ................ 10 8
An indicative guide to using the tools
                                  Strategic intent   Strategic architecture Strategic change
 100% bars                                                                     
 Activity maps
 Answer first hypothesis                                                       
 Asset extension modelling                
 Business definition
 Capability assessment                                                          
 Competitor analysis template             
 Conversion waterfall                     
 Customer experience analysis             
 Customer segmentation                    
 Customer segmentation analysis           
 Dupont analysis                                             
 Economies of scale                                          
 Executive dashboard                                                            
 Forecasting techniques                   
 Free cash flow diagram                   
 Gantt charts                                                                  
 Growth share matrix                      
 Growth spread matrix                     
 KPC comb charts                                              
 Marimekko charts                                            
 Market definition                        
 Market entry and exit                    
 Market sizing                            
 Model front panel                                           
 Parfait charts                           
 Partnering maps                                              
 PEST analysis                            
 Porter’s five forces                     
 Portfolio matrix                         
 Prioritisation funnel                    
 RACI analysis                                                                  
 Reverse costing                                              
 Risk matrix                                                                    
 RONA charts                              
 Root cause analysis                      
 ROS/RMS                                  
 Scatter graphs                                              
 Scenario development                     
 Sector charts                            
 Sensitivity charts                                          
 Shareholder value analysis                                  
 Share momentum charts                    
 Sources of value waterfall                                  
 Strategy articulation map                                                      
 SWOT analysis                                               
 Traffic light charts                                                          
 Value chain analysis                                        
 Value disciplines
 Weighted column chart                    

100% bars

 Description    The 100% bar is a powerful and flexible presentation tool for
                highlighting the relative proportion of elements within a fixed total.

     Typical    100% bars work effectively for many purposes, such as:
  application      - comparing competitors within an industry or market by
                     sales, market share, geography, product type etc.
                   - costs that go into the manufacture of a particular product;
                   - key elements that comprise a company’s revenue streams
                   - addressing changes over time etc.

                This enables people to easily recognize the relative impact of
                different factors that go into a process or trend.

                In particular, placing a series of 100% bars in order can highlight
                changing patterns in relative terms, over time, region or any other
                segmentation. 100% bars do not reflect changes in the absolute
                size of the category in question.

      Typical   Excel has an option to create 100% bars as part of its Chart Wizard,
     process    so they are easy to create.

                Gather the data appropriate to the particular application you are
                using the 100% bars for, from expert interviews, analyst and brokers’
                reports and, if necessary, client interviews.

                Ensure that you are happy with the data you have gathered and
                that, if you are creating a series of bars, the information refers to the
                same type of data.

                Annotate the chart and draw conclusions from it.

                Unless you are dealing with many categories, it is best to put the
                absolute size of each item at the end of the bar.

                For comparisons between bars over time, clearly mark the CAGR for
                each of the key elements of the bar.

    Example                     Concentration of Customer Profitability
      output                              7m                         £17m
                 % of
                 Total                     B
                                                                                          40% of
                                                                                       generate 90%
                         40%                                                             of profit

                                  Customer ranked                Net profit
                                   by profitability
                                                                 Source: RBS presentation, Feb 2001

                                           Wealth by Source Region

                                 $7.2tr        $16.6tr       $17.4tr        $23.1tr
                 % of    80%                                                          Middle East
                 Total                                                                S. America


                                                                                      N. America


                                 1986           1996          1997           2000
                                                         Source: Private Wealth Management, 1998/99

Tricks and     Use shading to highlight key messages you wish to show to the client.
               100% bars are often interchangeable with (or augmentations of)
               Mekkos and Parfait diagrams.


Activity maps

 Description     An activity map is an easy, visual summary of a company or series of
                 companies and what they do.

     Typical     Activity maps are a good way of moving from a broad overview of a
  application    particular company or industry’s activities to a detailed and
                 comprehensive list of all activities within the value chain.

                 They are designed more to spark discussion than provide an answer
                 to a particular problem, but make good slides for a presentation or a
                 client pack.

                 You can use the activities collated in a number of ways to stimulate
                 thought about the company in question. Try:
                       - Mapping company activities against competitors and
                         discussing differences;
                       - Shading boxes according to relative capability; and
                       - Shading boxes according to desired state and noting
                         discrepancies with ‘as is’

                 It is surprisingly difficult to develop activity maps. Take time over the
       Typical   process and make sure you don’t miss out important activities.
                 Start by drawing the value chain in which the client operates,
                 vertically on the left side of your slide.

                 Taking each element of the value chain in turn, try and record all the
                 sub-activities necessary that comprise the element as a whole.

                 Place each activity in a box to the right of the value chain.

                 This exercise can be completed with a client, but if not try and
                 discuss it with a client afterwards to ensure you have captured all
                 activities .

    Example                High-level activity map for fixed line telecoms: Now and Future
                                                                     Media/ Publishing                         Corporate               Advertising                     Communications

                Content                                News   Films/ Music       Games Publishing Information Transactions           Rich Interactive          Voice   E-mail     Video    Exhibition
               Production                                  Programming                                                               Media                                      conference
                                                                               User Applications                                                 Middleware                             ASP

                 Content                            Search BrowsersE-comm. App’n Enterprise Content-            Web Traditional      Netw’k Strm’g Cach’g Metr’g BIlling         Fixed W-ASP ASPE
                Provision                           engines          tools hosting tools app’ns specific        sites offline        mgmt media                                  ASP
                                                                                                 apps                 media
                                                          Portal              Mobile Portal
                              Customer management

                                                       Open “Walled          Open “Walled
                                                            Garden”               Garden”
                Access                                     Fixed                     Mobile          Hosting
                                                            ISP                       ISP
               Backbone                                            Network Provision                                              Network Equipment and Infrastructure
                                                     National Intern’l Bandw’th Coloc’n/ Switching/               Fibre    Co-ax Copper SwitchesMultiplexers Sat. M’wave Rights of
                                                    Backbone Backbone Trading Hotelling routing                                      and Routers                           Way
               Local Access
                                                            Fixed Network Services                 Fixed Netw’k Eqpm’t Infrastructure                     Mobile

                                                    Dial-up PSTN/ ISDN HSI Cable Data               xDSL Radio      Co-ax Fibre                 2G      2.5G      3G   GPRS
               Equipment                                                   Devices                                     Application
                                                      Fixed    Mobile PDAs       TVs Specialist Set top        Operating Local     Specialist
                                                     Handsets Handsets                Devices box              Systems Middleware Local Apps

                                                                                                            Key areas of future
                                                          Current area of activity                          activity - owned or as
                                                                                                            part of an alliance
                                                                                                                                                        Source: TMC example
Tricks and       Note: the above example is not to scale (was originally the size of a
       tips      powerpoint slide). To present this much data in a client situation,
                 ensure that all boxes are clear and well spaced.

                 You can shade boxes according to competency or desired
                 competency if you wish to draw out key messages.

                 Overlaying current with desired activities helps clarify key conclusions
                 in advance of alliance, M&A activities, etc.

                 Consider adding rows for parameters which fall outside the value
                 chain, but which can help distinguish competitors, e.g. geography,


Answer first hypothesis

 Description     The hypothesis or logic tree is a key method of thinking used on
                 strategy projects. It provides a framework for a piece of research
                 or analysis to ensure that all factors are suitably accounted for and
                 evaluated, and allows you to apply principles of structured thinking
                 to simplify complex problems.

                 Structured thinking is a key method for approaching - and
                 hopefully answering - a question in a compelling way. It helps you
                 to be clear about the key issues you are tackling, to remember the
                 information you have uncovered and to structure the solution you

     Typical     The hypothesis tree should be used early on in a project, once a
  application    basic understanding of the issues has been established. It should
                 be returned to and changed as your thinking develops.

                 The hypothesis tree can be translated directly into a research tree
                 to structure the activities that need to be performed. Once the key
                 questions have been established it is usually clear which research
                 method is the most appropriate.

       Typical   The process of creating a hypothesis tree is ideally completed by
      process    one person first, then discussed with the team - hypothesis trees
                 cannot be written by committee.

                 Begin by formally stating the situation your client is in. Then write
                 down the key complication. In other words, define your client’s

                 This should lead to a question which will point you towards your
                 tree’s hypothesis or ‘answer’. Write this at the ‘top’ of the tree as
                 a positive statement which directly answers the client’s question.

                 Create sub-branches by splitting the top of the tree into its natural
                 components (this takes practice). Each horizontal level should
                 contain statements of a distinct category or type; vertically, the
                 ideas should support each other.

                  The sub-branches should obey the MECE principle (Mutually
                  Exclusive Completely Exhaustive). This implies that:
                    - if one of the sub-branches is false then the top of the tree must
                      be false
                    - if all the sub-branches are true then the top of the tree must be

                  Discuss the tree with your team as an initial test of logic and
                  completeness, and change if it is required. Once the tree is
                  developed sufficiently, each question should be possible to address in
                  a manageable way. Take each element of the tree and formulate an
                  appropriate match in the research tree to satisfy the question

 Example                                                BankCo. Loyalty Scheme Redesign
   output                      The proposed changes to the loyalty scheme will generate significant profit uplift
                                    … but will not have the desired impact if the changes are incremental

                                         Will generate profit uplift                            Incremental changes won’t work

                                    Can change                                                Declining            Poor          Rewards do
                                                              Cost reductions                                   customer          not solicit
                                     customer                                                  market
                                                               can be made                                    rel’nship and        required
                                     behaviour                                                position
                                                                                                                targeting        behaviours

                                  Can increase                                                                 Can reduce      Can reallocate   Can save mis-
                 Can improve                        Can manage       Can convert       Can create new
                                  contribution                                                                  costs for      balance sheet      targeted
                  customer                            out poor      more prospects        revenue
                                   from best                                                                   sourcing of         costs          marketing
                 behaviours                          customers                            streams
                                   customers                                                                     goods          beneficially       spend
               • Can identify    • Can identify   • Can identify   • Can identify good • Can increase      • Sourcing costs are • Can legally   • Posted
                 profitable        borrowers,       poor customers prospects             share of wallet     higher than industry change          materials can
                 customers         and make       • Can price them • Can design        • Can increase      • Can offer high value provision       be reduced
               • Can retain them them borrow        out profitably   attractive CVPs     x-sales             goods selectively    position      • Process
                 longer            more           • Can manage     • Can win converts • Can partner        • Swap high for low • Others have      inefficiencies
               • Can increase x-                    attrition        from competition profitably             value rewards        lower           can be reduced
                 sales                                                                                                            provisions
               • Can reduce LLP
                                                                                                                                 Source: Example

Tricks and      A positive statement, although more difficult to express, is more
       tips     valuable in developing a proof.

                Express assertions in complete sentences rather than in note form as
                they better assist clear thinking.

                Some first level “splits” of the hypothesis tree occur rather regularly.
                Typical first level branches are:
                   - Sales, margins and costs; and
                   - Customers, competitors and costs


Asset extension modelling

 Description     Asset extension modelling is a simple too (or technique) for
                 identifying new business opportunities, based upon a company’s
                 existing strategic assets.

                 It is all too common in the new economy to define potential
                 business opportunities which are simply not realisable given the
                 starting position of a particular company. This techniques avoids
                 those pitfalls by isolating core, near and far opportunities based on
                 the structuring of existing assets such as brand, market reach,
                 capital, IP, etc.

                 By defining the “distance” of a business opportunity it is much more
                 likely that you will identify the likelihood of achieving stretch
                 opportunities without straying into the realms of fantasy.

     Typical     Typical applications for asset extension modeling might include:
  application          - e-commerce brainstorming;
                       - identifying regeneration targets;
                       - skills gap analysis;
                       - re-engineering; and
                       - portfolio investment planning and divestment analysis
                 Complete a skills audit, ensuring that all asset classes are captured
      process    (from soft assets through to hard assets). Typical asset classes
                 might include: free cash, debt availability, skills, scale of workforce,
                 IP (knowledge, patents), customer base, products, brand, access
                 to industry influences, etc.

                 Rank the strength of each assets, and then cluster into 2-6 groups.

                 One or two teams members should then develop an asset
                 extension map, which can then be tested internally with the rest of
                 the project team. Run this past the primary client contact and
                 incorporate his or her feedback.

                 Plan and organize a workshop, paying specific attention to the
                 “stretch questions” you will ask.

                 During the workshop, treat the exercise like a brainstorming
                 session, but keep drawing the threads back to the defining assets.

                 Conclude the workshop by gaining agreement on which
                 opportunities are most likely to be successful.

                                               Asset Extension Modeling
                Skills extension                                  Far satellite                                    Brand extension
                                                        Internet                                     On-line
                       B-B                             derivatives                                   wealth
                   integration       Internet         management                                   management
                    services        derivatives      and settlement                                   tools
                                   management                    Near satellite
                                  and settlement                                                     Mobile
                                                                     Institutional Operational research               Gold and
                       Operational                 Institutional         fixed        risk on-line provision          jewellery
                       risk on-line              investor trading      income            advisor                       trading
                         advisor                     and risk        transaction
                                                   management          platform
                                                       hub                                               Mobile
                                          XML                     Open                                   credit
                                       derivatives            architecture        Core                 derivatives    Mobile
                                        trading               ECN for US                                               bond
                                        platform                equities                                            syndication
                                                       Open                                   Internet                 tool
                                                    architecture                               Private
                                   Mobile           ECN for UK                                  Bank                  Interest rate
                                    credit            equities                                                          derivative
                                  derivatives                                                                            network
                                                                   XML            Institutional
                                                              derivatives             fixed
                                                                 trading            income               Forex portal
                                                                platform          transaction
                Market extension                                                                                Product extension

                                                                                                                   Source: April 2001

       Tricks   Don’t let suggestions in the “far satellite” region get too far away from
     and tips   reality. But balance this against the need for individuals to test their

                Use extension modelling alongside scenario planning, beachhead
                mapping, etc.


Business definition

 Description     A framework to help clients understand how they might best
                 manage their business as unified or separated entities. It also
                 forms a basis for identifying new business opportunities and for
                 estimating the potential of markets.

                 Business definition is based on the logic that “shared customers
                 plus shared costs constitutes a single business”. Alternatively, if a
                 business shares neither customers or costs they are distinct.

                 This has significant implications on how to structure businesses in
                 a manner which can leverage scale and reach customers to
                 maximise cross selling and minimise channel costs.

     Typical     There are many uses for business definition, but key applications
  application    include:
                       - establishing the boundaries of new e-business;
                       - deciding how to manage a portfolio of opportunities;
                       - as a basis for market entry studies;
                       - to support new business start-ups; and
                       - value proposition development
       Typical   Begin by getting a contextual understanding through background
      process    reading.

                 Use this knowledge to identify discrete business activities in the
                 area your client is working (as is). For example, food manufacture,
                 pet food brand management, wheat milling, food distribution (US),
                 food distribution (France).

                 Determine the cost structure (i.e. the key components) for each
                 activity. Use the 80:20 approach, but dig down as quickly as
                 possible into existing management accounts.

                 Plot 100% bars for costs against each other, and identify through
                 shading where cost sharing occurs (or could occur).

                 Map the channel processes at a high level, which serve the
                 customers for each business activity.

                 Plot this as a value chain, each against the others and identify
                 areas of channel/customer sharing.

                 Plot each business activity on the “cost sharing vs. customer
                 sharing” matrix.

                  Use this to draw out implications regarding which businesses can
                        - stand alone or unified;
                        - leveraged off each other’s distribution or cost base; and
                        - better “cross-sold” between sets of customers.

 Example                                       Business Definition Framework

                                                Single business
                                              (with niche potential)

                                                                             Single business

                                                Distinct business
                                              (with cost leadership
                   Cost sharing



                                              Distinct businesses       (with channel

                                         0%                            50%                       100%
                                                             Customer sharing
                                                                                           Source: Example
                Read examples of how new entrants have managed to get a foothold in
     and tips   new industries, and determine what elements of their existing business
                they have leveraged. For example, Virgin’s brand extension activities,
                or Japanese cost sharing in the motorcycle and engine manufacturing

                Assignments of this sort can be helped greatly by Global Corporate
                Finance’s knowledge of “best owners” for discrete businesses. Don’t
                assume your client is the best owner of its existing business portfolio.
     Contact    Clare H. Harding

Capability assessment

 Description     Capability assessment encompasses a number of tools designed to
                 focus a client on specific skills that the client or competitor’s company
                 may have or lack, and that therefore may act as a basis for a
                 sustained source of competitive advantage.
     Typical     Capability assessment is an important activity for isolating and
  application    ranking capabilities in a particular company, business unit or
                 department. It can be used either to rank capabilities as seen within
                 a company, or as perceived by customers or clients externally.

                 By using tools such as the spider chart in displaying the results,
                 characteristic patterns can be isolated, and the cumulative impact of
                 over- or underperformance in a number of fields can be highlighted.

                 See also: Value disciplines

       Typical   Determine the key capabilities you wish to assess the company by.
      process    These may be the three core capabilities from the ‘value disciplines’
                 model, or other categories (agreed with the client in advance), indeed
                 almost anything that can be broadly termed a ‘capability’. This might
                       - superior skills in producing high quality products;
                       - superior system for delivering customer orders accurately
                         and swiftly;
                       - better after-sale service capability;
                       - more skill in achieving low operating costs;
                       - unique formula for selecting good retail locations;
                       - unusual innovativeness in developing new products;
                       - better merchandising and product display skills; and
                       - superior mastery of an important technology

                 Conduct a comprehensive survey of a predetermined target audience
                 (customers, employees, etc.) based on ranking each capability.
                 Average the results for each category to get a single score for each

                 Plot the results of the survey on a spider chart so that each capability
                 runs along its own axis. Join the points on each axis together to form
                 a complete shape.

                 You may wish to shade the area enclosed by the lines to indicate a
                 rough ‘overall’ performance.

                 Annotate your results carefully so as to highlight the conclusions you
                 have drawn.
              There are many other ways to present the information in an
              informative way - take the so-called ‘wheel of fortune’ (below).
                                                                     Strategic fit with ML
 Example                                                                   4

   output                                 Rapid
                                                                           3                  Success of EXN

                                            ty                             2


                                                                           0                         Leveraging of

                                       Enhancing fund                                         Industry leadership
                                                                     Industry collaboration            EXN
                                     1- low importance                                                 BW
                                     4- high importance
                                                                                                  Source: FSI Project, April 2001

                Cash generating activities
                Financially strong negotiating position
                Operating in a growth industry
                Experienced and stable workforce
                Attractive, captive, guaranteed footfall
                High quality customer segmentation data
                Airports and lots of space
                On airport infrastructure e.g. roads and utilities
                Location (proximity to capital and entrance to EU)
                Very strong airport brands @ Heathrow and Gatwick
                BAA brand is fairly anonymous
                Good track record of management and investments
                Generally risk adverse
                Looking at the long term
                                                                                               Source: Client project, May 2001

Tricks and    Be aware that selecting capabilities and subjectively ranking them
       tips   can produce results that are very sensitive for the client and/or
              generate certain levels of disagreement. Also, take care when
              reproducing diagrams in final packs as they tend to divert attention
              and/or cause disagreement.

              Remember when conducting a customer survey to be aware of the
              impact of your sample size, the types of questions you ask and the
              ‘unrealistic’ environment of the survey. Also, make sure to ask open
              questions so you can provide qualitative evidence to support or bring
              out your conclusions.

              Inherently relative, spider charts usually work best when a series of
              different results are compared. For example, ask customers to rank
              not only the company but competitors; or compare the results of
              internal surveys between deparments.
Competitor analysis template

 Description     A template which aids direct comparison between industry
                 competitors, based around strategically important differentiating
                 factors. This template is not uniform, but is typically structured.

     Typical     Wherever a rigorous comparison between market players has to
  application    be made.

                 To address a company’s structure, strategic conduct and

                 There is no “magic” to this particular template, but something
                 similar should be employe in order to avoid uncomparative or non-
                 focused analysis.
                 Review the hypothesis for your current client assignment and
      process    agree the key parameters which capture the behaviours of each
                 competitor related to your specific issue.

                 Try the template on one or two competitors. Then simplify and
                 modify it on the back of the experiences you find.

                 Feed the information into the strategic decision making steps in
                 the assignment.

        Tricks   If you cannot fit all of your summary onto a single page you have
      and tips   not understood the issue or the competitor well enough. Revise.


                                                                                 Structure                                                      Conduct                                                    Performance
                                                            Mission - To provide customers with the most                     Acquisitions - Investment /HNW focus                    Profitability - Reliance on mass affluent market
                                                            useful and ethical financial services in the world                                                                       Charles Schwab has experienced significant net
                                                                                                                             • Research group Chicago Investment Analytics
                                                                                                                               (Nov 2000)                                            income growth (5 year CAGR of 33%). However,
                                                            Strapline: “Creating a world of smarter investors“               • Investment management group US Trust for              the recent downturn
                                                            Philosophy                                                         $2.9 Bn (June 2000) to tap wealthy investors          in online trading
                                                            • High tech, high                                                  “purveyor of investment advice and private            has impacted
                                                            • Technology leadership                                            banking services to some of America's richest         Charles Schwab
                                                            • A culture of innovation                                          families” (More than $5 Mn investable). Will retain   more than other
                                                                                                                               their separate brands                                 online brokers
                                                            Organisation                                                     • eTrading technology and brokerage CyBerCorp           because of their
                                                            • 24,300 employees                                                 (Feb 2000) (Provides internet based services to       greater focus on
                                                                                                                               highly active online investors)                       affluent customers, as opposed to active traders

     , Vince Colvin, Sedef Imer
                                                                                                                             • Resource Trust Company HNW bank. (Feb 2001)
                                                                                                                               Requires clients to have $3 million of investable     Value creation
                                                            Retail services                International businesses

                                                            415 branches, electronic       • Latin American center           Alliances - Extending the distribution network
                                                            brokerage                      • Charles Schwab Europe
                                                                                           • Charles Schwab Hong
                                                                                                                             • Multi-year alliance with AOL to become the
                                                            3,000 funds, 32 proprietary                                        premier financial services company and
                                                            Schwab funds                     Kong Ltd
                                                                                           • Charles Schwab Tokyo              brokerage firm across AOL’s personal channels
                                                            • Investment tracking
                                                            • Stock quotes                   Marine Co                         (Oct 2000)
                                                            • Trade orders                 • Charles Schwab Canada           • Teamed with Ericsson to develop mobile
                                                            • Asset allocation             • Asia Pacific Services center      investing products (June 2000)                        Customer assets - new broking customers and
                                                            • Research                                                       • Alliance with the 3 major wireless carriers (Nov      customers attracted from others
                                                            Schwab                 Schwab             Capital Markets                                                                Charles Schwab attracted self-directed customers
                                                            Retirement Plan        Institutional      & Trading              Marketing - Customising the product offering            from traditional
                                                            • Investment        • Operational      • Trade execution         • Lower pricing for customers with higher asset
                                                              advice to retired                                                                                                      brokerages and
                                                                                  support, trading • Trading, research         bases or trading volumes
                                                                                  and technology                                                                                     customers
                                                            • Services to plan                       and support             • Looking to expand offering to provide private
                                                              administrators      solutions for      services for
                                                                                                                                                                                     new to broking
                                                                                                                               banking services for affluent customers and           7.5 Mn active accounts,
                                                                                  independent        institutional clients
                                                            • TrustMark                                                        access to leading edge technology for active          $872 Bn customer assets
                                                              services                             • Customised                traders.                                              (2000)
                                                                                  investment         services for HNW        • Other new products include Gift Package for new
                                                                                  advisors           customers                 investors (June 2000);and Women’s financial site
                                                                                                                               (Oct 2000)

                                  Source: UBS, March 2001
Conversion waterfall

 Description     The conversion waterfall is a tool that helps identify areas of relative
                 competitive weakness and strength, whether between internal factors
                 (e.g. different locations or products) or relative to competitors. The
                 waterfall is a simple way of representing the findings of a customer
                 interview programme targeting six major measures.

                 The conversion waterfall illustrates the attitude and/or behaviour
                 patterns of a company’s customer base. It provides insight into
                 where a company is losing or gaining customer interest.

                 By focusing attention towards the strongest relationships, conversion
                 waterfalls can be used to direct a company’s efforts into retaining

                 See also: Customer Segmentation, Customer Lifecycle

     Typical     Understanding customer behaviour is a very important part of
  application    strategic business analysis. By examining customer attitudes and
                 behaviour, a business can identify where their strengths and
                 weaknesses lie and begin filling the competitive gap or maximising a
                 competitive opportunity.

       Typical   Begin by carefully planning your activities. This includes defining the
      process    hypothesis to be tested in your interview programme, and
                 determining the interview target population. When setting up the
                 interview programme, ensure the sample size is large enough. As a
                 rule of thumb, interview more than 30 customers.

                 Design your questions to ensure you answer the questions required
                 for the planned output, and include redundancy to check customer

                 Clearly define each category in the interview plan/questionnaire. If
                 you don’t understand the differences between the factors you are
                 evaluating, the customer never will.

                 Where possible conduct research in more than one market. A
                 variance of results may just show cultural differences, but in some
                 cases it might give an insight into the way different markets operate.

                 Spend some time thinking about the results. Average the quantifiable
                 scores, then seek to explain through reference to what you know of
                 an organization's brand, image, store, location or product feature.

                  Apply the results with intelligence and consider accompanying the
                  chart with qualitative comments gathered in the interview process to
                  flesh out your conclusions.

                  Clients can take different messages from the results of this analysis.
                  They may wish to refocus their efforts on areas of weakness; or they
                  could change the messages they are taking to market so that their
                  stronger performance is recognized.
 Example       % of population
                                                Conversion waterfall, combine harvesters, 2001

                                                                                               New Holland

                      80%                                                                      Competitor









                             Awareness   Knowledge       Liking     Preference        Tested          Purchase

                                                                     Source: TMC Project, March 2001

Tricks and        It is possible to show a repurchase column, representing the number
       tips       of customers that return. This is a key output of customer satisfaction
                  as customer acquisition costs in some industry sectors are enormous,
                  so assessment of repurchase across segments is critical to
                  understanding customer dynamics.

                  Make sure you identify customer segments and then target your
                  interview programme at the most important segments. It is very
                  important to get the segmentation process right first, as otherwise
                  valuable differences may be obscured during averaging.


Customer experience analysis

 Description     Customer Experience Analysis is a mechanism for identifying the
                 critical decisions, events and actions a customer undertakes during
                 the full purchase process. It helps identify the customer contact
                 points and the key criteria for success at each one. This analysis is
                 sometimes labeled Customer Value Exchange.

     Typical     Useful for any company which has to compete for and retain
  application    customers (i.e. all of them). The concept is easily extendable to
                 employees (internal customers), suppliers, partners and other
                 Improving customer profitability is only possible if you change the
                 customers’ behavior (e.g. buy more, use lower cost channels,
                 recommend to friends etc.) Measuring customer behaviour at every
                 interaction point with the company allows you to advise on where
                 your client must invest (i.e. change things) in order to bridge the gap
                 between customer expectations and delivery against them.
                 Many other tools can contribute to this analysis, including CVP
                 definition, root cause analysis, customer satisfaction surveys, product
                 prioritisation, financial return modeling, customer segmentation etc.
       Typical   The full process for undertaking this analysis can be extremely
      Process    comprehensive. Below is described a number key steps which are
                 typically undertaken.
                   - define and agree customer segments (need-based)
                   - develop insight into customer behaviours (e.g. understand
                     customer promise, rank needs, define perception gap etc.)
                   - develop hypothesis of how to fill ‘gap’ and estimate $potential

                   - identify all customer contact points (high level, then detailed)
                   - develop detailed gap analysis at each contact point – using
                     existing client and public domain data, interviews etc.
                   - prioritise areas for investment which will solicit maximum change

                   - determine root cause
                   - financially model benefit returns

                   - design processes for achieving changes in customer behaviour
                   - develop transition plan and measuring/monitoring system
                 Clearly, the full end-to-end analysis requires multiple tools and
                 techniques, but the fundamental framework of identifying and
                 prioritising customer contact points can be very powerful.

                                Key contact features identified for a UK insurance company

                                                                                                                      • Progress monitoring
                                                                                                                      • One point of contact
                                    • On time transaction                                                             • Telephone problem solutions
                                    • Effective problem
                                      handling                                 Evaluate                      Deliver Service
                                    • Follow up contact
                                                                                                                              • Quality of service and staff
                                                                                                                              • Ease of access to service
                                                                                                                                and efficiency
                            •     Payment alternatives                                                                        • Accommodation of
                            •     Account set up                                                                                customer requirements
                            •     No additional charges                          Pay
                                                                                                               Purchase       • Order taking process and
                            •     No billing enquiries                                                                          documentation
                                                                                                                      • Product/Service quality
                                                                                                                      • Sales Consultant recommendation
                                                                                                Detailed              • Price, delivery times
                                                                                                selection             • Additional services (e.g. ‘all in
                                                                                                                        one’ provider)
                                                                            Search for                                • Ease of access/convenience
                                              Interest                      alternatives        Repurchase
                                                        • Access to                                                            Recommend
                                   • Service              financial advice                    • Service provision satisfies
                • Financial advice   requirement                                                customer’s expectations
                                                        • Price differences
                • Advertising and    identified                                               • Performance confidence
                                                        • Promotional
                  Media            • Ease of contact                                          • Customer - supplier
                • Personal           for enquiry                                                relationship
                                                        • Overview of
                  Recommendation • Initial contact                                            • Quality of problem
                                                          products, services
                                     enquiry              and options                           resolution
                                   • Marketing material

                                                                                                                          Source: FSI project, 1998

     Tricks &     This is very difficult to sell to a client as an end-to-end solution. It
         Tips     needs to be broken down into it’s sub-elements.
                  Use a value chain to help build the initial high level customer
                  interaction points.
                  One way to identify how value may be generated from changing
                  customer behaviours is to use a ‘customer contact point matrix’.
                  Create a comprehensive list of all customer contact point (list
                  vertically), then list all the profit impacting behaviours you desire of a
                  customer (list horizontally). Use ‘traffic lights’ to indicate ‘high-medium-
                  low’ impact.
                  Typical sorts of changes to behaviour you might look out for are: buy
                  more, buy more frequently, buy more categories, submit business,
                  close business, recommend to friends, use cheaper channels, buy
                  higher margin products etc.

     Contact      Vince Colvin

Customer segmentation

 Description     The key to operating successfully in a competitive market is
                 understanding customers needs, values and behaviours and being
                 able to take action. Segmentation identifies groups of customers with
                 homogeneous needs, who can be served by a tailored proposition.

       Typical   From what you know about the client’s customer database, industry
      process    analysis, client or expert interviews, and focus groups, begin by
                 developing a number of hypotheses about likely segmentation

                 Segmentation seeks to group customers according to similar
                 purchase behaviours, attitudes and profiles. The outputs of a
                 segmentation schema must be:
                       - identifiable/recognizable: you must be able to identify which
                         segment a customer is likely to be in so that marketing
                         programmes can be actioned;
                       - actionable: you must present strategic options for each
                         segment which are achievable;
                       - measurable: it must be possible to measure segments by key
                         dimensions and assess them for market potential; and
                       - stable: there must be an assessment of a segments short,
                         medium and long term viability. Segments rarely remain the
                         same over time

                 When you are happy with your hypotheses develop a questionnaire
                 to test them/validate them. Keep the questioning as short as possible
                 and only focus on the things you really need to know. “Pilot” the
                 questionnaire with a small group of customers to test that it works.

                 The sample size for the actual programme should be a minimum of
                 50 to be useful, or 30 per customer segment identified. This can be a
                 large task and it may be more economical to subcontract the work

                 Analyze your results. Perform factor analysis to group customers and
                 identify trends and similar responses, and be prepared to re-
                 formulate your hypotheses if necessary.

                 Look at the groups to identify the characteristics that can be used to
                 describe them and their purchasing criteria, remembering the
                 objective is to identify a MINIMAL number of groupings.

                 Draw out the implications of your findings as they may require the
                 client to readdress its marketing strategy and/or business model.

               Remember that the purpose of segmentation is to identify “attractive”
               customer segments. Defining what is meant by attractive is key and
               depends upon the clients business objectives, for example;
                    - customers who are currently highly profitable;
                    - customers with high lifetime (future) value; and
                    - large customer segments who, whilst might not be hugely
                      profitable, support business development into other more
                      profitable segments.
   output                                                    x
                                                        x Visitors
                                        x                       x                          x
                                                             x                            Event
                                                                                        x goers
                                    x                                                                        averse
                                                x                            x
                            x                                                                Meeting
                                                                      x                       xgoers x
                                Shoppers                     x                      x       (business)
                                                    x                                             x
                                            x                                                      x
                                                             x                                     Vulnerable
                                                                              x x                  people /
                                                                            Commuters              carers (1)
                                                                               x x
                        Note: size of bubble represents the approximate size of potential segment
                        1: Bubble size representative only

                                                                                  Source: Client project, Aug 2000

Tricks and     The client’s views of the existence of customer segments, their
       tips    characteristics and attractiveness are often based on opinion and not
               fact and should be viewed with caution.

               Segments do not need to include all customer data points. There will
               be some outliers. If outliers look significant or interesting then
               conduct further research to understand whether they are significant.


Customer segmentation analysis

 Description     Customer segmentation is the subdivision of a market into discrete
                 customer groups that share similar characteristics.

                 Any product or service potentially appeals to a universal audience. In
                 reality, a company will sell to only a small segment of the population,
                 and may derive value from a sub-segment of that.

     Typical     Customer segmentation can be a powerful means to identify unmet
  application    customer needs. It allows you determine a client’s customer base
                 and its characteristics in a meaningful way, splitting customers up into
                 groups and ultimately making operational decisions about the
                 allocation of resources for such activities as product development,
                 marketing, selling methods, distribution strategies and pricing.

                 This allows a company to compete only where it is strong and likely to
                 prosper. For example, companies that identify underserved
                 segments can achieve a leadership position by being the first to serve
                 them. Customer segmentation is most effective when a company
                 tailors offerings to segments that are the most profitable and targets
                 them where the company has a distinct competitive advantage.

       Typical   Divide the market into meaningful and measurable segments
      process    according to customers’ needs, their past behaviours or their
                 demographic profiles.

                 In many ways, this is the most difficult part of the process.
                 Determining the most insightful segmentation variables can be done
                 through research, customer surveys, or focus groups (see customer
                 segmentation section for details).

                 Determine the attractiveness of each segment by analyzing, for
                 example, the revenue and cost impacts of serving each segment or
                 client retention rates.

                 Use shading and annotation to draw out the key market segments the
                 company should be targeting.

                 Try and identify ways the client can invest resources to tailor the
                 product, service or its marketing or distribution programmes to match
                 the needs of the key target segments.

              Ultimately, this should allow you to develop a performance
              measurement programme. This should assess ROI and be flexible
              enough to adjust over time as market conditions change.
 Example                                       Loyalty Segmentation for US Bank
   output                  95        Retired
                   Retention         savers
                           90                                                                   Mid-
                                                                                               Affluent             Lifetime


                                                                             Wealthy                     Young
                           75                                                                            Affluent
                                       Students                     Young

                             100         150        200      250            300        350         400          450
                                                      Customer annual contribution ($)

                                                                                                             Source: Example

Tricks and    The most important thing for segmentation analysis is ensuring that
       tips   the categories you define are meaningful for the exercise you are
              participating in. The easiest segments to identify - age, region, and
              so on - are often the least indicative ways of dividing a group of
              people for a company hoping to achieve a particular objective. Base
              all segmentation on hard, data-based analysis, not gut-feelings.

              One of the most difficult lessons of customer segmentation,
              particularly for the client, can be finding out which customers not to
              sell to.

                                         Types of segmentation and their applications

                                                Identify                                       Create
                                                               Prioritize         Develop      market
                                               customer                                                         Reach
                                                                targets            CVP        position

                     Segment by:
                      • Economic value
                      • Demographics
                      • Purchase
                      • Usage
                      • Channel
                      • Attitude

                                         low relevance                            high relevance

Dupont analysis

 Description     Dupont analysis is the creation of a series of financial ratios designed
                 to quickly indicate a company’s health so that senior staff can
                 manage the business for sustainable growth.

     Typical     Any decision that influences product prices, unit costs, volume or
                 efficiency impacts the profit margin or turnover ratio. Understanding
                 how these linkages work is the key to operating a company
                 successfully and extracting maximum value from capital.
                 Pioneered by the Dupont company, these ratios are designed to
                 provide a comprehensive summary of performance of a particular
                 company. The ratios are simple to calculate, each links closely to a
                 separate business function (for example, marketing). This helps to
                 demonstrate the relationships between otherwise disparate business

       Typical   The process to be followed is highly dependent upon the particular
      process    issue you are addressing for your client. However, some general
                 guidelines apply:
                    - use both published a data and your own market/performance
                      analysis as inputs to the Dupont analysis (e.g. Management
                      accounts, analyst reports, annual reports etc.)
                    - agree with your team and client the definitions of each ratio -
                      these do vary
                    - calculate the ratios from your research data
                    - think about your audience, then create a presentation which
                      addresses their particular ‘hot buttons’ (e.g. lenders are more
                      interested in liquidity and leverage; managers care about
                      profitability; shareholders care about ROE)
                 As a strategist you should not stop at this point. This is where the
                 insight begins:
                    - try to understand the drivers of financial performance. This
                      can be informed by other strategic analyses (such as Porter’s
                      five forces, which have direct bearing on sales volume,
                      margins, unit costs etc. that impact the PAT ratios)
                    - question which measure is critical for your client. For example,
                      is ROE really most critical for a new entrant into a market or
                      would market share alone
                   - highlight potential trade-offs between financial and operational
                     decisions to best manage organic growth
                 If appropriate to your task, design performance measurement
                 systems that reflect the critical Dupont ratios favourably

               Dupont Analysis – Framework 1
                                                Sales                    Assets                 Debt + Equity              PAT - dividend
                                    X                            X                          X                         X
                       Sales                   Assets                 Debt + Equity                Equity                       PAT

                       Margin              Asset turnover            Capital leverage           Equity leverage             Retention ratio
                     (Marketing        (Production efficiency)

                                   ROA (operating efficiency)
                                                                 ROC (capital efficiency)

                                                                                            ROE (equity efficiency)

                                                                                                   Equity growth rate (sustainable growth)

               Dupont Analysis – Framework 2

                                           profit                                                  capital

                  exceptional      revenue                       costs                   fixed                    working
                                                                                        assets                    capital

                               price         volume         unit        fixed            fixed           stock            debtors creditors
                                                            cost        costs           assets

                                   market market market
                                   share size growth
                       industry              suppliers                 buyers           substitutes                potential
                     competitors                                                                                   entrants

Tricks and
                 Dupont analysis works best with easy to quantify and measure,
       tips      finance based, statistics. Unlike much of strategic work, the
                 introduction of estimates weakens the analysis.
                 Remember: ratio analysis does not give answers; it helps you ask
                 the right questions.

     Contact     Vince Colvin

Economies of scale

 Description     Drawing a scale curve shows the benefits of scale in the production
                 of a particular product or component.

     Typical     Economies of scale can help to explain differences in cost between
  application    different producers.

                 Economies of scale are most likely to be found in industries with large
                 fixed costs of production such as chemicals, petroleum, steel and
                 automobile manufacture, etc. They are a significant barrier to entry if
                 fixed costs are high.

                 Economies of scale do not just apply to manufacturing businesses,
                 however. There can also be economies of advertising, promotion and
       Typical   Begin by gathering the relevant data on cost per unit from your client
      process    (e.g. get exact capacity and cost per tonne for client in four plants).

                 Research your client’s competitors’ costs through desk based or
                 direct research. If necessary, with project partner approval, you can
                 also interview competitors. For missing data, try and use your
                 ingenuity (e.g. by how much would your cost per unit drop if the size
                 of organisation doubled).

                 Organise your results in a table showing output and the effect of a
                 change in output on cost input. Use the Excel scatter function to
                 create your chart, and the r2 function to determine whether there is a
                 strong correlation.

                                     Manufacturing scale curve, biscuits industry, 1997
   output      Cost per
                                                                             A 10 times increase in scale represents a
               Tonne                          Broxburn                       theoretical cost improvement of £275p.
                          1,0                                                Some of this, however, would be offset by
                                                                             increased distribution and other costs.
               materials,              Linkoping
               1993,                           Hatton
                                    Durango                  Ashby
                                       Lauragais        X1    Maastricht                 Carlisle
                                                                                                                R2 = 65%
                                                                           Jyvas Hyva         X2
                          0,2                                                                                Tyneside

                            1 000                              10 000                                       100 000
                                           Manufacturing Capacity (kTonnes, 1996, Log scale)
                                                                                               Source: Example

Tricks and       Be aware that the quality of result will depend on the number of data
       tips      points used (e.g. five gives an illustrative outcome, ten to twelve
                 points will give more confidence).

                 The example above illustrates economies of scale via a decreasing
                 average cost curve. It is also possible to illustrate the same effect
                 with an increasing returns to scale diagram where the scale on the
                 vertical axis is inverted.

                 Economies of scale operate at the level of factory or plant rather than
                 company for manufacturing .

                 Be aware that there are two versions of the scale curve: one is really
                 about learning, the other is about scale. In the first case, the
                 horizontal axis should represent the cumulative number of units
                 produced to date and the vertical axis, the cost per unit over time.
                 (e.g. aeroplane manufacturing where few units are produced each
                 year and the cost of each unit falls as assemblers get better at it). In
                 the second case, the horizontal axis should represent the size of a
                 given process and the vertical axis the cost per unit for this process in
                 various plants (as above).

                 Manufacturing directors/managers are not often approached for
                 market research and are may be more willing to discuss production
                 units and capacity if asked the right way.


Executive dashboard

 Description     The executive dashboard is a tool designed to give a one-page
                 overview of the performance of a company that goes beyond simple
                 measures of financial performance. It provides a framework to
                 translate strategic objectives into measurable performance indicators,
                 giving the CEO/COO full and timely control over business
                 performance and/or business change

     Typical    The dashboard comprises a series of key performance indicators
  application   (KPIs) that look beyond financial performance alone and can address
                a very wide range of issues. The most common applications are
                   - monitoring the performance of a business in a dynamic industry
                   - monitoring the progress of business process reengineering
                   - monitoring organisational change initiatives
                Some typical example KPIs include: financial performance (turnover,
                profit, working capital); employee measures (satisfaction levels,
                utilisation); customer measures (churn, delivery time, satisfaction)
                Most successful applications of the dashboard have supporting
                “exception reporting” pages which identify individuals responsible for
                outstanding or poor performance against targets or milestones.

     Typical    Dashboards are typically constructed as the final output of an earlier
                study of the business fundamentals, so the first step is always to
    Process     review earlier work and interview team members and the client.
                KPIs may be determined through a number of mechanism, including
                analysis of management accounts, benchmarking, consultation with
                industry experts. However, do not be surprised if a business is
                seeking to build a dashboard with no clear view of the critical KPIs (it
                is certainly not unknown). In this instance determination of the
                critical KPIs may be long exercise including multiple client
                interviews, customer interview programmes etc. Whatever, make
                sure you agree the definition of each KPI and the most critical ones
                which will populate the dashboard.
                After the critical KPIs are determined it will be necessary to derive a
                hierarchical logic tree of sub-KPIs which feed the critical measures.
                It is common that the desired measures will not be (easily) available
                within the business. In this instance it will be necessary to put
                interim (manual) measures in place to capture the data. The
                hierarchy of KPIs should stop when an individual’s name can be
                placed against each measure and hence be held accountable.
              Finally, when constructing the dashboard panel (in HTML, Visual
              Basic,Excel), always include an indication of which measures are
              improving or worsening (often via traffic lights or coloured arrows).


                                                       Source: TMC proposal, May 2001

Tricks and    Remember: the function of the executive dashboard is to move
       tips   clients from vague performance measures to sharp, quantified
              performance indicators. An example might be moving from a
              general awareness of the need to monitor product mix to a specific
              commitment to keep to only two branded products per sales
              “We can’t measure that” is not a good enough answer. There is
              always a way to capture critical measures, even if the manual costs
              are high.
              Ask a web page designer to help with the presentation – it will look
              clearer than your effort. Help by keeping it simple.
              If you don’t have a dashboard, get out of the car.

Forecasting techniques

 Description            Forecasting techniques are used to project future market size and
                        growth from the statistical analysis of historical data.

       Typical          There are three main methodologies for deriving an estimate of
      process           market growth:
                              - extrapolating historical data: using time series and
                                statistical demand to infer trends from what has happened
                                in the past. This approach broadly assumes consistent
                                market drivers over the period in question;
                              - inferring from derived demand: developing a general trend
                                from the way demand in other related industries or
                                markets has changed over time; and
                              - compiling projective opinions: gathering multiple views
                                from better informed parties and constructing a best guess

                        The most common method for extrapolating forecasts from historical
                        trends is by the analysis of time series data. Time series typically
                        comprise four elements:
                              - trends: growth rates of the past market;
                              - cycles: long term fluctuations, usually linked to the economic
                              - seasonality: consistent fluctuations throughout the year; and
                              - erratic or stochastic events: normally caused by events
                                outside an industry or market’s control

                        Trends and cycles often require a long time to become evident and
                        can be masked by seasonality and erratic events. Factors can be
                        internal or external to a company, such as the launch of an
                        advertising campaign. When hard pressed for data, a good way to
                        forecast growth is to look to other industries or markets for guidance:
                                   Down-stream         Up-stream           Complementary          “Lateral”
                                   industry            industry            industry               industry
                                   demand              supply              demand                 demand

                 To forecast ...   Demand for          Demand for ski      Demand for             Demand for Mountain
                                   steel               boots               car rental             Bikes

                 Infer from ...    Demand for :        Supply of :         Demand for :           Demand for :
                                   - automotive        - winter holidays   - business trips       - video games
                                   - ship building

                 E.g.              Industries using our Industries whose   Industries whose      Industries which share
                                   output               output affects     product / service is  some characteristics with
                                                        demand for our     bought in conjunction ours (customers, etc.)
                                                        products           with ours

              Asking ‘experts’ for their opinion is an alternative, less formal
              approach to forecasting. However, undertake this with care. Ask as
              many qualified experts as possible and triangulate their views to
              minimise error. Be aware that opinions can be consistently wrong if
              all experts are using the same erroneous data set to base their
              opinions on. Become an expert yourself by reading widely and you
              will be better able to judge their views objectively.
                              •   Particularly useful for product purchases where advanced planning
                 Buyer            is required and for new products where past data does not exist
               intention      •   Outcome valid only if the buyer has clearly formulated intentions,
                surveys           will carry them out and will describe them to interviewers...
                              •   Rarely used in practice (low response rate)
                              •   Frequently used
              Sales force     •   Particularly to interview competitor sales people
               opinion        •   Be aware they may try to promote a product but can be useful to
                                  understand major changes
                              •   Very frequently used
                              •   Experts can include trade associations, independent consultants,
                                  senior members of companies, distributors, suppliers
                              •   Care should be taken to establish the basis for their estimate -
                                  was it based on original market research or is it a figure from
                                  another expert?

              It is not always practical to do our own research, or you may want to
              independently validate expert opinions. In these situations used
              published market research, and bear in mind the following:
                              •   Was it based on interviews with 1000 customers or a couple of
               How was            industry experts?
              the market      •   Speak to the authors(s). Do their estimates stand up?
                              •   Frequently, lack of reconciliation is due to analysis of slightly
                                  different markets, or because one person has used manufacturer
               with other
                                  selling price in one instance, retail selling price in another.
                              •   Check whether growth is real or nominal
                              •   Is the report thorough?
                              •   Has it been prepared by a trade body or market researchers?
              Is the source
                              •   Have you had difficulties with this company's estimates before?
                              •   Are key pieces of data excluded, e.g. not all countries covered to
                                  the same detail?

Tricks and
              Forecasting periods should be kept as short as possible (no greater
       tips   than 36 months) to preserve accuracy. It will, however, depend on
              the product and/or sector. Established products such as sliced bread
              will be easier to predict for a longer term than interactive TV, for

Free cashflow diagram

 Description     The free cashflow diagram is an excellent format for displaying the
                 results of a cash flow analysis over time. Its strength lies in the fact
                 that it displays all of the key business indicators looked for by a
                 senior executive. These include: sources of value; fixed and
                 variable investment costs; break-even; net and cumulative cash
                 position; net present value.
     Typical     Free cashflow represents the net cash flow that a firm or project
  application    expects to generate. Unlike a cashflow statement, which attempts
                 to reconcile sources/uses of cash with starting/ending cash
                 (accounting perspective), free cash flow focuses on the key strategic
                 component of the generating/financing equation.
                 Given this, the free cashflow diagram can be used in almost all
                 circumstances where you need to display the commercial outcome
                 of any strategic business investment. It is one of the most
                 frequently used tools in the strategy consultants armoury.

       Typical   The diagram should be drawn from an earlier Excel spreadsheet
      process    analysis. The following steps outline the main features:
                   - Identify main sources of cash in and cash spend. (Be aware
                     that more than 5-6 sources makes the chart look cluttered and
                     detracts from the key messages. Consider grouping small and
                     non-critical sources together as ‘other’.)
                   - Put cash flow on the x-axis, time on the y-axis.
                   - Create column chart chart, showing cash above the line (use
                     +ve numbers) and cash costs below the line (use -ve numbers)
                   - Hand draw the net cashflow and cumulative cashflow lines.
                   - Highlight the breakeven point and the point of maximum
                     exposure (highest negative cashflow).
                   - Name cashflow sources.
                   - Insert figures for net cashflow for the year and cumulative year
                     on year cashflow figures. This should lead to break even
                     analysis and an analysis of profitability.
                   - The key ratio for analysis is that of risk exposure - the
                     difference between maximum risk exposed point (worst NPV)
                     and best possible NPV. There is a clear link between the cash
                     flow diagram and the sources of value waterfall. Both show
                     the individual components of an overall financial flow.

                 Draw this picture early (in combination with your sources of value
                 waterfall diagram). It can form the bedrock of common sense
                 decisions and is a very useful communication tool with your team
                 and the client

 Example             100
                               Base Case                                              Cumulative
   output                      Cash Flow                                               cash flow
                      80         (£m)
                                                                                                          Corporate Actions

                      60                                        Net cash flow

                      40                                                                                  TCA

                                                                                                          Order routing

                      20                                                                                  OMS

                                                                                                          Ongoing costs

                                           Fixed Investment

                                 2002           2003             2004           2005               2006
               Net Cash (£m)     -35             -7               18             34                 64
                   NPV (£m)      -35            -38               -20            8                  51

                                                                                Source: FSI Project, April 2001

Tricks and      With a little bit of tweaking you can use this format to display other
       tips     time dependent factors most relevant to your client.
                Try to avoid including terminal values in this presentation of cash
                flows. Most business project planning anticipates pay back in the
                medium term (3-4 years). In some industries terminal value can
                dominate (e.g. telecom 3G licences, rail investment), in which case it
                warrants a completely separate argument and representation.
                Cashflow isn’t everything. Consider the results of the cashflow
                diagram in the light of softer issues, which may also have an impact
                on the project. These could include organisation culture, recruitment
                or change management.

     Contact    Vince Colvin

Gantt chart

 Description     A Gannt chart is a graphical timetable of project activities and
                 milestones. As well as showing the planned duration of activities, it
                 can also be used to show responsibilities for workstreams,
                 interdependencies between workstreams, and critical paths.

     Typical     Gannt charts are used to help plan and manage projects. They
  application    should be used in almost any proposal to help explain how we
                 would carry out the engagement. They should also be updated
                 regularly during projects to aid project management. Whilst Gannt
                 charts are rarely used in final client presentations, they can be
                 very useful in intermediate presentations to show progress and
                 future plans, and to highlight project constraints.

       Typical   The information to be plotted on a Gannt chart should be obtained
      process    during the course of project planing and ongoing management.
                 This should include:

                 • Project phases
                 • Project workstreams
                 • Activities within each workstream
                 • Project milestones
                 • Planned duration of activities
                 • Effort required for each activity
                 • Availability of resources

                 Gannt charts can be drawn directly in Powerpoint or developed
                 using a project management application such as Microsoft

                 Involve the project team members and the client in the
                 development of Gannt charts.

 Example                                                                    Project Proposal Gantt Chart
                                        •   Pressure test vision
                                                                        29 30 31 1    2 3 4 5 Proposal 12 13 14 Chart
                                                                                     Project 6 7 8 9 10 11Gantt 15 16 17 18                     19 20 21 22 23 24 25 26 27 28
               ‘Kick Start’

                                        •   Gather information
                                        •   Develop hypothesis
                                        •   Scope & workplan

                                        • Agree key drivers of client

                                        • Develop client needs
                                        • Client interviews
                                        • Form segments & CVP

                                        • Agree framework
                                        • Develop European
                 Market & Competitors

                                          competitor models
                                        • Develop US competitor
                                          models and market trends
                                        • Augment European value
                                        • UBS relative product &                               ‘as is’ client /products
                                          channel review
                                        • Form segments & CVP

                                        • Consolidate into strategic
                                          client segments
                                        • Develop likely winning

                                          CVP for each segment
                                        • Identify channel
                                          implications and unserved
                                          customers groups
                                        • Identify and scale sources
                                          of value to UBS

                                        • Pre-wire

                                        • Prepare board presentation

                                                                                     Hypothesis meeting                   Interim meeting   Consolidation meeting   Final meeting

                                                                                                                              Source:Banking project; March 2001

Tricks and                     Use colours and dotted bars to improve clarity.
       tips                    Gannt charts should be living documents - project plans should
                               change as more information becomes available during the course of
                               the project.
                               Use real dates as column headings, rather than (say) Week 1, Week 2
                               Gannt charts can be very complex, particularly on large projects.
                               Make sure you have an up-to-date summary Gannt chart that fits on
                               one page so that you don’t lose track of the big picture.

     Contact                   Any manager

Growth share matrix

 Description       The growth-share matrix - developed by the Boston Consulting Group
                   in the 1970s - is a simple two by two, devised to map business units’
                   or competitive position. It maps the relative positions of a company’s
                   business units against their industry’s growth rate and the relative
                   market share of the business unit.
  application      Among other things, the matrix:
                       - draws attention to cashflow and investment characteristics
                         of various types of businesses;
                       - encourages you to view diversified firms as a collection of
                         cashflows and cash requirements;
                       - explains why priorities for corporate resource allocation
                         can be different for each business.

                   The growth share matrix helps to determine a strategy for each
                   business unit to the overall benefit of the portfolio of opportunities that
                   a business develops.

                                                                  Star        Question mark     Question mark
                 High market share in high
                 growth market requires                                        Build market     Low market shares in high growth
                                                              Hold or build
                                                Growth rate

                 plenty of cash to sustain                    market share                      market needs large cash input to
                 growth but strong market                                       specialise,     finance growth, but poor yields
                 position yields high profits                                 harvest, divest   due to weak competitive position.
                                                               Cash cow           Dog
                 Cash cow                                     Hold market        Harvest,       Dog
                 High market share, low                        share or          divest or      Low market share, low growth,
                 growth, good cash flow can                     harvest         specialise      usually a cash trap
                 be used to fund developing
                                                                Relative market share

       Typical     Begin by defining your subject for analysis (market, industry,
      process      company) and listing the components (competitors, units, etc.).

                   Then, basing growth on product, market or industry size data over
                   three to five years, calculate the compound growth rate for each
                   product, market or industry. Strictly speaking, “high growth”
                   businesses are in industries growing faster than the general

                   Calculate the average size of product, market or industry over time
                   period and plot your results with growth rates against market share.
                   Market share is represented on a log scale, based on the largest data
                   point, with the largest values on the left of the chart. (The size of the
                   bubble should reflect the average size over the time period.)

               The position of the vertical divide is largely a question of judgement.
               However, the horizontal divide is classically placed at 10-15% and the
               vertical at 1.5 or 2

 Example                                                          Business Units
                                                                 Product - Markets
   output                       25
                                            Star                                            D           ?
                                15                                                              G
                                10          Cash                                                    Dog
                                  5                                                                 C

                                      10x              5x   3x    2x    1x               0.5x       0.3x    0.2x

                                                            Relative Market Share
                          = $30 million sales
                                                                                            Source: Example

Tricks and
       tips    Relative market share is used as a surrogate measure for economies
               of scale and experience. If such economies do not exist in the
               market, conclusions drawn from the growth share matrix may not

               The growth share matrix a product of the 1970’s. Exercise caution
               when using as it may not be strictly relevant to current circumstances.
               With current capital markets many firms no longer have to rely on
               cash cows to finance stars.


Growth spread matrix

 Description     The growth spread matrix plots a company or division’s ability to
                 create value, relative to its growth. The resulting chart can be split
                 into four quadrants:
                        - destroying value and growing quickly (top left);
                        - destroying value and growing slowly/shrinking (bottom left);
                        - creating value and growing slowly/shrinking (bottom
                          right); and
                        - creating value and growing (top right)

                 The ideal position for a business unit, sector or companies is in the
                 top right corner. Companies classically tend to move around in an
                 anti-clockwise direction from top left to top right. A business unit
                 which is performing badly will have its underperforming parts cut out
                 or sold, leaving a healthy base which can grow and create value.

     Typical     A growth spread matrix is used to show the relative performance of a
  application    portfolio of business units or companies within a sector.
       Typical   Define the context for your assessment - it could be an industry,
      process    sector, market or company - and the sub-elements which comprise it.

                 Obtain the last three to five years’ financial results for each element.
                 Define the net assets of each. In the case of comparing companies
                 across an industry or market, you would take this information from the
                 balance sheet. Inside a company, the information can be derived
                 from the management accounts.

                 Calculate the growth of net assets for each element over the period of

                 Calculate the “spread”, or value generated by each element, typically
                 as the cashflow return on investment less the cost of capital.

                 Plot a bubble for each element in a matrix with growth on the vertical
                 and “spread” on the horizontal axis. The size of the bubble is
                 indicative of the size of the business unit.

                 Use annotation and shading to draw out the key conclusions
                 indicated by the matrix.

                                                                                   Company A vs. Selected Peers
   output                                                                               Most Recent FYE

                                                                                   Company C

                                                                                                                               Company B

                Historical Real Asset Growth

                                                                  Company D

                                                                                              Company E
                                                                                                                                 Company F

                                                                                                      Company G
                                                                       Company H
                                                   -5%                                                             Company A

                                                     -10%                             -5%                   0%            5%                 10%

                                                                                                     CFROI - CoC

                                               = $1 Billion Inflation Adjusted Gross Assets

                                                                                                                          Source: Example

Tricks and     If the spread cannot be calculated easily, consider using a proxy such
       tips    as economic value added. At the extreme use market capitalisation
               less net assets.

KPC comb charts

 Description     The reasons that customers purchase products are central to a
                 company’s competitive positioning.

                 KPC (key purchase criteria) comb charts are a way of representing
                 these criteria in a visually arresting manner. They allow you to:
                       - evaluate the comparative importance of different purchasing
                         criteria, and which aspects of a client’s product are really
                       - rank your client’s performance against the results of customer
                         research; and
                       - rank your client against competitors.

                 They are similar to ‘Happy Line’ analysis that assesses how well a
                 company performs against the product characteristics that are really
                 valued by its customers.

    Typical      KPC comb charts form part of gap analysis and have implications for
 application     resource allocation. As such, they are a core part of any market
                 segmentation analysis exercise.

                 Understanding the importance of specific criteria to customers allows
                 a company to align its products and services more closely to those
                 customers and deliver greater value.
       Typical   The data for KPC comb analysis comes from a structured customer
      process    survey programme. Any interview programme is a major exercise
                 and should be carefully planned.

                 Take particular care to separate ‘wish list’ needs from preferences
                 that apply in reality: ultimately, every consumer would like the product
                 to overperform, arrive immediately and be free!

                 The survey should be structured so to rank each criteria for each
                 competitor in the market.

                 Create an Excel table with the results and calculate an average score
                 for each competitor on each category.

                 Plot the results on a Bar + Line chart.

                  Do not forget to set the minimum and maximum for the vertical axis to
                  the range offered to the customers in the interview process (say, from
                  1 to 10, not 0 to 10).

                  Apply the results with intelligence and consider accompanying the
                  chart with qualitative comments gathered in the interview process to
                  flesh out your conclusions.

                  Clients can take different messages from the results of this analysis.
                  They may wish to refocus their efforts on areas of weakness; or they
                  could change the messages they are taking to market so that their
                  stronger performance is recognised.

 Example                           Key purchase criteria (KPC) comb, Industry X, Germany, 1999
                Score       9
               (1 to 10)

                            6                                                                                    Comp 1
                                                                                                                 Comp 2
                                                                                                                 Comp 3
                            4                                                                                    Client



                                Criteria 1   Criteria 2   Criteria 3      Criteria 4   Criteria 5   Criteria 6

                                                          Key purchasing criteria
                                                                                                     Source: Example

Tricks and        Customers can be segmented according to purchasing criteria. This
       tips       is a useful technique used by retailers FMCG companies. FMCG
                  companies will develop a portfolio of products targeted at different
                  consumer segments (based on purchase criteria). A retailer’s
                  category will include a range of products which target all (relevant)
                  customers (segments) to the store.


Marimekko charts

 Description     Mekkos are one of the simplest ways of displaying data with a high
                 level of visual impact to develop strategic insight.

     Typical     Mekkos are typically used to display information about competitors
  application    in an industry, but can be used for a wide variety of other

                 They present subsets of a wider data set in a simple picture. They
                 can be used for almost any set of data, including:
                   – Market/industry maps, e.g. geography and product
                   – Cost reduction prioritisation, e.g. by process, by business group
                   – Customer analysis, e.g. customers by company
       Typical   To create Mekkos, you will need to use the Magic Mekko Macro.
                 Gather your research data from appropriate sources. Divide the
                 data into the segments and sub-segments you wish to analyse. If
                 there is insufficient data for small areas, use estimates or
                 assumptions and document what you have done.

                 Create a table of the results, with one segment per column, ranked
                 by decreasing size. Each sub-segment of a given segment is
                 placed in the successive rows of the relevant column.

                 Copy your table into the macro tool. Format your Mekko: state the
                 values at the top of each bar and state the total at top right. Shade
                 to highlight key messages.

                 Note that it is possible to make a mekko without using the mekko
                 maker. Use the following (Agarwal) process, by developing a set of
                 of stacked bar charts and then stretching them in Powerpoint to the
                 appropriate width.

 Example                                                                 Flooring market by geography, volume (m2) of sales in 1997

   output                                                                        2,297                               555           373     348     211       378        240


                  Proportion of Sales Volume









                                                                            US                                    Germany     Japan        UK/


                                                                                                                                                                        North West

                                               Parquet (wood & cork)
                                               Ceramic                                   Volume of sales in 1997/ millions of m2
                                               Vinyl (incl. Chlorfree)
                                                                                                                                                   Source: Example

Tricks and     In general, don’t put numbers on Mekkos - they distract the reader from
       tips    the impact of the image. If it is necessary to include data or
               descriptions, use a separate slide.

               For clarity of reading, segments of 5% or less should be grouped into
               an “other” segment.


Market definition

  Description    A market is a place, either conceptually or physically, where a
                 series of different products compete against each other. However,
                 it is not always easy to determine which products compete
                 significantly enough to be considered to be within the same

                 Markets are characterised by the sale and purchase of specific
                 goods or services that have a certain purpose or meet a certain
                 need. Because needs (and purposes) are subjective and difficult
                 to define, however, we have to abstract a little to arrive at a
                 workable ‘test’ for what a market is not, rather than a neat

     Typical     Successful market analysis requires a robustly defined market.
  application    An incorrectly defined market will lead to inaccurate assessments
                 of market growth, competition and customers.
                 Begin by creating a realistic definition of the market based on your
      process    current knowledge.

                 Based on your hypothesis, define the boundaries of your market
                 by listing ways in which customers can be segmented; and by
                 ways in which it can be differentiated from contiguous markets.

                 Consider whether the market needs to be subdivided to account
                 for differences between, for example:
                         - Geography: the UK apple market is different to and distinct
                           from the Australian market; or
                         - Time: the market for morning newspapers is different from
                          the market for evening newspapers

                 Identify a close product or supplier - one you think is in the market
                 or on the market boundary.

                 A strict test to define a market rigorously includes principles of
                 substitution. Two companies are in the same market if a change
                 in one company’s pricing of its product leads to a significant switch
                 of customer to the other company. A ‘significant’ switch is one that
                 materially impacts a company’s profit margin (use expert advice if

                 Repeat this process for each potential competitor until the switch
                 proves to be insignificant.

                      Through this, you should end up with a definition based specifically
                      on the key customer characteristics at play. Be aware of your
                      process at all times - it will explain why you have defined the market
                      as you did if you are questioned about it. And test your hypothesis
                      with team members to check its robustness.
   output                             Levels of market - Demand side

                               100%                                                            Example - New Covent Garden Market
               Percent                          Total Population
               UK population
                                                                         Potential market               -   Buyers who have a potential
                                80                                                                          interest in flowers
                                                Potential market
                                                                         Available market               -   Those who have a need to buy fresh
                                60                                                                          flowers in bulk
                                                                         Qualified available            -   Those who are willing and able to travel to
                                                Available market         market                             NCG for 5am
                                            Qualified available market   Served market                  -   Those who are interested in the flowers
                                                                         (target market)                    in stock
                                20               Served market
                                                                         Penetrated market              -   The set of consumers who have
                                               Penetrated market                                            already bought the product

Tricks and       Be sure that the definition is relevant to the client’s situation; make sure
                 that your definition has not been driven by data that is available.
                 Do not confuse markets with industries - a common mistake. Industries
                 are defined from the supply-side: hence, there is a single white goods
                 industry (built from common components in common factories), but
                 washing machines and dishwashers compete in different markets. Be
                 careful about the distinction: particularly when looking at companies that
                 operate in overlapping markets by selling ‘bundled’ products. The
                 ‘bundle’ provider is effectively competing against players in a series of
                 markets, but also attempting to create a new market for the ‘bundle’ as
                 a whole.


Market entry and exit

 Description     The threat of entry into an industry depends on a combination of
                 barriers to entry and the expected incumbent reaction. The threat
                 of entry is reduced if there are high barriers to entry or likely
                 aggressive incumbent retaliation.

                 Exit barriers keep companies in business despite low or negative
                 returns. They can be economic, strategic or emotional factors that
                 keep companies competing in businesses even though they may
                 be earning low or even negative returns on investment.
     Typical     Understanding the size of barriers to entry and exit can help to
  application    estimate the likelihood of entrants to the industry/market, or of
                 businesses leaving the industry, thereby helping an understanding
                 of the industry’s structure and dynamics.

                                Entry Barriers                                Exit Barriers

                                                               •Identify exit barriers to understand
                  •Identify current entry barriers             industry profitability and attractiveness
                      • to understand industry profitability   •Identify exit barriers when considering
                      • to understand how high prices          exit to allow for action to be taken to
                         can be set without attracting new     reduce them
                  •Develop actions to change situation
                      • Raise entry barriers to prevent
                         new entrants (as an incumbent)
                      • Lower entry barriers (as a new

       Typical   Taking data from the usual research resources - client
      process    data/interviews, conversations with experts, analyst and brokers’
                 reports, group analysis and supply chain analysis - try and
                        - the factors that make the industry accessible or
                          inaccessible to new entrants; and
                        - the factors that would restrict departure from an industry

                 Try and quantify each of these factors: including the resources,
                 relationships or scale required to successfully overcome the
                 barrier. Estimate both direct and residual costs associated with
                 leaving the industry.

                 Compare the levels of skills, technology, etc. against those
                 required to overcome the entry barriers; and any steps
                 incumbents may take to raise entry barriers.

                 Compare the cost of exit against the benefit; and any steps that
                 may lower exit barriers.
                This should enable you to form and robustly defend a view of:
                      - the degree of industry vulnerability to new entrants;
                      - the sustainability of the current competitive structure;
                      - the drivers of current costs and margins; and
                      - the existing profitability structure and how it may change

 Example                        High                                 When both entry and
                                                                     exit barriers are high,
   output                                  The most attractive       profit potential is high,
                                           segment- few new          but is usually
                                           companies can enter       accompanied by more
                                           and poorly performing     risk. Although entry is
                                           players can exit easily   deterred, unsuccessful
                          Entry Barriers

                                                                     companies will stay
                                                                     and fight
                                                                     Here entry is relatively
                                                                     easy and will be
                                                                     attracted by upturns in
                                           The case of low entry     economic conditions or
                                           and exit barriers is      other temporary
                                           uncommon                  windfalls. However
                                                                     capacity will not leave
                                                                     the industry when
                                Low                                  conditions deteriorate

                                           Low                                               High
                                                                Exit Barriers
                                                                                                   Source: Example

Tricks and     Barriers to entry are either structural (a result of differences in the
       tips    structure between companies under consideration - incumbents and
               new) or behavioral (a result of expected changes in competitive
               behaviour of the incumbents that run counter to the interests of the new
                    Major types of barriers to ENTRY                              Major types of barriers to EXIT

                 • Economies of scale                                        • Specialised assets
                 • Product differentiation                                        • low liquidation values or high
                 • Capital requirements                                             transfer / conversion costs
                 • Switching costs                                           • Fixed costs of exit
                 • Access to distribution channels /                              • labour agreements
                 property rights                                                  • spare part capability
                 • Cost disadvantages independent of                         • Strategic interrelationships
                 scale, e.g.                                                      • image
                     • favourable location                                        • financial markets
                     • proprietary technology                                     • shared facilities, etc.
                     • access to raw materials                               • Emotional barriers
                 • Government policy, e.g. licensing                         • Government / social restrictions


Market sizing

 Description     Market sizing techniques are used to understand the size of a
                 market an entity is operating in or is interested in entering/leaving,
                 once it has been accurately defined.

       Typical   There are three main market sizing methodologies:
      process          - triangulation - taking the best estimates from a range of
                       - top down - taking an industry whose size you know and
                         shaving off parts until you arrive at the required market;
                       - bottom up - building up segments to form the market you
                         are interested in

                 It is recommended that you estimate market size using two or
                 more of these methods at a time, typically top-down or bottom-up
                 supported by triangulation.

                 The triangulation approach involves taking the best estimate
                 from a range of sources providing slightly unequal estimates and
                 applying the five sanity checks below:
                       - Confidence ranging - narrowing a variety of estimates from
                         different sources down to a range within which you are
                         fairly confident the true answer is to be found (“confidence
                       - Feel right test - Connecting data obtained on esoteric
                         issues to more easily understandable dimensions and
                         assessing credibility of implication;
                       - Materiality test - Putting in perspective the differences
                         between the various estimates obtained typically by
                         expressing biggest delta as % of average value;
                       - Impact criticality test - Establishing whether the different
                         estimates obtained lead to the same outcome with regard
                         to the question you are really addressing; and
                       - Body doubling - Choosing one unique data point as the
                         estimate you will go with pending further information

                      Pool of                     Sanity                    Triangulated
                     estimates                   checks          =           estimate

                 The top-down approach is a method that consists in shaving off
                 parts of something you know until you are left with the rump (e.g.
                 a segment size) that you were trying to estimate in the first place.

               To construct:
                     - gather all the available data on the market you are trying to
                       estimate as well as data on broader industry sets;
                     - make a list of the cuts for which you have data; and
                     - split the starting object into a sub-set by applying the cut for
                       which you have the least data (e.g. split recorded music into
                       digital/non-digital before type).

               The example below illustrates the cuts you might undertake to arrive
               at one of the segments in question 3.

                                              Estimated size of the global archive footage market 2000
                                                                                                   $6 billion
                 1. The global market for visual
                 content is estimated to be $6bn.
                                                                                                                           $2 billion

                 2. The secondary visual content market accounts for approximately - $2bn.

                                                                                                                                 $200 million

                 3. Archive footage represents approximately 10% of the secondary visual content market - $200 million.

                                                                                                                                    $80 million
                 4. Of this archive news footage represents around 40% - $80 million.

                                                                                                                                   <$8 million

                 5. Less than 10% of the archive footage market is believed to be digitised at present.

                                                                                               Source: TMC project, March 2001

               The bottom up approach involves building up segments to form the
               market you are interested in. For example:

                                                 Population in Group              Average Amount of
                      Age Group                                                                                     Market Volume
                                                  (million persons)                Low Alcohol Beer

                            65+                          9,0 m        X              7 liter / yr / pers        =

                           55-64                         5,6 m        X            14 liter / yr / pers         =

                           45-54                         7,1 m        X            20 liter / yr / pers         =

                           35-44                         7,6 m        X              5 liter / yr / pers        =                         358m liters

                           25-34                         9,1 m        X              3 liter / yr / pers        =

                           20-24                         3,8 m        X              2 liter / yr / pers        =

                           15-19                         3,5 m        X            0,5 liter / yr / pers        =

               This approach requires detailed, disaggregated data. Take care to
               obtain accurate definition of your data and avoid double counting.


Model front panel

 Description     Every financial (Excel) model should have a control panel as its first
                 page. This panel should display all the key variables (inputs) and all
                 the key results (outputs) from the model calculations.

     Typical     The model front panel plays a number of important functions:
  application      - facilitates identification of key parameters and their influence on
                     the critical outputs
                   - allows you to ask “what if” questions when the model is “pressure
                     tested” by your manager/partner or client
                   - allows ‘live’ sensitivity analysis and interaction
                   - acts as a communication tool
                   - facilitates buy-in from the client and other audiences when
                     presenting a model

       Typical   Typically, two types components constitute a model front panel. They
      process    are as follows:
                   - controls: features such as scroll bars, check boxes and option
                     buttons in Excel. These are created by using the "Forms" toolbar.
                     Hover the mouse pointer over the buttons contained on the Forms
                     toolbar in order to determine the control that each one defines.
                   - gauges: Excel charts or simple tables
                 A third element that is sometimes introduced into a front panel is
                 ‘model scenarios’, where lower, base and upper-case parameters and
                 their impacts are displayed.
                 The process for constructing a front panel is more common sense
                 than technique. However, a few pointers may be useful:
                    - understand business need for model how and by whom the model
                      is going to be used.
                    - before going anywhere near a computer, structure the model and
                      panel on paper.
                    - work out “the answer” on the back of an envelope. This is critical,
                      both as a common sense check and as a very powerful
                      demonstration to the client that you understand the key drivers
                    - poll client and/or manager/partner to identify likely key controls
                      and gauges and scenarios that should be modeled.
                    - develop heart of model, and front panel prototype. Play with the
                      model – get the feel of it.
                    - revisit each of the stakeholders, demonstrating prototype front end
                      and explain intended functions.
                    - refine - then refine again throughout the project.


                                                     Source: FSI pricing project, Feb 2001

Tricks and     If you cant build a simple front panel you have not got to the heart of
       tips    the problem. Ask yourself “what is really critical to the strategic
               outcome of the situation I am modelling?”
               In most cases, an informal process is sufficient, but for large-scale
               models, building this methodology into the JAL and milestones.
               The best way of learning how to use Excel controls is to design some
               yourself using a new workbook. Learn how to use scrolls bars,
               spinners, option buttons and group boxes, drop down boxes and
               check boxes.
               When you have discovered a new (for you) trick to simplifying your
               front panel, pick up the phone ‘there and then’ and tell a colleague.


Parfait charts

  Description    A Parfait chart is a simple way of displaying the absolute size of
                 market segments and their relative growth over a given time

     Typical     A Parfait chart is used when analyzing an industry or market to
  application    help understand historical growth and its drivers. It is also used to
                 locate your client’s performance in relation to market growth, to
                 understand its current position and future direction.

       Typical   Plotting a Parfait chart requires an Excel table and the Area function
      process    in the Chart menu.

                 Begin by defining the market you are assessing and obtain figures,
                 typically of sales, for each competitor.

                 Gather your data from analyst, company or brokers’ reports. Take
                 care to account for the reliability of the information - examine how the
                 market was estimated, how it compares to other estimates, and so
                 on. If no data is available you may need to infer from contiguous
                 industries (suppliers or buyers).

                 Plot the chart with time on the horizontal axis and sales on the
                 vertical. Reorder your chart to put the largest data group at the
                 bottom and changes that only occur later in the period at the top.

                 In addition, calculate CAGRs for the period of examination.

                 Once you have completed the construction of a chart, take time to
                 look and think about its meaning. You should be able to begin to
                 make general assertions about the drivers of change - increasing
                 revenues may be derived from growing volumes or rising prices, for

       output                        Industry X sales, 1992-1996               CAGR (%)

                                                                        A      213%
                        10                                              B      -9.8%
                         8                                                      7.4%
                         4                                              E      -0.8%
                         1992        1993        1994        1995       1996
                                                                        Source: Example

Tricks and      Ensure you are assessing the market in ‘real’ terms (meaning that you
                are compensating for inflation). To do this, obtain indexed inflation
                rates (usually available from government resources), and divide your
                figures by the indexed inflation rate - you may need to rebase your
                figures if the index year is not the year in which your statistics begin.

                Once a market estimate has been published by a reputable source, it
                is often drawn on widely. Always check the source of your data to see
                how carefully the researcher has assessed the marketplace and
                whether multiple sources of data have been employed. Take care to
                trace sources and evaluate their reliability. If you are uncertain about
                the reliability of a source, trace the analyst and ask them how the
                estimate was made.

                When inferring market growth from contiguous industries, try and
                make reasonable inferences based on shared characteristics. For
                example, demand for car rental might be inferred from demand for
                business trips. However, always take care to specifically state your
                inferences and the limitations they may have (see forecasting
                techniques tools).

                Use annotation and/or commentary to bring out the key messages of a
                particular chart in advance of discussion or presentation to the client.
                This will allow you to clarify your view on the behaviour of the market.
                Use shading to pull out key messages you wish to present to your
Partnering maps

 Description     Producing a partnering map is a way of simultaneously mapping out
                 all the activities a particular company performs, and attaching a
                 relative importance to each of those categories. By ranking each
                 activity on two scales, a client can quickly see where the company
                 falls short and how easy or difficult it would prove to rectify this.

     Typical     Partnering maps are a very quick tool for business planning,
  application    negotiations or business restructuring exercises, that allows you to
                 focus on which elements of a particular business are crucial to the
                 company, and which are less important or damaging to overall

                 Partnering maps can be used for:
                       - planning for strategic acquisitions or divestments;
                       - preparing for negotiations over mergers, alliances,
                         partnerships or outsourcing agreements;
                       - realigning corporate structure;
                       - planning future strategic direction; and
                       - build vs. buy decisions

                 As an exercise, it is most effective if it takes place in discussion with a
                 group of representatives, where the consulting personnel facilitate a
                 discussion of relative performance. This way, the exercise reinforces
                 the critical elements of a discussion that would have to take place
                 Well in advance, decide as a team what the critical value driver is.
                 Typically, this might be ‘potential to generate customer intimacy’; an
                 alternative axis may be ‘relative capacity to differentiate’, or
                 something quantitative such as NPV.

                 Ensure you have a complete list of relevant activites.

                 Try to have a ‘dry-run’ of the exercise with the project team at least
                 once before the actual client meeting. List all the key challenges that
                 are likely to arrive when the exercise is repeated with the client.

                 In discussion with the client, place each activity on the map - with
                 relative capability on the horizontal axis, and the key criteria on the

                 Remember, this is a rough and ready exercise, designed to separate
                 activities into three broad categories. The exact position isn’t crucial.
                 Challenge the client vigorously, but not dogmatically.

                Analyze the results and draw conclusions.

                Draw out the implications of the completed activity map: you should
                be able to isolate which activities are ‘walk-aways’, which are ‘points
                of true negotiation’, and which are ‘hostages to fortune’.
                                                                      “Must have”                                                “Nice to have”

                                                                                     Customer      Content
                                    Application                                      problem       Packager
                               integrator/ developer                                  solver

                                                                                                                                                      “Nice to have”
                                                         Brand         adviser                                     Highly innovative
                                                        manager                                     Other             application
                                                                                                product/ service      developer
                                                  ISP                                  Data        provider
                                                            Billing                   mining
                                    ePurchasing                                                                                   Sales
                                      provider                    Customer data
               Potential for                                                                    Channel                  Marketing
                                                                                                licence                  (context
                 building                                                                        owner                   building)
                intimacy            product
                                                                       influencer                     Community                              PDA
                                                                                                        builder                            provider


                                                                      analysis                                           Handset

                                                                                                                                                      “Don’t want”
                                          Binary                                 authority
                                        processor                                                                                         Channel
                                  Financial                Bad debt
                                  controler                manager

                                 High                                       Current capability                                                 Low

                                                                                                                        Source: Vince Colvin

Tricks and
                The biggest problem with this exercise is failure to articulate the
                elements which feed into the value and capability adequately. Make
                sure the client is total clear what you are referring to and is ‘on board’.
                (You may wish to ‘pre-wire’ the meeting with a friendly, junior member
                of the client team who is already on side for the project.)

                Challenge your client hard, but don’t be too inflexible. Make sure you
                capture all the elements that are contentious so you can take them
                and do further analysis.

                Do not always believe that capabilities can easily be altered, if the
                client confidently asserts they can.

PEST analysis

 Description     PEST is an acronym for Political, Economic, Sociocultural and
                 Technological. The tool is an aide memoir to ensure you cover all the
                 external forces/risks that may have an impact on the company, market
                 or industry under consideration. PEST analysis should be performed
                 early on in an project as it helps identify and prioritse research efforts.

     Typical     PEST analysis is a simple framework to structure an informal analysis
  application    of the EXTERNAL forces acting on a market. It is universally applicable
                 and simple and can provide insight early on in a project

       Typical   PEST is essentially a framework to assist thinking and as such there is
      process    no process to work through. Below is a categorised list of the issues,
                 that may be relevant to each case.
                 From the long list of issues prioritise the most important by size of
                 impact on the client and probability of occurrence. (Consider both
                 current and emerging issues). Assessing the size of the impact and
                 probability of occurrence will relate to the type of risk identified.
                 Political Factors
                 The political arena has a huge influence upon the regulation of
                 businesses, and the spending power of consumers and other
                 businesses. You must consider issues such as:
                   - the stability of the political environment
                   - will government policy influence laws that regulate or tax your
                     business (Employment/Health & Safety/Environmental/Industry
                     specific legislation)?
                   - potential changes in Government/Government policy
                 Economic Factors
                 You will need to consider the state of a trading economy in the short
                 and long-terms. This is especially true when performing analysis for
                 clients with an international focus. You need to look at:
                 Interest rates
                    - the level of inflation
                    - employment/income/asset holding level per capita
                    - long-term prospects for the economy: GDP per capita etc.
                 Sociocultural Factors
                 The social and cultural influences on business vary by geography and
                 must be accounted for. Factors include:
                   - attitudes to foreign products and services
                   - changing consumer tastes/preferences/fashions
                   - how much time consumers have for leisure?
                   - socio-demographic profile of the customer base and its dynamics

               Technological Factors
               Technology is vital for competitive advantage, and is a major driver
               of globalisation. Consider the following points:
                  - does technology allow for products and services to be made
                    more cheaply and to a better standard of quality?
                  - do the technologies offer consumers and businesses more
                    innovative products and services such as Internet banking, new
                    generation mobile telephones, etc?
                  - how is distribution changed by new technologies, e.g. books via
                    the Internet, flight tickets, auctions, etc?
                  - does technology offer companies a new way to communicate
                    with consumers, e.g. banners, Customer Relationship
                    Management (CRM), etc?

 Example                                              PEST assessment
                                            Watching brief should be
                                                 developed and             Key issues, the
                                            implications considered.    implications of which
                                                Not immediately         should be included in
                                             necessary to formally        strategic planning
                   Scale of impact

                                              included in strategic            process
                                                planning process

                                                                       Tactically adjust strategic
                                             Low priority, no action
                                                                         planning process if

                                              Low                                       High

Tricks and     Brainstorm all possible risk factors before analysing each in more
       tips    detail. PEST analysis can never be complete, apply the 80:20
               rule in deciding where to stop.
               Do not spend too much time in the lower left quadrant.

     Contact   , Sam Barnett

Porter’s five forces

  Description    Porter’s Five Forces model is probably the most famous and widely
                 used strategic tool. It is a useful check list of issues that needs to be
                 considered when analysing and assessing a company’s competitive
                 positioning. The five forces are: rivalry amongst competitors; threat of
                 new entrants; power of suppliers; power of customers; and the threat
                 of substitution
                 The underlying principal is the weaker the competitive forces, the
                 greater an industry’s profitability. By implication, a company whose
                 strategy and market position provides a good defense against the five
                 forces can earn above-average profits.
                 At root, it is a great checklist for describing an industry. It helps you
                 organise your research and provides a good framework in which to
                 present your findings

     Typical     Porter’s Five Forces is most useful:
  application      - when you are trying to understand a new industry or market
                   - before building a hypothesis at the beginning of an assignment
                   - structuring and communicating your existing industry knowledge
                   - defining the boundaries of an industry and you client’s role within it

       Typical   Begin by reading widely (broad and shallow to begin), with the
      Process    framework always in mind. Use analyst reports, annual reports;
                 existing analysis and internal experts.
                 Carefully define your industry. Using this definition rigorously, list the
                 main players in each of the five categories: competitors, suppliers,
                 customers/ buyers, new entrants, and substitutes.
                 Continue by carrying out a search on the names you have compiled,
                 and gather company and brokers’ reports. Pull the relevant articles
                 together and get reading!
                 When you are reading the material, think about the themes listed
                 below. Lift the most common comments into a structured Word
                 Organize your results into five boxes, summarize and conclude in the
                 light of the purpose of the research as given to you by the client.
                 You should now have a much clearer picture of the market.
                 Where does the work you are doing fit into the picture of the industry
                 you have developed through the model?

 Example                                     Porter’s Five Forces Map
                                                 Threat of new entrants
                                                                                 The behaviour and market
                The potential for new
                                                                                 strategies of competitors.
                entrants and the likely
                                                                                 Factors include industry
                level of disruption
                                                                                 growth, product and brand
                caused by their arrival
                                                                                 distinctiveness, and
                                                                                 barriers to exit

                Bargaining power of                                                  Bargaining power of
                    suppliers                         Rivalry among                      customers

                                                  Threat of substitution
               The bargaining power and                                            The changing
               pressures on suppliers -                                            preferences and
               this category also includes                                         bargaining power of
               questions over the ease of                                          customers or buyers: the
               changing suppliers, the                                             impact of volume,
               availability of substitute          How products and                choice, information
               products and any                    technologies may replace        availability on behaviour
               economies of scale                  current ones and the
                                                   impact of this - how easy
                                                   this will be, including the
                                                   cost of changing product
                                                   or technology

                                                                                           Source: Example

Tricks and     Two limitations to Porter’s model are often encountered:
       tips      - regulation can be a very real sixth force not explicitly addressed
                 - the model is static and takes little account of the changes
                   occurring in a industry
               Bear in mind that the model is extremely widely known, and will not
               impress a client by itself. This is just a starting point to strategic
               Keep a good balance between words and data, but try to provide
               numerical indicators where possible (e.g. “CAGR =14%” is far more
               informative than “growth is strong”)


Portfolio matrix

  Description    Helping clients prioritise strategic options in an environment of
                 scarce resources is a key element of our work. The portfolio
                 matrix - a simple bubble chart that plots the value of options
                 against the ease with which they can be implemented - is
                 designed to assist in this process.

                 Typically based on NPV and a pre-agreed set of prioritisation
                 criteria, it allows the quick evaluation of which options are the
                 most difficult to put in place and their potential value.
                 Portfolio matrices enable businesses to underpin their choices
  application    with a clear, data-based framework. Businesses can choose
                 which projects to undertake now, which projects to undertake in
                 the medium term and which projects to put on hold because of
                 insurmountable barriers. They also help businesses quantify the
                 expected benefits from the projects they plan to undertake.

       Typical   Explicitly define each opportunity. Then identify criteria which
      process    provide insight into the ease of implementation of each, based on
                 the business context. Standard criteria might include project scale,
                 systems requirements, skills availability and structural obstacles.

                 Review each of the options either through detailed market research
                 or through brainstorming sessions, and score them against pre-
                 agreed criteria.

                 Meanwhile, isolate the NPV impact of each option. If it is not
                 possible to use NPV for this, you can use cash flow or profit, but
                 accounting techniques and lack of market risk premium mean that
                 these measures will not be as reliable.

                 Remember to use a standard NPV format, for example a five year
                 timescale with nil terminal value.

                 Create the chart and annotate it with key assumptions and a scale
                 bubble; and let the area of each bubble reflect the size of the NPV.

                 Research and brainstorm any softer issues that the options may
                 present (such as the impact on employee’s morale of working away
                 from home).

                 Document the major impacts and present these near the chart.

                        Attractiveness vs. ease of implementation
   output                                                                                                          £56 million


                                            Inherently attractive                                Basic

                                15                                                                                                                                   2002-2006

               attractiveness                                                                                                     Back-office outsourcing
               NPV 2002-2006

                                        Corporate actions

                                                                                                                                                              Light blue shading
                                                                                                                                                              indicates key
                                                                                                                                                              elements of ‘core’
                                5                                                                           Smart order routing                               proposition

                                                       Trade cost analytics

                                                                                                       OMS                Inherently unattractive

                                     High                                                                                                               Low
                                                                              Ease of implementation

                                                                                                                  Source: FSI project, May 2001

Tricks and      It is possible to segment the chart in many ways (e.g. quarters, waves,
       tips     grouping or slices) depending on results and the key message. The
                most common way is in quarters, as shown above.


RACI analysis

 Description     RACI stands for Responsible-Accountable-Consulted-Informed.
                 RACI analysis is a clear and simple way of mapping and assigning
                 functions between departments or individuals to ensure all activities
                 are managed optimally.
                 The four distinct roles are constructed on a grid allowing you to
                 determine exactly who should be influencing and taking
                 responsibility for each key step in a process – with no conflicting or
                 unaccounted activities

     Typical     RACI analysis often forms part of business process reengineering
  application    (BPR) or organisational change engagements. However, it can be
                 used very effectively within capability gap assessment exercises,
                 process mapping etc. (or even in constructing assignment roles).

       Typical   The starting point for this analysis is typically a clearly defined set
      process    of processes for the business.
                 Form a value chain or process map. In discussion with the client,
                 ensure your value chain is MECE and at a sufficient level to
                 determine activities that may be separable in terms of people
                 skills, technology, physical outputs etc.
                 List each activity along one axis (either vertical or horizontal)
                 Against the other axis list the personnel (or department) who are
                 may be directly related to the process. You should consider
                 existing staff, potentially new staff, and/or outsource agencies. It
                 is also important at this stage to be aware of other processes that
                 may share skills – so don’t look at each process in isolation.
                 It is helpful to place the most senior people on the left,
                 proceeding to the most junior on the right. This will facilitate
                 grouping of activities in the next step.
                 Taking each activity in turn, determine in discussion with your
                 client which individual (only one) should take responsibility for
                 each activity, which individuals are accountable for the
                 deliverables, which should be consulted and which need to be
                 informed. Place the relevant letter in the relevant box.
                 Use the resulting grid to identify clusters of activities, duplication
                 of roles, lack of roles etc. In particular you should be looking for:
                 simple demarcation; one person accountable for an activity;
                 limited consulting; limited informing
                 Derive recommendations for your client.

 Example                                    Outsource provider interview process
                                    AB PR SS    TJ AD DC SD NN PW       HC DC ED LY MC Dept     RD PdV   GR OS PF    JH Dir. PY
               Specify Resources    A       R   C           C   R                   C           C            I       I

               Build Acceptance     A   I   R   C   C   C   C   C   C   C   C   C   C   I   I   C            I       I

               Identify Providers   A   I   R                                                            C   R   I   I

               Develop Provider     A       R   C   C   C   C   C   C   I   I   I   I   I   I   C            C       C   I
               Review Processes

               Interview providers A        R   I   I   I   I   I   I   I   I   I   I   I   I                R   I   R

               Document             A       R                           I   I   I   I   I   I

               Cultivation          A       R                           I   I   I   I   I       C            C       I

               Integrate            A       R                                                   R                    R       I

                                                                                                     Source: Example

Tricks and     This analysis does not take the place of process design, but builds
       tips    upon it. However, you should always look to simplify the process
               and the number of people involved.
               This step is often highly contentious. Ensure that you have
               rigorously tested your ideas internally before taking them to the
               client. It is always better to co-develop a RACI chart with proactive
               client team members first.
               RACI charts are often called RAID charts (Responsible –
               Accountable - Informed - Discuss)


Reverse costing

 Description     Reverse costing compares a business’ cost position relative to key
                 competitors, activity by activity, by inferring cost structures and their
                 drivers. It involves estimating a competitor’s cost structure and
                 comparing it to the client’s to understand areas of relative strength
                 and weakness.
     Typical     By comparing a client’s cost to its competitors’, insights can be found
  application    regarding the key drivers of competitiveness.

       Typical   Reverse costing involves taking what you know about a client’s
      process    business and comparing to a competitor’s business to identify where
                 competitive disparities lie.

                 Start by taking the client company cost structure (based on activities)
                 and begin to model differences in a competitor’s cost structure by
                 taking into account known or estimated differences such as:
                        - Number of people / shifts;
                        - Specific equipment used;
                        - Plant output volumes;
                        - Product specifications;
                        - Scrap / by-product volumes produced;
                        - Plant size / layout; and
                        - Distribution system

                 Where hard data is unavailable, estimate the effect on the competitor
                 of, for example, scale factors, and by asking client company experts.

                                               Activity 3

                Per 10
               Unit                            Activity 2
                 (£)           Materials


                                               Activity 1
                                Client Costs                Competitor Product Design    Competitor Product       Competitor Product        Competitor Product
                                                                Our Technology          Competitor Technology   Competitor Technology     Competitor Technology
                                                               Our Factor Costs           Our Factor Costs      Competitor Factor Costs   Competitor Factor Costs
                                                                   Our Scale                 Our Scale               Our Scale               Competitor Scale
                         Source: Example

Tricks and        If the product is simple, with relatively few inputs, then reverse
       tips       costing may work (e.g. cardboard boxes), if the process is complex
                  (e.g. car) then think about trying another tool.

                  Reverse costing relies to some extent on guesswork. Make sure you
                  document how you arrive at the final figures and what assumptions
                  you make. Industry experts will have insights into cost structure,
                  activity chains and cost allocation guidelines. In addition, carry out
                  sensitivity analysis on your data so that you know the range of likely
                  competitor costs.


Risk matrix

 Description     The risk matrix is a simple structure for identifying the key risks
                 associated with an opportunity, and prioritising the actions necessary
                 to mitigate those risks. There are many possible structures that could
                 be used to achieve this end, however all share the common property
                 of defining both scale and controllability of each risk.

     Typical     The risk matrix is useful for clarifying decisions around complex, non-
  application    independent risks which arise from almost every business decision.
                 Typically, any individual investment project or portfolio decision would
                 benefit from such an analysis.
                 A very common situation in which this tool is used is when deciding
                 whether to take part in an alliance venture. In this instance it helps
                 answer the questions like:
                    - what is my greatest risk?
                    - how costly will it be if I cannot mitigate it?
                    - what shape of alliance would minimise my risk exposure.
                    - for those risks outside my control (e.g. market risk), what is the
                      potential downside? etc.

       Typical   Throughout any financial modeling exercise, identify those variables
      process    which most heavily effect the desired outcome (e.g. which elements
                 have most influence on NPV). Determine the monetary value of the
                 loss if the key variables change by (say) 5%. This is a hard measure
                 of risk.
                 Additionally, identify non-financial risks, typically in the following
                 classes: operational risk; brand risk; human capital risk; technology
                 risk; and timing risk. Attempt to scale these risks comparatively. Many
                 of these can only be scaled in discussion with your colleagues and the
                 client. These are soft risks, but are equally real.
                 Use a two-by-two to plot all the risks by Significance (high, medium,
                 low) and degree of controllability (manageable, mitigatable, non-
                 Use bubble size to accentuate the scale of risk (making area
                 proportional to monetary impact). Additionally, shade bubbles where it
                 adds clarity.
                 This exercise is best performed 2/3 of the way through a modelling
                 Test your findings with your team and share it with the client – ensuring
                 consistency of logic (especially for soft risks).

   output                                                                                                                           HIGH
                                                                                                                                    A. Level of inbound order flows from
                                                                                                     C             A
                                      High                                                                                          C. Exchange rate changes
                                                                                                                                    D. Tie in of OMFS affiliate companies to EA
                                                                                             D                                      E. Trading role (Sell order-flow or agency)
                                                                             E                                                      F. Handling of corporate actions
                                                                                                                                    K. Partner competence and fit
               Significance of risk

                                                                                                                                    P. DVP and intra-day cash exposure
                                                                         P                           K
                                                                                                                       G        B
                                                                 M                                                                  MEDIUM
                                                                                         L                     H                    B. Single currency cost transparency
                                      Medium                                                               I                        G. Merrill Lynch competitive product
                                                             N                                                              J       H. Jiway competitive product
                                                                                                                                    I. E-Cortal competitive product
                                                                                                                                    J. Market consolidation
                                                                                                                                    L. Lack of clearly defined exit scenarios
                                                                                                                                    M. Quality of research delivered
                                                                                                           R                        N. Technology competence
                                                                                                                                    O. Custody systems
                                                                                                                                    Q. Need to route all overseas business
                                      Low                                    W                                                      R. Potential failure of EA network
                                                                                     U           S                                  LOW
                                                  X                              V                                                  S. Quality of research received
                                                                                                                                    T. Free riding on partner research and
                                                                                 Mitigation /                                       U. Ability of EA to change fee
                                                Manageable risk                                          Outside OMFS control
                                                                                 Negotiation                                        V. Additional finance
                                                                                                                                    W. CLSA directors’ power
                                                                                                                                    X. Marketing of EA

                                      Risks falling                                          Note: The bubble size
                                      under the           Internal risks                     represents the potential
                                      following            Project risks                     financial impact
                                      categories:          Market risks

                                                                                                                           Source: FSI Project, April 2001

Tricks and      Use common sense when identifying risks, consider only those with a
       tips     realistic possibility of occurring or having impact. List only the issues
                that are at the root cause of the risk, rather than a number of knock-on
                effects entirely dependent upon it.
                Do not be precious about the absolute location of the bubbles. The
                critical factor is whether the key risks (top right hand side on the
                above chart) can be borne by your client.
                Do not stop when you have finished your risk chart. You must drive
                on to determine what actions must be taken to guarantee minimum
                risk and to determine the benefits case in this instance.

     Contact    Sedef Imer, Vince Colvin

RONA chart

 Description     In exploring a company’s strategies, it is important to see how they
                 used their asset base in making profits.

                 The RONA chart expands basic profitability/opportunity cost analysis
                 and shows the various business models adopted by different
                 companies in a segment. Some opt for high return on sales, typically
                 on low relative sales volumes, whilst others concentrate on high
                 volumes and a relatively low return on sales. This does, however,
                 vary by industry and market.

                 The RONA chart’s two axes show the constituent parts of the return
                 on net assets equation shown below: return on sales (how profitable
                 a business is) multiplied by sales/asset turnover (how efficiently a
                 business uses its assets).

                  Return on sales               Asset turnover     =      Return on net assets
                   (Profit/Sales)              (Sales/net assets)           (Profit/net assets)

    Typical      Return on net assets (RONA) is a technique to explore how
 application     businesses make money from their asset base. Particularly if they are
                 used in conjunction with sector charts, they can be used to assess
                 the apparent strategies of competitors.

       Typical   Begin with the usual data gathering process. Identify your market or
      process    industry, list the companies or business within this, and obtain
                 company annual reports and any other relevant data over a minimum
                 three year period.

                 Check the definition of net assets, profits and sales to be used. If in
                 doubt, get expert advice.

                 For profits and sales, check for unusual or non-recurring items like
                 disposal of investments or write downs. For net assets, check for
                 unusual or non-recurring items such as acquisitions or treatment of

                 Create a spreadsheet table with sales, profits and net assets over the
                 selected timescale.

Root cause analysis

 Description     When trying to understand why a business phenomenon occurs, it is
                 not enough just to ask a few well chosen questions. Root Cause
                 Analysis is a structured, logic-tree approach to asking the question
                 “why?” It enables you to get to the heart of an issue, with a high
                 degree of confidence that you have been MECE, and that your
                 conclusions can be numerically supported.

     Typical     Root Cause Analysis is most commonly used for structuring interview
                 programmes to unearth the reason(s) why individuals display certain
                 behaviors. For example: Why is our customer churn rate almost
                 twice the industry average?; Why do my staff in Sidney lose fewer
                 working days than those in Munich?
                 The utility of this technique is only realised when you reach a
                 question that is actionable and you have asked a large enough
                 population to get a measure of the scale/importance of the issue.
                 Clearly there are other more detailed and statistically more rigorous
                 methods for unearthing behavioural logic, but as a rapid tool for
                 getting to the heart of an issue, Root Cause Analysis is hard to beat.

       Typical   As ever, the first step is to contact colleagues to see what similar
      process    exercises have been done in the past, and to draw on expert
                 opinion as to the cause of the issue at hand. Industry expertise
                 is invaluable here.
                 Next, draw your own hypothesis (with numerical weightings) to
                 help guide your questionnaire. Draft a questionnaire and try it on
                 team members and manager/partner. Then test it with the client.
                 If you spend the time to make the questionnaire simple and
                 clearly worded it may be possible to outsource the execution to a
                 third party agency. However, always sit on the shoulder of a
                 third-party agent for the first set of interviews. This is essential,
                 as: you are closer to the issue; you can see which questions
                 work better than others; you will be far more tenacious in getting
                 a result. Then improve the questionnaire.
                 Typically, aim for logic to go 4-6 levels deep, and keep it simple.
                 Use a grading scale of 1-5 for each question where applicable
                 (or yes/no if necessary). Be sure to ask some open questions,
                 as this captures responses you may not have anticipated and
                 (nearly always) provides powerful quotes.
                 Preferably, use Microsoft Access to analyse the results, but use a
                 hard copy questionnaire whilst interviewing
                 Finally, populate the tree and derive implications for your client.

 Example                          Insurance product provider root cause analysis
                                                  “Why didn’t you purchase
                                                                                                          Normalised to
                                                 further products from us?”
                                                                                                          100 customers
                                  20%                                               80%

                       “I considered you”                                “I didn’t consider you”

                                                                     50%                             50%
                                                           “I was aware of your           “I wasn’t aware of
                                                                products”                  your products”           40

                 60%        25%             15%                50%         30%               17%            3%

                 Poor                                         Weak
                            Not top      Recomm-             relation-     Not top                        Conven
               product                                                                  Reputation
                            of mind      endation              ship        of mind                        - ience
                 12           5              3                                12             6              2

                                          52%               29%               11%                      8%

                                        Poor quality        infrequent        Poor contact            Not
                                           staff              contact          processes           proactive

                                             10                 6                   2                 2

                                                                                          Source: Example

Tricks and     Don’t let your conclusion be overly coloured by one or two
       tips    impressive/influential interviewees. Remain objective.
               There is always someone who will say “I’m not sure this is
               statistically significant”. Two comments:-
                  - this may be true if you have a small population of interviewees.
                    But you will be surprised at how rapidly significance is reached
                    for binomial processes (see any good statistics book)
                  - statistical significance is not always necessary, especially if
                    your work forms the early part of a strategic direction setting
                    exercise. Later, it may be desirable to combine this with
                    related technical analyses such as multivariate regression,
                    factor analysis, cluster analysis etc. Be aware of the use and
                    limitation of your analysis.

     Contact    Vince Colvin

ROS/RMS analysis

 Description     ROS/RMS analysis demonstrates the strength of relationship
                 between relative size of companies in an industry and their
                 profitability. It is a quick and visually clear way of demonstrating the
                 significance or otherwise of scale economies.

                 The ROS/RMS chart itself plots average return on sales against
                 relative market share for each competitor in the industry. The result
                 shows whether there is any competitive advantage to be gained from
                 economies of scale, and - more importantly - how significant those
                 economies of scale are.

    Typical      ROS/RMS charts are a useful tool to employ in any market analysis
 application     exercise, and relatively easy to create.

                 Begin by defining the industry you are examining and listing all the
                 players. Check the definition of profits and sales you will be using for

                 Obtain annual reports for the last three to five years for each of the
                 competitors you have identified. Strip down competitor sales to the
                 relevant segments and estimate comparative profitability.
      process    Make sure you are comparing like with like: watch out for profits on
                 sale of investments, extraordinary write-offs or other unusual items.

                 Create a spreadsheet in Excel with sales and profits over time for
                 each competitor.

                 Plot the table as a bubble chart with the relative market share (at the
                 end of the period of analysis, relative to the largest player) on the
                 horizontal axis and the return on sales on the vertical.

                 Use a log scale for the relative market share (small market shares
                 should be towards the left.

                 You can use the bubbles to represent the size of company.

                  Add trend lines to draw out the general economy of scale tendency in
                  the industry. The angle (steepness) of the trend lines indicates the
                  relative economies of scale at work in the industry.

                  Identify any competitors that are significantly different and check your
                  data. If you are confident you are comparing like with like, investigate
                  what the competitor does differently.

 Example                           ROS - RMS                                ROS - RMS
   output                          Industry A                               Industry B
                         25%                                    25%
               ROS       20                           ROS       20
               (last 3                                (last 3
               years,    15                           years,    15
               %)                                     %)
                         10                                     10
                          5                                      5
                          0                                      0
                                          1.00                                     1.00
                          -5                                     -5
                         -10                                    -10
                         -15                                    -15
                         -20                                    -20
                         -25         RMS (log)                  -25          RMS (log)

                                                                           Source: Example

Tricks and        Do not forget to use at least a three year average for return on sales.
                  Plot the data you have even if it is not complete: partial data is better
                  than nothing.

                  Consider calling the competitor if no information is available (after
                  discussion with the project’s manager) - to gain an idea of segment
                  profitability (i.e. higher or lower than others).

                  The tool is best used comparatively - see diagram above.


Scenario development

 Description     Scenario development is a methodology to help “manage the
                 future”. Where traditional analysis predicts the near future in terms
                 of historic and current trends scenario planning considers large-
                 scale forces that will push the future in different directions. The
                 process is as much a part of the benefit as the outcome, allowing
                 managers to generate and share ideas in a positive environment,
                 leaving a company better placed to react to changing future events.
                 Scenario development suggests a number of distinctively different
                 alternative futures, each of which are possible. These scenarios of
                 the future focus less on predicting outcomes and more on
                 understanding the forces that would eventually compel an outcome;
                 less on figures and more on insight. They are more concerned with
                 understanding the discontinuities in creating alternative futures by
                 recognising that the structure of the environment may change.

     Typical     Scenario planning can be applied to any changing environment, but
  application    is generally most successful in industries which face major change
                 to underlying fundamentals of environment and competition. Most
                 famously it has been adopted by Shell (oil), the NHS (health
                 service), and ICL (telco supply).

       Typical   There are many variants on how to run a full scenario planning
      process    engagement, but all begin with gaining an understanding of the
                 industry via client interviews, industry experts, and micro and
                 macro environment analysis
                 A “decision focused scenario” process will take the following form:
                    - clarify strategic decisions the scenarios seek to address (ie.
                      what would you like to know about the future to improve your
                    - agree key decision factors
                    - determine environmental forces at two levels :market/industry
                      level (micro) and an economic/political/technical level (macro)
                    - develop 3-6 scenarios - often called logics. (e.g. global giants
                      will dominate, industry will fragment, boundaries will blur, etc.)
                    - describe the scenarios in enough detail to identify implications
                      on the strategic decisions
                    - Identify strategic implications
                    - feed back into the original strategic decisions
                 This process is done in teams and workshops with the client.

   output      • High                                                                • Global media
                 technology                     Non-individual focus                   giants
                 state control                                                       • Control of all
                                                  Power becomes
               • Universal                                                             content/ formats
                                                  more centralised
                 surveillance                                                        • Increasingly
               • Police                                                                politically and
                 states/blocks                                                         economically
                                  Big brother
                                                                        never dies

               becomes less                                                                Technology
                                                       Today                               becomes more
                  Technology                                                                Technology
                     push                                                                      pull
               • Technological                                                       • Geographical
                 rejection                                                             boundaries
                 through                                                               become less
                 possible                        Power becomes                         relevant
                 technology                      less centralised                    • Change from
                 failure                                                               “haves/ have
                                                  Individual focus
               • Spiritual                                                             nots” to “wants/
                 Renaissance                                                           don’t want”

                                                                                 Source: Halo Group

Tricks and      This is a very interactive process but every client interaction should
       tips     be well prepared. Typically this means approaching each interaction
                with an overtly open mind, but a straw-man in your back pocket.

                Remember, this is not about predicting the future, it’s about being
                better prepared than anyone else to anticipate and react to change.

                Help stretch your thinking further by applying parallel tools e.g:
                bridgehead mapping, ecosystem mapping, value migration, asset
                extension modeling, BCG growth-share matrix etc.


Sector charts

 Description     The sector chart is a fairly simple, visually arresting demonstration
                 of relative positions of competitors in a sector or industry.

                 The sector chart tool is similar to a BCG matrix, however the BCG
                 matrix is from the point of view of a particular company rather than
                 the market as a whole. By contrast, sector charts are calculated
                 in reference to the largest market player at the end of a particular

     Typical     This tool should be used to uncover the competitive dynamics with
  application    a market or industry. By understanding the relative performance
                 of players by changing market share we can construct a number
                 of strategic implications for the client.

                 (See also: Share Gain Line tool.)
                 As usual, begin by carefully defining the market you are looking at.
      process    Identify the main players in the market and, through the usual
                 research methods, calculate their size in relation to the market.

                 Now calculate the growth rates for each player. Typically, the
                 values for growth are calculated over a period of three to five
                 years. Simply calculate the size at period start and end, and
                 divide by the number of years.

                 Plot the different companies as bubbles on the graph with the
                 relative market share at the end of the period as the horizontal
                 axis and growth on the vertical.

                 The area (note: not the radius) of the bubbles can be used to
                 represent the absolute size of each of the companies at the end of
                 the period of examination. Always make sure to add a key which
                 shows the scale for the bubbles.

                 Looking at the resulting values can tell you a great deal about the
                 changing face of a particular market. For example, if the smaller
                 players are grouped high up the chart, this suggests a process of
                 market fragmentation is taking place, and by contrast if the growth
                 is focused on the large players, the market is consolidating.

                 If you wish to use an ‘others’ category for a fragmented market,
                 separate the bubble - it is not a large market player.

                Copy and paste chart into Powerpoint, then ungroup the chart,
                deleting all but the stacked column.

                Group the column, rotate (using flip function) so that largest segment
                lies on left hand side and adjust re-size to fit in area, ensuring that
                you have locked the aspect ratio.

                For each segment follow the previous steps, but instead of flipping, fit
                the columns to the segment size.

 Example                                                    ABC Sector, 1996 - 2000
   output                                                                                             Company E

                                                                Company C
                                                                                                          Company I

                                                                        Company D
                 Real                                       Company B
                 Annual                                                                                     Company J
                 Growth (%)            10%                                                                              Company K

                                       0%              Company A                                       Company H              CAGR = 8.6%

                                                                               Company F
                                      -10%                                                             Company G

                                             2X 1.5X   1X      0.5X     0.3X   0.2X    0.1X   0.05X   0.03X 0.02X     0.01X

                                                                        Relative Market Share
                    = $1   billion revenue, 2000
                                                                                                            Source: Example
Tricks and     For purposes of clarity when presenting the information, it is wise to
       tips    calculate the relative market share on a logarithmic scale.

               If comparing a number of charts, make sure you retain a consistent
               scale on both axes.

               Adding a sector average growth line to the chart can be useful.


Sensitivity charts

  Description    Commercial models used to guide strategic decisions nearly always
                 depend upon assumption - about the market, our client’s ability to
                 capture share, the ability to implement etc. A sensitivity chart is a
                 clear mechanism for displaying the impact of assumptions in your
                 model. It achieves this through varying the most critical assumptions
                 and then recording the change to the key outputs.

     Typical     Sensitivity analysis is a fundamental part of the construction of any
  application    business model. It allows you to determine and communicate the key
                 assumptions in your model in terms of the impact they have on the
                 bottom line of the business.
                 Sensitivity analysis can also indicate any flaws in the functioning of
                 the model - keep your eye out when conducting sensitivity analysis
                 for erratic or unusual changes due to minor alterations in inputs.

       Typical   Based upon your growing understanding of the issue, build an Excel
      process    model. As the model develops be aware of which factors are having
                 most impact on your critical outputs, and question heavily the nature
                 and scale of the assumptions you are making about these factors.
                 Ensure all key assumptions are isolated (typically 5-15), and ensure
                 the model updates assumptions in real time.
                 Taking each key assumption in turn alter the value by +/- five percent.
                 (For example, an assumption of 50% CAGR would become 52.5%
                 CAGR NOT 55.0%). The sign of the alteration should be chosen to
                 give a positive change in the observed output.
                 Note the new values and calculate the percentage change in the
                 observed output. Reset the assumption then repeat the process.
                 Continue until you have tested all key assumptions.
                 Rank assumptions in terms of significance to the observed output and
                 plot. It is advisable to place the most sensitive assumptions in the
                 ‘control panel’ on the front page of your model, so the client can
                 change the values during interactive sessions.
                 Look carefully at the most sensitive values and make sure you are
                 particularly confident of them in advance of presenting the model
                 Significant time should be spent on this activity..
                 This will allow you to focus your time on those issues which are most
                 pertinent (and potentially most contentious) for the client.

 Example                       Sensitivity for Global Equity trader
                                                                            % change in 5 year NPV upon +/-5% in variable
                                           0%     2%           4%      6%           8%     10%       12%      14%      16%
                Flat $5 fee from option                                                                              15.2%
                      Inbound volume                                                                        13.3%
                    Exchange rate $/£                                             7.2%
                   Inbound growth rate                                            7.1%
                 US % of total inbound                                     6.0%
                 Pre tax cost of capital                              5.5%
               HR overhead load factor                              5.0%

               Investment cost of $9m                          3.9%

                        Market making                          3.9%

                 Exchange rate £/euro                   2.4%
                               Set fee                 2.3%
                  Dividend distribution                2.2%
               Outbound volume factor              2.0%
                     US settlement fee          1.0%                                 Source: FSI project, April 2001

Tricks and        Do not confuse the 5% changes you are making to assumptions with
       tips       real-world events. This is simply a constant figure to demonstrate
                  the impact (linear or non-linear) to selected outputs. The anticipated
                  range of your assumptions should be reflected in a parallel
                  upper/lower bound analysis.
                  5% is not cast in stone. Use a more appropriate (but constant) figure
                  where applicable to your industry (e.g 50 basis points may be more
                  appropriate if your model concerns insurance product margins).
                  Employing and understanding proxies and assumptions is at the
                  heart of good strategic consulting, but at times you may feel that you
                  have only limited confidence in your estimates. Three points on this:
                    - do not be afraid to express and discuss this concern.
                    - use this tool to understanding its impact
                    - you are not expected to know exact values for uncertain events,
                      but you are expected to know better than anyone else

     Contact      Vince Colvin

Shareholder value analysis

 Description    Shareholder Value Analysis (SVA) demonstrates how decisions affect
                the net present value of cash to shareholders. It measures a
                company's ability to earn more than its total cost of capital and thus
                add value.

                In recent years, tools for examining shareholder value have become
                widespread. This is because companies and individuals have
                increasingly realised that:
                       - accounting measures can distort economic reality;
                       - increasingly, analysts focus on cash flow;
                       - fund managers have used SVA analysis for years; and
                       - earnings per share (EPS) and other traditional measures tend
                         to have a lower correlation to share price performance than
                         SVA measures

                Shareholder value can be split into market-based measures (the
                ultimate external tests is the success of a company in creating wealth
                for its shareholders) and internal measures (which act as proxies for
                market based measures).

                                          Shareholder value performance measures

                           Market based measures                           Internal measures

                   •Market value added: the monetary           •Shareholder value analysis (Economic
                   premium (or discount) of the gross market   Value AddedTM): net operating profit after
                   value of a company to its total invested    tax - capital financing charge. Note that
                   capital base.                               there are many adjustments required to
                   •Market to book ratio: market value of      both these items.
                   equity divided by the amount of             •Economic profit: invested capital
                   shareholders’ capital invested and          multiplied by (return on invested capital -
                   retained in the company.                    weighted average cost of capital).
                   •Total shareholder return: dividend yield   •CFROI (cash flow return on investment):
                   and capital gain (expressed as %)           is the IRR of current cash flows assumed
                                                               to continue over the residual life of
                                                               •CFROI and TSR concepts can be
                                                               combined to measure total business
                                                               returns: at business unit level this leads to
                                                               TBR = ((MV2 - MV1) + FCF) / MV1

     Typical    This tool is used at two levels within a company: the operating
  application   business unit and the corporation as a whole. Within business units,
                SVA measures the value the unit has created by analysing cash flows
                over time. At the corporate level, SVA provides a framework to
                assess options for increasing value to shareholders: the framework
                measures trade-offs among reinvesting in existing businesses,
                investing in new businesses, and returning cash to stockholders.
                SVA is used both as a tool to aid in one-time major decisions (such as
                acquisitions, large capital investments or division breakup values) and
                to guide everyday decision-making throughout the organisation.
                When used as an everyday tool by line managers, SVA can be
                applied in many ways to:
                       - Assess the performance of the business or portfolio of
                         businesses. Since SVA accounts for the cost of capital used
                         to invest in businesses and the cash flows generated by the
                         businesses, it provides a clear understanding of value
                         creation or degradation over time within each business unit.
                         This information also can be linked to management
                         compensation plans.
                       - Test the hypotheses behind business plans. By
                         understanding the fundamental drivers of value in each
                         business, management can test assumptions used in the
                         business plans. This provides a common framework to
                         discuss the commercial viability of each plan.
                       - Determine priorities to meet each business's full potential.
                         This analysis illustrates which options have the greatest
                         impact on value creation, relative to the investments and risks
                         associated with each option. With these options clearly
                         understood and priorities set, management has a foundation
                         for developing a practical plan to implement change.
      Typical   Before embarking on shareholder value analysis, bear in mind that it
     process    requires a thorough understanding of the business in question in
                order to determine the amount of investment required and the
                expected cash flows that investments will yield in an accurate

                Begin by determining the actual costs of all investments in a given
                business, discounted to the present at the appropriate cost of capital
                for that business. You will need to agree this rate with the client.

                After you have done this, estimate the economic value of your client’s
                business by discounting the expected cash flows to the present at the
                weighted average cost of capital.

                The economic value added can then be worked out as the difference
                between the net present value of the investments and cash flows.


Share momentum charts

 Description     Share momentum charts are a way of presenting dynamics in market
                 share amongst competitors operating across different markets.

    Typical      As a tool, they help you display relative market share performance of
 application     competitors across a particular market sector, or across sectors for a
                 particular competitor.

                 See also: Sector Charts and Growth Share Matrix.

       Typical   Begin by carefully defining the market or industry you are dealing
      process    with.

                 List the competitors you are analyzing, and gather historical data from
                 general research, company and broker reports for each component,
                 along with overall data on the market’s size and growth. Ensure the
                 total market data corresponds to the competitors you are looking at.

                 Compile competitor sales data for between three and five years

                 Create an Excel table with market/industry size at period start and
                 end, and sizes for each competitor over the same period

                 Calculate the absolute growth between period end and start, then
                 divide by the number of years. Plot the results on the chart so that
                 the market or industry growth is on the horizontal, and competitor
                 growth on the vertical axis.

                 Add a share gain line bisecting the two axes.

                 Players whose bubble appears above the gain line are performing
                 relatively well, compared to competitors (i.e. they are gaining market

                 Take care how you interpret the results. It is important to think about
                 the meaning of the chart and add clear notes to your slide. Is, for
                 example, a poor position on the chart because of underperformance,
                 or is a player is choosing to exit the market?

 Example                                                   Share movements by competitor, Music, Cards & Video retail, UK, 1995-1999
                                                                        gaining share                                            Blockbuster
               Competitor Growth (% over 4 years)

                                                           40%                                      Paperchase
                                                                                                                                 WH Smith

                                                           30%                                                                   Disney Store
                                                                                                    Disney Store
                                                           20%                 Our Price            Boots                        Woolworths
                                                                                                    WH Smith
                                                                                                                               J. Menzies
                                                           10%                                       Woolworths
                                                                                                                                                  losing share
                                                                                                   J. Menzies

                                                    -10%          0%           10%          20%           30%            40%                50%             60%
                                                           -10%                WH Smith
                                                                       Music               Cards                         Video

                                                                                                   Total Market Growth

                                                                                                                                     Source: Example
Tricks and          Always write the meaning of the bisecting line on the chart:
       tips              - Above the line = gaining share
                         - Below the line = losing share

                    For multi-segments on one graph, all the bubbles in a given market
                    should be on the same vertical line - this allows you to look at the
                    relative performance of different markets as well as players within

                    The share momentum chart can be very insightful when used in
                    tandem with the growth share matrix to examine the market.


Sources of value waterfall

 Description     The sources of value waterfall is used to identify and highlight
                 individual sources of value within a company.

     Typical     Value waterfalls often add value to the client by presenting data in
  application    a simplified way. The process forces you to identify key areas of
                 value creation and/or destruction and thus focus on the big issues
                 that determine a client’s competitive position.

                 These could include:
                      - reasons for change in revenue or profitability;
                      - sources of cost savings;
                      - sources of capital expenditure spend or savings;
                      - description of full potential sources of value; and
                      - aspirational description of what is achievable

                 Two sources of value waterfalls next to each other can be used to
                 show comparative performance over time - such as between two
                 departments, products or competitors.

       Typical   Begin by obtaining the necessary data from financial statements,
      process    accounts, or market research. If data is not available, use
                 estimates or proxy data.

                 Decide what measure you wish to have on the vertical axis, but
                 remember that this axis always describes the value being created
                 or destroyed. This could be any financial or non-financial
                 measure (such as ROI, capex, working capital, headcount,
                 number of customers).

                 Then decide on the elements of the horizontal axis. These
                 represent the disaggregated categories which are causing the
                 change. Such categories could also be time or some other
                 incremental measure.

                 Ensure you choose the right categories to reflect all sources of
                 value creation and/or destruction.

                 Where value is destroyed, stack the boxes in a downwards

                 When creating the chart in Excel, you will need to use “invisible”
                 boxes to get the output to line up correctly.

                 Annotate your chart, including explanatory notes, and detail of
                 key assumptions, outputs and sensitivities.
   output                        100
               Cumulative net
               contribution to                                                                            c.£12m
                                                                                                                           Total net contribution
                                                                                                                              (2002-2006) =
                2001-2006 (£
                                                                                         c.£30m                                c.£89 million

                                 50                                         c.£8m


                                           c.£27m         c.£2m

                                                                                         Core element of ABCD

                                                                                         Related element of ABCD
                                                                                         Potentially independent of ABCD

                                       Connectivity and    OMS    ‘Smart’   Trade cost   Back-office        Corporate
                                       standardisation             order     analytics   outsourcing         actions
                                        (Basic ABCD)              routing

                                                                                    Source: FSI project, May 2001

Tricks and       Be careful not to overcomplicate the horizontal axis by having too many
       tips      categories, or by making the categories too complex. Remember, you
                 are trying to describe the big issues to senior managers. Leave the
                 detailed analysis to the appendix.

                 The sources of value waterfall often provokes many questions. Be
                 prepared to discuss all the assumptions, inputs and workings of the
                 model with the client.

                 Be careful to define your categories so that there is no double counting.


Strategy articulation map

 Description     One of the key challenges in any strategy project is articulating
                 strategic criteria in a clear and consistent manner. It is
                 necessarily complex and multi-faceted and cannot be reduced to a
                 glib phrase or mission statement without exploring what these
                 criteria mean, in practical terms, for a business.

                 The strategy articulation map is a tool designed to document and
                 analyse a company’s strategic intent in a structured manner.
                 However, it can also function as a quick and easy tool to quickly
                 gather ideas from the client about where the company is and
                 where they see it going, and demonstrate the linkage between a
                 company’s vision, mission and values.

     Typical     Ideally, the strategy articulation map is a tool used at the
  application    beginning of any project.

                 The strategy articulation map is built in close discussion with
                 senior management in the client company, and can be a useful
                 exercise on its own in getting senior staff members to think about
                 the relationship between the company’s stated intent and a
                 potentially divergent reality before communicating this across to
                 the company.

       Typical   In discussion with the project team, formulate a hypothesis to take to
      process    the key client contacts for dicussion.

                 Once you have done this, arrange interviews with the main senior
                 members of the client staff. Use these to conduct interviews on the
                 strategic direction of the company, based around the hypothesis you
                 have formed, following the logical flow of questions from the top to
                 the bottom of the pyramid.

                 Take care to challenge and evaluate the client contacts’ statements
                 robustly, especially when they come directly from mission or vision
                 statements. Bear in mind that competitive advantages are generally
                 few and far between; whereas competencies may be broader.

                 Initiatives and competencies usually flow fairly easily from the
                 statements at the top of the pyramid, although ‘corporate politics’
                 may find you returning to the original statements many times.
                 Make sure you track agreement and the reasoning behind any

                 The results of your information should be organised in a pyramid
                 structure. The information should be clear, and organised so as to
                 prove the conclusions you have reached through the course of the
                 interview programme.
   output                                                                                             To
                                                                                                      be a
                                                                                Vision             profitable
                                                                                                manufacturer of
                                                                                             branded, core, low-risk
                                                                                            investment products for
                                                                                          pre-eminent intermediaries
                                                                                      in chosen advice-led retail markets

                                                                                Leading     World-           Ability to build    History
                                                                                  asset     class,           and access          and
                                     Necessary competitive                    manager,      proven           leading             pedigree
                                          advantages                         leveraging     research         intermediaries      which may
                                                                          economies of      and              in the retail        have the
                                                                       scale to provide     investment       market              potential to
                                                                    out-performance to      processes,                           be leveraged in
                                                                     clients, and share     core to                              intermediary
                                                              value with intermediaries     differentiate                        retail markets
                                                                                            d products

                                                      Implementing         Establishing              Winning the           Employing best      Developing
                                                       leading-edge        company as top            hearts and            customer            the capability
                                                       management          10 UK provider            minds of              relationship        for faultless
                                               information systems         of retail                 intermediaries        managers and        administration to
                                                    which facilitate       investment                and end-              best managers       meet
                                                 understanding and         products, while           customers on          of customer         intermediaries’
                                               management of the           retaining                 the use of the        relationship        requirements and
                                           drivers of profitability at     profitable                advanced active       management          manage the risks to
                                       customer and product levels         offshore                  product as a          systems to sell     which BGI is
                                                                           business, rapidly         component of a        proposition         exposed by the new
                                                                           followed by entry         balanced                                  business
                                                                           into European             portfolio
               Key               Rationalise     Focus product                Develop high              Develop a          Design and              Develop a      Create operational
               initiatives    product set by     development capability       quality                   channel            implement               brand and      infrastructure to
                                   reviewing     on controlled product        management                strategy for       sales and               marketing      support retail
                             profitability and   innovation aimed at          information on            customer           customer                strategy to    business,
                         mapping to needs        meeting intermediaries’      customer                  acquisition        service                 build retail   including
                         of target customer      demand for new retail        profitability, sales                         processes and           and active     automated service
                                   segments      products                     effectiveness,                               infrastructure          reputation     offering


                                                                                                                                Source: client project, June 2001

Tricks and     During interviews, make sure you push to the logical end of any line of
       tips    questioning, even if that involves asking hard questions. Not asking
               enough is worse than asking too much - provided you are polite and
               have a clear and well reasoned logic to your argument.

               Always be prepared to defend your assertions to the CEO.

     Contact   Vince Colvin

SWOT analysis

 Description     SWOT analysis is a tool for auditing an organisation within the
                 challenges of its environment.
                 SWOT is an acronym for Strengths, Weaknesses, Opportunities
                 and Threats. The tool is a simple aid for structuring thoughts
                 about a company and the environment in which it operates, and
                 helps answer questions, such as:
                   - what strengths does the firm have to build a strategy upon?
                   - which weaknesses preclude certain strategic moves?
                   - what are the primary opportunities the firm can pursue?
                   - which threats need most careful management?
                 Any good strategy for a company should capture the best growth
                 opportunities, mitigate against the most significant threats,
                 leverage the company’s strengths, and act to decrease or avoid
                 their weaknesses.

    Typical      SWOT analysis is typically used to generate a list of factors
 application     affecting a company’s position within a market or industry. It is a
                 simple framework to guide more detailed formal analysis.
                 It is best performed towards the beginning of a project but may
                 also be useful in client interviews or workshops by letting the
                 participants brainstorm and prioritise within each category. The
                 key issues identified by the SWOT analysis can feed into a
                 project’s research programme and contribute to a hypothesis tree

       Typical   Define the market the client company is competing in and list the
      process    key players in the market.
                 Gather exiting analyst reports, expert interviews, annual reports,
                 players analysis, strategic group analysis
                 Draw out what seems to be the most important themes in the
                 research you have gathered
                 Fit each item into the relevant section of the SWOT model and add
                 any additional conclusions you may have drawn
                 Try to be MECE. Issues cannot be both opportunities and threats or
                 strengths and weaknesses.
                 After completing your SWOT analysis, ask yourself these questions:
                    - How can the client leverage strengths to capitalise on the
                    - How can the threats identified be overcome?
                    - What does the client need to do to overcome its weaknesses?
                    - How will the client overcome the identified threats?

 Example                                             SWOT analysis of Chelsea FC, 2000
   output      Strength                                                 Weakness
               • Skill, knowledge/experience                            • Missing asset needed to compete
               • Organisational resource or                               Condition that places a firm at a
                 competitive capability                                   disadvantage
               • Market advantage                                       • Competitive liabilities or unproven
               • Competitive assets                                       abilities

                                 • Experienced players                 • Little development opportunities


                                 • Key real estate location              for the youth teams
                                 • “Cultured” football methods         • Old players more accident
                                   shared across the squad               prone
                                 • Midfield play                       • Low scoring
                                                                       • Inexperienced manager

                                 • Attract further key international   • Still backed by private investors

                                   names                               • MUFC and Arsenal keep getting

                                 • Umbrella branding                     bigger
                                   (internationally recognised         • Leeds, Liverpool, back in
                                   name)                                 contention for N° 3 spot

               Opportunity:                                             Threats:
               • External charactistics that                            • Factors that may undermine
                 provide potential competitive                            existing business model – HR,
                 advantage or growth                                      technology, new products,
                                                                          regulation, politics, demographics
               Source: Example

Tricks and     Brainstorm all possible risk factors before analysing each in more
       tips    detail. SWOT analysis can never be complete, apply the 80:20 rule
               in deciding where to stop
               A word of caution, SWOT analysis can be very subjective. Do not
               rely on it too much. Two people rarely come-up with the same final
               version of SWOT. So use it as guide and not a prescription. Adding
               and weighting criteria to each factor increase validity
               Think about the implications of your conclusions carefully: how can
               strengths be built into corporate strategy; how can weaknesses be
               avoided or minimised; how can opportunities be exploited; how can
               threats be prepared for?

     Contact   , Sam Barnett

Traffic light charts

  Description    Traffic light charts are simple mechanism for capturing and
                 displaying performance against a number of different criteria.

                 Frequently used alternative names for traffic light charts are
                 “Harvey ball charts” or Moon charts.

                 They consist of a grid, where performance against key criteria are
                 demonstrated as high/medium/low - displayed as colours (red,
                 green, yellow) or shaded as new/half/full moon images.

                 Overall performance is usually summarised across all criteria, but
                 other strategic conclusions can be drawn from the clustering of
     Typical     Traffic light charts are a very versatile tool, and can be useful
  application    wherever a rigorous comparison between market players has to be

                 They are often used to summarise business opportunities or
                 competitor behaviour.

       Typical   Do not begin to construct your traffic light chart until you are sure
      process    that you have agreement on the key criteria under assessment.
                 Also, be sure to define the criteria very clearly.

                 Next, set up a template for each criteria which captures the sub-
                 elements and commentary that will eventually lie behind each
                 colored circle.

                 Complete the templates “in detail” and make sure you have tracked
                 and logged all of your logic.

                 Summarise all thinking into the final traffic light chart.

                 Sanity check the answers coming out: is this sensible overall, not
                 just as a summation of individual elements.

                 Look at the shape, shading, and patterns that may lie in the chart.
                 Use these observations to draw strategic assessments.


                                                                        Financial strength
                                                                        Scale/distribution capacity

                                                                        Cross sales leverage
                                                                        Management capability

                                                                        Open platform progress
                                                                        Adoption of technology

     Davis Hawley, Vince Colvin, Sedef Imer
                                                                        Structured product capability
                                                                        Segment focus
                                                                        Service capability

                                                                        European wide intent
                                                                        European understanding
                                                                                                                                         European market entry - competitor review


                                                                                                        Strong   Average   Weak

                                              Source: UBS, March 2001
Value chain analysis

 Description     To understand the dynamics of an industry, it is helpful to analyse
                 the entire value chain and the positioning and strengths of
                 competitors within the same context.

                 The value chain analysis tool shows the level of market
                 concentration at each stage of the value chain, and the value
                 companies create within it.

                 A company may dominate its own market/segment of the industry
                 value chain but be in a relatively weak position because of players
                 further up or down the value chain.

     Typical     Value chain analysis assists understanding of an industry’s
  application    characteristics: the linkages between suppliers and customers, the
                 share of value generated at each stage in a value chain, as well
                 as the degree of vertical integration and the structures and level of
                 company concentration.

                 Value chain analysis also enables a greater understanding of
                 monopoly and/or monopsony conditions.

       Typical   Begin by identifying the key activities in the value chain. To do
                 this, isolate the end product you are examining, and list the “raw
                 materials” required to produce this. Then, simply record each of
                 the intermediate steps required to transform the raw materials into
                 the final product.

                 Determine the value added by each step of the chain. This can be
                 determined by taking the selling price, less retail margin, minus
                 the input price.

                 Determine costs and margins within each segment for each

                 After this, begin to identify the key players at each stage of the
                 chain. Group together the players that produce equivalent or
                 substitute products, and determine the concentration of
                 competitors at each step.

                 Finally, identify the relationships within or across stages of the
                 value chain. Analyse specific relationships among players and
                 assess the degree of vertical integration among players in the
                 various steps.

                                                 Completing this process in a structured manner gives you a clear
                                                 picture of:
                                                        - the linkages between suppliers and customers;
                                                        - where the value resides in the value chain;
                                                        - the degree of vertical integration in the industry;
                                                        - where threats of substitution may lie;
                                                        - where barriers to entry and exit are located; and
                                                        - the drivers of key costs and profit margins

 Example                        Concentration and vertical integration by value added of players in a value chain
                                                      Suppliers    Manu-                 Distrib-         Wholesalers            Retailers
                                                                   facturers             utors
                                                          Player   Player 10
                                                                                       Player 10
               % share of total value created

                                                            7                                                                    Player 12
                                                 80       Player                                           Player 11
                                                            6      Player 9            Player 9
                                                                   Player 8            Player 8                                  Player 11
                                                                                                           Player 10
                                                 40       Player
                                                            2      Player 7            Player 7
                                                                                                                                 Player 10
                                                 20       Player
                                                                                                           Player 7
                                                            1                          Player 5
                                                                   Player 6
                                                                                       Player 4
                                                                   Player 5                                                      Player 7
                                                      0             20                  40                   60             80               100
                                                                               % share of total value created in Industry

                                                                                                                            Source: Example

Tricks and                                      Analysis of share of value generated is very time consuming and
       tips                                     resource intensive. The tool should only be used where the market
                                                structure is such that it will yield insight. Typically, these will be
                                                industries with high degrees of vertical integration or where competition,
                                                or lack of it, in one segment of the value chain affects preceding or
                                                subsequent segments.


Value disciplines

  Description    The value discipline model helps you position competitors or
                 industries against one another according to three generic capabilities:
                 product leadership, operational excellence, and customer intimacy.

     Typical     Use the value disciplines chart to demonstrate key competive
  application    differentiators.

                 It is a tool designed to aid discussion and thought, whether internally
                 or with the client, rather than in final analysis or in presentations or
                 packs, and usually works better at a high level than in a data rich

       Typical   Begin by carefully defining the market or industry you are assessing
      process    and identifying the competitors.

                 Try to be open and imaginative about potential competitors: think
                 about companies that address the same audience, or require
                 consumers to act in a similar way (e.g. bars vs. gyms as places
                 where only a finite and competitive period of time can be spent).

                 Gather data on each of your competitors, in both qualitative and
                 quantitative forms.

                 Organize your information against the three predefined capabilities: if
                 your information is quantitative rank against each capability; if
                 qualitative, rank in discussion with your client.

                 Plot the resulting data on a chart in Excel according to the rankings
                 you have identified. You can do this using the Radar function in the
                 Chart menu.

                 Always remember that this is an indicative tool, not a proof of a right
                 answer. However, it can illustrate a point, or highlight a lack of focus
                 in certain areas.

 Example                       Value disciplines, Car industry, UK, 1999
                                           Product Leadership




                 Operational                                                     Customer
                 Excellence                                                      Intimacy

                                                                                  Source: Example

Tricks and     One major drawback of the value discipline diagram is that it implies
       tips    a counter-relationship between capabilities: if a company performs
               particularly well on one axis, it undermines the comparative
               performance on others due to the shape of the diagram. Be aware of
               this when you are discussing your results with your client.

               Make sure you think in advance about the scale you use - these
               should be relative and meaningful in application.

               Try to shade and annotate the chart to bring out your main


Weighted column chart

 Description     The weighted column chart is a bar chart in which the width of the
                 columns shows a second dimension. It helps display, for
                 example, competitor profitability and competitor share.

     Typical     The weighted column chart has many uses, the most common of
  application    which is to analyse the profit performance of competitors or book
                 value and value generated relative to their market share. If the
                 data is available, the chart can equally be used to examine:
                        - business units within a company; or
                        - departments within a particular business unit

       Typical   Begin by carefully defining the market you are looking at. List the
      process    competitors to be included in your assessment, and obtain data
                 reports for each.

                 The weighted column chart always takes the same format, and
                 there is an Excel-based tool to automate its creation. Create an
                 Excel table for last year’s sales and the profits for the last three
                 years, and plot the results on the chart. Place the share of market
                 along the horizontal axis and the return on sales on the vertical.

                 Annotate competitors carefully if there is incomplete and/or
                 misleading data. This might be due to:
                       - less than three years of financial figures;
                       - year of sales is not last year’s;
                       - data does not compare like with like; or
                       - figures include activities not directly related to the market
                         you are looking at

 Example                            Industry profitability, Industry X, 1995-98
   output             20%
               (last 3 15
                                                                           Industry average = 10.0%

                                  Comp 1           Comp 2            Etc

                             0         20        40          60            80         100%


                                            Share of market, by competitor
                                                                                Source: Example

Tricks and      Don’t forget to average over at least three years of data when
       tips     calculating ROS. If your data is incomplete, be aware of what is
                missing, but start plotting your information anyway. Partial data is better
                than nothing at all.

                Don’t be afraid to call the competitor directly - after getting clearance
                from the manager on your project - to gain an idea of the segment
                profitability, but remember client confidentiality issues at all times.

                Plot the weighted average industry profitability line based on the
                information you have, but indicate what total percentage of industry
                sales you have profitability data for.



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