“The Secret of Success is to be ready for opportunity when it comes”
-Benjamin Disraeli[1]
I am not very handy with tools, but I appreciate how much the right tool can improve my life. This morning I was watching a house flipping show on HGTV and I noticed how many different tools they used to perform different tasks.
Tools help us leverage the environment in order to enlarge our natural powers. If you want to drive a one-inch nail into a piece of wood, it is unlikely that you could drive the nail with your hand. But, if you select the right tool, you can accomplish the task easily.
Hammers are different from saws and screwdrivers because each type of tool serves a different purpose. But even within the hammer category, there are multiple types of hammers. Framing hammers are longer and heavier than other hammers—22 to 28 ounce hammers. They are used to drive big nails. Very often they have a waffle-head to keep the head from slipping off the nail. In contrast, you might choose a standard 16-ounce hammer. Or, if you are working on a special project, you might choose a mallet, a slaters hammer, a shinglers hammer, a ballpeen hammer, a brickers hammer, an engineers hammer, a blacksmiths hammer, or a sledgehammer for large demolition projects.[2] Though each hammer is used for a specific purpose, they all operate in a similar way.
The hammer becomes an extension of the arm. The weight of the hammer is focused in the head. Because force = mass times acceleration, the hammer is more effective than a holding a blunt object like a rock over the nail. Contractors will tell you not to muscle the hammer but use proper technique. This is because proper technique creates momentum that transfers energy from the head of the hammer to the nail that overcomes the friction of the wood. An 1869 textbook on Physics explained the process succinctly:
A hammer, club, pile-driver, sling, fly-wheel, etc., are instruments for accumulating energy to be used at the proper moment. Thus we may press a hammer on the head of a nail with all our strength to no purpose; but swing the hammer the length of the arm, and the blow will bury the nail to the head. The strength of our muscles and the attraction of gravity during the fall both gather force to be exerted at the instant of contact.[3]
Why all this talk about tools? In the same way that a contractor chooses the appropriate tools for his task, you must familiarize yourself with tools that will help you succeed in business. Here we will deal with a few essential tools and techniques for strategic planning.
Up to this point, we’ve discussed the major elements of strategic planning. You must get the big picture before you can use other tools that enhance the process. It’s hard to overemphasize the necessity of rigorously reviewing Porter’s five forces. You learned to conduct a SWOT analysis and you have thought through the connection between your mission and organizational alignment. In this lesson, I want to introduce you to a few tools that will help you act more strategically.
Allow me to offer an important caveat. These are not all of the tools for strategic planning, but they are some of the more common tools that you might encounter in business school. They include tools that help you with strategic positioning such as identifying critical success factors, benchmarking, constructing competitive strength assessments, strategic group maps, and the BCG Matrix.
Critical Success Factors and Key Performance Indicators
First, you will need to understand the most important elements of your company’s success. These are called critical success factors (CSFs) or key success factors (KSFs). These are essentially the same thing. The Business Dictionary defines CSFs as a:
Limited number (usually between 3 to 8) of characteristics, conditions, or variables that have a direct and serious impact on the effectiveness, efficiency, and viability of an organization, program, or project. Activities associated with CSF must be performed at the highest possible level of excellence to achieve the intended overall objectives. Also called key success factors (KSF) or key result areas (KRA).[4]
In Basketball on Paper, the statistician Dean Oliver identified the critical success factors in the game of basketball. While it is obvious that a basketball team wins a game by scoring more points than the opponent, some factors weigh more heavily than others. When Oliver set out to research how basketball teams win games, he identified the four CSFs:
- Shooting (40%)
- Turnovers (25%)
- Rebounding (20%)
- Free Throws (15%)
The percentage behind each factor is the relative weight in its importance to winning the game. Knowing this, a team has a tool by which it can measure its progress. It can use these percentages to see where they might need improvement.[5] This is the basketball version of what Billy Beane and his statistician, Paul DePodesta did for the Oakland A’s in Michael Lewis’s book Moneyball. DePodesta found that the critical success factors in baseball are the players’ on base percentages and slugging averages (total bases per bat).[6] Everything else was secondary.
Some critics have argued that Michael Lewis’s analysis of these critical success factors was incorrect, because, “The team thrived primarily because of superb pitching. During its turn of post-season appearances, the A’s were second to third in the league in fewest runs allowed.”[7] From one perspective, the critics are right. Yet, from another perspective, they only reinforce DePodesta’s point. If on base percentages and slugging averages are CSFs to win, certainly denying these to the other team is just as important.
Each sport has CSFs. Your business does too. The first step toward strategic success is identifying these factors.
Benchmarking
Benchmarking is a common practice and one of the earlier steps in business strategy. Bill Hewlett, co-founder of Hewlett Packard said, “You cannot manage what you cannot measure…and what gets measured gets done.” To measure, you need a standard by which to judge your performance. Are you doing as well as your peers or worse? On which CSFs are you doing so?
According to Drucker, “Benchmarking assumes correctly that what one organization does, any other organization can do as well. And it assumes, also correctly, that being at least as good as the leader is a prerequisite to being competitive.”[8]
Benchmarking also has its critics. Tom Peters, for example, Coauthor of In Search of Excellence and author of dozens of other books said the following in a live seminar:
It’s not the main topic of my speech, but I hate benchmarking. Benchmarking is stupid. Why is it stupid? Because we pick the current industry leader and then we launch a five-year program, the goal of which is to be as good as whoever was the best five years ago five years from now.[9]
Peters went on to quote Seth Godin who wrote, “You can not be remarkable by following someone else who is remarkable.”[10] Peters and Godin are both right, of course, but I would add that if the concept of benchmarking is new to you—if you have never before benchmarked your business against your industry, you need to do this first to get your bearings. Once you have a firm grasp of your own position, take their advice and blaze your own trail. You will never be great by offering your customers a “me-too” product, but you will never have the chance to be great if you don’t know what success looks like.
If you know your critical success factors, you know what you want to benchmark. Next you need to identify your competitors. What do you need to know about your competitors in order to compete effectively? What are the industry norms for these CSFs? You may or may not be able to obtain all of the information, but every bit that you do moves you closer to being able to make the kinds of sound decisions you will need to position yourself for success.
Competitive Strength Assessment
A competitive strength assessment will allow you to compare your company or product against the competitors using the critical success factors that you have identified. Let’s say we have identified quality, reputation, cost of materials, technological skill, manufacturing ability, marketing & distribution, financial strength, relevant cost position, ability to compete on price, and customer service capability as your key success factors.[11] These are common factors, but you are not limited to these factors. Dozens of legitimate factors exist and it is possible that dozens more are applicable your specific industry.[12]
Once you have your list, weight each factor based on relative importance. Using the scheme, .20 = 20% and .05 = 5%. The total of each weight should add up to 1.0. In the example below, let’s assume that quality and reputation are incredibly important to your company as they are with Apple products.
| Critical Success Factors (CSFs) | Weight | You | Competitor A | Competitor B | Competitor C | Competitor D | Competitor E |
| Quality | 0.25 | 9 | 8 | 5 | 7 | 4 | 5 |
| Reputation | 0.20 | 8 | 6 | 7 | 6 | 3 | 6 |
| Cost of materials | 0.05 | 5 | 9 | 3 | 5 | 8 | 6 |
| Technological skills | 0.10 | 8 | 2 | 9 | 8 | 5 | 7 |
| Manufacturing ability | 0.10 | 8 | 7 | 9 | 6 | 7 | 6 |
| Marketing & distribution | 0.05 | 7 | 6 | 6 | 9 | 9 | 10 |
| Financial strength | 0.05 | 3 | 8 | 4 | 4 | 9 | 7 |
| Relevant cost position | 0.05 | 6 | 8 | 10 | 5 | 9 | 9 |
| Ability to compete on price | 0.05 | 1 | 4 | 9 | 8 | 8 | 10 |
| Customer service capability | 0.10 | 8 | 7 | 4 | 2 | 6 | 4 |
| Unweighted average: | 63 | 65 | 66 | 60 | 68 | 70 | |
| Weighted average: | 1.00 | 7.4 | 6.6 | 6.5 | 6.1 | 5.6 | 6.3 |
First rate your company on each CSF. Then rate your important competitors. This will give you a sense of where you stand relative to others. Be sure to weight the factors as described above. In our example, an unweighted average would lead you to think that you are behind most of your competitors with a 63 in a competitive range of 62 to 70. However, a careful review will show you that you are excelling in the most important variables and a weighted average tells a different story. You actualy lead the field with a 7.4 in a range between 5.6 to 7.4.
You must be careful because the subjectivity involved in picking the CSFs and in ranking the competition is open to manipulation. Even if you are doing this for you own benefit and not to impress a boss, you must guard against your own biases. Nevertheless, a competitive strengths assessment may be a valuable tool to help you see the data in a new light.
Strategic Group Maps
Strategic planners use strategic group maps to visually depict competitors across different variables. For example, they may use price and quality on one axis and geographic locations on another. In the scenario below, we will examine the retail grocery business in one major city. The strategic group map will visually tell a story.
What is the story that the strategic group map told? Study the map. Then, as you read the descriptions below, see how much you knew about the competitors before you read about them. You might be surprised how much you can gather from the diagram.
Snob’s Limited: This high-end grocery caters to the consumer who is trying to impress his peers with his purchase. There’s only one location. It’s downtown, walking distance from where all the rich people live and work.
Organic Foods, Inc.: This is a chain of high-end, organic foods. With multiple stores in the aspiring suburbs, consumers can overpay for ethically sourced, certified organic alternatives to the regular grocery store.
Mom and Pop’s Grocery: Mom-and-pop have run this small grocery since nineteen sixty-two. All their customers know that they are overpriced compared to the chains, but their customers are loyal for historical reasons.
Alimentos Deliciosos Hispanos: “Delicious Hispanic Foods,” is up and coming. With the recent demographic shifts, the specialty Hispanic market has had to open two new locations. The stores are small, but business is booming. While they are overpriced compared to the major grocery chains, they continue to grow because they carry goods that speak to the pallet of international customers. The major grocery chains do not stock the specialty goods that are staples in other countries.
Major Grocery Chains: The major grocery chains have been in existence for years. Until Big Box Stuff-Mart moved in, they were the key players in the industry. Over time, however, Big Box Stuff-Mart added a grocery component, leveraging its retail prowess and grabbing market share. Major grocery chains can’t quite compete with Big Box Stuff-Mart on price and they are now losing ground on locations too.
Big Box Stuff-Mart: After perfecting retail and value discounting, Big Box Stuff-Mart has aggressively entered the grocery business by adding onto existing stores and creating smaller grocery stores. They offer the lowest prices and they are aggressively adding more locations.
Did you gather a good deal of that of that from the strategic group map? Look at the map again. Do you see it now? Strategic group maps tell a story and if you listen, that story can provide a great deal of strategic insight.
When thinking about creating a strategic group map, you will want to consider a few additional guidelines:
- The variables you select are important. They should not have any direct relationship to one another and you can use any variables you consider relevant.
- Variables should be simple to categorize.
- You can use the bubbles on the map to indicate relative size of a feature.
- There is no best It all depends on the information you seek to compare.[13]
BCG Matrix
The Boston Consulting Group Matrix tells an entirely different story. It is alternately known as the BCG matrix, the growth-share matrix, or the product portfolio matrix. According to The Economist magazine, it was designed by Bruce Doolin Henderson, who set up the Boston Consulting Group in 1963.
Henderson’s contribution was creating a visual depiction of a portfolio of businesses to help the company’s leaders determine where to place resources. “The categories were all given memorable names—cash cow, star, dog and question mark—which helped to push them into the collective consciousness of managers all over the world.”[14]
Cash cows are solid businesses in a mature market. The market share is high, but the growth rate is low. This is a good business to hold on to.
Stars are also solid businesses. They have a high market share and they are experiencing high growth.
Dogs are the worst. They have low market share and they will likely experience a low growth rate, often because their part of a mature industry. Where stars and cash cows increase the bottom line, dogs tend to drain the bottom line.
Question Marks currently have low market share but they may experience high-growth. They may become stars or they may become dogs. It’s too soon to tell.
If you know where the businesses stand, you can drop the dogs and use the extra cash from the cash cows to help the stars and question marks.
Let me offer a practical example. Disney owns the Disney Channel, but it also owns ABC, ESPN and Freeform (formerly ABC Family). It owns nearly a dozen parks and movie studios including Walt Disney Animation Studios, Pixar, Marvel, touchstone Pictures, and Lucasfilm. Now, imagine you are in charge of a large conglomerate like Disney that has multiple businesses in different industries. How do you determine which businesses to support and which to sell off? The BCG Matrix may be the right tool for the job.
Last year at Disney, “Media networks — the segment that includes ESPN, ABC, Disney Channel, and more — accounted for a whopping $23.3 billion, or 44% of Disney’s $52.5 billion in revenue for the fiscal year.”[15] The theme parks did even better. The consumer products division (think licensing and merchandising) only accounted for 4.5 billion of Disney’s revenue, but its operating profit rose nearly 30% last year on the backs of Star Wars and the Avengers.[16] Disney’s interactive division, “was the only business segment to not grow its revenue in fiscal 2015. Gains in Disney Infinity sales with the release of Disney Infinity 3.0 were more than offset by a decline in its mobile business.”[17]
If you were Disney’s CEO, how would you place Disney’s companies on the BCG Matrix? Before you answer, let me add one more bit of information. While media networks accounted for 44% of Disney’s revenue, operating margins were only 6%, and the cable television environment seems to be in trouble as new innovations provide options for those looking for alternatives to cable.[18]
If you can plot Disney’s business segments on the matrix, you can do it with your own business. After all, the purpose of the instrument is to help you focus on the efficient use of your resources.
If you sell a half dozen core products, it’s almost certain that you have a combination of cash cows, stars, dogs, and question marks. The matrix will help you prioritize the products in your small business just as it would help Disney CEO, Bob Iger, prioritize entire businesses.
In fact, all the tools described in this lesson are useful at any level. You just need to select the right tool for the right job.
Actionable items:
What element of strategic planning do you need to focus on?
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What are your critical success factors (CSFs)?
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Construct a strategic group map of the businesses with which you compete?
End Notes
[1] The concepts and techniques of strategic management. (p. 86).
[2] How to choose and use a hammer – This Old House (2014). This Old House [Video] Retrieved from https://www.youtube.com/watch?v=3QBYNh-JVxg
[3] Steele, J. D. (1869). Fourteen weeks in Physics. New York: A. S. Barnes & Co. (p. 78).
[4] Critical success factors. (n. d.). Business Dictionary. Retrieved from http://www.businessdictionary.com/definition/critical-success-factors-CSF.html
[5] Four Factors (n.d.). Basketball reference. Retrieved from http://www.basketball-reference.com/about/factors.html
[6] Lewis, M. (2003). Moneyball: The art of winning an unfair game. New York: W.W. Norton.
[7] Hirsch & Hirsch, as cited in Bara, A. (2011). The many problems with ‘Moneyball.’ The Atlantic. Retrieved from http://www.theatlantic.com/entertainment/archive/2011/09/the-many-problems-with-moneyball/245769/
[8] Drucker, P. F. (2006). Classic Drucker: Essential wisdom of Peter Drucker from the pages of Harvard Business Review. Boston: Harvard Business Review Book. (p. 107).
[9] Peters, T. (2013). Reimagine Business Excellence in a Disruptive Age Better Life Media. Retrieved from https://www.youtube.com/watch?v=NWO2mjp5Hsg
[10] Godin as cited in Peters, T. (2013). Reimagine Business Excellence in a Disruptive Age Better Life Media. Retrieved from https://www.youtube.com/watch?v=NWO2mjp5Hsg
[11] These success factors were borrowed directly from The concepts and techniques of strategic management. (p. 96).
[12] For a large list of possible options, see: Jurevicius, O. (2013, Oct 29). Competitive Profile Matrix (CPM). Strategic Management Insight.Retrieved from https://www.strategicmanagementinsight.com/tools/competitive-profile-matrix-cpm.html
[13] Strategic group mapping. (2010). MBA-Lectures.com. Retrieved from http://mba-lectures.com/management/strategic-management/1000/strategic-group-mapping.html
[14] Growth share matrix. (2009, Sept 11). The Economist. Retrieved from http://www.economist.com/node/14299055 (para. 1).
[15] Munarriz, R. (2015, Dec 10). The Walt Disney Company’s best business segment in 2015. The Motley Fool. Retrieved from http://www.fool.com/investing/general/2015/12/10/the-walt-disney-companys-best-business-segment-in.aspx
[16] Munarriz, R. (2015, Dec 10). The Walt Disney Company’s best business segment in 2015. The Motley Fool. Retrieved from http://www.fool.com/investing/general/2015/12/10/the-walt-disney-companys-best-business-segment-in.aspx
[17] Munarriz, R. (2015, Dec 15). The Walt Disney Company’s worst business segment in 2015. The Motley Fool. Retrieved from http://www.fool.com/investing/general/2015/12/15/the-walt-disney-companys-worst-business-segment-in.aspx
[18] Munarriz, R. (2015, Dec 15). The Walt Disney Company’s worst business segment in 2015. The Motley Fool. Retrieved from http://www.fool.com/investing/general/2015/12/15/the-walt-disney-companys-worst-business-segment-in.aspx