December 7, 2011 § Leave a comment

By George Daniels

Numerous companies are now using or have been introduced to lean and/or six sigma concepts for improving performance. If you are not using them or are not familiar with them, then without a doubt you will be at a disadvantage to those that have.

There are now institutes and numerous resources available to assist in lean and six sigma programs, and the Plexius Group has a team of experts to as well. The first program implemented by our experts using both lean and six sigma was almost thirty years ago before it was even named.

However the critical issues not addressed by many of these resources is how to make these efforts a manageable and sustainable process, how to transition an improved process into a new innovative one, and finally how to insure the efforts are in sync with the business strategies and customers’ needs.

The following pictorial from The book “Staying Lean: Thriving, not just surviving” by S A Partners helps to visualize these points:

The  model suggests what in fact happens in most businesses. The experts, the consultants and the “six sigma belts” come in and tackle the cream off the top (above the water line).

As the manger you can’t help but be impressed with the results, feeling you got your monies worth.

If they have not left you with an organizational system of continuous improvement then the true bonanza will not be visible nor will it be worked on.

It is this effort that is the most valuable to your business today and every day after.

The objective is how to get below the water line. The Plexius Approach does just that and is only three steps:

1)       Alignment and Synchronizations of actions with Strategy

2)       A Management System that ties improvement efforts with business goals and customer needs

3)       A problem Solving Culture driven by the business goals and Customer needs

All improvement efforts must be aligned with your future direction and its needs in order to optimize their value. Our group is qualified through our unique “Life Cycle Methodology” to provide solutions to this issue. It is about the future product and service decisions relative to the market needs and technological trends. Thus the Plexius Group provides you with the critical business intelligence that allows you to create alignment with surety and minimize risk. The last thing you want is a major effort improving yesterday’s needs.

Next if you have numerous improvement projects going on, as the CEO you know how difficult and time consuming the management process is and how you are concerned that each project is focused, controllable and measurable to results. This becomes the second required element. The need for management reports that drive the improvement process. You cannot review all projects all the time in person. The reports we use today such as P&L’s, Balance sheets, Cash flow, project reviews and the like are insufficient at best.  A Management process that drives improvement, that ties improvement to business goals and that ties business goals  to customer and internal needs would be invaluable. It is invaluable and the Plexius Group will assist you in developing and implementing a proactive, improvement driven, results oriented management process. A simple Management Operating System (MOS) to drive your future.

The third step is to tie the MOS to the actions of each improvement team effort. This provides the structure for a continuous improvement culture, where each and every employee is bettering the performance of the company within their skills, measurable and verifiable. Not just the consultants and “belts”. The results are the water level recedes quicker allowing for new projects to be tackled and breakthroughs to occur.

If you are a Shingo Award or Baldrige Award recipient then this is probably not knew as the approach outlined above  is a prerequisite to being the Best and moving beyond just a Lean and Six Sigma project.

Answering the following questions is a good barometer and thought provoker.

  1. You do not know or are unsure of the number of improvement projects in your company.  True——   False——-
  2. The improvement projects are generally led by specialists.  True—–  False—–
  3. You have already done lean or six sigma.  True——  False——-
  4. Your cost reduction results per year are less than 5%.True—- False–
  5. The number of improvement projects is far less than the number of employees.   True—-  False—-
  6. Too often we seem to be fixing the same problem.  True—-  False—-
  7. Innovation is scarce or limited. True—  False—
  8. The number of improvement projects is limited by management’s time and the number of experts. True—  False —-
  9. You do not have a report that summarizes the improvement in business objectives and customer needs by project. True— False —

Every question answered “true” is an opportunity. If you would like more information or further the conversation please contact me at george@plexiusgroup.com.


“Organic Growth-A value Creation Engine”

July 13, 2011 § Leave a comment

By George Daniels

Creating an effective organic revenue generator within a business entity adds greatly to the value of the business whether it is in the multiples/evaluations for an acquisition target or the contributor to earnings per share. This has never been truer than now where we are coming out of a deep recession. During the recession much effort has been put into “rightsizing” and improving operational efficiencies, but at the same time many of the products and services have aged within their individual life cycles which were already becoming shorter. Thus, there is a greater need to replenish the pipe line with new products and services or expand into new markets in order to organically grow and increase the value of the entity. This is particularly true with private equity firms where holding times have extended to five to ten years on numerous acquisitions.

Effective “Organic Growth Engines” are not the everyday staple in business today, but those that have them do exceptionally well. Just look at one of the premier players today, Apple. It was just a little over a decade ago that they languished with flat revenues and stock price. Today their “organic growth engine” (new products and new markets) has propelled them to revenues and a stock price which have increased more than tenfold!

For those entities wanting to create value this is a model and strategy worth considering.

It is the famous Peter Drucker who may have said it best:

Because the purpose of business is to create a customer, the business enterprise has two—and only two—basic functions: marketing and innovation.”

“Marketing and innovation produce results; all the rest are costs…”

There are numerous CEO’s that turn around finanicially ailing entities, but it is the next steps in which CEO experience is in short supply.

Getting the house in order is tough, but it is more difficult to decide what you want to be (the new products and markets and customers) and then even harder to define and execute getting there. If it were easy all companies would be successful and have longevity.

After spending time studying “the successful” companies only to find many do not exist anymore, The Plexius Group studied hundreds of companies to find why they fail. In the failing companies the poor portfolio management and the related decisions and execution were primary reasons for failure. Also important were poor operations not just in their efficiency, but in their misalignment with the portfolio needs. It is not just about lean or six-sigma! It is critical that your resources, no matter how efficient, are aimed at the products and services that support today and will also define your future.

Self funded organic growth is the diamond in the rough for business success, value creation, and longevity.

The Plexius Group’s recommended approach begins with improving business effectiveness to generate cash. This enables and reduces the risks of the new product introduction and marketing which is the driver of the “Organic Growth Engine”.

We provide unique methods to improve your marketing and the release and management of innovation and then execution of the development process.

If your firm is looking to improve its “Organic Growth Engine”  begin the dialogue by contacting george@plexiusgroup.com .

The Arbitrage Impact of Lifecycle Analysis

April 1, 2011 § Leave a comment

By Doug Brockway and George Daniels

Buyers and sellers of assets agree on a price at the time of the transaction but each is hoping, expecting and planning that the actual value is better than the price paid.  To this end, accurately understanding the value of an asset is key to success in buying and selling.

Value calculations are based on historical performance as well as projected future revenues and profits.  Plexius uses lifecycle diagnosis and analysis to quickly and deeply inform on the accuracy of that view and whether, at the current price, it actually represents good value.

One way to illustrate the power of lifecycle analysis is to look at Apple, Inc.  Today, Apple is the second largest company in the world, when measured by market value, behind only Exxon/Mobil.  In 2000 Apple was a successful company, to be sure, but since then their success has been explosive.

What has occurred in the last decade is a multi-pronged relentless assault on both the corporate and the consumer markets.  Apple has not only introduced a series of products on a near-maniacally consistent pace of new products every year, but products seemingly aimed at one market spawn products in entirely different markets and then merge back together or feedback on each other with increasingly positive revenue.

The IPOD Case

The iPod family provides a telling illustration.  Introduced in October of 2003, over the next five years there were seven major releases of the iPod itself.[1] Each new product provided a combination of new features that drew existing and new customers back into the stores.  Memory would increase to handle more songs.  The user interface would change or the look of the device itself.  By the fifth release images and video were added and eventually the “standard” iPod was replaced by the iPod Touch which looks like and has all the features of an iPhone without the phone.  To date there have been two releases of the Touch.

In the 7 years of this analysis there have been 6 new products or branches on the iPod tree.  There were two versions of the iPod Mini, five of the iPod Nano, and three of the iPod Shuffle, all compact, stylish players.  There was an interim iPod Photo which added the ability to take and display pictures, subsumed into the standard iPod in release five.

The regularity of the releases is striking.  On average, across the family, there is a new release of a product every 1.2 years.  If you remove the iPod Shuffle, which averages 1.6 years/release from that analysis, Apple, in each branch of that family tree, adds a new release once a year.

Apple’s success includes many factors.  Two of them are deeply insightful understanding of markets and marketing combined with a product introduction juggernaut that both defines new markets and effectively cripples less nimble competitors.  Everything about Apple is organized around the ability to look beyond the current product and, while realizing the rewards of a successful current product actively designing, developing and delivering its replacement without waiting for the lifecycle curve to turn downwards towards commoditization.

– Plexius’ Reinforcing Innovation Model –

As a standalone product the iPod was successful.  It protected its revenue steam and expanded its market and dominated its market.  But, it was the iPod (and iTunes) piled on by the iPhone (and the App Store) then piled again with the iPad, that revolutionized Apples revenue growth in the 2007 to 2010 time window growing from $37 million to $65 million.  It is difficult to recall such a compounding of product and market innovation in so short a period.  How would you have valued Apple in 2005 if all you saw was historical performance without examining the development pipe line? The stock market price was from $30 and $70 during 2005.  Apple is now trading at $350 per share.

If you are thinking of buying a company that has a very successful line of products but for which there are relatively few replacement products in the pipeline ready to replace the current offerings at their peaks then the future cash flows of that company must be discounted.  However dominant the products are they will soon fall prey to commoditization and competitors.  The prices you are able to charge customers will go down, the marketing costs needed to maintain share and volume will go up and funds for reinvestment will be compressed.  Expect a squeeze.

Conversely, if you are thinking of selling a company that has a good set of products but each of them has replacement products in line and in the course of delivery ready to not only replace your installed base but that of your competitors you should hold out for a very good bid.  Expect a premium.

The information needed to reasonably estimate life-cycle positions for a company and its competitors offerings can be obtained through an examination of readily available data. The value of such insights to the buyer or the seller is priceless.   By having that information you are in a position to arbitrage, to your advantage, any acquisition or sale of an asset.  “To the [best informed] go the spoils.”

Doug Brockway and George Daniels are Principals with The Plexius Group

The Perfect Storm in Medical Devices

March 17, 2011 § 1 Comment

By George Daniels

Not long ago the medical devices industry was a darling of the investment community.  A wealth of medical innovation, rapid growth and profits were the attraction. Recently, the alignment and timing of numerous influences creates an ominous picture. With this post the Plexius Group intends to describe that picture and engage the discussion on possible solutions.

Our Industry research has uncovered a number of factors that combine to form an economic “Perfect Storm.”  First, there is a lack of profitability.  Putting the elite players aside, the majority of the mid range companies have not been profitable over the past few years and therefore cannot self-fund their development needs to stay competitive.

Second, this leads to shrinking investment dollars.  The investment community has almost totally retracted from the start ups in this space.  Recent discussions with investors and advisors show that now they look only for the end stage investments where revenues are imminent. The vast majority of investments made since 2000 are still waiting to realize return. The community is well aware of the external pressures from the FDA and the Patient Protection and Affordable Care Act (PPACA) that has injected near-term uncertainty into the industry’s economics and will almost certainly negatively impact the costs and profitability of this market. All of these things make finding cash less and less likely.

Thirdly, the governmental costs are rising in terms of actual regulatory costs and the uncertainty and variability in the interpretation and implementation of regulations[1].  The industry is well aware of the impact on the development process when the FDA’s 501K approval process is in change mode, resulting in longer times, moving demands and greater testing costs. The term “time is money” is very appropriate and approval is becoming far more costly due to the moving targets requirements.

Unless amended, the new health care law will add an excise tax on manufacturers and importers of certain medical devices in 2014, while capping payments for all Medicare and Medicaid services.

However laudable on a national basis the intent of the law to reduce medical costs means there is no room for the industry’s customers to pay a higher price for new products and pressures to reduce price and frequency of use (demand) of products already on the market.

Fourth, exit alternatives are few.  The two main avenues for investors to recover are either an IPO or a sale to another company. This market is not IPO attractive due to the uncertainties and the historical lack of profitability. Acquisition by one of the elite players in most cases has already been cherry picked, but there may still be some but not enough.

Fifth, on a product life-cycle basis the industry is out of sync.  Due to the governmental factors the industry market is having major discontinuities. It is uncertain that new technology products will replace the older ones due to cost pressures. It is uncertain that even better technologies will be adopted for the same reason.  The strategy of technology and growth leaves numerous products in the market that are in their mature product phase and yet have not produced returns. Thus they are unable to support funding their replacement.

These factors combine to form a “Perfect Storm” for any industry or business.  Although all jobs and all industries are important Plexius believes the US can more easily afford to lose, say, the hot-dog industry than medical devices.  It is too important to the health and welfare of our citizens and too crucial to maintaining a vibrant participation in the scientific and technical industries that dominate future economic success.

The way to survive this storm is not to follow the movie and press on with the course already set but to think and act differently.  While awaiting for help from the market and regulators medical devices companies need to find ways to make money now. The three areas that need innovation and reinvention now are:

1.   Go to market more effectively and for far less cost

2.   Develop products that do more, cost less and cost less to develop and how to more effectively manage the FDA approval process

3.   Make current products profitable now and new ones profitable at the get go

Plexius would like to hear from readers about this industry diagnosis.  We have some ideas on how to better go to market, develop new products, and increase the profitability of existing products.  Let’s not lose one of the great industries created in the USA again.

If you have ideas or comments, please share them.

If you want to discuss it directly e-mail me at george@plexiusgroup.com.

[1] At a recent seminar it was shown that FDA analysts require different tests on proposed devices when shown the same application and often over-rule approved test plans if the supervising FDA analyst who made the initial approval moves on and is replaced.

Life Cycle Perspectives on Managing Capital Expenditures

September 24, 2010 § Leave a comment

By George Daniels and Doug Brockway

The key questions of need and by when are central to the allocation of capital dollars.  Does the business in fact need this resource?  Is there an alternative or better way to get to the needed result in the time window required?

A perfectly tuned business will spend money on resources and capabilities when in the right amount and at the right time.  They will not have capital, people, plants, facilities, or technology idle in anticipation of a new business not yet launched.

All too often expenditure requests are poorly or incorrectly defined or timed.  Need as a core and critical element of analysis is too easily dismissed by many as non-essential.  Timing is frequently “yesterday” – in reality, too early or too late. Even when evaluating legitimate or reasonable expenditures, no business continuously fires on all cylinders – sequence and timing are rarely perfect.   Good management must continuously tune their decision making processes.

Life cycle analysis and methodology is most powerful when evaluating the timing of capital expenditures.  Products and services each have their own interconnected market life cycles and must be managed as such. As a given market matures, the next market ramps up, with its own four life cycle stages, and well running businesses are ready to participate.  The chart below illustrates this process.

During the Embryonic phase, the business makes preparatory investments.  These involve getting the production processes defined, establishing the skills and resources needed for support, testing marketing and sales value propositions, offers and approaches.

In the Growth phase, the business is aggressively garnering market share.  As this phase matures, life cycle savvy companies begin preparing their next offering.

The Mature phase requires a different management style to closely manage and nurture incremental opportunities through improved cost structures and revenue optimization.  Organizations must be careful not to miss significant late revenue opportunities (e.g. plastic handcuffs) but must avoid long term capital expenditures in a failing market (e.g. non-HDTV).

During the final (Obsolete), phase existing customers are appreciated, but encouraged to move to the new offering.  At this point, a decision to exit is often made and no additional expenditures committed to marketing or sales efforts.

A properly managed life cycle methodology generates maximum profitability. Yet, profitability can be less than optimal if a product is brought to market too early or too late.  Too early creates idle resources, unrecoverable costs as well as lost opportunity cost due to the underutilized resources.  Offerings brought to market too late show phantom initial cash savings early because investments were made when as margins were declining and the product was becoming a commodity.

As the business tries to play market catch up, the same investments are made late and often at a premium and with inefficiency.  Those who dominate market share garnered it during the late Embryonic or early Growth phases.  Consequently, late comers have fewer pickings as the really profitable customers are no longer available.  The remaining customers bring in much needed revenue, but at a cost, with depressed profitability.

What Management Should Do

The fundamental requirement is to establish a life cycle baseline by product/service offering.  This includes evaluating external life cycles: the market, competitive offerings, regulatory changes, and the underlying technologies driving the market.  With this picture, management has a framework to determine if internal resources, expenditures, processes, infrastructure and products/services are in alignment with the needs and timing of the markets.

In terms of Capital Expenditures, the required timing of new products and services adds critical information to the approval and allocation decision process.  This incremental, yet valuable, information is used to determine the ‘right’ programs to generate long-term, sustained success.

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· Capital spent too early[1]

Idle resources

[1] Assumes no early production build

Revenue Enhancement Through Life-cycle Analysis

September 15, 2010 § Leave a comment

by George Daniels

Much of what passes for revenue projections amounts to steering a boat by looking at the wake.  Managers examine past sales and transactions and using that as a basis project that the future sales will increase by a fixed, usually quite achievable, percentage rate.  Their goal is to project growth without promising the world.  If the future is reasonably like the past, which in the short term it can be, this can suffice.  However, for managers with a world view that extends beyond the current bonus cycle this approach guarantees projections that cannot be achieved and which entail or require the use of resources for the wrong challenges in the wrong markets at the wrong time.

Managers who are “in it for the short and the long haul” make projections in alignment with the natural market life-cycle phases; from initiation, through growth, to obsolescence.  They evaluate each product or market’s specific prospects for growth or decline based on both internal and external measures of market, product, and technology life-cycle positions.  These companies enhance the profitability and the market share by aligning the product cycle with the most probable customers relative to their buying profile.

Are they early adopters of new technology or not? Early adopters are focused on technology more than price i.e. more probable to buy and at higher prices (higher margins). Maintaining this group while capturing the later stage adopters maximizes your market share opportunity. You never get early adopters later.  They’re already looking for the products and services in the cycle that comes next.

By properly managing through a life-cycle analysis companies are less likely to be early or late to that upcoming market. They can optimize the revenue stream and forecasting by projecting smaller volumes of high margin product early and properly projecting and leveraging the change to high volumes and lower margins.

Over time products tend to be commoditized (reduced price). Understanding and predicting the timing of this transition is critical. It tells you when your costs must have been reduced to maintain margin (dollars are reduced in revenue and profit). It tells you the timing of price impact on your revenue forecasting. This transition point is critical to your investment and resource allocation decisions when comparing the position within the life cycle. By knowing internal and external cycles and their individual Growth/Maturity Transitions, companies make wiser and more economically sound and less risky decisions on were to invest monies and precious resources.

The net result is an improvement in knowledge, decisions and forecasting/budgeting. It enables companies to organically grow by synchronizing the current product with at least two future, properly timed introductions.  For want of a better term this enables out-negotiating or out-arbitraging the competition and improves the profitability and market share of products over their lives.  It’s a practical solution that generates lasting results.

The Power of Life-cycle Analysis

August 31, 2010 § Leave a comment

The most commonly known “life-cycle” in the business world is the Product life-cycle.  For most managers where their products stand in their individual life-cycles is a day-to-day concern.  This is true whether management formally and consciously measures the positions or if they manage based on the collective sense of management.  One reason the Product life-cycle is a focus is that it is something that managers directly control and are directly responsible for.

Although the products are for customers, the elements of the Product life-cycle are driven by external life-cycles.  Management should look to:

  • demographic life-cycles to determine future needs and demands,
  • technology life-cycles of your customer and at least theirs to predict changes,
  • marketing life-cycles to know your own position within them

The list goes on.  Understanding the relevant life-cycles that influence your business will help your business by reducing your risks and improving your probability of success.  It is in managing the Product life-cycle to adapt to the demands of external life-cycles that management achieves repeatable success.

For example, one decade’s old and, by all measures (longevity, profit, cash and returns), prosperous business was developing a growth strategy. Its focus was to develop an added line of business.  While evaluating their current Product life-cycles and comparing them to the Market and Technology life-cycles of the markets served, reds flags arose. The company’s objective of a new product line had value but would take time they didn’t have.  They estimated that two years remained before new requirements entered the market.  They were not ready.

This Market Life-cycle Analysis, adjusted for technology change, made it abundantly clear that if the company did not move faster than planned their revenues would decline substantially over the plan years.  Their prior best time-to-market was six years.  It appeared that an acquisition was needed if they were to grow.

Instead, with the clarity of life-cycle misalignment measures to guide them, the company introduced to the market a leapfrog product in slightly over two years.  The key changes were:

  1. Recognizing the pending revenue decline due to a shortened product life-cycle
  2. Acknowledging the need to define, develop and introduce a new product in two years to meet new market technologies
  3. The decision to accomplish growth through acquisition
  4. A Need for simultaneous efforts (new product & acquisition)
  5. Need for a reconciled Marketing and Product specification
  6. Need for a new product development process

Through this program the company captured the market in a very short time and it became the dominant revenue source, saving the business. The simultaneous effort landed and integrated an acquisition providing a platform for growth.

A confident business so close to the edge did not become a turn-around or failure, but added years to its prosperity and longevity.  Being late to changing markets is an un-necessary business failure, but a common one. Life-cycle management practices at a minimum reduce this risk if not eliminating it.

To find out more contact George Daniels at george@plexiusgroup.com or at (603) 772-5135

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