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 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.

Taking Care in Pricing Care

January 17, 2011 § 5 Comments

Pricing is a difficult skill at any time and in any market.  Determining how much of costs to recover, by offering or by service, within the limits of market demand requires a comprehensive understanding of a myriad of factors and forces including; market dynamics, competitive drivers, internal direct and indirect actual costs, the appropriate allocation of indirect costs, and calculations regarding gross sales projections.

If you’re running a hospital in today’s newly regulated, capital intensive and competitive environment proper pricing can make the difference between success and failure.  The new health care regimen requires that health insurers reimburse reasonably for services rendered.  They cannot allow some hospitals to demand high prices for standard services while others are receiving a lower price.  From a reimburser’s perspective all prices must be “efficient.”

Currently hospitals are quoting quite different prices for the same or similar services, a practice that cannot survive.  A recent investigation in the Massachusetts market by the Boston Business Journal uncovered wide ranges in prices for CT Scans, Weight Loss Surgery, Angioplasty and C-Sections.

Source:  Boston Business Journal, Dec. 3-9, 2010

As seen, pricing varies widely in these local hospitals.  There is a 100% variance in CT Scans[1].  Leaving out the CT-Scan as an outlier, the most expensive option for a service tends to be 40% more costly on average than its lowest priced competitor.  This leads price conscious insurance companies to make choices.  In one case a local care group, Partners HealthCare, is being written out of certain insurer programs due to pricing levels.

One key requirement for pricing success is branding selection and clarity.  For example, some time back a well known large Boston hospital looked into defining its brand.  As the story goes they were inconsistent in how they wanted to be perceived by their customers.  It should be obvious that the operational needs of, say, psychiatry are more about communication and social skills while that of heart surgery are more weighted toward technical surgical and procedural skills.  It is difficult at best to be good at one thing but impossible to excel at everything.  In our example the skills and market reputation favored technical offerings but their pricing favored social skills and the result was that the beds were full but not with patients requiring the offerings at which they excelled.  This negatively affected their costs, effectiveness and severely impacted profitability.  This hospital has since re-focused on its brand clarity, priced its services to attract patients that match its skills, and seen strong success as a result.

Pricing discrepancies like those shown above are often the result of utilizing a limited ‘cost plus’ pricing model that does not give full consideration to:

  • Your true cost of service
  • The purpose of the service relative to your Brand and its archetype strategy
  • The competitive environment
  • Patient alternatives
  • The perceived value of your services
  • Aligned product/service portfolio profit models

For example, hospitals might consider if their CT Scan service is supportive of heart surgery, is a standalone product, or is supportive of a radiology service strategy?  Each alternative necessarily supports different cost structures, pricing and purpose strategies which cannot be intertwined without potentially unfavorable consequences.

The Plexius Group does not propose pricing strategy as a cure all but we do believe there are opportunities to fundamentally improve business prospects by aligning skills, branding, market clarity and pricing.  Hospitals should examine how to best position and price their services to compete effectively and profitably in the local market.

George Daniels, Randy Atkin and Doug Brockway contributed to this post.  Their contact information can be found at http://www.plexiusgroup.com/contact_us.html.

[1] We know of a New Hampshire hospital asking $2,500 for a CT Scan

Kick the Can is a Dangerous Game

October 18, 2010 § 1 Comment

by Doug Brockway

Whether you’re working on day-to-day operational efficiency and effectiveness, or the long-term value of the products and services in your portfolio, it is almost never advisable to put off a decision about a difficult problem.  There are situations when either the resources or the time to deal with a problem are not immediately available.  And, you can’t profitably fight all battles at all times from all comers.  You must choose when and where to take your shots.  But, the continuously festering US mortgage crises are an example of what happens when people leave a mess for others to clean up.

As of this writing in October 2010 the rate of foreclosures on mortgage in the US is now one in every 21 mortgages.  Just two years ago it was one in every 100 mortgages:

Similarly, the number of mortgages that are past due has skyrocketed as the combination of variable interest rate jumps in an economy that stubbornly fails to create sufficient new jobs for the people ready, willing and able to work:

Like the proverbial frog in the incrementally heating pot of water, you can imagine the managers and executives on Wall Street, in the mortgage banks,  the public policy makers, even individual homeowners, incrementally “loosening the screws” on underwriting and documentation, telling themselves that it will be OK.  You can imagine regulators convincing themselves that the business is solid.  Rating agencies basking in credit for analysis “well done.”  As Citi’s former CEO Charles Prince said during the height of the sub-prime boom, “”As long as the music is playing, you’ve got to get up and dance.”

Throughout the mortgage value chain, from borrowers and brokers through to bankers and investors we were not actually examining the value, import, and risk of our business bets.  As the foreclosure snafu makes clear, we were busily assuming we had everything under control and not actually checking.  Attending mortgage industry conferences in the 2000’s the mood increasingly went from hopeful to aggressive to an outward euphoria.  But if you asked people how all that credit and all those loans would work out you could tell that they didn’t know and they also didn’t want to, couldn’t personally afford to be the one to start asking around.

Don’t kick the can down the road.  If you have a product that is growing year-over-year but you’ve put off decisions to fundamentally improve it “until you have to” then you’re too late already.  If you have managers and sales people who create revenue just by the uplift of “market action” then you had better be actively preparing for a change in the market that deflates revenues (but likely leaves egos intact).  If you detect a chink in your armor but things are good, fix it.  Either the market or your competitors won’t be forgiving.

Life cycle View on Shareholder Value

October 10, 2010 § Leave a comment

by Randall Atkin

The concept of shareholder value enhancement, also known as value based management, has the objective of assisting management in considering the interests of shareholders, typically their financial enrichment through earnings power and cash flow optimization. As shareholder value is difficult to influence directly by any one manager, it is usually broken down into components of so called value drivers. A widely used model comprises seven drivers of shareholder value[1], giving some guidance to managers: Revenue, Operating Margin, Cash Tax Rate, Incremental Capital Expenditure, Investment in Working Capital, Cost of Capital, Competitive Advantage Period.

Based on these seven components, all functions of a business can plan and demonstrate how they influence shareholder value. A prominent tool for any department or function to prove its value are so called shareholder value maps that link their activities to one or several of these seven components.  However, organizations that possess a singular focus on shareholder value are not without their critics. What can inadvertently be neglected are social issues like employment, environmental sustainability, or ethical business practices. These aspects of corporate accountability are typically referred to as stakeholder values, and will be the subject of a separate discussion by our organization.

“Time-Based Value Management”

Plexius’ principle of time-based value management (TBVM) comprehensively deals with the issues of shareholder enrichment, management accountability and the dimension of time.

It can be defined as the analysis of external, or non-controllable, and internal, or manageable business cycle components (e.g., product, technology, regulatory, etc.) and the proper alignment of management processes and decisions to the activities that form a company’s strategy and execution plans. Interrelated to the cycle analyses are the elements of people (skills, knowledge, accountability, etc.), process (design, efficiency, cost, etc.) and technology (leverage, investment, alignment).  Combined, these assessments drive decisions regarding the key dimensions of competitive design that a company embraces.  These inputs are all used in suggesting a properly balanced portfolio of products, development initiatives, operational processes and investment plans that will optimize shareholder value interests.

What Management Should Do

Begin by measuring your current life cycle position by product/service offering.  This includes evaluating external life cycles: the market, competitive offerings, regulatory changes, and the underlying technologies driving the market.  Do the same for the controllable cycles.  This should be done for each of your current offerings, your planned next offering and for the 2 to 3 previous offerings.

The competitive design aspects (operational excellence v product excellence v customer intimacy) vary by life cycle stage.  For instance, one competes in a mature market more with operational excellence than with product superiority.  Misalignments of these relationships can be damaging shareholder value.  Look for these misalignments between the life cycle you are in and how you are competing.  Devise plans to eliminate them.  Within markets, make sure that pricing, promotion, and product development plans are aligned with the current life cycle.  For instance, it is during the growth phase that the next product must be planned and initiated, not before and not after.  With these analyses in hand examine each offering for its impact on shareholder value and how it could be improved.

[1] See: “Corporate Financial Strategy”, Ruth Bender, Keith Ward, 3rd edition, 2008, p. 17

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