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

Do Products Die? or, Product Development and Management through Life Cycle Analysis

October 1, 2010 § Leave a comment

By Ken Morton

Products, like human beings, have their own life cycle. They are introduced (born), grow, mature, decline and often “die.”  Each phase in the cycle poses significant management challenges, involves many professional disciplines, and requires broad skills, tools and processes. Within this context, there are four key principles:

  1. Products have a limited, predictable life
  2. Sales/Revenues pass through distinct stages, each with different challenges, opportunities, and problems
  3. Profits rise then fall throughout the different stages
  4. Success requires different marketing, financial, manufacturing, purchasing, and human resource strategies and planning horizons in each stage

Successful managers must challenge themselves constantly to know if they are making the right decisions: Do I have the right product, at the right time, exploiting the right resources, to generate the right profit?

A life cycle strategy helps you plan, understand and structure your product development and management activities to ensure that you are.

(source: “Managing Products and Brands”, Rohan, SDSU)

Business success combines allocating scare resources and balancing needs.  Knowing where you are in the product life cycle allows you to manage your risks to achieve the optimum marketing mix – Product, Price, Promotion, Place, and guides your actions to ensure success- at every stage.

What Management Should Do

Begin by evaluating your entire product line showing life cycle stage, and analysis of price, promotion, place (distribution), as well as competition and consumers.  The individual maps consolidated to create a full product/market strategy.

(source: “Managing Products and Brands”, Rohan, SDSU)

At this point you must ruthlessly analyze where you are in the life cycle vis-à-vis the competition and take action to ensure that scarce management, operational, technical and financial resources are being properly managed and developed – both now and in the future.  In this way you will match your Investment, Development, Planning and Profit horizons synchronized within the field of competitive actions.

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.

Life-cycle Analysis and IT Alignment

September 7, 2010 § 1 Comment

Generally speaking “IT Alignment” addresses both doing the right things (effectiveness), and doing things right (efficiency).  In the literature on IT Alignment there is much talk of the degree to which business and IT “understand” each other, know the other’s “domain”, or “trust and respect” each other.  But, as the widely read Jerry Luftman of the School of Management at the Stevens Institute of Technology says, “While alignment is discussed extensively from a theoretical standpoint in the literature, there is scant empirical evidence regarding the appropriate route to take in aligning business and IT strategies.”

To Plexius, IT and business are mis-aligned when the market has shifted, but the IT is still working on projects designed for a world-gone-by.  IT Alignment centers on having an IT delivery cycle that is tuned to the market, business, and technology life-cycle windows that the business itself must adapt to.

When capabilities are not available as they are needed, they detract rather than add value in the same manner as a late-to-market product development cycle.  It is within the context of the life-cycles that drive business decisions regarding:

  • IT project and program governance
  • Project scope management
  • Agile development techniques
  • Build versus. buy decisions
  • Sourcing decisions, and
  • IT organization structure

The single most dominant driver of why business views IT to be “mis-aligned” is the time-to-implementation.  Too often, from the business view, “new function takes too long.”  If the market has a total life-cycle of 18 months and getting the new capabilities added to the Applications Portfolio takes 6 months, most of the market will be gone before the IT enabled business is ready.  On the IT side of the coin, too often business comes to them with a requirement that must be available in 3 months but requires 6-9 months to complete.  Regardless of the cause, when an IT system is delivered too late the new offering’s prospects are bleak and the IT project is deemed a failure.  There is much written about the high rate of “IT project failure.”  Many of these failures involve projects that were conceived, started, or managed out-of-cycle with actual business need.

Businesses should understand the external market, product/service and technology life-cycles that determine the size and scope of real product/service opportunities.  They need to synchronize the current product/service with at least two future market changes/disruptions.  In making plans to attack these markets they must plan to have all of their capabilities in place at the right time, including the information technology that is needed.  That is the “what” of IT Alignment.

IT and the business, understanding the cycle times at hand, must ensure that development and implementation speeds can accommodate them.  This drives build vs. buy decisions and insource vs. outsource or cloud computing decisions.  It greatly raises the return-on-investment-bar on large scale, long-delivery time, mega-projects.  Because cycle times are far shorter now than just a decade or two past, it almost certainly requires that development projects are scoped in such a manner that tangible, material benefits can flow in 6 months or less.  Its amazing how aligned things seem when everyone is zigging and zagging at the same time.

To find out more contact Doug Brockway or at (617) 834-0067

[1] “Assessing Business-IT Alignment Maturity”, December 2000

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 or at (603) 772-5135