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

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

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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