“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 .


Thinking outside the Health Care Box, Leveraging Lessons from Other Service Providers

May 2, 2011 § Leave a comment

by Randy Atkin and Ken Morton

The Situation

The US health care market is entering ”interesting times” –  increased government participation, smarter and more involved consumers, and global influence and competition place health care in the United States at a major cross roads.  The key question:  Is the present business model sustainable?  The topic is drawing attention of the media, government and public thought leaders like Professors Clayton Christensen and Michael Porter of the Harvard Business School, both having recently provided analyses and recommendations with regard to the need for change in America’s health care system.

In response to these challenges, American consumers will push for transparency, enhanced quality, and administrative efficiency in health care delivery in pursuit of their own well being.  Governments will necessarily need to facilitate this access.  Buyers of these services are making, and will continue to make comparisons to other industries and (internal and external) markets. These drivers will ultimately test the sustainability of marginal players in the US (i.e., health providers with less than top notch quality, efficient operations and reasonable prices, aka strong patient value propositions).

Unfortunately, American industry has seen declining market share and revenues.  Looking inward for answers to growing global competition and consumer value sensitivity has not provided concrete solutions. The US health care industry is not entirely shielded from these same competitive factors, and health care is no longer a ‘local, price insensitive delivery system’ as some would argue. For example, it is possible to order prescriptions by mail from other countries at lower cost, it is possible to consult with a physician over internet delivered video services, and it is possible to fly to another country in order to have surgery at less expense than in the US.

The Opportunity

What can our health care system learn from best practices in other industries that can prepare it for the business pressures arising from greater government involvement, a more enlightened and value sensitive consumer, and the potential for greater global competition? We believe there are three main areas where the US health delivery system could benefit from the experience of other service industries that have faced similar challenges:

  • Process design and control:  improving patient handling and management for better quality scores, higher satisfaction and lower costs relate closely to the payments transaction and investment management businesses where consumer relationship with local banks and advisors has rapidly evolved to a global market place of services.
  • Information management and security:  Having the right information in the right hands at the right time to improve efficiencies, makes better decisions and reduces unnecessary treatments.  This focus on better information management, availability and analysis, has helped credit card processors reduce fraud by billions of dollars. At the same time, improved security has allowed greater access and availability across legal and banking networks.
  • Asset management optimization: Approach care delivery management like an investment advisor, including monitoring your patients’ health metrics throughout their life stages, providing access to the right expert resources as/when  required will  assist them in understanding the ‘investments’ in health choices that they may face. Making the consumer an accountable member of the team, sharing information, and encouraging a proactive stance to one’s health as an asset to be managed should improve the health dividend yields.

Comparison to Financial Services

Recently a colleague saw his doctor about a boil on his finger.  As it happens the doctor could not heal it but would recommend a specialist.  The doctor picked up his mobile computer, keyed in a request and said the appointment was set-up.  As it happened, instead of making a query into the specialist’s calendar, confirming the referral and securing the appointment the doctor’s electronic message went 50 feet down the hall to the nurse’s station where a printout awaited our colleague who took the piece of paper and made calls to the specialist’s office, the specialist’s medical group, and his own insurance group to secure and confirm the appointment; so much for efficiency.

Health Care likes to think that it is a totally unique industry and that you have to “make your bones” only in that space in order to have credibility and expertise but disconnected and incomplete processes like the one described here are the very kind of thing banks, brokerages, asset managers and insurance companies have successfully attacked for years.  We would argue that the Health Care Industry can and should embrace and learn from Financial Services.

The areas where the industries can share knowledge, expertise, and capabilities include:

  • Transaction Processing
  • End-to-End (Straight Through Processing)
  • Data Security
  • Cost Containment
  • Portfolio Analysis
  • Fiduciary Duty
  • Technology

More specifics

Transaction Processing – Financial Service organizations process a high volume of transactions (and transaction types) per day – requiring a high degree of accuracy while meeting tight daily deadlines.  Financial Services had developed workflow management and optimization procedures to help insure processing efficiency.  These procedures are essentially content-independent, while the large number of transactions (in both industries) requires constant attention to detail in both processing and training – a clear opportunity for knowledge transfer.

End to End Processing – Closely related is the idea of End to End Processing, essentially treating a transaction as a highly automated continuous (“straight through”) process focused on quality, accuracy and smooth customer service.  A particular point of emphasis is one-stop/step problem resolution.  This area long practiced by Financial Services is just started to be explored by some of the more innovative Health Care providers and would have saved our colleague, the specialist, and at least three administrative centers time and money.

Data Security – There are intense requirements for customer/patient confidentiality in both industries. HIPPA requirements are similar in concept and application to Financial Privacy Policies followed by most Financial Services companies.  The mindset is the same; procedures and training to implement industry regulations and norms (often from overlapping regulatory interests) regarding the creation, access to, and the long-term maintenance of sensitive data are transferable.

Cost Containment – The Financial Services Industry has been living through severe revenue and expense pressures – as has Health Care.  The measures taken by Financial Services to contain costs over the past three years has given them significant expertise in wringing out expenses, streamlining operations and maximizing efficiency at every step of a process.  Lessons learned can be shared and we would argue that Financial Services has the advantage.

Portfolio Analysis – a recent article in the New Yorker (“The Hot Spotters” Atul Guwande, Jan 24, 2011) outlined a new approach to analyzing the patterns that drive health care costs, an approach, interestingly enough, which developed from New York City’s Compstat approach to crime prevention.  This type of data analysis and mining are fundamental strengths of the Financial Services industry.  The industry’s deep experience in not only statistical models and complex mathematics but also knowing how to use that information to drive day-to-day  and actions should be easily transferable and of great utility within Health Care.

Fiduciary Duty – Both industries have a primary duty to do the best for the clients/patients. Taking a look at control processes, risk management systems, and accountability models within Financial Services should provide some interesting baseline approaches for Health Care.

Technology – Here, Financial Services shines.  It is constantly at the leading edge of technology and applying that technology to key operational functions like process management and improvement, risk management, financial management and controls and portfolio analytics.  A major area of leadership is customer service – beyond efficiently handling normal interactions, Financial Services knows how to handle customers throughout their life cycle and has developed interesting techniques to get the right information to the customer at critical points of his life.   This is a model that Health care could easily follow.

These are not the only areas where the long term goals of service industries participants are congruent.  Much could be learned and outcomes improved if “Not Invented Here” were replaced by more dialogue, at every level.

Ken Morton and Randy Atkin are principals at Plexius Group.  You can reach them at ken@plexiusgroup.com and randy@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.

How Social and Mobile Will Transform Your Business

March 1, 2011 § 2 Comments

– Participation is Obligatory. Your Choice is How –
By Doug Brockway

It’s fairly easy to find examples of presentations, articles, and videos that describe how to think about how and whether to participate in social media for your business. Similarly, it’s an easy thing to find a great deal of content about how Cloud Computing is changing everything and you have to start thinking about it. Most of this is fairly useful and very little is harmful. Little of it expresses the stark reality that mobile technology is now out shipping total PC shipments, that the entire planet has overtly adopted social media, that Cloud and related technologies are making any place you are right now a fully functioning business location.

For all intents and purposes all of your customers, competitors and influencers, and all of your staff either now have or soon will have a smart phone or a tablet and often both. These devices, always connected, are part of our daily lives. It’s not just that egotists can Twitter about their soy latte’s or that many people can’t navigate without their GPS’s but people are doing transactions with mobile technology using a social media metaphor wherever they happen to be located. 60% of the usage on smart phones is on things phones have never been used for until very recently: mail, apps, games, maps and GPS and the like. Kleiner Perkins’ John Doerr calls it SoLoMo, Social, Local, Mobile.

Source: Top Ten Internet Trends, Mary Meeker and Matt Murphy

This is true around the world. In Japan 85% of page views are from mobile devices today, only 15% from desktops and you can guess the trend. Global mobile data traffic, performing tasks like searching for data, sharing files, capturing and sharing video, and voice over IP is predicted to grow by 26 times over the next five years.

We don’t propose for a second that you must now consider what your mobile-to-mobile gaming strategy will be within your business (though that may make sense in YOUR case…) but we do believe that your customers and your staff, and your competitors, will be working in a SoLoMo fashion, changing their management practices, their tasks, the definitions of who does what, when and how and so will you.

Whether you’re planning for it or not all of your value chains, all of your processes, everything you do will either be mobile or be heavily influenced by SoLoMo over the next 5-10 years. You only need to look towards Tunisia and Egypt to see the potential effect. Whatever lines of communications you are used to, whatever hierarchies of who is aware of which data or trend, they are likely to come undone.

There are whole economies where laying down land-lines is not going to happen and an entire generation in the industrialized world that acts, thinks and lives as if land lines don’t exist (I’m using “land-lines” here as a metaphor for traditional business processes). And the SoLoMo vision isn’t new. In 1987 Apple produced this highly stylized video, The Knowledge Navigator, which shows the potential of an intelligent, widely networked, multi-purpose tablet device. People have been working in this direction for quite a while.

Start thinking about how to take advantage of the inevitable. One way is to make day-to-day activities of management and staff far more responsive to day-to-day information. A metric driven business improvement plan starts with the definition of key business metrics (e.g. a certain improvement in new product introduction rate), ties them to operational metrics that actually create value (e.g. the speed with which new product production is brought on line) and then are used in a combination of ways to do work and to solve problems (quality issues, cost overruns, faulty orders):

source:  Plexius Group

Now design your implementation of your plan assuming that the key business metrics and the operational metrics can be displayed on management and staff smart phones and tablets, not just their PCs or in reports. Update the information as it happens. Embed in the tablets analytic tools, use the smart phones to capture video of processes as they happen, use the tablets to run improvement workshops and directly adjust the operational metric standards. Since your staff is living in a SoLoMo world use it to embed a team problem solving culture in your business. Since its networked, whenever possible and prudent involve your suppliers, partners and customers directly in the process.

An enormous amount of technological change is happening all around us. Seize the [data]!

Doug Brockway, a Principal with The Plexius Group, can be reached at (617) 834-0067

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.

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.

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