Business Strategies and Frameworks (Part 4)

Synopsis

Want ways to think through and solve any business problems? Our Business Strategies and Frameworks (Part 4), the latest of a four-part collection, provides the best tools to find the perfect solutions. It includes slides for McKinsey Directional Policy Matrix, Cost Patterns, Competitive Benchmarking, Market Entry Assessment, Stakeholder Analysis, plus many more.

GE/McKinsey Directional Policy Matrix

When it comes to investments, businesses are faced with the challenge of limited resources but also many possibilities. For diversified businesses, deciding which products to invest in is even more difficult. This issue was addressed by the GE/McKinsey matrix. At that time, General Electric had many unrelated products and didn't have the desired returns from its investments. They consulted McKinsey, and the resulting directional policy matrix was created. It evaluates opportunities based on industry attractiveness and competitive capability.

The larger the circle on this bubble chart, the better suited the opportunity is, given an organization's existing capabilities. With this, you can see which opportunities should take priority and which may need to be divested. (Slide 6)

To figure out where to plot each opportunity on the bubble chart, use this table to make an assessment. Make a list of factors weighted by importance. Then, rate each factor from 1-5 or 1-10. Finally, calculate the total score. (Slide 5)

Cost patterns

The ability to lower costs can be the biggest competitive advantage for certain companies. Through cost pattern analysis, management can better budget to reduce costs and maximize profit. It also allows them to set realistic production and sales goals. There are two main types of costs: variable and  fixed.

• Variable costs typically change in proportion to changes in volume of activity. For example, if more bikes are produced and sold, the total variable cost will be higher.
• Fixed costs, on the other hand, do not change with the volume of activity. This includes costs like salaried employees, building rent, or insurance.

These graphs show some common patterns that take these costs into account. You can expect the cost structure for a grocery store versus a software company to be wildly different. But no matter what type of business, familiarity with the behavior of costs and how they shift is essential for pricing assessments, cutting costs and budgeting expenses. (Slide 26)

Competitive benchmarking

Benchmarking your business against others in the industry can help identify how successful your company is in comparison, where it excels, and where it falls behind. By setting up a list of critical success factors, you can create a series of standards to match up to your competition and recognize the disparities.

Here, each success factor is given a weight for importance, and then scored by customers. Plot out the scores for each success factor under the companies that are the biggest competitors. The gray dots indicate the competitor scores, while the blue dots are how customers scored your company. Quickly make visual comparisons by looking at the plotted lines to see what's working and what's not. (Slide 12)

Market Entry Assessment

Market entry analysis is used to evaluate if a company should enter a market or offer new products in existing markets. In this case, some areas that are commonly considered are growth prospects, skills and difficulties. In most cases, product performance improves over time. But too big of an improvement can actually lead the downfall of a firm. Now, this sounds counterintuitive, but here's why… (Slide 11)

This paradox is called the "innovator's dilemma": A product or tech advances to the point where the average consumers don't have a need for the above-and-beyond performance. At this point, these customers aren't willing to pay a higher price for the better performance. In fact, they'd rather buy a less advanced tech for a lower price. There's a certain range of performance that customers can utilize, and past that point, both consumers and the business will start to see diminishing returns.

Once a product reaches the point of unmet needs, it may be time to start thinking about pivoting. That way, you can be sure the company is focused on activities that address the customers' needs and promise higher profits.

Stakeholder analysis

Stakeholders include people, leaders, organizations and other parties who could be affected or have an influence on a project's outcome. They can be from within an organization or external to it. Here we map the stakeholders by power and interest. Keep satisfied and monitor those who have little interest, but the ones to monitor closest are those with high power and high interest. Communicate often with these stakeholders. Or if you want a simpler design, this matrix lists them all out with just the important details. (Slides 16-17)

Business impact analysis (BIA)

Business impact analysis has a lot to do with risk prevention and scenario planning in the event of disruption. It can help prepare for ups and downs in the macro economic world. With this chart, map out the information needed to develop recovery strategies from a disruption, such as how much time it will take to recover and the importance of a recovery. In our uncertain economy, this tool is more important than ever. (Slide 13)