Building Robust Distribution to Support Strategy

Introduction
During the past year I have been working with a variety of different client companies to develop and improve their distribution networks. Distribution really matters when you consider that, on average, half of the price of the product is absorbed by activities related to getting that product from producer to the purchaser. [1] As a case in point, in the individual life insurance business, distribution costs can exceed 100% of the first year premiums.  Many of the top companies, such as Coca-Cola, who have formed superior distribution relationships, excel while others who treat distribution in a cavalier manner seem to stumble along towards mediocrity and even failure.  With the increased fragmentation of markets, media, globalization and the proliferation of more players operating as distributors, distribution is increasingly more complex and harder to manage.

In “marketing 101”, we learned all about the importance of the 4 P’s of marketing where E. Jerome McCarthy, proposed a Four P classification of the marketing mix, in 1960, which has enjoyed wide use.[2] One of the critical 4 P’s is “Place” which includes distribution. Distribution is the pipeline or path(s) a product or service takes from producer to purchaser.  The paths to the customer impact your brand and the customer experience so it is critically important that distribution consistently delivers on the brand promise. In some cases, the producer of goods or services decides that a direct distribution model provides the highest level of control and therefore, is the most desirable distribution method. In other businesses, an indirect or intermediary model is considered the most appropriate distribution method.  Some businesses choose to deploy both a direct and indirect approach – which is akin “to having their cake and eating it too”.

Back in the early days of the Internet “disintermediation” was considered a constant challenge or threat to the traditional distribution models – particularly in the insurance industry – with the rise of direct-to-consumer insurers and aggregators that supplanted field agents with lower cost call center agents. Traditional distribution-based companies like Allstate (with their recent acquisition of Esurance and Answer Financial from White Mountains Insurance Group for $1 billion in cash) are exploring direct-channel distribution approaches out of necessity.  Distribution is an evolutionary pursuit and requires thoughtful discourse among the leaders of the business who are involved in the strategic planning process.

The Indirect, Intermediary Approach

With the indirect approach, determining “Best fit” for the “Place” (of the 4 P’s) and placement of your product or service requires the careful consideration of the following:

The Importance of Formulating Distribution Objectives

Generally, the producer develops distribution objectives which are developed, with intermediaries in mind, who create value in one or more of the following ways:

• Market intelligence, support and positioning the product via customer value proposition and points of differentiation, tailored to resonate with a specified target market.
• Offer what I call real “Paths of least resistance” to accelerate new market entry and/or current market initiators, customers, decision makers, approvers and buyers.
• Enables your company to “tap into” a wellspring of trust and leverage from channel partner experts, consultants and influencers who have a relationship and history with the prospective client/consumer/end-user.
• Offer resources and scalability– via shared service capabilities in the form of:

Forward flow: market research, co-marketing, demand generation, lead generation, lead qualification, quotation/proposal preparation, sales and promotional support; product management, negotiation of terms, point-of-sale transactions, supply chain integration, systems, delivery, problem solving, operational integration, training, order fulfillment.

Backward flow: billing issues and handling cancellations/returns, renewals, retention, “win back” programs, data sharing (CRM), etc.

• Synergies – through co-development of new products, capabilities, risk sharing and/or reverse flow opportunities (reciprocal arrangements).
• Added advantages – or points of differentiation gained from intermediary products in the form of product line extensions and/or enhancements.
• Pursuit of common financial goals – they also aspire to meet the same or similar financial (i.e. production, sales and profit) goals. See Strategic Marketing Plus, LLC Channel Partner Scorecard spreadsheet.
• Information and knowledge sharing – a necessary feedback loop to improve efforts along the marketing, sales and customer decision journey.

Common Types of Distribution Relationships:

1. Value Networks and Marketing Channels[3].   Philip Kotler provides these two definitions:

“A Value Network is a system of partnerships and alliances used by a firm to source, augment, and deliver its product or service offerings.

Intermediaries that help get the product from manufacturer to business, consumer or end users form the Marketing Channel(s).”

2. Captive (company-owned and operated), Exclusive (through appointed independent organizations) and Non-exclusive distribution arrangements. Typical boundaries in scope of distribution relationships include:

• By Geography
• By Vertical (single industry i.e. affinity)
• By Horizontal (multiple industries)
• By Product line
• By Market – B2B, B2C or, however else you finely slice the market(s).

3. Direct and Indirect. Indirect has one or more intermediary levels or layers beginning with the manufacturer. Example: Insurance industry, from producer to purchaser, in cascading order, there are 2 to 4 tiers to distribution for any given product line:

• Insurance Company
• Aggregator, Wholesaler, Program Manager, Broker, MGA or MGU
• Sub producer, Agent, Advisor or Financial Planner
• Consumer

4. Embedded or Standalone– where your product or service is embedded in another product or service or sold standalone.

5.     Value-added, Broadline or Fulfillment Distribution:

• Value-added – focuses on products where there is a limited number of distributors, usually in early market entry stage and very common with technology companies.
• Broadline – provide the mainstream market coverage in terms of products and market coverage.
• Fulfillment – where products are bought, not sold (i.e. office supplies).[4]

Common Characteristics of Robust Distribution

Robust distribution, what is also called “Best fit”, supports the whole reason for engaging with intermediaries – knowledge, resources, expertise, market presence, etc. and is key to execution of the strategic plan -

• Similar or the same Target Customer(s) – where the intermediary has a presence, and ideally, an installed client or customer base that can be leveraged.
• Operates a network of professional distributors - who meet certain minimum requirements (licenses, credentials, appointments, approval process, contractual agreements in place, etc.), adhere to guidelines, rules and written procedures and/or standards (quality standards, Service level agreements, minimum production levels, production quotas, etc.).
• Adds value – as mentioned above, to a set of complimentary products and/or services.
• Repeatedly, Efficiently and Productively delivers – the product or service to the intended purchaser on a consistently basis thereby delivering on the producer’s brand promise.
• Speeds up the sales cycle - and purchasing process and embraces continuous improvement initiatives.
• Possesses similar logistical and operational integration opportunities - similar operational characteristics, systems, touch points and service capabilities that can be leveraged.
• Competitive intelligence – keeps an external market focus and operates as part of an “early warning” system to signal competitor moves and changing market dynamics (both good and bad).

Preventing Channel Conflict

The distribution channel champions, stewards or managers of distribution relationships must prevent, detect and minimize any channel conflict immediately.

Using Benchmarks, Key Performance Indicators (KPIs) and a Scorecard to Set Goals and Evaluate Performance

It is critical in any relationship to establish benchmarks, KPIs, distribution relationship goals (including training, etc.) and periodically evaluate the performance of the channel partner(s). In addition to listing the contact people responsibilities and roles, typical performance measures include:

1. Sales forecast – by product, by target market, units, lives and total revenue.
2. Marketing Campaigns – description.
3. Sales contest(s) – Budget vs. Actual.
4. Market Development Funds– Budget vs. Actual.
5. Marketing, Communications and Promotional Funds – Budget vs. Actual.
6. Persistency /Client and Customer retention and Agent turnover.
7. ROI: Total Revenue/Total Cost – Forecast vs. Actual.

Distribution Partner Agreements

The distribution partner agreement outlines the specific contractual terms and conditions of the relationship between the parties. Incentives, rewards and recognition should be built into these agreements to reward the best performing distribution partners (and their front line employees).

Bill Tyson is the CEO and Owner of Strategic Marketing Plus, LLC, an independent consultancy firm specializing in strategic marketing and sales optimization based in Santa Rosa Valley, CA. See http://www.strategicmarketingplus.com

If you need help with your distribution channel strategies give Bill a call.

For information about the changing dynamics of affinity distribution, please go to http://www.afficiency.com

[1] Distribution Channels – Understanding and Managing Channels to Market by Julian Dent, Kogan Page Press, Philadelphia, PA 2008, 2011. Page 9.

[2] Basic Marketing, A Managerial Approach, E. Jerome McCarthy, PhD., Richard Irwin Books, 1981. Homewood, IL, 1981. Page 42.

[3] Marketing Management, by Philip Kotler and Kevin Keller, Chapter 14, 14^th Edition, Prentice Hall, Upper Saddle River, New Jersey, 2012.

[4] Distribution Channels – Understanding and Managing Channels to Market by Julian Dent, Kogan Page Press, Philadelphia, PA 2008, 2011. Pages 32-33.

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Harnessing Multichannel Marketing for Strategic Advantage

“Sustainable competitive advantage no longer arises exclusively from position, scale, and first-order capabilities in producing or delivering an offering. All those are essentially static. So where does it come from? Increasingly, managers are finding that it stems from the “second-order” organizational capabilities that foster rapid adaptation. Instead of being really good at doing some particular thing, companies must be really good at learning how to do new things.”[1]

In this day and age, which is defined by volatility and uncertainty, multichannel marketing can be an organizational capability that provides a business with a strategic advantage.  By its very nature, multichannel marketing, with all of its moving parts, is the key to building stronger lifetime value through longer term relationships with your customers, before, during and after purchase. Having spent the past 20 years in various marketing leadership roles, I know firsthand the tactical challenges marketers face in trying to orchestrate successful multichannel campaigns. It isn’t easy but, to me, the rewards in terms of profitability can be significant so it makes sense to make this a key competitive advantage.

Top Down, Bottom Up or Side to Side?

From a strategic standpoint, it is critical to have a top down approach to the process, people, technology, partnerships and infrastructure necessary to enable effective multichannel marketing.   Once the multichannel infrastructure and network is in place it then requires aligning and tightly integrating all of the tactical elements of marketing—strategy, budgeting/spending, channel management, targeting, creative and messaging—with the journey that consumers or businesses undertake when they make purchasing decisions around your products and services. Once the “decision journey” is identified, defined and mapped it is then necessary to ensure that the customer value proposition and multichannel capabilities are linked and can live up to the brand promise. In other words, no matter how the customer chooses to interact with your business the customer experience must be seamless, consistent and the brand promise is maintained throughout the entire experience.

Multichannel Marketing Defined

My definition of Multichannel Marketing is presented here in 2 parts:

Multichannel marketing - is a marketing methodology that uses two or more different media approaches to reach and influence a target audience in a single campaign. 

Furthermore, Multichannel marketing is usually supported by:

one or more inbound response channels, that, when combined, produces a single, return-on-marketing investment result.

A good example of this definition is Eddie Bauer’s multichannel approach. Their approach is referred to as a “bricks, clicks and flip” approach that leverages Stores, The Eddie Bauer.com website and their catalogues where ordering can be done through any of these inbound response channels (store, online or call center).

Why is Multichannel Important?

Here are 4 of the many reasons why multichannel is important:

• Multichannel buyers generate more revenue, purchase more items, purchase in more categories and all of this more frequently than single channel buyers. (1)
• According to a 2009 study by McKinsey & Company, consumers who shop across multiple channels will spend on average 4 times more annually on purchases than those who shop via a single channel.
• Multichannel drives higher customer satisfaction levels, higher cross sells and retention levels. (2)
• Heavy users – have demonstrated greater preference for shopping in multiple channels. (3)

Multichannel Marketing Options

“The medium is the message – and never before has there been so much different media and, hence, so many ways to shade, inflect, blow out, or screw up your message.” – AdWeek: Media Plan article, July 2011.

According to our definition above, a subset of multichannel marketing is media selection. The media selection of a given multichannel campaign is critical since it can add to the complexity and effectiveness of the outcome, including the ROI.

A common way to look at multichannel marketing is to separate it into inbound and outbound media channels.

Outbound Channels:

• Direct mail
• Tradeshows/seminars/events
• Email
• Web sites, Microsites, PURLS
• Contact Centers (Telemarketing)
• DRTV and Radio
• Mobile/SMS/Chat/Apps
• Brick and mortar stores
• Other (newspaper, out-of-home ads, etc.)

Inbound Channels:

• Paid search/Pay per click
• Search Engine optimization
• Blogs and social media
• Word-Of-Mouth (WOM)
• Viral video

The outbound channels are more traditional and “one way” communications and as such, are “marketer lead”, are becoming more expensive from a cost per lead perspective and less effective in generating responses than inbound channels, all other things remaining equal. (Source: “Marketing Data:101 Charts and Graphs of Original Marketing Research” by Hub Spot.)

The important distinction between the two categories is the simple fact that inbound channels are customer-lead channels that encourage and encompass “two-way interaction” capabilities.  As one executive recently stated, we are increasingly living in an opt-in world. Inbound channels are opt-in, sometimes even permission-based and most importantly, they drive engagement with the customer. On average, the cost per lead is significantly less for inbound channels.

Multichannel Dimensions

From a strategic perspective, in addition to the managing the channels marketers have to consider and manage these different dimensions of multichannel marketing:

1. Managing the allocation of Marketing spend across two or more channels.

2. Channel-specific promotional events that can vary by:

• Sequencing of events,
• The Timing,
• Testing and learning protocols:  targeting, product positioning, offer, format, messaging and pricing.

3. Channel Adoption Duration – which is the time it takes for customer to adopt a channel.

4. RFM analysis:

• Recency – or, the time between transactions.
• Frequency – # of Transactions (i.e. per campaign, per year, or however you define this metric) and the
• Monetary value – basket size and cumulative “share of wallet”.

5. The customer view of your operational performance via multi-channels:

• Time between order, fulfillment and delivery.
• Any real or perceived breakage in the sales process.
• Accessibility and convenience.
• Richness of the information presented.

6. Customer interactions: as customer relationships grow, develop, deteriorate and dissolve based upon the customer experience with 2 or more channels.  (Journal of Marketing, April 2007, Page 116.)

7. Post-acquisition behaviors – your ability to carefully support withdrawals, cancellations, cross sells, upsells and add-ons.

8. Return-on-Marketing-Investments (R.O.M.I.) – analysis and insights, by channel and channel combinations.

9. A commitment to transparency and compliance – including your ability to track, record and archive customer interactions, calls, problems and disputes.

 Addressing Common Multichannel Pain Points

Here is a brief list of challenges or common pain points the strategist encounters in the development and execution of multichannel marketing efforts:

• Channel Silos: online/offline, inbound/outbound.
• Complexity – the proliferation of New Channels.
• Determining the ROI of some of the channels (i.e. social media).
• Synchronization – the managing multi channels, simultaneously.
• Costs of Resources to support the efforts. This includes the deliberate avoidance of over investing in what McKinsey calls the “3 Es Trap”:  investing to provide “Everything to Everyone Everywhere.”[2]
• Tracking and reporting across multichannel campaigns – to arrive at a single ROI.
• Cannibalization – or the fear of cannibalization.  Walmart’s online sales are a mere 2% of total sales and the reason for that is fear that the online channel will cannibalize in store sales. Store managers managing warehouses of 40,000 feet still wield a tremendous amount of power. As a result, Amazon’s online sales of $34 billion per year is still 3 times that of Walmart.com – but Walmart intends on changing that with the purchase of Vudu (a low cost, on-demand, movie streaming site).

The Traditional Sales Funnel/Process Has Changed

Here is a look at the traditional sales or purchasing funnel.

“Consumers are moving outside the purchasing funnel—changing the way they research and buy your products. If your marketing hasn’t changed in response, it should.” -McKinsey Quarterly, 2009 #3

In the traditional funnel metaphor, consumers start with a set of potential brands and methodically reduce that number to make a purchase. And then, re-emerge in some cases to make an additional purchase.

The traditional sales funnel has changed to something like this, which is more of a lifecycle as shown by the series of concentric circle than a single event:

McKinsey developed this lifecycle model by examining the purchase decisions of almost 20,000 consumers across five industries and three continents.  The emphasis here is delivering a great customer experience throughout what they call a “consumer decision journey”.

Managing Systematic, two-way Interactions

Their research showed that the proliferation of media, channels and products require marketers to find new ways to get their brands included in the initial-consideration set that consumers develop as they begin their decision journey. We also found that because of the shift away from one-way communication—from marketers to consumers—toward a two-way conversation, marketers need a more systematic way to satisfy customer demands and manage word-of-mouth. In addition, the research identified two different types of customer loyalty, challenging companies to reinvigorate their loyalty programs and the way they manage the customer experience.

Finally, the research reinforced our belief in the importance not only of aligning all elements of marketing—strategy, spending, channel management, and message—with the journey that consumers undertake when they make purchasing decisions but also of integrating those elements across the organization. When marketers understand this journey and direct their spending and messaging to the moments of maximum influence, they stand a much greater chance of reaching consumers in the right place at the right time with the right message.

Conclusion

In the final analysis, to gain a strategic advantage, you must have all of these elements in place:

1. A common definition of what Multichannel Marketing truly is.
2. Formulation of the multichannel strategy.
3. Organizational alignment around the people, processes and technology to be able to execute such campaigns.
4. A complete set of multichannel and media options, both inbound and outbound, at your disposal.
5. Knowledge and understanding of all of the various dimensions of multichannel marketing.
6. The ability to address and eliminate any “pain points” associated with these multichannel efforts.
7. Development of a map of the Customer Experience or Customer Decision Journey to determine all of the potential lifecycle touch points, customer interactions and the use of channels for each so you provide a seamless and consistent experience across all channels.
8. Development of Key Performance Indicators and ROI targets. Tracking and measurement is paramount.
9. Once cross channel tracking and measurement is accomplished, then the optimization effort can proceed.

In the final analysis, managing the “points of influence” throughout the customer life cycle will determine whether you merely meet customer expectations or delight them.

For more information, see Multichannel Power.com web site I created to share articles and where you can download the presentation entitled: “Customer Experience Marketing” featured at the recent Professional Insurance Marketing Association (PIMA) conference, July 28th 2011.

Bill Tyson is the CEO and Owner of Strategic Marketing Plus, LLC, an independent consultancy firm specializing in strategic marketing and sales optimization based in Santa Rosa Valley, CA. For more information see: http://www.strategicmarketingplus.com and his website dedicated to multichannel marketing called MultichannelPower.com

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[1] Adaptability: The New Competitive Advantage, by Martin Martin Reeves and Mike Deimler  HBR July 2011.

[2] McKinsey Marketing Solutions, 8/2000.

[3] McKinsey Quarterly, June 2009, The Consumer Decision Journey.  This diagram appeared in a follow-up article entitled “Winning the  consumer decision journey,  By David Court, Dave Elzinga, Susan Mulder, and Ole Jørgen Vetvik

[4] Ibid

[5] McKinsey Quarterly, June 2009, The Consumer Decision Journey.  This diagram appeared in a follow-up article entitled “Winning the  consumer decision journey,  By David Court, Dave Elzinga, Susan Mulder, and Ole Jørgen Vetvik

[6] Ibid

Strategic Risks – Threats and Opportunities

Introduction

My last post entitled: “A Prescription for Change” was about tackling change, one of the many strategic risks an organization faces. As every practitioner of strategy knows, strategic planning is a risky business so it is critical to address the other risks that can affect strategy and execution through a formal process that must be integrated into both planning and execution activities. In this post I will share some information about strategic risks, how I am addressing them and provide you with some resources I found useful to help you guide your own efforts.

In this age of increased corporate scrutiny, transparency and oversight, efforts at managing enterprise risks by the risk management, legal and compliance “silos” is no longer adequate. Fueled by the recent financial meltdown (and corresponding Dodd-Frank Wall Street Reform and Consumer Protection Act), Sarbanes-Oxley Act of 2002, FCPA, the new SEC rules, FINRA and now the debt rating agencies (such as Standard and Poors and Moody’s) there are new, more formal rules and requirements for enterprise risk management (ERM) procedures, processes and controls that impact strategic planning.

For example, to illustrate the new ERM reality, consider this excerpt from a recent Forbes Magazine Blog that pertains to the U.K. version of the Foreign Corrupt Practices Act:

“Anti-corruption law is now a tidal wave that can engulf anyone doing any kind of business on a global basis. Nor is anti-corruption law the idiosyncratically Wilsonian expression of an oddball American rectitude. As we’ve seen, the UK program [aka 2010 U.K. Bribery Act] is, if anything, much broader in application.”[1]

In fact, the U.K. Bribery Act provides only one defense “Adequate procedures” must be in place to prevent persons associated with the company from conducting illegal activities.  The Act “outline[s] certain compliance actions as being valid defenses, including due diligence, risk assessments, and monitoring”.  [2]

See the recent WSJ article on Oracle entitled: “US Probes Oracle Dealings”, August 31st 2011.

Strategic Risk Accountability Has Risen to The Board Level

As a result of these sweeping new regulations, the “ability to effectively manage risks” has become a top priority in large enterprises.  Generally, ERM is an initiative being pushed vigilantly by the Board of Directors. Since Directors and Officers are responsible for discharging the duty of risk oversight, and are now being held liable when things go very wrong, they are beginning to insist that management provide them with details on all the major risk exposures (known and emerging) facing the organization.[3] No surprise here. In fact, many larger companies have already created a new C-level position, the Chief Risk Officer (CRO), along with a new set of metrics called Key Risk Indicators (KRIs)[4] to provide a focused, top-down ERM monitoring,  enforcement and reporting regimen. And that effort includes keeping everyone at the top of the organization abreast of risks, and drivers of risk, external to the organization:

“It’s important that boards and senior executives focus on external drivers of risk and consider how they might strategically respond to events that might be out of their direct control.”

– Mark S. Beasley and Mark L. Frigo[5]

The Risky Business of Strategic Planning

Strategic planning and execution in this environment can be one of the riskiest business activities to engage in, so it is imperative to approach it in a systematic manner.  Beyond value creation the strategist must also consider value preservation. So, in addition to tackling the fun part – developing strategies, setting objectives, action plans, timelines and projections – an essential part of the strategic planning process involves how we choose to allocate resources and spend our time in the most productive and effective manner.  In this effort, each choice we make has associated risks; and therefore, a part of the process must also include an evaluation and quantification of these risks. To the extent possible, strategic risks must be identified, weighed, evaluated then prioritized.  As you analyze and determine the relative risk of each strategic initiative, this additional information will have an impact on prioritization which drives such important factors as investment level commitments, resources and timing going forward.

Some Important Terms Defined for this Post

In the classical sense, risk is defined as the possibility of loss or reversal, emphasizing the downside or the negative side of risk.  However, in the Chinese language, it has been said that risk has a dual meaning (or “two sides of the coin”), as expressed in these two symbols[6]:

The first symbol (or character) is the symbol for “danger”, while the second is the symbol for “opportunity” – thereby making risk a mix of danger (the downside) and opportunity (the upside).[7] In other words, in strategic planning terms, this definition of risk includes both the “T” (threats) and “O” (opportunities) in the S.W.O.T. analysis framework. This expanded view of risk management includes both activities designed to deal with risks: risk mitigation (or hedging) as well as thoughtful risk taking.  In my opinion, both of these separate defensive and offensive activities should become an integral part of the strategic planning process and strategic risk management equation.

Also, in the context of strategic planning, I think it is also important to be mindful of Michael Porter’s definition of risk:

“Risk is a function of how poorly a strategy will perform if the ‘wrong’ scenario occurs.”[8]

 The Risk Intelligence Process

Risk Intelligence refers to an organization’s ability to weigh such risks effectively.  The Risk Intelligence process involves classifying, characterizing, and calculating threats; perceiving relationships; learning quickly; storing, retrieving and acting upon relevant information; communicating effectively and adjusting to new circumstances.[9]  Taken a few steps further, it is important to consider the 4 rules of risk intelligence and a tool for conducting a risk strategy audit.

The “4 Rules of Risk Intelligence” are:

1. Recognize which risks are learnable.
2. Identify risks you can learn about fastest.
3. Sequence risky projects into a learning pipeline.
4. Keep networks of partners to manage all risks.[10]

The Risk Strategy Audit

A risk strategy audit is a step-by-step review of how the principle risks in your organization fit together by developing a score, by project or strategy, in a fairly subjective manner. There are 3 categories that require scoring at the project level: risk intelligence as measured against the competition, risk diversification and project size vs. all other projects.  See and download the attached example spreadsheet I created (based upon David Apgar’s model) to help me conduct a Risk Strategy Audit for a Marketing and Sales function.[11]

Sample Risks and More Definitions

See the attached Exhibit A: Sample Strategic and Business Risks.

Strategic risks - are simply those that affect the strategic direction of the organization.

Business risks - are those risks that have an impact on the day-to-day running of a business in terms of operational, product and marketing risks.

According Sayan Chatterjee, author of the book Failsafe Strategies, the three business risks that can derail a strategy are: demand risk, competitive risk and capability risk, as defined:

• Demand risk – is the risk that the value proposition that a firm is trying to sell will not be accepted by the market or, will be so accepted by the market that demand exceeds supply causing a competitive risk.
• Competitive risk - is the inability to cope with unexpected demand making the firm susceptible to competitive advances.
• Capability risk – is the risk that a firm is not able to deliver on the value proposition that customers are willing to pay for or, the capabilities cost is so high that the firm cannot make a satisfactory profit.

Key Risk Indicators (KRIs) – are the leading indicators of emerging risks and metrics that shed light on shifts in risk conditions so the management team and the board of directors can proactively assess the impact of such risks on the organization’s portfolio of risks.[12]

Risk appetite – is the organization’s comfort level with each associated risk. The risk appetite can be expressed by the Board of Directors and senior management in the form of risk parameters, limits and thresholds of risk that their organization is comfortable in assuming. The 4 elements of risk appetite are: 1) Existing Risk Profile, 2) Risk Capacity, 3) Risk Tolerance and 4) Desired Level of Risk. [13]

But the mother of all of these definitions is this one:

“Enterprise risk management – according to COSO.org “is a process, affected by the entity’s board of directors, management, and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within the risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.”[14]

Translation: ERM seeks to consider the risks to the business as a “portfolio of risks” that fall within the “risk appetite” of the entity.

A subset of the Enterprise Risk Management process is the category of Strategic Risks. As part of ERM, the strategist must identify, evaluate and approach strategic risks in an intelligent and organized way.  The risk intelligence process described above can help the strategist do so.

Developing Key Risk Indicators (KRIs)

Similar to the concept of Key Performance Indicators (KPIs), a common practice in most businesses, COSO.org[15] has developed a process for the development of Key Risk Indicators (KRIs) which helps management to focus on risks that otherwise might threaten the business, present new opportunities for risk taking or, potentially hinder the execution of the strategic plan. The KRI Development Process can be summarized by the following simple workflow diagram:

Where:

Objectives – are the Strategic Objectives (such as Increase Revenues and Reduce Costs).

Strategies – are a set of Strategic Initiatives developed to meet the Strategic Objectives.

Potential risks – are the risks, potential risks and events associated with each strategy that might affect the achievement of the Strategic Objectives.

Key Risk Indicators (KRIs) – are the leading indicators and metrics that are mapped to potential risks and key strategies. Stress points and Trigger points that lead to the root causes and intermediate risks need to be identified. Thresholds and limits need to be established to guide actions in conjunction with KRIs (i.e if the response rates on a direct mail campaign fall below .x% then we will stop funding these campaigns). Such limitations are based upon an organization’s “risk appetite”, as defined above, and as articulated in the COSO.org whitepaper entitled: Strengthening Enterprise Risk Management for Strategic Advantage, COSO 2009.

Strategic Response – is the Directors and Officers response and reaction to the KRI that is unfolding. These responses can include remedial actions to reduce or eliminate the impact of the emerging risk such as: revising or eliminating strategies, risk mitigation activities, explicit countermeasures, raising and/or lowering of expectations based upon a new level of awareness, establishing legal defenses, increasing lobbying intensity, etc.

During this process it is important to note that KRIs must cover the linkages between a root cause event, an intermediate event all the way through to a complete risk event.

According to COSO.org, well-designed KRIs possesses all of the following characteristics:

• They are based upon established practices or benchmarks.
• Developed consistently across the organization.
• Provide an unambiguous and intuitive view of the highlighted risk.
• Allow for measurable comparisons – across time and business units.
• Provide opportunities to assess the performance of risk owners on a timely basis.
• Consume resources efficiently.[16]

The Ernst & Young Business Risks Report of 2010[17]

After several years of issuing a report on business risks alone, E&Y has seemingly adopted “the Chinese definition of risk”, surveying top risks and opportunities.  I thought it would be interesting to share the E&Y survey results (from more than 700 leading organizations in 15 countries) of the top risks and opportunities that have been identified.

The Top 10 Risks

1. Regulation and Compliance
2. Cost Cutting
3. Managing Talent
4. Pricing Pressure
5. Emerging Technologies
6. Market Risks
7. Expansion of Government’s Role
8. Slow recovery/Double Dip Recession
9. Social Acceptance risk/CSR
10. Access to Credit

The Top 10 Opportunities

1. Improving Execution of Strategy Across Business Functions
2. Investing in process, tools and training to achieve greater productivity
3. Investing in IT
4. Innovating in products, services and operations
5. Emerging Market Demand Growth
6. Investing in Clean Tech
7. Excellence in Investor relations
8. New Marketing channels
9. Mergers and Acquisitions
10. Public-private partnerships[18]

Conclusion

Transparency and oversight of risk exposures has become the “new normal” and strategic planning is no exception. Therefore, it is imperative to view risks as yet another dimension of the strategic planning process. So, my suggestion to the strategist would be to follow these 9 steps towards strategic risk management, as follows:

1. Be proactive and get ahead of the curve. Become a student of strategic risk management by tapping into the resources listed at the end of this post.
2. Take a broader-than-traditional view of risk management that considers both threats and opportunities.
3. If you haven’t done so already, conduct an updated S.W.O.T. analysis to help guide your strategic risk management efforts.
4. Establish a dialogue and collaborate with anyone internally that has a role in ERM, compliance, regulatory and related activities.
5. Determine the Company’s “Risk Appetite” as articulated by the Board of Directors and Senior Management in the form of practical guidelines for you to use.
6. Establish a baseline by conducting a risk strategy audit.
7. Review the list of “Sample Strategic and Business Risks” and the E&Y Top Risks and Opportunities and select the ones that apply to your organization.
8. For each strategic initiative, develop the potential risks and follow the process for developing KPIs.
9. Track and report KPIs as new risk information becomes available or, monthly at a minimum, making adjustments and recommendation along the way.

“Strategy formulation involves the constant search for ways in which the firm’s unique resources can be redeployed in changing circumstances.”

-Richard Rumelt

As a final note, there is much work left to be done in the area of ERM. According to the ERM initiative at NC State University, the current state of enterprise-wide risk management, across a wide spectrum of organizations is in an immature stage of development.[19] Therefore, I encourage you (and your colleagues) to utilize some of these recommended resources I have listed below to help guide you.

What are your thoughts on strategic risk management? I recognize that this is just a cursory review of a very broad topic. Do you agree or disagree with my recommendations? Do you have anything else to add or comment on related to strategic risk management? Please comment below or, if you prefer, you can email me through Linked In, or my web site at: http://www.strategicmarketingplus.com

Bill Tyson, CEO of Strategic Marketing Plus, LLC is an independent strategic marketing consultant and the author of the popular blog Strategy-In-Action. He is a graduate of the Temple University Fox School of Business Insurance and Risk program. To subscribe visit:  http://www.billtyson.wordpress.com

Recommended Resources:

News article on FINRA guidelines for social media

Video: 

Naomi Klein gave an interesting talk 12 months ago on TED called “Addicted to Risk”. It was posted in January 2011.

http://www.ted.com/talks/naomi_klein_addicted_to_risk.html

Books:

Risk Intelligence: Learning to manage what we don’t know, David Apgar, Harvard Business School Press, 2006, Boston, MA

Strategic Risk Taking – A Framework for Risk Management by Aswath Damodaran, Wharton School of Publishing, Upper Saddle River, NJ. 2008.

Failsafe Strategies – Profit and Grow From Risks That Others Avoid by Sayan Chatterjee, Wharton School of Publishing, Upper Saddle River, NJ. 2005.

Free Whitepapers:

Strategic Finance, May 2007 “Strategic Risk Management: creating and Protecting Value” by Mark Beasley and Mark Frigo. Available at http://www.coso.org.

2009 COSO Thought Leadership paper entitled: “Strengthening Enterprise Risk Management for Strategic Advantage”, by COSO.org.

December 2010 COSO Report: “Developing Key Risk Indicators to Strengthen Enterprise Risk Management”, COSO.org by Mark S. Beasley, Bruce C. Branson and Bonnie V. Hancock.

Ernst and Young Report: Business Risks Report of 2010.  Also see http://www.ey.com.

Ernst & Young Dodd-Frank Whitepaper called Positioning for Change.

Report on the Current State of Enterprise Risk Oversight (2009) at http://www.erm.ncsu.edu

Marsh April 2011 Report: Dodd-Frank’s Whistleblower and Clawback Provisions: Potential Effects on D&O Exposures.

 Bailey Cavalieri, LLC Attorneys-at-law: Future D&O Exposures: Storm Clouds Ahead?

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[1] Forbes Magazine, Richard Levick’s , The Communicator, Blog post entitled: “Today’s Guidance on the UK Anti-Bribery Act Launches New Enforcement Era.”, March 30, 2011.Today’s Guidance on UK Bribery Act Launches New Enforcement Era

[2] Ibid.

[3] See 2009 Thought Leadership paper entitled: “Strengthening Enterprise Risk Management for Strategic Advantage”, by COSO.org. Page 4.

[4] See December 2010 COSO.org report: “Developing Key Risk Indicators to Strengthen Enterprise Risk Management report by Mark S. Beasley, Bruce C. Branson and Bonnie V. Hancock.

[5] See May 2007 whitepaper: Strategic Risk Management: Creating and Protecting Value, by Mark S. Beasley, CPA and Mark L. Frigo, CMA, CPA, Strategic Finance.

[6] Strategic Risk Taking: A Framework for Risk Management, Aswath Damodaran, Wharton School Publishing, Philadelphia, PA. 2008. Page 6.

[7] Ibid.

[8] Competitive Strategy, by Michael Porter,

[9] Risk Intelligence: Learning to manage what we don’t know, David Apgar, Harvard Business School Press, 2006, Boston, MA.

[10] Risk Intelligence: Learning to manage what we don’t know, by David Apgar, Harvard Business School Press, 2006, Boston, MA. Chapter 6: Raising Your Risk Intelligence Systematically, Pages 184 to 198.

[11] Risk Intelligence: Learning to manage what we don’t know, by David Apgar, Harvard Business School Press, 2006, Boston, MA. Chapter 6: Raising Your Risk Intelligence Systematically, See Figure 4-4.

[12] “Developing Key Risk Indicators to Strengthen Enterprise Risk Management”, COSO.org by Mark S. Beasley, Bruce C. Branson and Bonnie V. Hancock, December 2010.

[13] See 2009 Thought Leadership paper entitled: “Strengthening Enterprise Risk Management for Strategic Advantage”, by COSO.org. Page 9.

[14] Strategic Finance, May 2007”Strategic Risk Management: creating and Protecting Value” by Mark Beasley and Mark Frigo. Pages 25 – 53.

[15] COSO.org is the Committee of Sponsoring Organizations of the Treadway Commission – a private sector initiative to support the development of enterprise risk management best practices, internal controls and fraud deterrence. For more information see http://www.coso.org.

[16] “Developing Key Risk Indicators to Strengthen Enterprise Risk Management”, COSO.org by Mark S. Beasley, Bruce C. Branson and Bonnie V. Hancock, December 2010. Page 6 Well designed KRIs.

[17] Ernst and Young Report: Business Risks Report of 2010. Also See http://www.ey.com

[18] Ernst and Young Report: Business Risks Report of 2010. Also See http://www.ey.com.

[19] See the Report on the Current State of Enterprise Risk Oversight (2009) at http://www.erm.ncsu.edu.

A Prescription for Change

You Can Keep the Change…Say What?

One of the tough things to swallow in business is the lip service paid by some executives towards change initiatives. It goes something like this:

“Yeah, we know have to change but, we are too busy struggling to keep our clients happy while at the same time trying to meet our numbers”.

This is the common “deer-looking-into-the-headlights” response when change initiatives are stalled or shelved due to the increased level of risk and complexity nearly everyone in business feels in this newly connected global marketplace.  Take complexity and combine it with the daily pressures of meeting “the numbers” and sometimes you get paralysis.

As we all know, postponing change indefinitely can be a fatal position for a successful business.  Just take a ride around a city like Detroit or other cities in the “rust belt” if you need a reminder about how critical it is to continuously change. In the never ending quest to meet the numbers though, the unspoken feeling among those executives who seemingly have no time for change – is that fatalist view that “change won’t help me if I fail to meet my numbers”.  That level of complacency won’t work. I think every executive needs to spend at least 10% of their time on change initiatives – no matter what.

Here is what Dwight D. Eisenhower so poignantly said about the subject of change:

“Neither a wise man nor a brave man lies down on the tracks of history to wait for the train of the future to run over him.”

—Dwight D. Eisenhower

For a moment, just think about the painful change that has been occurring at most businesses who have been forced to embrace social media…and how during its infancy the whole social media opportunity was dismissed by many CEOs as a “passing fad for kids”. A perfect example comes from Google Inc.’s executive chairman Eric Schmidt who said one of his biggest failures as chief executive of the search giant over the last decade was grappling with the rise of social identity services such as Facebook Inc. (Source: Wall Street Journal, June 1, 2011: article entitled: Google Missed the Friend Thing).

Here is another one of my favorite quotes on change:

“Everybody has accepted by now that change is unavoidable. But that still implies that changes like death and taxes — it should be postponed as long as possible and no change would be vastly preferable. But in a period of upheaval, such as the one we are living in, change is the norm.”[2]

—Peter Drucker

Transformational Change

To me, one of the most exciting and riveting challenges a leader faces is developing and implementing a change initiative. Call me crazy but I think that is especially true now – during this age of economic turbulence, political instability, industry consolidations and market upheaval. A large-scale change initiative (called “transformation”) certainly gets the juices flowing – both good and bad.  And it’s the bad that you have to plan for, guard and defend against. The inherent nature of a transformation initiative is that it typically involves BIG changes – a change in business model and/or business model design that fundamentally alters the business.  Examples of business transformation are the adoption of new technologies, major strategic shifts (entering new markets, launching completely new products), full scale process re-engineering, mergers, acquisitions, integration, restructuring, innovation initiatives and dramatic cultural changes. If you ever find yourself knee deep in the midst of the implementation of a full scale transformation initiative, you will agree that it requires a complete set of leadership skills, a strong constitution, resilience (and a background in risk management helps).

“A willingness to change is a strength, even if it means plunging
part of the company into total confusion for a while.
-Jack Welch

And this one, again from Peter Drucker:

“The greatest danger in times of turbulence is not the turbulence; it is to act with yesterday’s logic.”

—Peter Drucker

People and Change

As we all know, change comes at an organization in a variety of different ways.  When thrust upon us during or following a crisis (the worst kind) it can hit so hard and fast it takes your breath away. Other times change is incremental, planned and emerges following an event like a business performance review process or through an organized strategic planning process (aka the easy way towards change).  In a few cases, it comes packaged with clever slogans (remember “Change We Can Believe In”[3]?).  One thing is for certain: change is really tough to accomplish because it involves changing people’s behavior.  With few exceptions, in most organizations people already have full time jobs …so to “pile on” a large-scale change initiative or a few consecutive change initiatives can be viewed as overwhelming or just another “flavor-of-the-month”[4] effort by senior management.  If not carefully planned, the people within the organization can view your change initiative(s) as unrealistic or “doomed from the start” which can obviously create a big morale problem that impacts the existing business (and eventually results) and in extreme cases, threatens the long term viability of the business.  Change can be an uphill climb, just like most rewarding things in life. However, it can be made a little bit easier if you, as the leader, sets the right tone and follows a proven process or what I like to call a “prescription for change”.

 ”People don’t resist change. They resist being changed!”

—Peter Senge

My “prescription for change” is modeled after two very cogent approaches called the Fifth Discipline and Dr. Kotter’s the 8 step process for leading change, as described below.

The Organizational Entity as an Organism

Some organizations make change look easy because they have developed and truly shaped change over time.  In this way, the organization is similar to a living entity or organism, morphing into adaptive, learning organizations[5] from the very top to the very bottom.  In his seminal 1990 best seller of a book, The Fifth Discipline, Peter Senge developed the concept of the “learning organization” which consists of five key ingredients to operate and adapt in an increasingly complex and changing global marketplace:

1. Systems Thinking
   – viewing the organization as a system of interdependent and connected parts that operate like an organism, ever changing and learning.
2. Personal Mastery
   – encouraging skills development and spiritual growth of the employees by the “learning organization”.  Being able to see and deal with the current reality of the business.
3. Mental models
   – a discipline that requires managers to construct mental models for the driving force behind the organizations’ values and principles.
4. Shared Vision
   – creativity and innovation are based upon group creativity which is contingent upon having a shared vision.
5. Team Learning
   – instilling candor, shared dialogue, team work and open communications is necessary for achieving the vision.[6]

I really recommend this book if you have not already read it.

Jack Be Nimble

Learning organizations create the environment necessary for constant change. One of the best examples of a learning organization is General Electric where, in the 1990s, Jack Welch is famous for saying: “You’ve got to talk about change every second of the day.” While this declaration is a bit overboard, as his record demonstrates, he truly practiced what he preached. In the final analysis, Jack was a nimble leader, incredible trainer and evangelist for change who really understood that real change is harder and takes a lot longer than most people think.  Change became part of the fabric of this massive company because of his undaunted leadership skills.

Oh, and Machiavelli thought change was pretty tough too:

“There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things.”

—Niccolo Machiavelli
The Prince (1532)

And, consider this gem on change:

“Keep in mind that you cannot control your own future. Your destiny is not in your hands; it is in the hands of the irrational consumer and society. The changes in their needs, desires, and demands will tell you where you must go. This means that managers must themselves feel the pulse of change on a daily, continuous basis…. They should have intense curiosity, observe events, analyze trends, seek the clues of change, and translate those clues into opportunities.”

— Michael J. Kami

Thank You, Dr. Kotter

Dr. John Kotter, a Harvard Business School professor and preeminent author of the best selling book, “Leading Change” has studied dozens of organizations in the midst of tremendous change and upheaval put it this way:

“The central issue is never strategy, structure, culture, or systems. The core of the matter is always about changing the behavior of people.”[7]

Again, people determine the success or failure of change so there is a need to continuously motivate, train and promote new behaviors that support change.  Several of the best books on change have been written by Dr. Kotter (Leading Change, The Heart of Change and one of his more recent books Our Iceberg is Melting).  He advocates a very sensible and straight forward 8 step process toward effective, lasting change, which I will summarize here:

1.     Establish a Sense of Urgency:

• Examine internal and external realities (via SWOT analysis).
• Identify and deal with any crisis, potential crisis and key transformational issues and opportunities.
• Reinforce the idea that change is about creating a brighter, better, more sustainable future.

2.     Build the Guiding Team:

• Pick a champion known for change leadership.
• Assemble a team that is powerful enough to lead the initiative, made up of key influencers.
• Ignore the usual organizational hierarchies and encourage the group to work as a team.
• Establishing a dialogue of trust, candor and truth throughout the organization is absolutely critical.

3.     Get the Vision Right:

• Create the vision for the change initiative.
• Use the military approach of Commander’s Intent (CI).
• Develop strategies for change.
• If you cannot explain the vision in 5 minutes or less then you are NOT finished with this important step.

4.     Communicate for Buy-in:

• You must use the art of persuasion and strike an “emotional cord”.  Follow Dan and Chip Heath’s advice on communicating ideas that stick: Simplicity, Unexpectedness, Concreteness, Credibility, Emotional and Stories.[8]
• Use every vehicle to communicate the new vision.
• Teaching/training new behaviors.
• Show how this change initiative or turnaround plan is different from past plans.
• Develop and nurture a positive culture around change.

5.     Empower Action/Remove Obstacles:

• Identify and remove obstacles to change, including people who haven’t bought into and support the change program.
• Changing and/or eliminating systems/procedures that undermine change.
• Encourage risk-taking, the exchange of non-traditional ideas, activities and actions (proof positive change is underway).
• Fight momentum killers – complacency, resistance, defiance, skepticism, cynicism and pessimism whenever it surfaces.

6.     Create Short-term Wins:

• Plan for visible performance improvements – engineer short term wins.
• Creating, implementing and rewarding employees involved in the improvements.

7.     Don’t let-up – Produce More Change – build on Your Quick Wins

• Using increased credibility to change systems and policies further.
• Hiring, promoting and developing employees who can implement the vision.
• Recognize that setbacks are inevitable.
• Reinvigorate the process with new projects, changes and themes.

8.     Institutionalize Change – Make Change Stick

• Articulating the connections between the new behaviors and corporate success.
• Developing the means to ensure leadership development and succession.
• Follow this mantra: “We see, we feel, we change”[9]

Again, another great quote from Peter Drucker:

 ”Company cultures are like country cultures. Never try to change one. Try, instead, to work with what you’ve got. “

—Peter Drucker

Communication – Leveraging the “Bees Knees”

Successful change requires a carefully crafted and orchestrated communication plan that supports all 8 steps of the process. Again, I marvel at Jack Welch’s ability to continuously drive change throughout his long, successful tenure as CEO and Chairman of GE.  He was also a proponent of teamwork and pushing change down to the lowest levels of the company until the positive view of change permeated the entire organization.

To do so, I believe it is critical to have the management team establish a clear and open dialogue with the entire workforce by appointing supervisors and managers with the task of transmitting (and often times translating) the communications for an on behalf of senior management. The second, third and fourth levels down the organization, those closest to the frontline employees, represents what I call the “bees knees”.  They must be part and partial of such a critical communication effort.

“Culture does not change because we desire to change it. Culture changes when the organization is transformed; the culture reflects the realities of people working together every day.”

—Frances Hesselbein[10]

Making Change Stick

In the final analysis, lasting change is not a ‘hit and run” exercise and rarely occurs through happenstance.  It is typically a long, hard slog of a process. “Making Change Stick”, my “prescription for change”, then is about:

• making sure that you always have an eye on the future,
• a thorough understanding of the environment your business is operating in,
• a simple but effective vision,
• the identification of the behaviors that need to change,
• the willingness to change,
• an evangelical leader that sets aside at least 10% of his or her time working on change,
• additional resources and funding to support change,
• adopting the Fifth Discipline, creating and nurturing a learning organization,
• a persuasive (and pervasive) communication plan supported by the “bees knees”, involving the entire management team, filtering down through the supervisory ranks to the frontline employees.
• a process for change – as I recommend – following Dr. Kotter’s 8 step process to guide change initiatives.
• And last but not least, motivational rewards, incentives and recognition consistent with the vision and outcome(s) you want to achieve.

That is my “prescription for change”.  What are your thoughts on change? Do you agree or disagree? Do you have anything else to add or comment on related to change?

Bill Tyson, CEO of Strategic Marketing Plus, LLC

P.S. See Seth Godin’s Ted speech on change:

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[1] Title is the same as Step Number 8 of Dr. Kotter’s process for change in The Heart of Change, John P. Kotter, Harvard Business School Press, Boston, MA, 2002.

[2] Peter Drucker’s quote appears in: Management Challenges for the 21st Century (1999)

[3] “Change We Can Believe In” was President Obama’s Campaign slogan until it was changed to “Change We Need”.

[4] Flavor-of-the-month - Something that is prominent in the organization for a short time then fades out of interest and is replaced by the next temporary initiative.

[5] The phrase “learning organization” was first coined in The Fifth Discipline, The Art & Practice of The Learning Organization by Peter Senge, Crown Business; Revised edition (March 21, 2006).

[6] The Fifth Discipline, The Art & Practice of The Learning Organization by Peter Senge, Crown Business; Revised edition (March 21, 2006)

[7] Fast Company, Change or Die, BY: ALAN DEUTSCHMAN, May 1, 2005.

[8] Made to Stick: Why Some ideas Survive and Others Die by Chip Heath and Dan Heath, Random House, NY, 2007.

[9] The Heart of Change, Dr. John Kotter, Harvard Business School Publishing, 2002.

[10] The Key to Cultural Transformation, Leader to Leader (Spring 1999).

See also, HBR’s 10 Must Reads on Change by all of these great authors: John P. Kotter, David A. Garvin, Michael A. Roberto, Samuel J. Palmisano, Paul Hemp, Thomas A. Stewart, Debra Meyerson, W. Chan Kim, Renee A. Mauborgne, Dan S. Cohen, Ronald A. Heifetz, Marty Linsky, Robert Kegan, Lisa Laskow Lahey, Michael Beer, Nitin Nohria, Harold L. Sirkin, Perry Keenan, Alan Jackson, Russell A. Eisenstat, Bert Spector

220 pages. Publication date: Jun 07, 2010. Prod. #: 12599-PDF-ENG.

Making a Good Customer Value Proposition Better

Introduction

The creators of the Balanced Scorecard, Robert Norton and David Kaplan, view the customer value proposition (“CVP”) as the “heart of strategy”.  They very succinctly stated that:

“Strategy is based on a differentiated customer value proposition.  Satisfying [your] customers is the source of sustainable value creation.”[1]

A customer value proposition is an offering that helps customers do an important job more effectively, conveniently, or affordably than the alternatives. [2]

In addition to being “the heart of strategy” it is one of the 4 key components of a business model (which include: 1) customer value proposition, 2) revenue/profit formula, 3) resources and 4) processes such as manufacturing).[3]

In my opinion, successful customer value propositions have certain common characteristics, are inextricably linked to the offer(s) and need to be supported by the people, processes and technology geared towards delivering on the CVP in a manner that conveys an intimate understanding of the customer’s requirements.

Successful businesses that exist in a competitive industry environment know all too well about the need to gain and maintain sustainable points of differentiation in the form of a superior customer value proposition. They also understand the nature of customer value proposition – that it is not a single undertaking as a customer’s experiences, preferences wants and needs, fluctuate, evolve and change over time.

Furthermore, developing and maintaining a superior CVP is a “C” level activity, not to be pushed off to marketing and/or sales as an exercise in positioning.

The traditional marketing exercise for developing a customer value proposition was to consider the following “tweaks” (i.e. improving, transforming or reinventing the CVP) to the generic product or service:

• Raising benefits.
• Reducing costs.
• Raising benefits while lowering costs.
• Raising benefits by more than the increase in costs.
• Lowering benefits by less than the reduction in costs.

While this is certainly a step in the right direction, it is a bit too simplistic, it is geared narrowly towards improving an offer, and is missing a few essential elements. Creating an effective value proposition or, making a good customer value proposition better, requires a review of these 7 essential elements.

The 7 Essential Elements of an Effective Customer Value Proposition

A truly effective customer value proposition has the following 7 essential elements:

1. The CVP is Created by Conducting a Thorough Needs Analysis – starting with a complete understanding of the customer, determining what their needs, preferences and requirements of an improved solution would be (that meets or exceeds these needs and/or preferences).  Again, determining how these identified needs are currently being satisfied, and applying the litmus test to an improved product or service in the areas of: effectiveness, affordability and convenience (per the definition of CVP above). Ultimately, the CVP creators must determine the elements that deliver (and will continue to deliver) the greatest value (or “bang for the buck”) amongst the alternatives that a customer has access to.  A complete customer profile analysis can assist a business in identifying your best customers (and the least valuable customers).

2. The CVP is Truly Customer Experience driven – an effective value proposition is expressed in terms of real benefits, as defined by the customer, through their experience from the actual or expected consumption of the product and/or service.  CVP must be integrated into all customer-facing activities, marketing materials and messaging. When developing the CVP, you should heed the advice of the McKinsey Quarterly authors (who wrote an article that challenges the traditional sales funnel entitled:  The Customer Decision Journey):

“Marketers must move aggressively beyond purely push-style communication and learn to influence consumer-driven touch points.” [4]

When developing your CVP you must consider the phrase they have coined the customer decision journey, each point of contact along the way and the relative influence the CVP has on the customer and their decision making process.  In other words, can you determine how marketing and sales can leverage the CVP to influence or motivate trial, purchase, repurchase, and advocacy elements of the customer decision journey?[5]

Jeff Bezos, CEO and Founder of Amazon.com has embraced this concept well and stated: “if you do build a great experience, customers tell each other about that.”[6]

3. The CVP is simple, yet distinctive and all encompassing. By this I mean it should reflect 2 aspects of what are called value elements: 1) points of parity and 2) points of difference.[7] Points of parity are elements (i.e. functionality and performance) in common with the next best alternative whereas points of difference are elements that make your product better than the next best alternative. The third value element is called points of contention; they arise when you and the customer disagree as to how the elements compare to the next best alternative.

To demonstrate value elements, you simply need to present clear proof of your product or service value versus the competition (to ensure an apples-to-apples comparison) by articulating the points of parity and differences between your product and the known alternatives.  Internet Security software companies do this well in comparing the “free” software to the paid subscription service and then against the most popular brands. BMW-chasing companies (such as Hyundai) also do this well by demonstrating and documenting their value proposition in terms of tests related to safety, speed, duration of warrantee, handling, affordability, quality, re-sale value and customer satisfaction levels.

Many companies have adopted the Net Promoter Score which simply asks what the author, Fred Reichheld, calls The Ultimate Question: “would you recommend this company to a friend or colleague?”  The metric it produces is called the Net Promoter Score where P – D = NPS”[8] where:

P = Promoters are loyal enthusiasts who keep buying from the company and urge their friends to do the same. (Passives are satisfied but unenthusiastic customers who are easily wooed by the competition) and

D = Detractors who are those customers trapped in an unhappy relationship.[9]

4. Your CVP Is Measurably Better than the competition’s Customer Value Proposition – all customer value propositions should be based upon tangible points of difference, expressed in both qualitative, quantitative and ultimately, monetary terms. An effective CVP has a “resonating focus” on one or two points of parity and/or points of differences.[10]

5. Customer validation and substantiation – to avoid being considered marketing puffery, your value proposition must be substantiated by actual case studies and/or testimonials. You need to demonstrate instances where the customer not only decided to purchase your product or service but did so from your company for reasons that you can substantiate. Customer testimonials are critical and must be expressed from a customer’s viewpoint.  They help to substantiate and authenticate the customer value proposition.

6. The CVP Is Sustainable – not easily copied, substituted or subject to rapid obsolescence or, if it is, then the new and improved customer value proposition should be in the process of simultaneous development. To satisfy this requirement, you must be able to execute on this value proposition for a significant amount of time (which varies depending upon the intensity of your competitive environment).  And, to avoid morale issues, you must constantly communicate to your people what the next value proposition is going to be, lest they think that you are “resting on your laurels”.

7. The CVP Should be Tied to Business Reviews and A Performance Evaluation Program. One of my “pet peeves” is accountability. A CVP review should be conducted in conjunction with monthly and/or quarterly business reviews. In addition to the typical business unit performance measures, a management performance review process should include an evaluation of eahc manager’s performance in delivering the customer value proposition to each target segment and key client(s) they serve in their role within the company.

Conclusion

To be effective a Customer Value Proposition should be distinctive, have a resonating focus and possess the following 7 elements:

1. Should be based upon a thorough customer needs analysis and enhances effectiveness, affordability and convenience vs. alternatives.

2. Is customer experience driven.

3. Is simple by design, yet distinctive and has a “resonating focus” on a few value elements.

4. Is measurably better, expressed in monetary terms.

5. Is authentic – through validation, substantiation, data and documentation.

6. Is sustainable – now and in the future.

7. Is tied to the business review and performance evaluation process.

And finally, this post represents the 10^th in a series of Strategy-in-Action articles in as many months. It covers one of the most fundamental business performance topics: making a good customer value proposition even better.   As always, I would appreciate everyone’s viewpoints, comments and input.

Yours in strategy,

Bill Tyson, CEO, Strategic Marketing Plus, LLC March 27, 2011.

Additional Online Resources related to Customer Value Proposition (CVP) that you may find helpful:

1. Powerful Value Propositions, Thursday, 16^th of October 2008 at: http://www.marketingexperiments.com/improving-website-conversion/powerful-value-propositions.html

2. Ed Barrows – Customer Value Proposition  - http://www.edbarrows.com/Resources/briefs/valueProposition.pdf

3. HBR.org – see various articles cited here.

4. Developing Strong Value Propositions, in Selling to Big Companies, by Jill Konrath, 2009.

http://www.sellingtobigcompanies.com/file_redirect.jsp?siteObjectID=99998&fname=ValueProp09.pdf.

Footnotes:

[1] Kaplan, Robert; Norton, David. Strategy Maps, HBS Press, 2004.

[2] The New M&A Playbook, by Clayton M. Christenson, Richard Alton, Curtis Rising, and Andrew Waldeck. Harvard Business Review, March 2011 edition, page 50.

[3] Reinvent Your Business Model by Mark W. Johnson, Clayton M. Christenson, and Henning Kagermann, Harvard Business Review, December 2008  edition, page 50.

[4] Customer Decision Journey, by David Court, Dave Elzinga, Susan Mulder, and Ole Jørgen Vetvik. McKinsey Quarterly, 2009 Number 3. Page 5.

[5] Ibid.

[6] The Ultimate Question, Driving Good Profits and True Growth by Fred Reichheld, Harvard Business School Press, Boston, MA 2006.  Page10.

[7] Customer Value Propositions in Business Markets by James C. Anderson, James A Narus and Wouter Van Rossum, Harvard Business Review, March 1, 2006.

[8] The Ultimate Question, Driving Good Profits and True Growth by Fred Reichheld, Harvard Business School Press, Boston, MA 2006.  Page 10.

[9] The Ultimate Question, Driving Good Profits and True Growth by Fred Reichheld, Harvard Business School Press, Boston, MA 2006.  Page 19.

[10] Customer Value Propositions in Business Markets by James C. Anderson, James A Narus and Wouter Van Rossum, Harvard Business Review, March 1, 2006.

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Accountability: The X-Factor in Your Organization?

In this context, “the X-Factor” means a hard-to-describe force, influence or quality that has a positive impact on an organization’s performance. I believe that when an organization possesses and promotes the concept of accountability appropriately, the effect can be the X-Factor for the organization, and thus, result in a key competitive advantage.

Going From Accounting to Creating the X-Factor

True, the root of accountability is accounting but, in the truest sense of the word, it includes so much more beyond just the numbers. By accountability, I don’t mean the old school practice of autocratic, policing by the “quants” who are so worried about the flow of too much information they create confusion, a void of understanding and mistrust with key constituents (those closest to them – middle management team and employees).  Rest assured that I write this from a position of experience (I have the scar tissue and grey hair to prove it) but luckily, it hasn’t been my recent experience. These are the kind of senior level people who are constantly looking for opportunities for a surprise attack and take delight in embarrassing or humiliating people within the organization with their tenacious pursuit for what they call “the truth”.  If you have ever encountered this old school element then you understand, like I do, that these counterproductive methods can have a debilitating effect on morale, hurt productivity and create an environment of fear, uncertainty and doubt (aka “F.U.D.”).   To counter this element, some companies, like Google, Barklays Capital, Jet Blue and Capital One, have a “No A-Holes” recruitment standard so people like this are identified during the pre-employment screening process and NOT hired to join the ranks of their work force.[1]

Instead, I am referring here to the much more meaningful effort of fostering of the spirit of a fully committed team.  Such a fully committed team in this context is working together towards the pursuit of lofty ambitions (i.e. achieving an industry leadership position) based upon a common set of performance goals (quantitative and qualitative) and clear-cut metrics that have real meaning – to them.  To be effective, the goals are necessarily supported by rewards and recognition programs and a well-conceived communication plan to ensure the team is constantly motivated to achieve continuous improvements in performance.  Peter Drucker so eloquently made the point towards a definition of accountability that goes far beyond just financial accounting:

“Financial Accounting, balance sheets, profit-and-loss statements, allocating costs, etc. are an x-ray of the enterprise’s skeleton.  But much as the diseases we most commonly die from – heart disease, cancer, Parkinson’s – do not show up in a skeletal x-ray,  a loss of market standing or, a failure to innovate,  do not register in the accountant’s figures until the damage is done.”[2]

An Accountability Success Story

As a case in point, before becoming a Strategic Marketing Consultant, I ran a direct marketing life insurance business for a few years. Early on, the management team and I agreed on a set of 6 key metrics[3] and goals for each that we tracked on a weekly and monthly basis.  While we had a dashboard of more than 50 available metrics to review, we put much more emphasis on these six critical ones. These goals and metrics were agreed to, signed off by and fully supported by the senior leadership (CEO and CFO) of our parent company.  Using a simple sensitivity analysis spreadsheet, everyone in the company knew what the baseline metrics were, how they were calculated and the relative impact that each had on our top line performance. With this tool we were able to create “what if” scenarios to demonstrate first hand that “not all metrics are created equal” so, for scoring purposes, each metric had a relative weighting based upon the potential impact it could have on achieving our goals and driving top line revenues.  Incentives were tied to performance levels that exceeded plan.  All front line employees could see how they contributed to the performance metrics, some directly and others indirectly, but there was a prevailing a sense amongst the team that they all had a role in accomplishing goals and were an integral part in the day-to-day achievement of the overall strategy.  In the agent call center, each agent had an individual scorecard tied to these metrics which was compared to the agency averages overall and the variances to the average were denoted by a simple color coded system: plus variance (green), minus or negative variance (red) or no variance – equal to the average (yellow).  A meritocracy of sorts was created that rewarded the best performing agents with proportionately higher amount of the best performing leads. One-on-one meetings were held quarterly with each agent and were designed to be informative, prescriptive and helpful (as opposed to punitive). The poorest performing agents were placed on a performance management track and coached on a weekly basis until improvements were made – or not. With our employees and agents we met in a lively but relaxed environment; and when we exceeded our metrics, we met over pizza.

Accountability Applies Equally to External Stakeholders

Meanwhile, outside the company, we met with the paramedical companies, third party suppliers and the insurance companies to explain our goals and metrics. We compared common performance metrics and the goals we shared with them and examined any discrepancies between our results and theirs.

Once we had our external partners on board, the accountability cycle was complete – where results were shared openly with the key stakeholders in the form of a Monthly Progress Report.

Accountability worked. Once we had everyone in alignment – where we were all on the same page and focused on the improvement goals we created for each metric, we achieved a dramatic improvement in our performance, across-the-board.  In some of our metric categories (like conversion rate[4]), our external partners (insurance companies and paramedical firms) confirmed that our performance levels went from mediocre to industry leading.

The 4 Key Elements to Accountability

There are 4 key elements to accountability. In the book “Counting What Counts”, the authors have painstakingly chronicled hundreds of surveys and case studies that support 4 main areas of accountability common across all organizations:

1. Governance – corporate rules and policies to guide and govern employee behavior.
2. Measurement – measures that aid in decisions, reveal quality and customer satisfaction levels and ultimately, drive long term value.
3. Management Systems – a holistic, balanced view of the company performance that goes beyond financial measures alone and encompasses the customer perspective, social aspects, internal perspective (i.e. operations) and learning and growth. The Norton Kaplan Balanced Scorecard (BSC) approach is an example of such a management system.  See the CIGNA P&C BSC example that follows.
4. Reporting – this is the age of transparency, both inside and outside of the organization.[5]

In taking this concept one step further, they suggest creating a matrix called the Corporate Family of Measures, by key constituency. Here is a sample Matrix for the aforementioned life insurance direct marketing agency:

Key  Constituencies	Financial  Measures	Operational  Measures	Social  Measures
Shareholders
Customers
Employees
Agents
Suppliers/Partners
Insurance Companies

Source: “Counting What Counts” by Marc J. Epstein and Bill Birchard, page 150.

To fill in the Matrix and make it meaningful, you need to determine how each stakeholder contributes toward the achievement of the overall performance goals and metrics then state it in concise terms.

Example: CIGNA Property & Casualty Balanced Scorecard

Financial Perspective

• Net Operating Income
• Combined Ratio
• Premium Growth by business
• Premium mix by business

Customer Perspective

• Loss ratio by producer (agent/broker)
• Expense ratio by producer
• Producer triangle
• Premium run-off rate
• Performance against producer plans
• Average policy size

Internal Perspective

• Loss Ratio
• Expense ratio
• Price monitors
• Underwriting quality survey
• Claims Frequency
• Claims Severity
• Severity-control monitors
• Loss-control utilization

Learning and Growth Perspective

• Premiums per salary dollar
• Net operating income per salary dollar
• Competency development plan status
• Key staff turnover
• Key staff acquisition[6]

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[1] Robert I. Sutton, The No Asshole Rule: Building a Civilized Workplace and Surviving One That Isn’t, Warner Business Books, New York, 2007.

[2] Peter F. Drucker, “We need to Measure, not count.” The Wall Street Journal, April13, 1993.

[3] The 6 key metrics were: 1) response rate 2) application rate 3) medical completion rate 4) policies in force 5) average annual premium and 6) average premium per lead.

[4] Conversion Rate in this instance was the same as application rate = applications written/gross leads.

[5] Marc J. Epstein and Bill Birchard, “Counting What Counts”, Perseus Books, NY,NY, 2000. Page 7

[6] Source: Adapted from Robert L Nolan and Donna B. Stoddard, CIGNA Property and Casualty Reengineering (A)” (Boston: Harvard Business School, Case No. 9-196-059, 1995 and appears on Page 87 of “Counting What Counts”

Why Does Your Organization Need A Mission Statement?

Well, first of all, a mission statement can be pretty effective at establishing guidelines for people to follow in an effort to achieve a certain loftier, longer term mission.  In fact, mission statements have been used throughout history and many have indeed withstood the pressures and tests of time.

Think religion and the book of Genesis 1:28: “Be Fruitful, and multiply…”.[1]

One of my favorite, classic examples is in the preamble to the Constitution of the United States, which is a mission statement of sorts:

“We the people of the United States, in Order to form a perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.”[2]

What are Mission Statements?

Mission statements are a reflection of a set of principles that an institution (be it a government, armed forces, employer, not-for-profit, club, etc.) utilizes to guide and motivate their constituents (citizens, employees, soldiers, members) towards a common goal or mission.

Over the course of six years during the late eighties and early nineties, two Stanford University Professors (Jim Collins and Jerry Porras) conducted an exhaustive research study to determine what separates visionary companies (the elite of the elite companies) from all of the rest. To them, “visionary” companies have 6 common traits; they:

• Are a premier institution in their industry;
• Are widely admired in the business community;
• Made an indelible imprint on the world in which we live;
• Had multiple generations of Chief Executives and leadership changes;
• Have been through (and succeeded) multiple product (and service) life cycles;
• Were founded before 1950.[3]

Within each one of these companies, beyond a steady record of profitability and growth, was a set of ideals or what they refer to as a core ideology.  Mission statements reflect a corporation’s fundamental ideology.  According to the authors of Built to Last, Jim Collins and Jerry Porras, a core ideology has 2 parts:

1)      Core values are the handful of guiding principles by which a company navigates.

2)      Core purpose is an organizations most fundamental reason for being. [4]

So, a mission statement is usually supported by additional principles, objectives or beliefs that are presented in the form of a vision, values, purpose, creed, ethical guidelines, operating procedures or policies that are, in total, generally designed to “set the tone” for the entity.  The other characteristic of effective mission statements is the fact that they are developed for the long term, endure and withstand the test of time.

In their book, Collins and Porras describe through a set of actual cases, the paradoxes or the “yin and the yang” that occurs in these companies where they operate simultaneously as highly idealistic companies yet are also highly profitable.  Companies in this elite category include: Nordstrum, Wal-mart, Sony, Proctor and Gamble, Disney, Motorola, HP, Boeing and GE.

Sample Mission Statements that Work

I decided to look around, curious to see the mission statements that really are durable and, in my opinion, can withstand the test of time. Here are my top 10 favorites:

1)      Nike: “To Bring Inspiration and innovation to every athlete in the world. If you have a body, you are an athlete”.

2)      Microsoft: originally it was “a computer on every desk and in every home”. Now the mission is: “to help people and businesses throughout the world reach their full potential.”

3)      Apple: “designs Macs, the best personal computers in the world, along with OS X, iLife, iWork, and professional software. Apple leads the digital music revolution with its iPods and iTunes online store. Apple reinvented the mobile phone with its revolutionary iPhone and App Store, and has recently introduced its magical iPad which is defining the future of mobile media and computing devices.”

4)      The NFL: “To challenge National Football League players to be lifelong learners while pursuing continuous improvement in family relations, social interactions, personal growth and career development during and beyond their careers as NFL players.”

5)      AFLAC: “To combine aggressive strategic marketing with quality products and services at competitive prices to provide the best insurance value for consumers”.

6)      Hershey Corporation: “Undisputed Marketplace Leadership”. Pretty direct and to the point!

7)      Disney: “The mission of The Walt Disney Company is to be one of the world’s leading producers and providers of entertainment and information. Using our portfolio of brands to differentiate our content, services and consumer products, we seek to develop the most creative, innovative and profitable entertainment experiences and related products in the world.”

8)      Ben & Jerry’s Ice Cream: A product mission stated as: “To make, distribute & sell the finest quality all natural ice cream & euphoric concoctions with a continued commitment to incorporating wholesome, natural ingredients and promoting business practices that respect the Earth and the Environment.”

9)      Joe Boxer: ”JOE BOXER is dedicated to bringing new and creative ideas to the market place, both in our product offerings as well as our marketing events. We will continue to develop our unique brand positioning, to maintain and grow our solid brand recognition, and to adhere to high quality design standards. Because everyone wants to have fun every day, JOE BOXER will continue to offer something for everyone with fun always in mind.” (The CEO is called the Chief Underpants Officer!).

10)  Wal-mart: “Wal-Mart’s mission is to help people save money so they can live better.”

Some Useful Guidelines to Follow …When Developing a Mission Statement

I personally have been involved in the development and review of quite a few mission statements for companies I have worked for and the process can be difficult and sometimes daunting. When you work within a diverse leadership team, there are many different and divergent points of view about what the mission of the organization actually is. So, as you get started on the process, keep these 6 “best practices” steps in mind:

1. Determine who has the “R” (Responsibility) – CEO and/or Board should appoint a single person responsible for the completion of the mission statement; someone absent a broader agenda and who is a proven, collaborative facilitator that represents a wider group of people selected from the leadership team.
2. Assemble the team and set the deadline for completion.
3. Determine your audience – that can include: shareholders, employees, customers, clients and the general public at-large.
4. Model and Emulate the Best Businesses – review the mission statements for other companies in your industry group, the visionary companies outside your industry and the most admired companies in the world.  See how they support the mission statement with vision, value and principle statements (as defined later on).
5. Does it pass the Spouse or Mother Test? Run it by your spouse, or better yet, your mother. If your mother doesn’t understand it, then it might be time to start over.
6. Communication plan – where and how will this Mission Statement be communicated – over and over again? How will you keep the mission alive and well and avoid it from ending up on the proverbial corner shelf of everyone’s office gathering dust?

As you begin your mission statement development process, remember what Jack Welch, former Chairman of GE once said about a vision, which is equally true with mission statements:

“Good business leaders create a vision, articulate the vision, passionately own the vision, and relentlessly drive it to completion.”

A Mission Statement Positioned as the Essence of a Business

One Mission Statement I am particularly proud of is this one I developed for a direct marketing company that marketed term life insurance to its customers. When I was hired, to my surprise, the company had no mission statement.  Equally disturbing, I found that every employee had a different view of what the mission was so it became extremely important for me to get everyone “in concert and reading from the same hymn book”.  In this effort, I served as the collaborative facilitator and worked closely with my management team. The mission statement was entitled “The Essence of XYZ Insurance Services” and became our mantra:

“The people of XYZ Insurance Services, assist bank customers in securing their family’s financial future, with the purchase of affordable life insurance.”

This mission statement is simple, to the point, and an exact expression of what we were all doing there in the first place!  In addition to providing focus, this mission statement served as our moral compass, spoke to our core competency and a served as a blue print for the collective, continued success of XYZ as a company. I used every opportunity to state and re-state it – to employees, independent contractors, vendors, partners, clients and customers. In the final analysis, the very last thing you want is a mission statement that is rendered less meaningful by vagueness, wordi-ness or worse yet, one that the employees believe is insincere, totally futile, farcical or completely untrue.

More Sample Mission Statements:

Company Statements and Slogans from A to Z:

http://www.company-statements-slogans.info

Additional Fortune 500 Company Mission Statements can be found at:

http://www.missionstatements.com/fortune_500_mission_statements.html

Mission Statements by top 25 Tech Companies

http://seo.seocompany.ca/top-mission-statement/

Additional Terms Defined:

Values – shape your organization’s actions.

Vision – a statement of the organization’s longer term aspirations.

Purpose – a description for the organization’s reason for being.

Credo/Code of Ethics – similar to values, a business code of ethics.

Here is Costco’s:

Our Code of Ethics

1. Obey the law.

2. Take care of our members.

3. Take care of our employees.

4. Respect our suppliers.

If we do these four things throughout our organization, then we will achieve our ultimate goal,

which is to:

5. Reward our shareholders.

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDAwMDR8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1

Service Pledge – typically, a promise to deliver outstanding customer services.

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[1] Genesis 1:28 English standard version states: “And God blessed them. And God said to them, “Be fruitful and multiply and fill the earth and subdue it and have dominion over the fish of the sea and over the birds of the heavens and over every living thing that moves on the earth.”

[2] The Mission Statement Book, by Jeffrey Abrams, A Kersty Melville Book, Ten Speed Press, Berkeley, CA, 1994, 1999, page 7.

[3] Built to Last,  by James C. Collins and Jerry I Porras, HarperCollins Publishing, 1994, page 2.

[4] Ibid, page 54

Making Critical Decisions the R.A.P.I.D. Way

I believe it is increasingly important, no matter what the size and complexity of your organization is, to have a defined decision-making process.  Having been a leader of extensive global and regional underwriting and marketing business units that require many fast and accurate decisions, my teams had no choice but to establish formal decision-making roles and responsibilities.  In retrospect, while these written authorities provided some clarity, they were fairly one dimensional, written “lines of authority”.  To support these basic decision-making rules required constant interaction and an enormous amount of communication.

Executing a strategic plan successfully depends upon the success or failure of the actual people executing the plan to make good decisions.  It stands to reason that if you can improve your team’s decision-making abilities then plan execution and results should also improve along the way.  The RAPID[1] Decision Making Model goes a few steps further than what I call “written lines of authority” and is an easy but effective way to instill professional decision making within an organization.

According to a Bain and Company Study[2], the average organization has the potential to more than double its ability to make and execute key decisions. On a decision-effectiveness scale of 0 to 100, the best companies score an average of 71, while most companies score only a 28, according to Marcia W. Blenko, Michael C. Mankins, and Paul Rogers, authors of Decide & Deliver: 5 Steps to Breakthrough Performance in Your Organization.

Quick Summary of RAPID

• RAPID was developed by Paul Rogers and Marcia Blenko – two Bain & Company Consultants.  Their article: “Who has the D? How clear decision roles enhance organizational performance” which appeared in the January 2006 Harvard Business Review and has since become one of HBRs “10 must reads”.
• The Acronym RAPID describes the various roles and responsibilities for clear decision making within an organization.  With respect to critical decisions, it ultimately shows how power flows through an organization and/or business unit.
• The objective with this approach is to create a more formalized, participatory approach towards decision-making process within an organization.  It is also useful as a “post mortem” tool to diagnose failed decisions – to see what element or elements in the RAPID process was/were lacking or missing so the next time a critical decision has to be made so you are not repeating the same mistakes over and over again.
• Implementing RAPID can be messy; it can reveal a convoluted and faulty decision-making process so there must be a full commitment to “check egos at the door” and accept the need for adopting RAPID as part of an organizational improvement initiative.  If your organization is in flux, it may not be the appropriate time to implement RAPID.
• The web site http://www.decide-deliver.com designed by Rogers and Blenko can help you assess your decision making prowess and also, do the same type of assessment of your organization. Like the “5 Step Organizational Improvement program” simulator at www.simulator-orgeffectiveness.com that I featured in my blog post on organizational effectiveness, this tool is based upon thousands of quizzes taken and stored in their database over a 10 year period.
• One of the pitfalls of this approach can be that it actually slows decision-making down. Therefore, at the outset of a project it is recommended that you decide which projects will follow RAPID and which ones will not.

Here is What R.A.P.I.D. Stands  For:

Recommend:

• Making a proposal on a key decision, gathering input, and providing data and analysis to make a sensible choice, in a timely fashion.
• Consulting with input providers – hearing and incorporating their views, and winning their buy-in.

Agree:

• Negotiating a modified proposal with the one who recommends if they have changes or concerns to the original proposal.
• Escalating unresolved differences and issues to the decider if A and R cannot resolve their differences.
• If necessary, exercising veto power over the recommendation.

Perform:

• Executing a decision once it’s made.
• Seeing that the decision is implemented properly and effectively.

Input:

• Providing relevant facts to the one who recommends that shed light on the proposal’s feasibility and practical implications.

Decide:

• Serving as the single point of accountability.
• Bringing the decision to closure by resolving any impasse in the decision-making process.
• Committing the organization to implementing the decision.

Characteristics of High Performance Companies That Use RAPID

High-Performing organizations make good decisions quickly. Some of the characteristics they exhibit are:

• For complex issues that require rapid decision making, achieving the right mix of control and creative freedom is critical for sustainable success. [3]
• A list of critical decisions in priority order must be part of the Strategic planning process. Determining which ones will follow the RAPID process is also required.
• Decisions that build value are most important and thus, have the highest priority on such a list.
• Action is the Goal.
• Ambiguity is the enemy.
• Speed and adaptability are key.
• Decision roles trump the organizational chart.
• A well-aligned organization reinforces roles and responsibilities.
• Practicing beats preaching.  That being said, a communication plan needs to dovetail with the RAPID process.
• Remember the Rule of 7: Once you’ve got 7 people in a decision-making group, each additional member reduces decision effectiveness by 10%, according to Marcia W. Blenko, Michael C. Mankins, and Paul Rogers, authors of Decide & Deliver: 5 Steps to Breakthrough Performance in Your Organization. Thus, a group of 17 or more rarely makes any decisions.[4]
• Managers spend 50% or more of their time in meetings, but Bain & Company research shows that two-thirds of meetings end before participants can make important decisions. Not surprisingly, 85% of executives are dissatisfied with the efficiency and effectiveness of their companies’ meetings, according to Marcia W. Blenko, Michael C. Mankins, and Paul Rogers, authors of Decide & Deliver: 5 Steps to Breakthrough Performance in Your Organization. [5]

For More information on This Topic:

See the January 2006 Harvard Business Review article, “Who has the D?” by Paul Rogers and Marcia Blenko. Reprint #R0601D. You can download this article from the Bain.com Website at http://www.bain.com.

Also, download the article: “Decision Insights: What are Your Critical Decisions?”

The web site http://www.decide-deliver.com designed by Rogers and Blenko can help you assess your decision making prowess and also, the same of your organization and is based upon thousands of quizzes taken and stored in their database over a 10 year period.

Decide & Deliver – The Book That Covers The Subject Matter in Detail

You can purchase the book by Marcia W. Blenko, Michael C. Mankins, and Paul Rogers, authors of Decide & Deliver: 5 Steps to Breakthrough Performance in Your Organization. at Amazon.com and other quality book stores.

See also this Harvard Business Review article entitled: The Big Idea: Before You Make That Big Decision…
Reprint #: R1106B
by Daniel Kahneman , Dan Lovallo , and Olivier Sibony

http://hbr.org/2011/06/the-big-idea-before-you-make-that-big-decision/ar/1

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[1] RAPID is a registered service mark of Bain & Company, Inc.

[2] Harvard Business Publishing: The Daily Stat 10/12/2010 Bain and Company by Bain’s Global Organization practice. See their website at http://www.bain.com

[3] Institute For The Future: Rapid Decision Making for Complex Issues, August 2005, by Andrea Saveri and Howard Rheingold. See their web site at http://www.iftf.org.

[4] Harvard Business Publishing: The Daily Stat 9/28/2010 by Bain’s Global Organization practice

[5] Harvard Business Publishing: The Daily Stat 10/5/2010 by Bain’s Global Organization practice

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