PTV© in Action – Taping those untapped “capability efficiencies” using Capability Pool Portfolio (CPP) Framework

*IECQ=Intelligent,Emotional,Cultural Quotient-ITR=Inventory Turnover-ACP=Average Collection Period-CTR-Capital Turnover-EPFT(CVA) =Economic Profit/Cash Value Add - 3P-ERS=Purpose,Planet, Passion

While our Portfolio-Thread View (PTV©) has been receiving some great reviews within the blogosphere, one of our readers came up with a follow-up question - how exactly this view different from other popular strategy views? Let us cut to the chase and go straight to the answer – PTV© is being birthed as an answer to solve the six macro dilemmas that are commonly present within most businesses (Purpose vs. Profit, Customer Centric vs. Vision Centric Innovation, Pull vs. Push value chain, Operation Excellence vs. Innovation Excellence, long term vs. Q-To-Q results and Market based vs. Resource based view) - using a “synthesis/analysis” balanced, “doing both” portfolio management approach, unlike the other views, that take the “either/or” type approach . With that said, we would be the first one to agree that PTV© indeed has adopted/borrowed some of its best features from other popular views(MBV,EBV,RBV,DTV etc) to make it a holistic/balanced view.

Another key difference is that, it is being designed using the “value conservation based balancing opposites” principle where, value (like energy) gets accelerated using “value accelerators” (generating positive cash flows from experience pools and capability pools) and de-accelerated using the “value de-accelerators” (generating negative cash flows) - as illustrated in the PTV© radial cycle picture. Yet another difference is- PTV© is driven by the causal-chain based value transformation events called capability pools/experience pools producing the Sustainable Competitive Advantage (SCA) within its five perspectives (Norton/Kaplan’s 4 BSC perspectives plus an additional PURPOSE perspective in the center) as outlined in the PTV© radial cycle picture.

In other words, every business invariably gets challenged with one or more of these six “yin and yang” type dilemmas, in one form or the other, during their value transformation process - and this is where our PTV© framework stands tall (with its set of EPP©, CPP© & PIP© portfolio frameworks, tools, techniques and templates) - as it not only helps us to solve these dilemmas efficiently, but also, helps us to proactively identify these causal-chain based “value accelerators & de-accelerators”, so that we can effectively devise strategies to maximize value creation within our PTV© cycle. To expound upon these three key differences further, let us recall our causal chain based value transformation event flow process from last week–

• “the intangible intellectual capital energy ( in the form of value accelerator called capability pool) within the “Growth/Learning” perspective, first transforms itself in to a tangible asset capability (in the form of P&S’s) within the “Value Chain” perspective – and then, those tangible assets gets interchanged with another value accelerator called “experience pools” within the “Customer” perspective (creating the positive cash-flow or negative cash flow depending upon the efficiency of the capability pools) – which finally transforms itself in to the shareholder value in the “Financial” perspective by overcoming the opposing force called value de-accelerators– which again gets re-invested in the form of intellectual capital (or capital/capability pool) – and the PTV©© value conservation cycle keeps moving”.

As we can clearly see – this causal chain based value transformation process brings forth yet another value-add insight -

• While “value accelerators” enter the value transformation radial event cycle in the form of effective experience pools (from external sources), the “value de-accelerators” already happen to exist within the cycle, partly because of the absence of efficient capability pools.

In other words, corporate strategy in its essence is –creating and managing this value transformation process efficiently – first, by identifying the “effective experience pools” from external sources and then injecting “efficient capability pools” to overcome the opposing forces (called value de-accelerators)- with an end goal of maximizing the value. Rightfully so, we have used the term “effective” to qualify experience pools – as the emphasis here is - identifying the right set of experience pools (using EPP framework as covered in last week’s blog). Similarly, the term “efficient” is being used to qualify capability pools – as emphasis here is achieving the maximum value by injecting the OPTIMAL set of capabilities producing the so called SCA, that is difficult to be emulated by your competitors– using Capability Pool Portfolio (CPP) Framework – which, by the way, is the topic of today’s blog.

For those us who chart these things – let me also explain these concepts using growth (g) and Return on Capital (ROIC, WACC) variables- that are commonly used within McKinsey’s Zen of Corporate Finance valuation formula (V= NOPAT x (1- g/ROIC)/ (WACC-g). Interestingly enough – “value accelerators” can be equated to the both “growth (g) generating experience pools & efficiency (ROIC) enhancing capability pools” and “value de-accelerators” to the hurdle rate (WACC) – thus resulting in yet another value-add insight -

• The “experience pool” driven growth variable (g) and the “capability pool” driven efficiency variable (ROIC) must form a joint alliance called “value accelerators” - so that they can together, not only overcome the opposing force called hurdle rate (or the value de-accelerator called WACC) – but also, can go much beyond that hurdle rate, with a higher force called “spread” (ROIC-WACC) - for value to be reaching the maximum growth potential, as promised by the experience pool driven growth (g) opportunity.

In other words, if we need to re-state this insight in the form of a hypothesis, we perhaps can restate it as follows -

• To maximize the value from the experience pools, corporations must learn to become excellent at injecting highly efficient capability pools (in the form of an optimal mix with these five capability pools producing the SCA as identified in the picture on the top of the page) in to the value conservation event cycle – for them to, first, overcome the opposing forces (hurdle rate) and then to create the higher spread value.

Given the fact our hypothesis is all about- increasing the efficiency by injecting these 5 different capability pools in the form of an optimal mix (producing the so called SCA), it is important that we first understand the characteristics of these capability pools including their opposing forces (called value de-accelerators) before arriving at an optimal SCA producing capability pool mix. In other words, identifying, guarding and rejuvenating (IGE) the efficiency factors within each of these five capability pool types is the first step in increasing the efficiency of the capability pools within our PTV© cycle- as summarized below.

• IDENTIFYING, GUARDING and REJUVENATING the capability pool efficiency factors (as identified in the picture on top of the page) - is the first step in increasing the efficiency of the capability pools, so that the experience pools can produce their maximum possible value.

This does not mean that we need to ignore the opposing forces (WACC) side of the value equation altogether - rather, we need to balance both (i.e. efficiency factor forces and opposing forces) to bring this “right to win” capability pool hypothesis to life. With that said, the key question that needs to be solved within this hypothesis is –

• What are those unidentified, lower turn state/margin state, based capability pool buckets, especially within your most profitable experience pools -and how fast you can, not only identify them, but also, can fill them with your efficient capability pools in an optimal manner (producing the so called unique SCA that is difficult to be emulated), much before your competitors could?

As we started answering this question– we quickly realized that we need to first re-frame this capability pool gap analysis using “factor-force” balanced capability pool segmentation approach – given the fact “INVESTMENT ONLY” capital structure segmentation approaches of yester-years, do not seem to work very well in quantifying the emerging capability gaps. Moreover, quantification of these emerging gaps must also holistically address the reality of the distributed talent/capital requirements that are emerging from the fastest growing developing economies of the world (e.g. BRIC countries and other Asian/LA/African countries) - as the traditional country specific capital/talent management processes are proving to be ineffective in quantifying these futuristic capability gaps emerging from these developing economies. Hence, the need of the hour is to try a different approach – called the “Efficiency Factor/Opposing Force balanced Capability Pool Portfolio (hence forth called as CPP Framework)” – with its five capability pool types, as identified in the picture, on the top of the page.

The question, however is -How do we inject these five different types of efficient capabilities, not only, in an optimal proportion (producing the so called SCA), but also, fill those capability gaps and to maximize value? How do they fit together? How do we align them with our portfolio of experience pools, products and services? How do we transform them in to financial value from shareholders standpoint? While these are all great questions – first things first – let us first define some basic terminologies.

Capability within our context here is defined as the ability of these five capability pool types (i.e. Intellectual capital, Inventory capital, Investment capital, Brand equity and Purpose equity) to efficiently execute their operations within their respective PTV© perspectives (Learning/Growth, Value Chain, Financial, Customer and Purpose). Similarly, Capability Pools are the group of capabilities that are grouped as per the 5 PTV©’s perspectives (4 BSC perspectives +1 PTV© purpose perspective) fulfilling their intended job expectations (i.e. what part), including the rationale behind the decisions that are made to execute their operations (i.e. why part), and how efficiently they execute their functions (i.e. how part of discerning the capability variations within those groups and assigning the right capability mix to the right experience pool).

As we look at this definition, we definitely see the need to quantify the efficiencies of these five different types with a new ratio called Capability Turnover State (similar to Investment Capital Turnover ratio) as part of this article. The only difference is that Capability Turnover State, unlike Capital Turnover ratio, is a conceptual/abstract measure with five sub components (Intellectual Capital Pool, Inventory Capital Pool, Investment Capital Pool, Brand Equity Pool and the central Purpose Equity Pool). In other words, Capability Turn-States (CTS) are the distinct set of “capability efficiency states” depicting various efficiency degrees of capability pools depending upon the perspective where they execute their functions.

Once the capability pools (CP) and capability turn-states (CTS) are mapped as a matrix (5x5 matrix as identified in the picture at the top of the page), it helps us to perform the capability pool gap analysis to accurately size these “capability gap opportunities” in terms of tangible and intangible equity measures as identified in the picture on the top of the page. Granted that these capability pools might vary from business division to business division ( perhaps even from category to category) – however, our analysis has shown that most of these macro level capability pools and turn states – as identified in our 5x5 matrix , seem to be common across most consumer focused industry divisions (whether it be consumer electronics capabilities, content/video capabilities, F&B capabilities, retail capabilities or non-durable capabilities), as there is a need to solve/gauge these emerging unmet capability needs within all of these industry sectors, regardless of a specific business division. For the purposes of this blog, our CPP framework (along with its 10 component level analysis sub-frameworks) - definitely will answer our hypothesis question with clarity, certainty and speed -as identified in the picture at the top of the page.

1. Capability Pool (CP) analysis - arriving at these five capability pools addressing the emerging capability expectations as identified in the 5x5 matrix at the top of the page.

2. Capability Turn State (TS) analysis - arriving at the distinct set of “capability efficiency states” depicting various efficiency degrees of capability pools depending upon the PTV© perspective where they execute their functions - as identified in the 5x5 matrix at the top of the page.

3. CPTS Gap analysis – econometric analysis to identify the capability gaps between current capabilities within a LOB/Category vs. the ideals expected based on the emerging needs of each CPTS bucket. CPTS bucket is the intersection bucket of CP and TS within the 5x5 matrix.

• Context sensitive Capability Gap(CG) metrics in % at Capability-Pool-Turn-State (CPTS) bucket level e.g. SURVEYED CAPABILITY GAPS (SCG %)and DERIVED CAPABILITY GAPS (DCG%) in the CG areas of – IQ, EQ, CQ, IEQ Index, gifts, talents, skills, GTS index, ITR times, ACP Days, COGS, CTR times, CVA, Margin, passion fans, inspired fans, loyal fans, occasion fans, deal fans, 3P’ers, 2P’ers, 1P’er, occasion P’er, deal P’er or some combination of above pools as outlined in the picture at the top of the page.
  
• Context sensitive CG’s relative priority rankings at Capability-Pool-Turn-State (CPTS) bucket level e.g. SURVEYED CAPABILITY GAPS (SCG #) and DERIVED CAPABILITY GAPS (DCG #) of the above CG’s.
  
• Context sensitive weight factor for each CG metrics (%) and rankings (#) at Capability-Pool-Turn-State (CPTS) bucket level e.g. SURVEYED CAPABILITY GAPS (SCG #) and DERIVED CAPABILITY GAPS (DCG #) of the above CG’s.

4. CPMS Gap analysis – econometric analysis to identify the capability gaps between current capabilities within a LOB/Category vs. the ideals expected based on the emerging needs for each Capability Pool Margin State (CPMS) bucket. CPMS bucket is the intersection bucket of CP and Margin States within the 5x5 matrix, very similar to the above matrix, with the only difference of Turn-states being replaced by Operating Margin-States (High Flyers, Flyers, Average Flyers, Stalers and Laggards).

• Context sensitive CG’s metrics in % at Capability-Pool-Margin-State (CPMS) bucket level e.g. SURVEYED CAPABILITY GAPS (SCG %)and DERIVED CAPABILITY GAPS (DCG%) in the CG areas of –as outlined in the picture at the top of the page.
• Context sensitive CG relative priority rankings at Capability-Pool-Margin-State (CPMS) bucket level e.g. SURVEYED CAPABILITY GAPS (SCG #) and DERIVED CAPABILITY GAPS (DCG #) of the above CG’s.
• Context sensitive weight factor for each CG metrics (%) and rankings (#) at Capability-Pool-Turn-State (CPTS) bucket level e.g. SURVEYED CAPABILITY GAPS (SCG #) and DERIVED CAPABILITY GAPS (DCG #) of the above CG’s.

5. CPTS and CPMS pool based new opportunity analysis - mapping the CPTS and CPMS gap capabilities to future capabilities (IQ,EQ,CQ, capital(equity, debt and/or other fancy derivative based capital structures), gift, talent, skill, training, succession planning etc) in few more variations (i.e. permutations and combinations).

6. CPTS & CPMS pools mapping to tiered capital structure (Creative Financial engineering based Debt/Equity balanced capital structure with efficient capital sourcing/tax shielding/tiering option perhaps with hedging/fancy derivatives etc) based on these emerging/emotional gap opportunities.

7. CPTS & CPMS pools mapping to tiered Brand and Purpose Equity , using the brand passion index based gap opportunities.

8. CPTS & CPMS pools mapping to talent pool strategy (Creative Talent Management based Dual/ Triple A, B, C Player positioning and few other emerging talent management techniques) based on these emerging/emotional gap opportunities.

9. CPTS and CPMS based CVA Analysis - Capability Fulfillment (CF) map wherein CPTS and CPMS pools are mapped to current and gap opportunities using the 25 bucket metrics identified in the picture on the top of the page (e.g. CVA/Economic profit, Margin and Capital Turn over # for the Investment Capital Pool type).

10. Final recommendation with an action plan/execution focused roadmap.

As it turns out, our journey of identifying these three key PTV© differences from other popular strategic views, has indeed paid off - in the form of three “synthesis/analysis” balanced, “doing both” portfolio management frameworks called Capability Pool Portfolio (EPP), Experience Pool Portfolio (EPP) and Purpose innovation Portfolio (PIP) – as they, together, not only help us to tap these untapped“ capability pools & experience pools”, but also, help us to arrive at the optimal capability pool mixes (producing the so called SCA), to uncover the value, that is being buried deep inside those experience pools. .

Yet another final point that deserves our attention, as part of our closing argument here- especially to those of us -who may be still looking for a compelling case to adopt PTV© in our near term and long term strategic planning initiatives (i.e. Annual Plan & 2020 Plans). Let us face it -with the fact that emerging markets, recently have started competing for the limited set of capital and talent pools, the global demand for capital has already started rising, creating a different type of capital pool playing field, with an increased cost of capital (WACC) pressures - as suggested by a recent McKinsey research (global investment demand could rise to $24 trillion per year by 2030, from $11 trillion today). Another GE research also suggests that over 60% of GE’s growth for the next decade is going to come from emerging markets. What do these numbers tell us? The country specific capital/talent management processes that were designed for the last decade may not necessarily work well for the next decade, especially within the context of this distributed talent pool/ global capital pool expectations of this decade. And this is where, our CPP portfolio framework stands tall - as it not only helps us to take a global approach in managing capability pools, but also, helps us to arrive at the optimal capability pool mix(producing the so called SCA), that is very much needed to maximize the value promised by the experience pools.