Purpose Innovation© – An answer for developing the next billion dollar, game changer type opportunities?

Out of the six dilemmas that were identified within our last blog , the one that has caught the attention of most folks was - the dilemma between customer (or user) centric innovation vs. vision centric innovation – and so, we thought of expounding upon that topic little more within today’s blog. While both of these innovations are equally important - the most successful innovative companies in the world today are the ones who have found a way to balance them properly (by assigning the appropriate emphasis to both) depending upon where they are in the life cycle or season of their business. In other words, the intuitive tactics of assigning the right weight factor emphasis to both innovations (in the form of 60:40 or 70:30 or 50:50 split) within the context of their business life cycle is what going to differentiate a company from their competitors. As it turns out, our purpose innovation© concept seem to exactly do the same – as it inherently helps companies to pick and choose the best of both worlds – i.e. choosing the best features of customer and vision centric innovations (with the right split weight factor emphasis) that is further custom- tailored to their business cycle.


The natural follow-on question is - how does Purpose Innovation do that from pragmatic standpoint? Let us take one of the key strategic challenges facing most companies today – creating the next billion dollar game changer opportunity - and see, if our purpose innovation© concept can help solve that puzzle. First things first… With the concept of purpose innovation being already covered in detail in one of our earlier blogs –we are going to just focus on putting purpose innovation© in to practice within today’s blog. We recommend our readers to read the earlier blog to get grounded on purpose innovation© concepts (Purpose Models, Purpose Bundles and Purpose Platforms etc.) - before reading today’s blog.

Now, back to the question of developing the next billion dollar opportunity, as a first step, let us introduce an index called Consumer Experience Threshold (CET) © index. CET index is an index that is designed to quantify the “value of experience” expected by consumers from a P&S category, not only based on the price they are willing to pay (i.e. baseline functional experience expectation), but also, based on what they are dreaming of experiencing (i.e. emotional and emerging experience expectations) from it, on top of its baseline functional experiences. In other words, when a P&S delivers more than the consumer’s baseline experience expectations (or more than its category median break-even CET), it is deemed to be an exceptional P&S - and, in our opinion, those brands that exceed the CET index, on a consistent basis are the ones that qualify to be the next billion dollar brand or opportunity.

• CET = Baseline Experience/Price +the dreaming component of Emotional & Emerging Experiences

Having said that, with all things being equal, it is important to highlight yet another fact that different P&S categories will have different CET indices – and so, it is important that a brand, not only to figures out a way to accurately calculate that CET index for its category, but also, find a way to go above that index consistently, for it to qualify to be the next billion dollar opportunity. As it turns out, there is another challenge here as well- that competition keeps pushing the CET index higher and higher on a daily basis (as consumer's experience expectations keeps going up as well), and so, the need of the hour is a mechanism to group the experiences of various P&S categories in the form of a framework, so that companies can devise ways to exceed their category CET indices on a consistent basis.

With that need in mind, we did a deeper dive analysis on the CET index concept using a CET framework as outlined on the top of the page. With the economy showing signs of improvement- more and more consumers are becoming experience minded when it comes to buying various P&S categories. Our research also suggests that more than 50% of the consumers are looking for better value experience deals when it comes to buying P&S’s - followed by another 30% who are willing to exchange their preferred brands for better experience providing brands. This does not mean that they are trying to buy cheap – rather they want to get the best possible experiences for the price they are willing to pay. Within the context of this insight, we did some more “deeper dive analysis” on the spending patterns of consumers across various P&S experience categories. The insights we garnered was all the more intriguing - that consumers have altered their spending patterns, not only based on the experience their brands provide, but also, based on the way they map their preferred P&S’s to the experience it provides. Based on this renewed insight, we grouped those experiences under five major experience categories and plotted them within the CET framework – with “Dollars Paid” on X axis and “degree of perceived Experience” in Y axis - as outlined below and on top of the page.

• Experience base liners – addressing the basic experiences quadrant -where these P&S’s barely break-even the CET median index and provide just the minimum baseline/functional experiences for a price point below the industry average - leaving an impression of “no gain, no pain” mindset in consumer’s minds.



• Experience Stalers – addressing the basic experiences quadrant -where these P&S’s barely break-even the CET median index and provide just the minimum baseline/functional experiences, but for a price point much above the industry average – and so, leaving an impression of “paid in full, yet no net gain” mindset in consumer’s minds.
  
  
• Experience Stars – addressing the star type experiences quadrant-where these P&S’s exceed the CET median index and provide both emotional and emerging experiences on top of the baseline/functional experiences for a price point above the industry average - leaving an impression of “paid in full, yet got dollar’s worth” mindset in consumer’s minds.



• Experience Super Stars – addressing the super star type experiences quadrant -where these P&S’s score exceed the CET index and provide both emotional and emerging experiences on top of the baseline/functional experiences for a price point below the industry average - leaving an impression of “Got a deal, yet exceeded $’s worth” mindset in consumer’s minds.



• Experience balancers – addressing the “optimum experience” quadrant – where a P&S or a bundle of P&S’s together provide both emotional and emerging experiences on top of the baseline/functional experiences for a price point, just around the the industry average - leaving an impression of “Got a deal, and got $’s worth” mindset in consumer’s minds.

Interestingly enough, four of these experience categories fell perfectly in to the four quadrants of the framework with an exception of one category called experience balancers– which got placed in the centre of the framework covering all the four quadrants. What does this tell us? There is a new need of “purpose experience based composite brand equation” evolving when it comes to consumer’s experience expectations. This new need - is indeed an emerging insight – and so, it is time to accept this new composite brand experience based purpose bundle (i.e. bundling products and services in the form of purpose bundles) and devise an appropriate purpose innovation strategy to answer these emerging experience patterns of 21st century consumers.

Granted, the CET indices vary from category to category and industry to industry – and so, those brands that exceed their category CET median index consistently are the ones that qualify to be the next billion dollar brand. This is where our purpose innovation concept looks very promising as it helps companies to create the next billion dollar composite opportunity using the same rationale used by the alchemy equation (1+1=3 ) that is commonly used to justify the synergistic M&A business cases. In other words, by combining various "multiple experience providing" P&S’s from both related and unrelated industry verticals with various degrees of CET indexes in the form of purpose bundles would definitely help participant companies to exceed composite CET median indexes on a consistent basis. In other words, the next billion dollar opportunity may not necessarily come from a single category brand – rather it could be a composite brand in the form a purpose bundle covering multiple P&S categories across multiple related and unrelated industry verticals.

For example, a Health and Wellness/Green minded consumer (who is also a passive participant of the Purpose innovation platform), will get a better experience deal when they purchase a dynamic purpose bundle of “health insurance along with a variety of H&W based durables and non durable P&S and GYM workout services” in a price that is in proportion to their purpose scores. The causal chain relationship rationale here is that- those consumers, who eat healthy organic food, apply natural beauty treatments to their bodies and exercise well will have a healthy life - and hence they deserve a better health insurance premium and so on and so forth. In other words, stronger the power of purpose themes (e.g. H&W, Green, Externality etc.) that binds the purpose bundle components together, the stronger the affinity (or causal chain relationship) within the sub components of the purpose bundles – which will eventually make this composite brand to be viewed as a single category brand in the hearts and minds of consumers .

I am sure someone is asking - how does this Purpose Innovation concept along with purpose bundles, purpose models and composite brands (& the corresponding CET framework) help solve the earlier dilemma between customer centric innovation and vision centric innovations? As it turns out, customer centric innovation, by and large helps companies only to meet just the base line experience expectations (i.e. Experience base liner and Experience staler quadrants) whereas vision centric innovations is the one that help companies to exceed the base line expectations to become Experience Stars and/or Experience Super Stars, as we can clearly see in the CET framework picture on the top of the page. This does not mean that companies need to pick one approach vs. the other; rather they need to do both in the words of Inder Sidhu and Roger Martin – as focusing on vision centric innovation without customer centric mindset, will invariably result in “out of context” super star experiences without the minimum functional/ base line experiences – and vice versa.

At the same time, we should not limit our innovative thinking just to meet the needs and wants of the typical consumers (as 80% of consumers by and large look for solutions to solve only their today’s needs); rather we need to derive our inspirations from the remaining 20% of the creative consumers – as part of the vision centric innovation. In a way one can also call the vision centric innovation as customer centric innovation in steroids (or glorified customer centric innovation) - and this where our purpose innovation concept comes in to the picture as it derives its best features from both customer and vision centric innovation approaches- as outlined in the center of the CEM framework picture.

In the final analysis, it is important to highlight the fact that history is filled with many such examples of billion dollar game changer opportunities – but, if you study them all in detail, there are not many of them in the recent years, with the exception of few within the consumer gadget product categories. Part of the reason is that most consumer’s needs and wants have already been met my multiple products and services within a given category, and in a way, most P&S categories are highly crowded with products of similar functions without much differentiation. Hence, the need of the hour is an alternate, out of the box, differentiated approach called Purpose Innovation© – and, in our opinion, it is one of the compelling ways to create the next billion dollar game changer opportunities for corporations.

Portfolio-Thread View (PTV©) in action within a 2020 strategic planning scenario

As we are well aware, within the last few weeks, we have been pitching a compelling case for our "PtC© collaboration driven PTV© View"– based on the lessons learned from the dominant strategy views (SPV, RBV, SEV, DTV etc.) of recent years- especially from the standpoint of how they have evolved within the last 50+ years. While our compelling pitches have definitely got the attention of few strategy practitioners - one of our fellow strategists encouraged us to expound on PTV© in detail- in terms of how it will actually come to life within a real world engagement with a “day in the life” strategic planning scenario. In other words, we are going to challenge ourselves and put PTV© in Practice using a real world strategic planning case study within today’s blog.

To meet this challenge, we have developed a metaphor driven “mini case study”- leveraging the learning’s from one of our recent strategic planning engagements of our client called CPGR-Co Inc. (our fictitious CPG/Retail Corporation pronounced as ZipGyarCo) - who had asked us to help them formulate their 2020 strategic plan - to unleash their growth and innovation opportunities. As a starting point, using our 10 box model, we framed up their strategic planning problem space with a set of 6W based hypothesis (or questions) to help solve their 2020 challenge. For the purposes of this case study (and to maintain their anonymity), we have provided only the hypothesis part of our case study (& not the final answers) – given the fact, hypothesis formulation (& its sub questions) is the single most important task within any strategic planning engagement/case study – and the subsequent answers are client specific – as it varies from client to client, industry to industry depending upon the internal/external environmental data points. With that said, let us first agree on few foundational definitions (with a help of a metaphor) to get grounded before plunging in to the case study in detail.

So, what is PTV© again?

First things first - under PTV©- strategy is a portfolio of aspiration structures that are knitted together by our 10 box model based strategic threads/themes - producing multiple strategy choices as outlined in one of our earlier blogs. Let us use a card game puzzle metaphor to better understand how PTV© is different from other dominant views. In most strategy views, strategy is viewed as a traditional card game puzzle – wherein each part of the puzzle (i.e. aspiration structure portfolio elements) is viewed as individual pieces of the strategy that are being assembled together to form the final big picture. On the other hand, within PTV©, strategy is viewed as an “Anchor Stone Tangram” puzzle with its 36+ design constructs - when assembled in various combinations producing variety of meaningful big pictures depending upon the sequence in which they are assembled - very much like how our PTV© helps us to develop multiple strategy choices depending upon the way we sequence/knit the aspiration structure portfolio elements and the strategy threads – that are further shaped by the competitive situation scenarios and the vision/ imagination of the strategists.


PT view is all about fishing for the Perfect choice within the set of Permissive choices

To understand this multiple strategic choices development process further – let us use yet another “chute and ladder (CL)” game metaphor, to better grasp its concept. The chutes and ladders within the game board playing area can be visualized as the opportunities and roadblocks respectively within the four walls of a corporation campus - in which one can reach the senior leadership floor- using multiple paths (very much like how one can reach the CL game destination using multiple paths within the CL game). Nevertheless, only one path, in general is the perfect path that is commonly used by the senior leaders except on few situations - where the internal/external conditions (construction work, unfortunate accidents beyond one’s control, bad weather etc) might make the senior leaders to take an alternate path – which might become the perfect path for a period of time and so and so forth.

This is where our PTV© comes in to the picture- as it is designed to help us find that perfect path in those unexpected situations – i.e. finding the perfect strategy choice from the multiple permissive strategy choices depending upon the internal/external competitive scenarios. The question however is - what happens if one chooses to take the permissive path even in normal circumstances? Granted, we will still be able to reach the final destination, but definitely not in an optimal fashion- as there might exist one or more chutes along the way within those permissive paths to slow us down before reaching the final destination - and this is where our PT view again (with its set of dashboard tools, techniques and templates) help us to perform various “what if scenario analysis” on top of its portfolio of aspiration structures to help arrive at the perfect choice (providing the right to win SCA ) out of the various permissive choices. Interestingly enough, we may be able to derive some additional insights from the spiritual concept of finding “GOD’S PERFECT WILL vs. PERMISSIVE WILL” that is commonly taught within the scriptures (of west and east alike) to better understand this PERFECT CHOICE vs. PERMISSIVE CHOICE strategy dilemmas.

The natural follow-on question is how do we choose the perfect choice between these two seemingly opposing permissive choices (i.e. Yin and Yang type scenarios) with conflicting goals? Well, this is where we need to use our intuition/synthesis based converging techniques (as opposed to the analytics based diverging techniques ) to reconcile/agree on the "essential" features from both options, yet compromising on the non-essential features – thus formulating the third option with a best of both worlds. While it might sound like an abstract theory – we can feel rest assured - that it has been used successfully by the philosophers of yester-years to resolve the doctrinal dilemmas for centuries.

Some of the most notable examples being - a) Augustine who had used a similar intuitive synthesis based technique to resolve the doctrinal conflicts between two opposing views in Church history and b) Gaudiya tradition that used a similar intuitive tactics to resolve Shiva-Vishnu conflicts. Augustine would say “In essentials unity, in non-essentials liberty, in all things charity” – which perfectly aligns with this intuitive synthesis principle of agreeing on the best of both world type essentials - yet compromising on the non essentials. Similarly under the Gaudiya tradition, the Shiva-Vishnu question is nicely dealt with, in terms of reconciling the major Shiva/Vishnu related doctrinal conflicts using intuitive contextual interpretation – in which Shiva/Vishnu are jiva on certain occasions and sometimes not- depending upon the context in which the deity is being interpreted very much like how “God the Father” and “God the Son” are being interpreted in bible. Honestly speaking – I have always been inspired by the deeper insights from the ancient scriptures of both west and the east like – and found them to be very helpful in sharpening the strategic insights. I would love to hear from other readers on their experiences as well.

PT View in Practice

Now that we have understood the perfect choice vs. permissive choice dilemmas within the context of both spiritual and strategy disciplines- the next obvious question is how does PTV© inherently help us to solve these dilemmas efficiently? The answer lies in the way PTV© efficiently knits (or balances) the aspiration structure portfolio elements with a help of our 10 box strategy threads/themes (such as differentiation, cost leadership, focus, globalization etc.) within the context of the four BSC perspectives - as identified by Kaplan/Norton’s BSC framework. In other words, PT view is designed to balance (and answer) the following “6W based cause and effect driven opposing scenario questions” within the context of the four perspectives of Kaplan/Norton’s BSC design - to help arrive at the optimal aspiration structure portfolio mix producing the magical SCA providing the right to win for our client CPG-Co– as part of their 2020 strategic planning engagement.

As we can clearly see that – each of the four perspectives of BSC are often at odds with each other in terms of their goals and requirements resulting in a 6W based seemingly opposing scenarios within these four perspectives- as outlined below and in the picture on the top of the page . For example, the most notable dilemma being the conflict between Financial and Growth/Learning perspectives - resulting in Q-To-Q results vs. long term results dilemma and so on and so forth. Solving these 6W’s efficiently is what sets an organization apart in terms of developing, testing and implementing well differentiated/well guarded strategies that are difficult to be emulated by the competitors.

1. Purpose vs. Profit Scenario (Addressing the WHO do we serve question of adding value to customers vs. shareholders). This hypothesis further drills down in to the customer and shareholder value segmentations at a granular level - to balance the profit and purpose value dilemmas in an effective and efficient manner.
   
   
2. Market Driven vs. Resource Driven Scenario (SPV vs. RBV) – Addressing “WHAT strategy formulation view to use” question by using the best features from Strategic Positioning View vs. Resource Based View. This hypothesis further drills down to choose the perfect choice out of the many permissive choices at a granular level – and to clearly articulate the underpinnings of the portfolio aspiration structure portfolio elements (that maximizes the SCA) with a help of a dashboard driven what-if-analysis scenario design tools, techniques and templates.



3. Operational Excellence vs. Innovation Excellence Scenario (SEV vs. DTV) - Addressing “WHICH strategy management view to use question” by using the best features from Strategic Execution View and Design Thinking View. This hypothesis further drills down to choose the perfect choice out of the many permissive choices at a granular level – and to clearly articulate the underpinnings of the portfolio aspiration structure portfolio elements (that maximizes the SCA) with a help of a dashboard driven what-if-analysis scenario design tools, techniques and templates.



4. Customer centric vs. Vision centric Scenario – Addressing WHY do we exist question – or the reason for being in the business - i.e. meeting the “needs and wants” of customers vs. redefining their” needs and wants” with a vision centric innovation. This hypothesis further drills down to at a granular level - to clearly define the boundaries and source of innovation in terms of whether it is going to be limited within four walls and meets just the current needs and wants of customers vs. going across the related and unrelated industry vertical boundaries in the form of the purpose innovation as we had identified in our earlier blog .



5. Supply/Push driven vs. Demand/Pull Driven Scenario (Inside the Four walls vs. outside the four walls) – Addressing the WHERE to position the value question – to help design an efficient value chain based on the best features from Push and pull value chain designs. This hypothesis further drills down at a granular level - to clearly define how and where the value will be created and consumed in terms of whether it is going to be limited within four walls meeting just the current needs and wants of customers (and the immediate partners/suppliers) vs. going across the related and unrelated industry verticals in the form of the pull value chain based purpose innovation as we had identified in our earlier blog .



6. Q-To-Q results vs. long term results Scenario -Addressing the WHEN to reap the financial value question of focusing on quarter by quarter results vs. 3-5 year results. These hypothesis further drills down in to financial results at a granular level to help focus both on the Q-To-Q results and long term results with a Corporate Performance Management (CPM) System.

Although these 6W’s appear to be resulting in 6 seemingly opposing scenarios on the surface – PTV© inherently helps us to balance (& solve) these 6W’s – with a set of analytics/synthesis based tools, techniques and templates (using an automated what if scenario based dashboard tools) to help answer these 6W’s with clarity, certainty and speed. In other words, PTV© uses a balanced combination of analytics and synthesis driven “doing both” principle driven problem solving techniques, tools and templates - as promoted by Inder Sidhu and Roger Martin. Time permitting- we will cover the details behind these dashboard tools/techniques in a future blog. Coincidentally, couple of our fellow strategist like Mr. Gerald Nanninga (http://planninga-from-nanninga.blogspot.com/search/label/Balanced%20Scorecard) and Mr. Ali Annani have used similar balancing opposites based thinking to show the relationship between blue ocean strategy and team work dimension of BSC framework(http://www.slideshare.net/hudali15/blue-ocean-strategy-balanced-scorecard-strategy-and-team-forming-a-shared-perspective) as well.

Conclusion

This type of PtC© collaboration driven PTV© strategic view – not only helps us to answer these seemingly opposing 6W’s - but also, inherently enables us to take a systemic view in our strategic planning efforts– which further positions us to create boundary less purpose innovation models and bundles as outlined in one of our earlier blogs.In other words, this well orchestrated strategic planning process that is based on the nature’s principle of balancing opposites, reinforcing teamwork and collaboration - is what differentiates PTV© from other dominant strategic views. With that said, let us be rest assured that this PtC© driven PTV© is guaranteed to help unlock the creative innovation potential that is buried deep inside the large organizations like CPGR-Co.

Strategist of the Year 2010 – CKP

Happy New Year to our readers, both from the west and the east alike!


With us all getting ready to welcome the year 2011, I see quite a few news clips from various organizations bestowing the “person of the year/decade” awards to those individuals who have influenced certain fields in an outstanding way. More specifically, some of the professional awards include, but not limited to are – artist of the year, scientist of the year, engineer of the year, architect of the year, physician of the year and so on and so forth.


As I was looking at this list, I was surprised to see that there is no award called – “strategist of the year” – and so, wondered if it makes sense to propose a “STRATEGIST OF THE YEAR” award as part of our 2010 year-end blog. As I tossed this idea to my wife – she chuckled –“You aren’t creating an award for yourself? Are you?” Well… although I never meant it that way, it sounded like a good idea as well – given the 2010 career slogan being ”if you do not get the job you wanted – go and create the one for yourself”.


With all the pun aside, we decided to propose the “strategist of the year” idea to our fellow readers – with a noble goal of honoring the legendary strategists who have helped to shape the strategy agenda in the last few decades. As it turned out, developing the selection process to choose the top strategist from the list of 50+ legendary pearls – is not an easy task at all. But, then we remembered the song “no turning back” and so, created a mini panel (with me and my wife as members) and quickly scanned through the profiles of the top 50 legendary strategists from various sources (we have listed few links at the bottom of the page for your perusal as well) within the last 10+ years or so.The only key criteria we used was to honor those strategists whose thinking have helped to shape the world’s purpose agenda - given the theme of our blog being “ strategy with purpose” promoting the “collaboration driven purpose innovation”( http://strategywithapurpose.blogspot.com/2010/10/transforming-so-what-opposites-in-to-so.html).

To our surprise, we quickly learned that the list of renowned strategists who have been repeatedly being ranked in the top 50 list, year after year – by and large remained the same, except for few who have changed their positions relative to others depending upon the criteria in which they have been evaluated in those years.The question however is how to trickle down to the finalist - and that indeed turned out to be even more daunting task than agreeing on the process itself!

This is where we applied our intuition and decided to make the process simple – i.e. decided to honor C.K.Prahalad, who was called home in the year 2010. Although he might qualify to be the “strategist of the year” on his own merits- we decided to bestow the award – primarily based on the fact that he was the only one in the top 50 list who happen to be called home in the year 2010. And so, the Grammy goes to... Oops! the “Strategist of the year 2010” award goes to C.K. Prahalad. I hope you all agree with our intuition as well.

As part of showing our respect to CKP, we decided to re-publish the tribute I had published in Harvard Business Review blog earlier this year, with some minor tweaks. May I request you to observe a minute of silence and recite this poem in the honor of the legendary strategist CKP, the strategist of the year 2010.

Twas the day of a solemn note!

‘Twas the Sunday morning like any other day, (April 18, 2010)
There stuck a solemn note in my heart as the news reverberated far and wide,
Stilling the clatter and traffic of the business world – and made them to pause and look around,
A new sense of new world order, at least for the time being- a new world without CKP,
In its sorrow - yet with its splendor, in its moment of loss -yet with its fortitude.

The light is gone, yet I whispered to myself - I wish I was wrong,
For the strategic light that shone the world was no ordinary light,
That strategy light that illumined this world for these many years,
Will continue to illumine this world for many more years to come,
And hundred years from now, I am sure, that light will still be seen around the world.

Not an ordinary one, the light that redefined the word strategy...
The praja that made strategy relevant for the bottom of the pyramid,
That gravitas that drew us away from the conventional thinking,
That compassionate heart that reminded us to do the right thing,
That simple soul that took the strategic thinking altogether to the new level – strategy with purpose!

The strategy Guru with his spectacled charm and of happy nature,
The champion of the once alien concept “core competencies” along with Gary Hamel
Among his virtues, sense of duty still stands out tall – as teacher and a servant
His courage to go against the odds with stronger conviction,
That is the character that won the glint of admiration.

That innovator who planted the resource based view (RBV) seed for the swallow-tails
And the milkweed plants where strategists of yester years would lay,
To make this April meadow grass green and the next round of caterpillar generation to grow
Beckoning the world to watch the mystery unfold
The metamorphosis of translucent prodigies (us?) giving our golden service for the needy.

The immigrant star smiling with his trademark embed spectacled eyes (from his place of resting)
Like a immortal who refused to be a mortal,
Realizing how quickly his insights are going to be consumed (for the betterment of the world)
Resting in peace with the assurance of his prodigies fulfilling his purpose,
Yet, rolling over from his grave once in a while (reminding us that purpose) with his spectacled smile indeed!

PS: The inspiration for this poetry tribute came from the scripture verse– “You are the light of the world. A city that is set on a hill cannot be hid. Neither do we light a candle, and put it under a bushel”

References:

http://www.thinkers50.com/
http://www.scribd.com/doc/6984582/Worlds-Top-50-Management-Gurus
http://derekstockley.com.au/guru.html
http://www.accenture.com/Global/Research_and_Insights/Outlook/By_Alphabet/The50TopBusinessGurus.html
http://www.forbes.com/2009/10/13/influential-business-thinkers-leadership-thought-leaders-chart.html

A compelling case for our Purpose-Profit balanced "Portfolio-Thread View"

For those of us who have been following our blogs closely for the last few months would have definitely noticed a key message - that our purpose driven strategy is based on the collaborative “Portfolio-Thread View" (PTV) that is being derived from the nature’s principle of “balancing opposites”. I hear someone surely asking a follow-on question - how is it different from the other predominant views such as - Strategic Positioning view (SPV), Strategy Execution/Operations View (SEV), Resource Based View (RBV) and Design Thinking View (DTV)? Before answering that question, let us refresh our memories with a strategy history refresher.

As practitioners, those of us who have practiced one or more of these dominant views as part of our strategic planning engagements would definitely agree with our observation – that these views, in most situations, end up creating conflicts with one another – thus, resulting in a tension, between the two key opposing business realities of “competitive advantages and aspiration structures”. Interestingly enough – we had depicted this tension with a funny cartoon with a tug- of-war metaphor in one of our earlier blogs (http://strategywithapurpose.blogspot.com/2010/09/what-in-world-is-strategy-pitch.html).

By advantage - we mean the ease in which companies can sustain their competitive advantage for an extended period of time in spite of the emerging challenges like disruptive innovations, globalization, and reverse capital flows etc. By aspiration structure, we mean, how flexible are company’s system (including system wide processes, culture, relationships, and distinctive capabilities that are knitted together uniquely creating their brand identity) structures to help sustain those competitive advantages.

Sustaining competitive advantage for an extended period of time- though sounds easy – in reality, is one of the most challenging things to do- especially within old economy companies - partly because of their rigid system-wide aspiration structures. Trying to change those rigid system-wide aspiration structures (especially after it has been set in stone for 50+ years or so) invariably results in a tension – which has made the business leaders to experiment different strategic views with a hope to arrive at that magical “advantage/aspiration” mix - producing , just the right amount of optimal tension needed to win the game. Nevertheless, most leaders have not been 100% successful yet on that mission – partly because of the fact, these dominant views inherently do not help them to balance these opposites effectively and to arrive at that magical “advantage/aspiration” mix.

Hence, the need of the hour is to develop a fifth strategic view (or framework) called Portfolio-Thread View (PTV) – that inherently helps leaders to balance these opposites (advantage/ aspiration mix and its sub variables) and help them to answer the key strategy question of “How do you win?” along with its three sub-part questions -

• How do you win or increase the value for your key stakeholders (shareholders, customers, consumers, partners and suppliers alike)?
• What is the optimal advantage/aspiration mix that uniquely creates the DNA of your brand/firm (or the so called “sustainable competitive advantage/aspiration” mix) that is difficult to be emulated by your competitors?
• How do you align that DNA with your Portfolio-Thread elements?

PTV is a blended “collaboration driven, purpose-profit balanced, boundary-less based, pull value chain driven, portfolio-theme view” – and, in a way, it is unique, because of its ability to answer these three questions effectively with a set of “what if scenario” based “balancing opposites” type dashboards - that is built on top of the set of interlinked purpose-profit balanced, boundary-less based, pull value chain driven, portfolio structures/ schema (i.e. product, services, experiences, market, investment, process, competency, sustainability, risk etc) that are further knitted together by key strategic themes (i.e. differentiation, low price, globalization, disruptive innovation etc) as outlined in our earlier blog (http://strategywithapurpose.blogspot.com/2010/06/purpose-driven-systemic-strategic.html). This dashboard driven model not only helps leaders to balance these portfolio variables within the context of their advantage/aspiration mix simultaneously, but also help them to arrive at the magical “advantage/aspiration mix” that is custom tailored to their specific set of market, resource, operation and creative needs –so that they can win with an absolute certainty.

Within that winning spirit – we then did a deeper dive analysis using an Advantage Aspiration Portfolio (AAP) Framework (as outlined in the top of the page) - to gauge where all of these dominant strategy views stand viz-a-viz to our PT strategic view - to help develop a compelling case for PTV. Before going too much further with our analysis, let us reiterate an important fact- that all of these four dominant strategy views are not only being widely practiced within various quarters today, but also have proven to be effective for most companies.

With that said, let us first recap the compelling cases behind each and every one of these strategic views to get a perspective of how the strategy landscape has evolved in the last 50+ years – before building a case for PTV. The Strategic Positioning View (SPV) was developed in the 70’s with a compelling case for choosing the right market entry options (while market conditions are stable) and was heavily promoted by leading thinkers like Michel Porter, whereas the Strategic Execution View (SEV) was developed as a compelling case to answer the criticism of the execution practitioners - who argued that relying too much on market share and financial algorithms have started slowing their productivity and so, they stressed the need for an execution view – with an emphasis on optimization, continuous improvement, quality and process reengineering -and, promoted heavily by leading thinkers like Ram Charan and Larry Bossidy.

While SPV and OTV were still widely practiced within various quarters during the 70’s and 80’s –an economic shift silently happened in the 90’s in terms of the capital moving from the developed economies in to the developing economies as part of the globalization phenomena -and so companies quickly realized the need to scale their expertise and resources for the global market -and hence the Resource Based View (RBV) became the new mantra (promoted heavily by C.K.Prahalad and Garry Hamel) with a compelling case that “effective companies must have set of core competencies” to win with an absolute certainty.

While all of these three views were being practiced in different quarters in the nineties- the dot com era slowly came along - and so did, the compelling case from the “design thinking” promoters – and they argued that all of these analytics driven views (SPV, OEV and RBV) try to put strategy in a box and so they do not necessarily guarantee competitive advantage for an extended period of time - and hence, they proposed a synthesis focused Design Thinking View (DTV) with a mantra – “let out-of-the- box strategic visions and creative ideas bloom with an innovation focus using right- brain based design thinking insights, before we start deciding the patterns of strategic choices” – and most recently, this view has been promoted by Roger Martin and Roberta Verganti.

Interesting history – isn’t it? What does these 50+ years worth of strategy history tell us? - None of these four views seem to meet all the needs, at all the time, for all the markets/industries. In other words, while all of these strategic views definitely have helped companies to devise effective strategic plans, not all of them have equally balanced the “advantage/aspiration” mix effectively – the key prerequisite for winning with an absolute certainty. With this renewed insight and finding – we placed all of these strategic views within the AAP framework – with “degree of aspirations” on X axis and “degree of advantages” in Y axis as outlined below and on the top of the page.

• SPV – addressing the market centric view – wherein companies can win by selecting the niche market entry options - with a key assumption - that those niche markets eventually can become their stronghold - and pretty much make competition irrelevant for them – which kind of gives a perception that this view can work well regardless of how flexible (or less flexible) their aspiration structures are – and hence, at times, is being misinterpreted to be creating class differences among various markets and industries.

• SEV – addressing the execution centric view – wherein companies can win by optimizing their processes, practices and eliminating waste/idle capacity with a leading edge analytics/statistics (Six sigma, lean, regression etc) tools and techniques with a value engineering focus – but at times, is being misinterpreted to be resulting in an over engineered initiatives in certain markets/industries that do not produce sufficient returns to justify those initiatives.

• RBV – addressing the core concentration view - wherein companies can win by focusing on their core businesses i.e. by finding creative ways to unleash the untapped value from their core, with a set of core competencies – but at times is being misinterpreted to be promoting too much cost containment mindset stifling the edge focused disruptive innovation.

• DTV – addressing the design thinking view – wherein companies can win by “trial and error” based innovation culture and willingness to experiment with “out of the box” ideas and directions, and adjust the efforts based on the experimental learning every step of the way – but at times, is being misinterpreted to be lacking focus, discipline and coherence.

• PTV – addressing some combination of the above four categories – wherein companies can win by balancing their opposites to their best – i.e. advantage/aspiration mix –that is further custom tailored to suit to their individual market, resource, operation and creative needs with a set of analytics/synthesis focused (left and right brain focused) interlinked purpose-profit balanced, boundary-less based, pull value chain driven portfolio structures and themes – to help face the challenges of 21st century and to win with an absolute certainty (http://strategywithapurpose.blogspot.com/2010/10/transforming-so-what-opposites-in-to-so.html) – but at times, can potentially be misinterpreted as - “being all things, to meet all needs, for all industries”.
  

As we recognize from these “advantage/aspiration” mix driven strategic view placement analysis- interestingly enough, four of these strategic view categories fell perfectly in to those four quadrants of the framework with an exception of our PTV – which got placed in the centre of the framework covering all the four quadrants. What does this tell us? There is a need for a fifth view with a flexible set of “collaboration driven, purpose-profit balanced, boundary-less based, pull value chain driven, portfolio structures and themes”- to effectively balance these opposites and help answer these three key questions – with an absolute certainty to win at all times. And so, it is time for companies to accept this new reality (i.e. PTV strategic view) and start using them in their strategic planning engagements to help answer these three winning questions effectively - to meet the emerging ever changing challenges of the 21st century and to win with an absolute certainty. However, by no means – we are suggesting that other views have lost its relevance – I guess “doing both” is the way to go in the words of Inder Sidhu and Roger Martin and as summarized in the poem below.

Realizing the need to weed the strategic creed’s advantage-aspiration clutter, (then)
Rebranding that creed with nature’s “balancing opposites’ principle breeder, (by)
Renewing that aspiration fixture (of SPV) with a flexible structure,
Re-energizing that engineering overture (of SEV) with a good-enough engineering culture,
Rejuvenating those core competencies culture (of RBV) with an edge competencies glitter,
Refreshing that free thinking sculptor (of DTV) with a process rigging stature, (by)
Reinvigorating them all with a fifth venture, with an optimal advantage-aspiration mixture, (and delivered by)
Rendering them all with a “collaboration driven, purpose-profit balanced, boundary-less based, pull value chain driven, portfolio-theme structure”, (that is)
Reverberating the corridors of the world’s elite’s strategy theatre,
Raising the bar to a newer glitter with a startling strategy whisper– purpose driven strategy is the new clatter to rattle!

Yet another Compelling Case for Purpose Model Driven Purpose Bundles

On the other day – I had lunch with one of our business network contacts and the conversation slowly turned towards our last week’s blog on sensitivity analysis framework (http://strategywithapurpose.blogspot.com/2010/11/sensitivity-analysis-framework-for.html). More specifically, his hypothesis was that- the granular value drivers covered within our sensitivity analysis framework (e.g. pricing, volume, COGS etc) is useful only to develop “bottom line focused operation excellence strategies” and not the top line focused innovation strategies. While I agreed with him in principle, I immediately pointed out the other variable within the ROIC called “VELOCITY” (or, the capital intensity as some folks call it when we reverse denominator and numerator) is what helps us to develop the top line focused innovation strategies. What do we mean by that? Let us go back to our ROIC formula –

ROIC = NOPAT/Sales x Sales/Capital => Operating Margin x Velocity

While most organizations focus on improving the operating margin within this ROIC equation- few in addition, also simultaneously focus on increasing the velocity to improve the ROIC from both top and bottom line standpoint. They usually do that- either by increasing their top line revenue (using innovative product lines and/or new business models) or by reducing the capital intensity by smart integration strategies (vertical, tapered and/or forward/backward integrations) and/or efficient sourcing strategies.

I ended up convincing him with few real world examples – where one of our client had specifically asked us to help them to increase their velocity – given the fact that consumers in the recent months have started to be very value focused (partly because of the down economy) when it comes to shopping household and personal-care products. One of the biggest conundrums facing this client is - the emerging shift in value perception is no longer a short term phenomena anymore– rather, as most experts predict, it is going to continue to stay even after the economy starts coming back again- which means it is imperative that consumer focused companies to have a value strategy if they already do not have one. For example, Store brand market shares, while stalling in the last spring after a big run up, resumed their growth this summer. While packaged food and beverages did perform reasonably well as people ate out less, store brand shares have grown in F&B categories as well.

When we analyze these store brand growth numbers holistically within its context, there is an interesting dynamics emerging– although consumers have cut back on commodity type packaged goods, they are still spending money on electronic gadgets (Smart phones, HDTV’s and iPads etc) – despite the fact many of them have high monthly subscription fees on top of their already high price tags. What does this tell us? Consumers, of late, have redefined their value equation – i.e. being value minded is not necessarily buying cheaper goods anymore– rather, it is being smart in purchasing products that solve their unmet needs with a longer lasting “higher award status” or experience.

In other words, consumers in their mind have started categorizing the products and services based on their consumption experience patterns as – “value-add vs. non value-add” - not just based on the price tags anymore, but also, based on the perceived long lasting award status those products (and services) leave behind them. Within the context of this renewed insight - the biggest innovation strategy question facing most consumer focused firms regardless of the industry vertical is- how to innovate with an end goal of increasing consumers’ award status, yet increasing the velocity from financial algorithm standpoint?

Before answering that question- first things first – let us recollect the value definition we had laid out in one of the earlier blogs - Value from consumers standpoint is “… the proposition of experiencing the “good enough” product/service consumption attributes (it varies depending upon the product/service) within an acceptable price point that is accessible and relevant to their life situations and experiences.”. In other words, the term value to consumer is the summation of all the experience attributes divided by the price they are willing to pay.

Consumer Value Equation = Top Experience attributes/Price

Within the context of this foundational definition – we sharpened our consumer insight analysis to answer our innovation strategy question using the Award Status Portfolio (ASP) Framework as outlined in the top of the page. Our research suggests that more than 50% of the consumers are looking for better “award status” based value deals when it comes to consumer products/services - followed by another 30% who are willing to exchange their high price commodity products for high price “value-add” products. This is definitely an alarming trend for commodity players and so we did some “deeper dive analysis” on the spending patterns of consumers across various product/service categories.

The insights we garnered was all the more intriguing - that consumers have altered their spending patterns not just based on usage needs, but also based on the way they map their preferred products/services to their personal award status experience. With this new insight and findings – we grouped the products/services under five award status categories and plotted them in the award status framework – with “degree of spending” on X axis and “degree of award status” in Y axis as outlined below and on the top of the page.

• Commodity – addressing the basic commodity experience -where consumers are cutting down on paying higher prices for national brands as 80% consumers now believe that store brands are made by the same manufacturers that make the national brands - especially when it comes to packaged goods and household items.

• Standard – addressing the standardized or mechanized product and/or service experience - where consumers, although are less likely to reduce their spending, yet are not willing to increase their spending e.g. some mechanized packaged/ household services and subscription based utility/content/TV services.

• Transformational – addressing the “inner” soul enhancing experience – where consumers are likely to increase their spending to increase their inner award status e.g. H&W focused nutritional supplements, Workout services, books, CD, music, SPA etc.

• Value-Add – addressing the “outer” prestige enhancing experience – where consumers are likely to increase their spending to increase their outer award status e.g. electronic gadgets, HDTV, value-add content services like context TV, iPads etc.

• Blended value – addressing some combination of the above four categories – where consumers are more likely to balance them on a daily basis to reach their personalized optimum category - and this is where our “purpose model based purpose bundles” (http://strategywithapurpose.blogspot.com/2010/10/transforming-so-what-opposites-in-to-so.html) come in the picture.

As we recognize from these “award status” based category maps – consumers are likely to increase their spending on higher award status experience providing “value-add” categories than other categories– and above all – consumers are also trying to balance their consumption experience portfolio on a daily basis to arrive at their personalized “Blended value” category. This is where our concept of “inter industry vertical” based purpose bundle strategy - of bundling commodity and standard products with transformational and value-add categories-come in to the picture. As it turns out, it is also a win: win strategy (as outlined in one of our earlier blogs), for both consumers and providers alike – as consumers see the synergistic value of the “cross industry” purpose bundles - i.e. sum of the total bundle award status is higher than the individual part’s award status.

What does this tell us? There is a new reality or an “award status based value equation” seems to be evolving when it comes to consumer spending - and so, it is time to accept this new reality and devise an appropriate “purpose model based purpose bundle strategy” to answer this emerging award status perceptions of 21st century consumers. However, by no means – we are suggesting that commodity products and services have lost their relevance – rather, it is time for commodity players to come up with more of value-add/innovative products and services with a higher award status – where, historically, CPG/Retail firms have been lagging behind the electronic gadget firms. I guess the right answer is “doing both” (i.e. innovating commodity product categories and formulating purpose bundles) is the way to go in the words of Inder Sidhu and Roger Martin and as summarized below.

To whom shall we ask… and whom shall we send (to find)
Those who are seeking for this “award status”?
Pay attention pals, sit tall, and don't look so content!
For it is an honor coveted by us all, the normal consumers…
It’s been dreamed of and prayed for so long …
Reflecting the true inner self esteem of the highest scale
No bribes, no pleas, no threats will prevail – and so,

It is time that we fulfill that dream, by

Balancing "value with spending" to achieve that aim,
Reducing the “commodity” quadrant as there exist few choices to claim,
Keeping the “standard” quadrant as basic necessities remain the same,
Sustaining the “transform” quadrant to enhance the inner exclaim,
Increasing the “value-add” quadrant to enrich the outer fame, (yet with a goal of)
Reclaiming the “blended value” quadrant as it is the ultimate acclaim, (so…)
The name of the game tomorrow is for "purpose bundles" to proclaim!

Sensitivity Analysis Framework for Improving Profitability and Valuation

Some of the ideas we have been promoting in the last few weeks – appear to have caused some buzz within the blogosphere- more specifically, our sustainable valuation formula, definitely has caught the attention of few readers (http://strategywithapurpose.blogspot.com/2010/11/purpose-profit-balanced-sustainable.html). One of our fellow readers made a casual observation - “our simplified valuation formula [i.e. V= NOPAT x (1- g/ROIC)/ (WCCP-g)] does not seem to take in to account the impact of all key value drivers (e.g. pricing, margins, volume, COGS etc) –and, hence it trivializes the whole valuation exercise”.

While we agree that it is a simple formula, it is an accurate one from financial algorithm standpoint. The reason we took McKinsey’s “Zen of Corporate Finance” as the base in our article last week was -to build a simple yet compelling case for discounting the free cash flow with a purpose value driver (WACP) very much like how WACC is used to discount the free cash flow. At the same time, we definitely empathize with our readers –who, otherwise perform the detailed valuation exercise with multiple spreadsheet pages of DCF cash flow projections and value driver assumptions. We still recommend our readers to go through the similar DCF process and validate the result with our summarized formula. In other words, our formula is more of a validation formula than a working formula.

The question however is – does that mean our sustainable valuation formula do not take in to account the impact of those granular value drivers? Before answering that question, let us first dissect ROIC within the valuation formula

ROIC = NOPAT/Sales x Sales/Capital => Operating Margin x Operating Velocity

As we further inspect the Operating margin and its sub components– some of the key value drivers that contribute towards the operating margin are – Price, COGS and Volume - which are further dependent upon promotion scenarios (including their depth and frequency), competitor responses, elasticity and boundary conditions to name a few. We sure can expand our formula mathematically to explain how these value drivers are indirectly accounted for within our valuation formula. However, it does not communicate the causal chain relationship effectively, and so we thought that it is a worthwhile exercise to come up with a sensitivity analysis framework to show the impact of these value drivers on margin using a real world case study – clearly showing the impact of price changes on volume (& hence on margin and the overall NOPAT/enterprise value).

Our goal for this case study is to develop a flexible framework model from the methodology we had used for one of our client CPGR-Co Inc. (our fictitious CPG/Retail Corporation pronounced as ZipGyarCo) who had asked us to help them to increase the profit by 10% (& hence enterprise value) by increasing (or decreasing) price by a certain percentage, yet without substantially impacting the volume.

The Working Framework Model

As part of that exercise, we decided to develop a working framework model (and a mathematical formula) of linking all the input and output variables that contribute towards increasing the operating margin, profit and valuation as outlined in the schematic at the top of the page. With all things being equal (consumer purchase criteria, brand perceptions, trade promotion rates and efficiency etc), we quickly realized that there still exists few cost differences (e.g. supply chain/distribution costs) across the market regions and hence we decided to develop a region specific pricing model (as opposed to one mammoth corporate model) to better simulate the real world business conditions. Within that approach, we then divided the CPGR-Co’s markets in to 5 RMA’s (East, West, Central, South and North) selling all of their top 5 Product models or package sizes (P1, P2, P3, P4, P5) – resulting in 25 model cells (i.e. one model each for each cell). Please note that the more granular we divide the markets the more accurate our models will be.

The objective of our case study was to develop an analytics based pricing model with a regression based mathematical formula producing the following projected results.

• Recommendation to price up or down in each cell.
• Projected volume, profit, share and valuation outcomes from price changes.
• Optimization recommendations for competitive response scenarios.

To achieve these objectives - we went through a systematic problem solving process with the following steps.

1. Calculate VCOGS matrix – at the product model level for each RMA.
2. Arrive at the optimum adjusted trade price (from retail price) to better negotiate with retailers/vendors.
3. Load the Product/RMA matrix with historical volume and price data from IRI/Nielson.
4. Develop the analytics based CORE Pricing model with all the inputs, outputs and their interdependent relationship.
5. Develop the equivalent log-log form mathematical equation simulating the core model- more specifically, develop a formula to arrive at the unit volume – which is a function of
   • Current price (e.g., P1)
   • Previous period’s price (e.g., P1_PriorPeriod)
   • Price of our other pack and/or model sizes (e.g., P2, P3)
   • Price of our competitors (e.g., CPCp1, CPcp2,C Pcp3, CPcp4)
   • Brand Equity impact
   • Other ancillary variables (e.g., Holiday, Trend etc)
   

The corresponding equation format is

New Volume = e0 + b1*ln(PP1) + e2*ln(PP1_Prior_Period) + e3*ln(PP2) + b4*ln(PP3) + …
e5*ln(CPCP1) + e6*ln(CPCP2) + e7*ln(CPCP3) + e8*ln(CPCP4)…
e9*Brand Equity + 110*Holiday …

Where

• e1 - own price elasticity (negative) - “If we raise P1 price by 1%, P1 volume will change by e1%”.
• e2 - lagged price impact (positive) - “If we raise P1 price by 1% this period, next period’s P1 volume will change by e2%.
• e3 and e4 - own model size cannibalistic -elasticities (positive) - If we raise P2 price by 1%, P1 volume will change by e3%.
• e5-e8 - competitive elasticities (positive) - “If competitor raises CPcp1 price by 1%, P1 volume will change by e5%.
• e9 - Brand Equity impact (could be negative depending upon the depth and frequency of the promotion and where the firm is on the innovation maturity curve) - Every additional period we move forward in time, we expect P1 volume to change by e9 * 100%.
• e10 Holiday impact (positive) - For holiday periods, we expect P1 volume to be e10*100% higher than for non-holiday periods”.

6. Calculate the price elasticities for three scenarios (SELF, SELF CANNIBALISTIC and COMPETITIVE) based on IRI/Nielson data.

7. Adjust the results based on competitor responses.

8. Adjust the results based on boundary condition analysis.

9. Use economic model to further optimize the results across various regions/accounts.

10. Finalize the projected volume, profit, share and valuation changes from price changes.

Value Driver Strategy Execution Considerations

As we can recognize from the steps above, we can easily extend this working model and mathematical formula for other value drivers like COGS containment, inventory cycle reduction, idle capacity containment (& few more) as well for arriving at a similar set of recommendation/results for improving profitability and valuation. However, one of the big challenges in implementing those recommendations within large organizations like “CPGR-Co” is building the consensus across various stake holders – from the standpoint of - first identifying the right set of appropriate value drivers, developing the right framework, arriving at the the action plan and finally implementing them.

For example, although there is a substantial opportunity to achieve profit/valuation goals by making the pricing changes as identified by our analysis - executing those price changes in a timely manner, is not an easy thing to do- given the fact pricing is embedded in a wide range of broader business decisions like strategy development (e.g., capacity utilization, new product pricing), price optimization (e.g., average price targets) ,trade strategy and sales execution (e.g., EDLP vs. HiLow) scenarios. In addition, the optimal pricing decisions require the input and expertise of a wide range of domain “experts” from both business units and front line sales strategy teams.

To circumvent these execution challenges, we made a recommendation to our client “CPGR-Co” to form few cross functional Value Driver Councils (VDC’s) to coordinate and proactively shape these value driver decisions (e.g. pricing decisions) across accounts, channels and brands. More specifically, within the context of our value driver council for pricing, the VDC will be chartered with the following

• Define pricing strategies/moves across the portfolio.
• Identify other value drivers that compliment pricing.
• Communicate approved pricing strategies to the field.
• Ensure region/account-level trade policies fit with strategy.

In addition, create a forum or platform for regular review of pricing trends, and other value driver needs by analyzing

• Market trends, competitor behavior
• Performance of new products
• Performance of competitor products

Finally, also act as the steering committee or governance layer for long-term pricing improvement

• Identifying “next level” pricing challenges
• Pricing pilots/tests—spreading best practices
• Upgrading analytics foundation (tools, processes, techniques, policies and organization models)

“Winning by Analytics” Considerations

As we can clearly recognize from the framework model steps and VDC’s governance layer requirements, Analytics is critical for successfully executing the tasks in every step of the way. We cannot stress the importance of analytics enough - that we encourage organizations like CPGR-CO to develop a solid analytics foundation with a right set of tools, techniques and templates to reach the winning level of "Level 5 analytics maturity" as promoted by Davenport & Harris and as explained in some of our articles published by Academy of Business Strategy (http://theacademyofbusinessstrategy-businessanalytics.com/). Within the context of that winning spirit, we specifically encourage our client CPGR-Co to develop the following set of tools.

• RMA/Product Matrix level optimization tool, techniques and templates to develop tailored pricing decisions across pack and model sizes and RMAs.
• IRI /Nielson price elasticity tool, technique and templates to estimate profit and volume impact of these decisions across competitive scenarios.
• Average price to trade calendar tool, techniques and templates to estimate impact of trade calendar scenarios on average price/unit.
• Category management tool to develop compelling cases to support field execution of pricing decisions.
• Forecasting and sales management tool to provide input to financial management system and to track progress against pricing targets in the form of “what if analysis based” drill down dashboards.

Bottom Line:

At the end of the day – developing winning strategies is definitely a great thing to do – but, institutionalizing them is all the more important - as strategy in its "execution form" is what brings the tangible outcome to stakeholders. Let us face it - fully empowered price strategy decisions (or for that matter, any other value driver strategy decisions) requires extensive consensus building in most organizations- and this is where- our Value Driver Councils (VDC) come in to the picture. So, it is a call to action for our client “CPGR-Co” and other similar clients-not only to develop winning strategies to improve profitability (and valuation), but also, institutionalize them using VDC’s.

Purpose-Profit Balanced Sustainable Value Equation Framework

Happy Diwali (or the festival of light) to our readers from both east and the west alike!

Based on the extensive coverage of purpose-profit value concepts in the last few weeks - one of our fellow bloggers posed an informal observation – "while it all sounds great to talk about the purpose agenda, the thing that matters the most at the end of the day is just profit – as profit is the primary variable within the valuation formula". As we thought more about this observation, there seems to be some merit in that argument- given the fact, most of the modern day valuation frameworks are being built with just profit variables- and so, we decided to come up with a valuation hypothesis - with an enhanced WACCP (Weighted Average Cost of Capital and Purpose) that is calculated as a weighted average of WACC and WACP.

Let us face it – the reason we discount the free cash flow (FCF) with WACC within the valuation formula is - that it does not make sense to valuate (or run) a business that does produce the minimum hurdle rate of WACC- like wise, our hypothesis also proposes that - it does not make sense to valuate (or run) a business that does not meet the minimum purpose hurdle index of WACP. Assuming we have a behind-the-scene formula for accurately arriving at the WACP index (using the purpose scores we had proposed in our previous blog) that is further "weight averaged" (with WACC and WACP) with appropriate weight factors– our renewed sustainable value equation will look as outlined on the top of the page.


At this juncture, we also would like to remind our readers that this is a hypothesis based formula and so will need lot more analysis and research before we can publish this as a working formula. Under the normal circumstances where WACC and WACP happen to be the same (say 10%) with an equal weight factor(say, 0.5+0.5), then our sustainable value equation formula will indeed work like the Mckinsey’s valuation formula. On the other hand, on scenarios( with ROIC of 15% , growth rate of 5% and WACC of 10%), where WACP is changed by a percentage point, we have seen the valuation changing by (+ or - ~10%), the intended effect we were hoping for. However, lot more regression testing and research needs to be done before proposing this as a working formula - and until that time, please treat this as a hypothesis formula.

With this renewed sustainable value equation definition as the foundation– we then did some more qualitative analysis to strengthen our hypothesis using the Purpose-Profit balanced Value quadrant framework as outlined on the top of the page. With the tough economic conditions still lingering- most of the H&W/Green minded consumers, of late, have started changing their buying patterns - that they have started to buy their products and services only from those corporations whose purposes and values align with that of theirs. In addition, our research has also found that over 35% consumers say that they are likely to do business with only greener brands (source: “2010 ImagePower Green brands Survey) and among them, a substantial percentage of consumers are also looking for a better value deals while buying their products/services.

This is definitely a new trend and another compelling reason for corporations to be purpose minded - and so we did some more “deeper dive analysis” on the extent of purpose adoption within various corporations. The insights we garnered was all the more intriguing - that most corporations, not only have started pursuing purpose initiatives , but also have started revising the way they measure their internal successes. In other words, corporations have started measuring their performances with both profit and purpose KPI’s like corporate sustainable index and corporate social responsibility index etc.- which is very encouraging.

At the same time, with all things being equal, the extent of the purpose adoption, however varied from corporation to corporation (and industry to industry) - and rightfully so, our valuation numbers did end up being all over the map as well. With this variety of values in our findings – we then grouped the resultant values under five value categories and plotted them within our framework – with “degree of profit” on X axis and “degree of perceived purpose” in Y axis as outlined below and on the top of the page.

• Surviving Value – addressing the “ordinary outcome” quadrant -where most corporations start (or arch) their purpose journey from. As the name suggests – although most corporations can survive by being on this quadrant for a period of time, they are advised to move on to other quadrants to be relevant in the 21st century.

• Sacrificial Value – addressing the “extraordinary" outcome” quadrant where purpose driven corporation’s angle there for a period of time, before moving on to the other quadrants. These are corporations who go the extra mile to fulfill their mission – at times even at the cost of not meeting their profit goals. Although not a place to be in for a longer period of time, definitely a worthwhile quadrant as it teaches us the discipline of what it takes to practice what we preach.

• Startling Value – addressing the “aggressive outcome” quadrant – where corporations aim to achieve the startling profit performance with “just good enough” purpose agendas to keep the momentum going. Although, it is a good path way quadrant to be in, sustaining the profit performance without sufficient purpose agenda for a longer period of time is not an easy thing to do -and so, they are advised to move on to other quadrants!

• Soaring Value – addressing the “utopia” quadrant – where corporations aspire to achieve the perfect performance numbers in both purpose and profit dimensions. Although, an ultimate path to aspire for, a very difficult quadrant to sustain the numbers for a longer period of time!

• Sustained Value – addressing the “optimal outcome” quadrant – where corporations ace towards achieving the optimum values in both purpose and profit dimensions and it is indeed a perfect quadrant to be in - as it produces "sustainable purpose profit balanced value" for the long haul!
  

Interestingly enough, four of these value categories fell perfectly in to the four quadrants of the framework with an exception of one category – which got placed in the centre of the framework covering all the four quadrants. What does this tell us? There is a new reality or a “new sustained value equation formula” seems to be evolving within the context of corporations balancing purpose and profit when it comes to assessing their intrinsic value. This new reality - is indeed a wake up call for most corporations – and so, it is time that corporations to reevaluate their internal business units and capital investments with this sustained value equation mindset to respond effectively to the emerging consumer spending pattern changes towards purpose brands. This does not mean that businesses have to become charitable organizations – rather, the optimal goal is acing in to the sustainable value quadrant as outlined in the framework and summarized in the poem below.

We have a dream, where all businesses bubble up by,
Balancing profit with purpose as their ultimate way, (via)
Arching in to the “surviving” quadrant as the initial lay,
Angling through the “sacrificing” quadrant as the mid day, (yet)
Aspiring to the “soaring” quadrant as the ultimate way, (but),
Aiming for the “startling” quadrant as a path way, (yet)
Acing in to the “sustaining” quadrant as the best way,
That’s the dream; we wish that it comes true today!