In our recent column, "Get on the Same Page," we identified four steps to align your management team on a path to value growth. The first, and arguably the most critical, step in this process is to develop and agree on a common set of facts about the business and the markets in which you compete.
When companies lack a clearly defined strategy, one reason is typically because the members of the management team disagree on the key facts around the business. These different and often conflicting views–such as the growth potential of a specific market–can lead one executive to push for increasing investment and another to recommend an exit strategy. These perspectives are driven not by differences in philosophies, intellectual ability, or risk tolerances, but simply by a different view of the facts about the market.
How do you develop a basic set of facts about your business on which everyone can agree? There are three key components to a fact base about any business:
1. Market Size and Growth by Segment
Estimate the market size and growth rate of the business’s core market and each of its adjacent or emerging markets. Within each market, break out the size of relevant segments–geographies, demographics, products, distribution channels, or consumer attributes.
These segments will vary by industry; for instance, a coffee shop will have daily consumers vs. one-time visitors, while a steel distribution business may have construction customers and manufacturing customers. Each of these segments may have different size and growth characteristics. Don’t worry about decimal-level precision; the relative differences in markets and segments are what you’re after here.
2. Current and Forecast Economics by Segment
Much of the potential opportunity in a business can be determined by understanding the basic economics in the business. In particular, it’s helpful to understand the concentration of revenue and profit across segments as well as what’s driving those sales.
In most businesses, the 80/20 rule applies–80 percent of the profit is generated by 20 percent of the customers (or products, geographies, or channels). Understanding these dynamics is important, but even more critical is gaining a clear view of the value drivers–the specific strategic insights that define the differences between customer segments.
3. Competitive Position
Value in its purist form is defined by a business’s ability to charge its customers more than its cost to serve those customers. But each business has a competitive position, hopefully a competitive advantage, that it must understand and exploit in the marketplace. Competitive position is determined by your 1) offering, 2) pricing, and 3) operating or cost relative to competitors and substitutes.
Building a fact base around where your business is advantaged, at parity, or disadvantaged relative to customer alternatives is generally accomplished through customer surveys and competitive research–but the best information often comes from talking to your customers, your sales force, and your sales channels, because they have the best understanding of how your product or service compares with competitive offerings.
Once you understand the key differences between your business and your competitors, you can identify ways to exploit these differences and increase (or regain) your advantage.
Getting everyone on the management team to agree on these three key elements of you business–based on facts, not assumptions–will make it easier for you to identify growth opportunities that have everyone’s support.
Have you aligned your management team on a common set of facts? Share your questions and comments below, or write us at firstname.lastname@example.org.