Target Market Criteria

THIS IS AN INTERNAL GOLDRATT GROUP DOCUMENT.
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Target Market Criteria Page 1 Eliyahu M. Goldratt, 2007

Target Market Criteria

Eliyahu M. Goldratt, 2007

Background

Its time for a late night discussion between you and me. Locate us in a
nice place; the view is less important than the comfort of our seats. Put
drinks in our hands (I prefer Sprite with several pieces of lime thank
you), and most important, no one is going to disturb us for the next few
hours.

You are the auditor, Im the project leader, the project is Goldratt Group
(GG).

I like your audits. They do help to keep me, and the project, on the
right track. What I like best is the practical way you do it. For
example: Eli, you claim that you implemented step 3.1 (the decisive
competitive edge build step)? Fine, but if so how come the predicted
results are not there?

We put our heads together. We had a hard look at the existing
implementations, realizing that so many of them are far from bringing
the conditional fees, that more than a few are probably beyond repair.
And then we figured out what was missing. The lack of an explicit
cause-and-effect roadmap for implementations an observation that
led to the construction and assimilation of the S&T trees. Or, the fact
that in too many cases the assigned experts did not spend enough time
on their projects that led to the reconstruction of the arrangements
from contract percentage to daily fees.

As a result, the existing implementations are progressing well. Bad
implementations (most, in retrospect, we shouldnt have taken in the
first place) have been closed without resulting in bad actions or even
bad feelings from the clients. And all open implementations are
producing nice results for our clients and for us (delivering or will soon
deliver bonuses).

No wonder that now Im looking forward to our next pleasant and
fruitful discussion.

THIS IS AN INTERNAL GOLDRATT GROUP DOCUMENT. IT IS NOT INTENDED FOR GENERAL DISTRIBUTION

The BUILD steps are basically done. The topic of tonights discussion is:

Capitalize

Im floundering, I start. I tried everything. Take for example the VV
seminars. Its not easy to organize them; its not easy to bring in
dozens of companies, especially when we do our best to bring the
Presidents. And still, even when we succeed to bring 30 Presidents and
the presentation is enticing to the extent that as many as 20 apply for a
VV, we end up with about 5 VV Validation meetings. The sales pipeline
is much too thin. What are we missing?

You lean forward and in a low voice you say, Maybe its about time to
follow our own book? Nowhere is it written that a shoemaker must go
barefoot.

Reacting to my puzzled look you continue, If Im not mistaken, the
capitalize section, in each of our S&T trees, starts with the step entitled
target market definition. In the necessary condition the warning is:
Pursuing wrong prospects is not just a waste of valuable resources
(money, sales capacity, time ...) but it can lead to the conclusion that
the direction is invalid.

I know. I wrote that tree, I respond with a slightly impatient tone.
Then, more slowly I add, Frankly, I dont see the relevance. When we
deal with our clients, organizations which are not used to having a
competitive edge, I clearly see why we have to stress it. If we dont,
their inertia is likely to cause them to continue to pursue their
traditional clients and they might miss the ones that are a much better
fit for their newly acquired competitive edge the ones for which the
addressed need is very significant. But is it applicable for us? In GG
why should we be afraid of inertia? Our competitive edge is not new to
us.

You try to answer, but I interrupt, Besides. In our case, show me an
organization for which our offering is not meeting a significant need?
Which company doesnt want to ten-fold its profits, and in less than
four years?

You make sure that Ive finished and then you state, The more
powerful the competitive edge, the more important is the need to
properly choose the target market. You are right in saying that we
have one of the most powerful competitive edges. That is precisely the
reason why we have to be even more careful in choosing our target
markets.

Hmm is my skeptical response.

Its not inertia that bothers me, you try to explain. The danger is
that since our offer fits almost any organization, we run the risk of
spreading ourselves too thin. Of losing focus!

Im taking my time thinking about it, finally I say, You might be right.
If I take Realization as an example

Its always easier to examine somebody elses company than our own,
you comment.

So correct, I smile back. So, regarding Realization, they definitely
have a most powerful competitive edge; so many organizations do
recognize the need to improve project management. And Realization,
not like us, does bother to properly document and publish their clients
results. Im convinced that currently there is no other software
company that has a reference base that comes even close to the one
Realization has. Not in number of references, the brand names of its
clients, and most impressive the magnitude of the improvements. Still
they have the same problem that we do their sales pipeline is not
overflowing.

You wait for me to tie my example back to what you were talking about.

Yes, I agree. They have not defined for themselves a target market.
They have fantastic references in, for example, MRO in aircraft
maintenance. They can easily use their existing clients to get excellent
referrals to any other companies or military operations that have MRO.
That market alone can keep them busy for years. Instead they chase
any plausible opportunity.

Exactly my point, you comment. To grow, and grow fast, one must
focus and focus means self-imposed limitations. We are able to
improve almost any organization; that does not mean that we should go
after any organization. We need to impose limitations on ourselves
we must define our target markets and stick to them.

But wait a minute, I argue. We are doing just that. We did restrict
ourselves to just physical products. And within that category we further
limited ourselves to companies that fit only four templates.

Just bear with me, you say as you are searching for something on
your computer. After a long pause, here it is, you mutter. The

necessary assumption right below the target market step, in the first
corresponding level 5 step, contains something interesting. It states
that: it stands to reason that the market analyses the company has
done were based mainly on a product view. Isnt that exactly what you
just described? Arent we choosing our target market according to
product view the templates? Shouldnt we use instead some prudent
criteria for choosing the target markets?

How can one object to drinking his own medicine? Okay, I say. Lets
put our heads together and figure out what the criteria should be. But,
lets do it slowly, I recommend, I would hate to make a mistake and
as a result chase the wind for the next few months.

We have all night, you agree and stretch your legs.

I light my pipe, gaining a minute to organize my thoughts. I think that
it is quite clear where to start. I release a cloud of smoke and continue,
Our waste of time and effort is exposed at the stage where we need to
trim the many applications we worked so hard to get. Trim into the
smaller number we accept for (and continue to trim during) the VV
Validation meeting.

You justify my observation saying: If we were focusing our initial
efforts, if the target market would have been correctly defined, we
wouldnt have to drop so many companies from our sales pipeline.
Good target market definition means that almost every company that
belongs to that market is a good candidate. Dropping over 70% is a
clear indication that our current market definition is lousy.

No argument here, I reply. So what we should do now is to examine
the main reasons for the rejects. This will lead us to the desired
criteria.

One reason for the rejects is that the company that applied doesnt fit
one of our templates. In a disappointed voice you add, That doesnt
help us much.

I think that the main reason is different, I argue. In the last year or
two we marketed the VV seminars more carefully and I do stress in the
seminar itself that the companies must deal with physical products and
lately I even explain the four templates. If you check the applications
youll see that at least 80 to 90% of them do fit, at least on the surface,
one of our templates.


So what do you think is the main reason for rejecting so many of the
applications? you ask.

Im convinced that it is our prudence of not accepting borderline
cases, I answer. We did learn, the hard way, how much time and
efforts are drained by borderline cases. How much headaches they
cause for everyone, including myself.

You strengthen my claim by adding: Thank god for Mickeys rule: do
not accept a company when you are not convinced that we can surpass
the Viable Vision target by at least 50% with just the left part of the
tree. Im convinced that this rule saved us. And I also agree that it is
the overwhelming reason for the rejection of applications. After a
short pause, you ask, Where do we go from here?

Im still thinking about it when you actually verbalize my rambling
thoughts, Doesnt it mean that the first, and most important, criteria
for choosing a target market is the degree to which we are sure that we
can meet and surpass the VV target for almost any company in that
market?

We just made a major step forward, I concur. But my friend, since
we just recently changed the way we set the VV target, lets stay a little
longer on that point.

You nod and I continue. We used to set the VV target to be: yearly
profits reach, in four years or less, the companys current yearly sales.
Now we save ourselves a lot of problems by determining the VV target
as the lowest profit per year number that there is a consensus by all
management of the prospect, that such level of profit is unrealistic to
achieve in four years.

That is a very good change, you comment. I had cases where
putting the target to be equal to current sales was considered so
incredible that we could not possibly get the management commitment
for the project. We got the contract but not the management
commitment. That led to the attitude of show us. The project became
our project rather than the managements project. But Eli, why do you
elaborate on this point?

Im a little confused. How can we evaluate our confidence to achieve
the VV target if we dont know what the target is? I ask.

But the VV target is specific to each company individually, you
answer. Actually, the chance of reaching the VV target is dependent

on many parameters: the level of TVC, the amount of excess capacity,
the number of shifts, the You stop in the middle of your sentence
and just gesture in disappointment, Bummer.

Whats the matter? I inquire.

You explain. If the chance of reaching the VV target is dependant on
the specifics of the prospect we can not possibly use a criterion for a
target market that is based on our confidence to achieve the VV target.
And you sink deeper into your couch.

Not necessarily, is my response.

Explain, you insist. Remember, we agreed that a criterion for a
target market should be met by almost any company that belongs to
that market. If meeting the criterion depends on the specifics of the
company then by definition the criterion is invalid. Bitterly you add,
For a minute I thought that I had a nice idea but forget it. We are
back to square one.

Hold your horses, I say. You criterion is too good to give it up so
easily. Lets check it again. In the base of what you just said there is
a statement that I dont accept.

You look puzzled. Are you trying to claim that the chances to reach
the VV target are not dependent on the specifics of the company?

In the vast majority of cases I agree with you, I answer confidently.
But if we agree on a small change then there is one market which is an
exception. Yes, we can point to one, very big market segment where
we know, a-priory and with very high confidence, that we can surpass
the VV target of any company that belongs to that market.

What is that miraculous market? you demand to know.

I cannot resist the temptation to pull your leg. First, I have to explain
what change we have to agree on.

Go ahead, you say quite impatiently.

I take my time. I again light my pipe and send a cloud of smoke in
your direction.

Come on, Eli you wave your hand in the attempt to clear the air.


We used to define the VV target in terms of profit, I finally say, But
do you agree with me that instead of profit we could use any other
bottom line measurement?

As long as it is in wide use, you qualify your answer. And then add,
And it also should be perceived by the prospect to be as important as
profit.

I dont have a problem with your qualifications. There is one segment
of the market in which the number one measurement to judge how
good companies are is not profit but percentage of profit on sales. For
example, a supermarket will be judged as very good if it makes over
2% profit on sales.

And a fashion chain, if it sells its own brand garments, will have to be
over 10% profit on sales to be regarded as exceptionally good, you
show that you too are no stranger to the retail industry.

From your expression, I see that you already know where Im heading.
Keep on talking, you encourage me.

I dont need much encouragement to proceed. Just yesterday, Frans-
Jan brought to my house in Holland an MD (President) of a EU2B
holding company of many retail chains. Actually, it was Patrick who got
that prospect. Probably, he wanted to prove to himself that if the
Brazilians can arrange such a meeting in 10 days, he can do it in 7.
What is amazing is that he arranged that meeting at the end of July
when, for all practical purposes, Holland is on summer vacation. You
can barely find a secretary to talk to.

Impressive, you comment. It will be interesting to know the details of
how he pulled it off. But not now. Please continue.

Last year, they were doing EU160M profit. I tried to pull out of this
shrewd person a profit number that he will agree is unrealistic to reach
in four years, and I failed. In retrospect, I should have expected this
from the only top manager that chose the red curve as more realistic
than the green curve and stuck to his choice in spite of my attempts to
shake his confidence. Then I found the key. I suggested that his
chains can be improved to do, not the 8% on sales they currently do,
but 16%. Impossible, he declared, No one is doing that good, not
even close. It took two more minutes to guide him to realize what the
impact will be if we succeed to prevent most shortages. You should
have seen how broad the smile was on his face. After that, it wasnt a
problem to get him to agree on my suggestions for next steps.

So what you are suggesting, you say slowly, is that for retail we take
the VV target as double the percentage of sales of that sector.
Interesting. You are definitely right that in almost all cases it will be
regarded as an impossibility to achieve in four years. Actually, time
isnt a factor here. It will be regarded as an impossibility, period.

Now that we agreed on the possibility to determine, for retail, the VV
target as just doubling their sectors percentage of profit on sales, I
continue, lets examine our confidence in reaching that VV target.

Save your breath, you say. Just implementing step 3:1:1 of the
retailer tree will bring us above that target.

To make sure that we dont leave loose ends behind, I go over the
reasoning. We can safely assume that for most retailers the amount of
shortages is, at least, 25%. Bearing in mind that most SKUs which are
missing are the high runners, the impact on lost sales is at least 35%.
If we now take into account the impact of the slow movers on sales,
through blocking the shelf space and diverting the sales peoples
attention, we can safely assume that eliminating most shortages while
reducing the excess slow runners will increase sales by, minimum 50%.
The evidence that we have in the few, too few, implementations verifies
that estimate.

When I pause to light (again) my pipe, you pick up. Assuming that the
retail markup is 100%, Throughput is about 50%. Therefore, increasing
sales by 50% increases profit by 25%. When the target is 16%, as I
said a minute ago, just implementing step 3:1:1 will surpass the target.
And then implementing step 3:1:2, which deals with replacing slow
movers with faster moving goods, will probably double the performance
again.

To complete the picture I ask, And what about the other retailer
extreme, the supermarkets where the Throughput is only about 30% on
average?

No problem, is your answer. The increase in sales is still about 50%,
which means that profit will go up by about 15%. Compare it to that
sectors standard of 2%, and we are in an even better position. We
cross the VV target even if the increase in sales is only 20%. Eli, Im
excited. We found a target market that is fitting our utmost important
criterion. And with a huge buffer.


We sit smiling when you ask, How many VV contracts do we have with
retailers? Dont bother to answer, I know it is zero. But did we ever
approach retailers with a VV offer?

Not as far as I know, is my flat answer.

Why? you wonder.

Beats me, is my short answer. Enough with self beating. As long as
we are on a streak, can you think of another criterion for target
markets? I will feel much safer if we have at least three criteria.
Seeing your disappointed expression, I hurriedly add, To prevent us
from losing focus, lets agree that the one you suggested is the most
important criterion.

You try to please me, Okay, well look for a secondary criterion.

And then one more, even less important, but still significant one, I
plead.

You smile. Fine, but first lets summarize where we stand. Our
number one criterion for choosing a target market is: The degree to
which we are confident that, for almost any company in the target
market, we can reach the VV target. So far we have found just one
target market that fully satisfies that utmost important criterion the
retailers. Eli, should we look for more markets that satisfy this
criterion, even if to a lesser degree?

My experience is that operating with only one criterion might lead to a
too narrow point of view, that in turn leads to distortions and
opportunities missed. And therefore my answer is: It will be better to
first try and devise the other two criteria. Then we will be able to check
candidate markets according to how they stand vis--vis all three
criteria.

You accept and start the search by asking: Where can we look for the
other criteria? When you realize that Im not going to answer you
continue, We used the reason for the major rejects from the sales
pipeline as a clue to guide us to the desired criterion. We also agreed
that it is the overwhelming reason, so I dont see much point to start
digging into the remaining chupchik reasons.

Should we examine the reason for losing prospects after the VV
validation meeting? I suggest.


You dont like the idea, Before we accumulate more statistics about the
failure rates of the Consensus day and the S&T Workshop, any attempt
to use reasons for dropouts will be pointless.

I fully agree. What about looking for things that might endanger the
implementations? I suggest.

Like?

Like the speed in which we achieve significant bottom line results? I
answer.

You think about it for a while and then say, I see what you mean. The
more time it takes us to achieve significant bottom line results, the
higher the danger that the client will drift away from his commitment to
stick only to our S&T; an attractive merger opportunity might pop up,
or even a new management fad, not to mention a state-of-the-art new
computer system that nobody really needs.

I just sigh.

This leads to a very good criterion, you conclude and summarize: So
our second criterion for choosing a target market is the speed in which
we expect to get results in almost any company that belongs to that
market section. Looks like a good criterion.

I pick up the ball. If we use it to examine the market section of
retailers, we again see that retailers are the number one target market.
How much time should it take to significantly reduce shortages? One
month? In a big chain, covering most of the shops and most of the
product categories will probably take almost a year. Its still nothing
compared to the constant ongoing increase in the bottom line
measurements.

Your eyes are narrowing. That is exactly what bothers me. What does
the second criterion add? What is the difference between the first
criterion and the second one?

For that, I answer confidently, We just have to bring one example of
a market sector that satisfies one criterion but fails to satisfy the other.

Do you have such an example? you inquire.

Producers of major machines is my answer. Then I elaborate, They
fit our Pay-per-click tree, and they all have minimum 50% throughput.

The chance to reach and surpass the VV target is very high. They are
very high even when we set the VV target to be profit equal to the
current sales. Which means the first criterion is satisfied to a high
degree. But what about the second criterion? How much time does it
take until the bottom line is significantly improving. It takes so much
time that for PPC we have to ask for six years rather than the
conventional 4 years.

Im satisfied, you say. Do we need to look for a third criterion?

What about the degree to which one client leads to more clients? I
mean the number and effectiveness of the referrals that we can get
from an existing client. Shouldnt we take it as a criterion?

The multiplier factor, hmm You continue to hum for a while and
then say, Now I realize the benefit of having three criteria. It is only
when we are using the third criterion that we get the full realization of
how exceptionally good the retailer market sector is for us.

Im thinking about exactly that point.

Finally you talk. Every retailer has many suppliers dozens, hundreds
of them. The Retailer S&T tree highlights the need to approach the
suppliers. It clearly shows the additional huge benefits the retailer gains
when more and more of its suppliers fully adopt the TOC way. So, very
early in the VV implementation, the retailer will ask for our help in
converting his suppliers. Well be glad to help, in a controlled way. We
dont need tsunamis.

And if the retailer pushes its suppliers, I add, most will at least
pretend to listen. The bigger the retailer, the more attentively its
suppliers will listen to us. And we have a surprising message for them.
It is not the message they expect to come from a client, not the get
better or else, not the whip of demanding a cut in price, but rather the
opposite. Here is how you can get more, a lot more, money from the
referral client and the rest of your clients, etc.

The multiplier is phenomenal, you start to get excited. How many
suppliers does a supermarket chain have? Hundreds? No, it must be in
the thousands. And they all fit our consumer goods tree! Even if we
stagger them, even if we screen them, we still talk in terms of many
dozens per retailer. Our capacity will be a real problem. Project
leaders, logistical experts, M&S experts


What about GC people and GS people? Now that it looks like we found
the key to CAPITALIZE, shall we continue to discuss how to implement
it, how to SUSTAIN? I suggest.

You look at your watch, Its almost two oclock in the morning, you
say.

The night is still young, is my reply.

You sigh. Just let me wash my face.

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