PERFORMANCE MANAGEMENT AND KPIs

Linking activities to Vision and Strategy

There's constant pressure to achieve performance targets, to reach higher performance
levels, and to ensure that people's work supports and furthers (impulse, fomenta,
promueve) the organization's goals.
The key question asked is, "How well is an employee applying his or her current skills,
and to what extent is he or she achieving the outcomes desired?" The answer has
traditionally been found in the performance evaluation process, where managers look
for hard data to tell how well an employee has performed his or her duties.
What is often missing from this evaluation, however, is the part about making sure that
the employee is doing the right thing. After all, you may have a very hard-working and
dedicated team member, but if he or she is not working on things that advance the
organization's purpose, what is the point?
This is where key performance indicators come into play, and they apply both at the
organizational and individual levels. At an organizational level, a Key Performance
Indicator (KPI) is a quantifiable metric that reflects how well an organization is
achieving its stated goals and objectives.
For example, if your vision includes providing superior customer service, then a KPI
may target the number of customer support requests that remain unsatisfied by the
end of a week. By monitoring this, you can directly measure how well your organization
is meeting its long-term goal of providing outstanding customer service.
If your KPI is inappropriate or nave, however, the resulting behaviors may be
counterproductive. For example, using the same goal of providing superior customer
service, the first KPI that often comes to mind is the number of customer complaints
received. Intuitively, you may feel that the fewer complaints you receive, the higher the
customer service you're offering. This is not necessarily true: You may be getting fewer
complaints because you have fewer customers, or because customers are not able to
access your support services.
Taking this a step further, while it is important for organizations to choose the correct
KPIs for business performance, it is equally useful if managers and employees define
KPIs for members of their teams. In fact, an ideal situation is where KPIs cascade from
level to level in the organization (in reality, this may be impractical if there are many
levels to the organization.) This helps people work in such a way that their activities are
aligned with corporate strategy.

Employee Goals and KPIs

So part of performance management is setting goals with members of your team. This
may be done within the formal appraisal (evaluacion, tasacion, apreciacion) process,
but it doesn't have to be. The important factor is that the goals that are set are aligned
with the department's strategy, which in turn is aligned with the overall strategy of the
organization.
This follows the common adage in management that says, "What is measured gets
done." If you set a goal around a certain outcome, the chances of that outcome

occurring are much higher, simply because you have committed to managing and
measuring the results.
When an employee's goal is defined in terms of an organizational KPI, it ensures that
what the employee is doing is well aligned with the goals of the organization. This is the
critical link between employee performance and organizational success.
Let's take an example of how an individual employee's goal is linked to organizational
strategy:

Organizational Vision To be known for our superior customer service and

satisfaction.
Organizational Objective To reduce the number of disatisfied customers by
25%.
Organizational KPI The number of customer complaints that remain
unresolved at the end of a week.
Team Member's Goal To increase the number of satisfactory complaint
resolutions by 15% this period.

Taken to the next level, each employee goal should have at least one associated KPI.
How will you specifically measure, on a regular basis, whether or not this person is
meeting his or her goal?

Team Member KPI The weekly percentage difference in complaints handled

that result in satisfied customers versus unsatisfied customers.
Tip:
For setting strategic direction, see :
Strategy Tools
Critical Success Factors (CSFs) as KPIs are essentially a way of making CSFs
measurable.
Use the following questions to help you work towards defining effective KPIs:

Understanding the context

What is the vision for the future?

What is the strategy? How will the strategic vision be accomplished?
What are the organization's objectives? What needs to be done to keep moving in
the strategic direction?
What are the Critical Success Factors? Where should the focus be to achieve the
vision?

Defining KPIs

Which metrics will indicate that you are successfully pursuing your vision and
strategy?
How many metrics should you have? (Enough, but not too many!)
How often should you measure?
Who is accountable for the metric?
How complex should the metric be?
What should you use as a benchmark?
How do you ensure the metrics reflect strategic drivers for organizational
success?

How could the metrics be cheated, and how will you guard against this?
What negative, perverse incentives would be set up if this metric was used, and
how will you ensure these perverse incentives are not created?

KPIs and Rewards, Recognition, and Development

When you are satisfied that you have meaningful metrics for measuring organizational
or employee performance, you now have to make sure that the supporting elements of
employee performance are aligned as well.
Just as what gets measured, gets done; so does what gets rewarded!
When you are establishing your rewards and recognition practices, make sure that what
you are rewarding ties directly to the KPIs you set. For example, if you are measuring
people on how well they deal with customer complaints, then rewarding them for
lowering numbers of complaints confuses the message you're trying to send.
Conversely, if your organization wants to attract new customers, then you might have a
KPI that measures how many new customers are attracted each week. Depending on
the situation, a well-aligned performance system may reward employees based on the
number of new customers they personally help to attract.
Tip 1:
Use of formal performance measures is one approach to managing performance.
However, don't forget the importance of inspiration and good leadership! For more on
this, click here for the Mind Tools Leadership Section.
Tip 2:
For more on performance management, see our articles on the Balanced
Scorecard , Feedback , and 360 Feedback .

Key Points
KPIs are metrics that link organizational vision with individual action. If you think of
strategic practice as a pyramid, as shown in Figure 1 below, with vision at the top and
actions at the bottom, in the middle you find the KPIs that have been derived from the
strategy, objectives, and critical success factors of the organization.

Below the KPIs are the activities and projects that are pursued by the organization in an
attempt to achieve the KPIs.
To ensure that these activities are in fact aligned with the organization's strategy, you
need to concentrate on what the employees are actually doing. You do this through
performance management. By applying the principle of KPIs to employee goals and
performance, you create a direct link between all of the key success factors that have
been derived from the overall strategy. The result is that members of your team
actually do what they should be doing, and that your measurements for determining
how well they are doing are clearly tied to organizational success.

STRATEGY TOOL
http://www.mindtools.com/pages/main/newMN_STR.htm

WHAT IS STRATEGY??

The 3 LEVELS of strategy.

Corporate Strategy
Business Unit strategy
Team strategy
There arent a unique definition of strategy.
a- Analyze the present carefully, anticipate changes in your market or industry, and, from
this, plan how you'll succeed in the future.
b- Evolve strategies organically (because they think future is just too difficult to predict)
Strategy determines the direction and scope (alcance, ambito) of an organization over
the long term, and it should determine how resources should be configured to meet the
needs of markets and stakeholders.
Porter said: emphasizes the need forstrategy to define and communicate an
organization's unique position, that should determine how organizational resources,
skills, and competencies should be combined to create competitive advantage.
Many successful and productive organizations have a corporate strategy to guide the
big picture. Each business unit within the organization then has a business unit
strategy, which its leaders use to determine how they will compete in their individual
markets.
In turn, each team should have its own strategy to ensure that its day-to-day activities
help move the organization in the right direction.
At each level, though, a simple definition of strategy can be: "Determining how we are
going to win in the period ahead."

Corporate Strategy
Corporate strategy refers to the overall strategy of an organization that is made up of
multiple business units, operating in multiple markets. It determines how the
corporation as a whole supports and enhances (realza) the value of the business units
within it; and it answers the question, "How do we structure the overall business, so
that all of its parts create more value together than they would individually?"
Corporations Build strong internal competences, by sharing technologies and resources
between business units, by raising capital cost-effectively, by developing and nurturing
a strong corporate brand, and so on.
How the business units within the corporation should fit together, and understanding
how resources should be deployed to create the greatest possible value.

Tools like:
1. Porter's Generic Strategies

2. Boston Matrix
3. ADL Matrix
4. VRIO Analysis

The organization's design is another important strategic factor that needs to be

considered at this level. How you structure your business, your people, and other
resources all of these affect competitive advantage and can support your strategic
goals.

Business Unit Strategy

Strategy at the business unit level is concerned with competing successfully in
individual markets, and it addresses the question, "How do we win in this market?"
However, this strategy needs to be linked to the objectives identified in the corporate
level strategy.
Competitive analysis, including gathering competitive intelligence , is a great
starting point for developing a business unit strategy. As part of this, it's important to
think about your core competencies , and how you can use these to meet your
customers' needs in the best possible way. From there you can use USP Analysis to
understand how to strengthen your competitive position.
You will also want to explore your options for creating and exploiting new
opportunities. Porter's Five Forces is a must-have tool for this process, while a
SWOT Analysis will help you understand and address the opportunities and threats
in your market.

Note:
For smaller businesses, corporate and business unit strategy may overlap (superponer)
or be the same thing. However, if an organization is competing in different markets,
then each business unit needs to think about its own strategic direction.
It's important, though, that each business unit's strategy is aligned with the overall
strategy of the corporation, particularly where the corporation's brand is important.
Your business unit strategy will likely be the most visible level of strategy within each
business area. People working within each unit should be able to draw direct links
between this strategy and the work that they're doing. When people understand how
they can help their business unit "win," you have the basis for a highly productive and
motivated workforce. As such, it's important to have a clear definition of the business
unit's mission, vision and values .

Team Strategy
To execute your corporate and business unit strategies successfully, you need teams
throughout your organization to work together. Each of these teams has a different
contribution to make, meaning that each team needs to have its own team-level
strategy, however simple.
This team strategy must lead directly to the achievement of business unit and
corporate strategies, meaning that all levels of strategy support and enhance each
other to ensure that the organization is successful.
This is where it's useful to define the team's purpose and boundaries using, for
example, a team charter ; and to manage it using techniques such as Management
by Objectives and use of key performance indicators .
You need to be working efficiently to achieve the strategic objectives that have been
set at higher levels of the organization; so, an important element of your team strategy
is to implement best practices to help your team to meet its objectives. Activities that
optimize supplier management , quality , and operational excellence are also
important factors in creating and executing an effective team strategy.

Key Points
Strategy can be difficult to define, but a good definition is: "Determining how we will
win in the period ahead."
In business there are different levels of strategy. Each of these has a different focus,
and needs different tools and skills.
Corporate strategy focuses on the organization as a whole, while business unit strategy
focuses on an individual business unit or market.
Finally, team strategy identifies how a team will help the organization meet its overall
goals and objectives.
Tip:
Our Developing Your Strategy article presents a common-sense step-by-step
approach to strategy development, which you can apply to developing a corporate,
business unit, or team strategy. You can also find out more about strategy development
by taking our Essential Strategy Bite-Sized Training session.

1 - Porter's Generic Strategies

Three airlines:
The no-frills (sin lujos) operators have opted to cut costs to a minimum and pass
their savings on to customers in lower prices. This helps them grab market share
and ensure their planes are as full as possible, further (adicional, ademas,
promover) driving down cost.

The luxury airlines, on the other hand, focus their efforts on making their service
as wonderful as possible, and the higher prices they can command as a result
make up for their higher costs.
Smaller airlines try to make the most of their detailed knowledge of just a few
routes to provide better or cheaper services than their larger, international rivals.

Generic Strategies
Can be applied to products or services in all industries, and to organizations of all sizes.
Generic strategies:
o "Cost Leadership" (no frills),
o "Differentiation" (creating uniquely desirable products and services)
o "Focus" (offering a specialized service in a niche market).
"Cost Focus"
"Differentiation Focus".
Each of these companies has chosen a different way of achieving competitive
advantage in a crowded marketplace.

Tip:
Remember that Cost Focus means emphasizing cost-minimization within a focused
market, and Differentiation Focus means pursuing strategic differentiation within a
focused market.

The Cost Leadership Strategy

Porter's generic strategies are ways of gaining competitive advantage in other words,
developing the "edge" that gets you the sale and takes it away from your competitors.
There are two main ways of achieving this within a Cost Leadership strategy:

Increasing profits by reducing costs, while charging industry-average prices.

Increasing market share through charging lower prices, while still making a
reasonable profit on each sale because you've reduced costs.
Tip:
Remember that Cost Leadership is about minimizing the cost to the organization of
delivering products and services. The cost or price paid by the customer is a separate
issue!

The Cost Leadership strategy is exactly that it involves being the leader in terms of
cost in your industry or market. Simply being amongst (en medio, entre) the lowestcost producers is not good enough, as you leave yourself wide open ( de par en par) to
attack by other low-cost producers who may undercut (rebajar) your prices and
therefore block your attempts to increase market share.
You therefore need to be confident that you can achieve and maintain the number one
position before choosing the Cost Leadership route. Companies that are successful in
achieving Cost Leadership usually have:

Access to the capital needed to invest in technology that will bring costs down.
Very efficient logistics.
A low-cost base (labor, materials, facilities), and a way of sustainably cutting
costs below those of other competitors.
The greatest risk in pursuing a Cost Leadership strategy is that these sources of cost
reduction are not unique to you, and that other competitors copy your cost reduction
strategies. This is why it's important to continuously find ways of reducing every cost.
One successful way of doing this is by adopting the Japanese Kaizen philosophy of
"continuous improvement."

The Differentiation Strategy

Differentiation involves making your products or services different from and more
attractive those of your competitors. It will typically involve features, functionality,
durability, support and also brand image that your customers value.
To make a success of a Differentiation strategy, organizations need:

Good research, development and innovation.

The ability to deliver high-quality products or services.
Effective sales and marketing, so that the market understands the benefits
offered by the differentiated offerings.
Large organizations pursuing a differentiation strategy need to stay agile with their new
product development processes. Otherwise, they risk attack on several fronts by
competitors pursuing Focus Differentiation strategies in different market segments.

The Focus Strategy

Companies that use Focus strategies concentrate on particular niche markets and, by
understanding the dynamics of that market and the unique needs of customers within
it, develop uniquely low-cost or well-specified products for the market. Because they
serve customers in their market uniquely well, they tend to build strong brand loyalty
amongst their customers. This makes their particular market segment less attractive to
competitors.

As with broad market strategies, it is still essential to decide whether you will pursue
Cost Leadership or Differentiation once you have selected a Focus strategy as your
main approach: Focus is not normally enough on its own.
But whether you use Cost Focus or Differentiation Focus, the key to making a success
of a generic Focus strategy is to ensure that you are adding something extra as a result
of serving only that market niche. It's simply not enough to focus on only one market
segment because your organization is too small to serve a broader market (if you do,
you risk competing against better-resourced broad market companies' offerings.)
The "something extra" that you add can contribute to reducing costs (perhaps through
your knowledge of specialist suppliers) or to increasing differentiation (though your
deep understanding of customers' needs).
Tip:
Generic strategies apply to not-for-profit organizations too.
A not-for-profit can use a Cost Leadership strategy to minimize the cost of getting
donations and achieving more for their income, while one with pursing a Differentiation
strategy will be committed to the very best outcomes, even if the volume of work they
do as a result is lower.
Local charities are great examples of organizations using Focus strategies to get
donations and contribute to their communities.

Choosing the Right Generic Strategy

Your choice of which generic strategy to pursue underpins (apuntala, da soporte) every
other strategic decision you make, so it's worth spending time to get it right.
But you do need to make a decision: Porter specifically warns against trying to "hedge
your bets" (cubrir sus apuestas) by following more than one strategy. One of the most
important reasons why this is wise (sabio) advice is that the things you need to do to
make each type of strategy work appeal to different types of people. Cost Leadership
requires a very detailed internal focus on processes. Differentiation, on the other hand,
demands an outward-facing (orientado al exterior), highly creative approach.
So, when you come to choose which of the three generic strategies is for you, it's vital
that you take your organization's competencies and strengths into account.
Use the following steps to help you choose.

Step 1:
For each generic strategy, carry out a SWOT Analysis of your strengths and
weaknesses, and the opportunities and threats you would face, if you adopted that
strategy.
Having done this, it may be clear that your organization is unlikely to be able to make a
success of some of the generic strategies.

Step 2:

Use Five Forces Analysis to understand the nature of the industry you are in.

Step 3:
Compare the SWOT Analyses of the viable strategic options with the results of your Five
Forces analysis. For each strategic option, ask yourself how you could use that strategy
to:

Reduce or manage supplier power.

Reduce or manage buyer/customer power.
Come out on top of the competitive rivalry.
Reduce or eliminate the threat of substitution.
Reduce or eliminate the threat of new entry.
Select the generic strategy that gives you the strongest set of options.
Tip:
Porter's Generic Strategies offer a great starting point for strategic decision-making.
Once you've made your basic choice, though, there are still many strategic options
available.
Bowman's Strategy Clock helps you think at the next level of details, in that it splits
Porter's options into eight sub-strategies.
USP Analysis
Core Competence Analysis to identify the areas you should focus on to stand out in
your marketplace.

Key Points
Three basic strategic options available to organizations for gaining competitive
advantage:
Cost Leadership.
Differentiation.
Focus.
Organizations that achieve Cost Leadership can benefit either by gaining market share
through lowering prices (whilst maintaining profitability) or by maintaining average
prices and therefore increasing profits. All of this is achieved by reducing costs to a
level below those of the organization's competitors.
Companies that pursue a Differentiation strategy win market share by offering unique
features that are valued by their customers.
Focus strategies involve achieving Cost Leadership or Differentiation within niche
markets in ways that are not available to more broadly-focused players.

DIFERENT OPTIONS of PORTERS STRATEGY Real Life:

Ask yourself what your organization's generic strategy is. How does this affect the
choices your make in your job?
If you're in an organization committed to achieving Cost Leadership, can you
reduce costs by hiring less expensive staff and training them up, or by reducing staff
turnover? Can you reduce training costs by devising in-house schemes for sharing skills
and knowledge amongst team members? Can you reduce expenses by using
technology such as video conferencing over the Internet?
If your organization is pursuing a Differentiation strategy, can you improve
customer service? Customer Experience Mapping may help here. Can you help to
foster a culture of continuous improvement and innovation in your team?
And if you're working for a company that has a chosen a Focus strategy, what
knowledge or expertise can you use or develop to add value for your customers that
isn't available to broad market competitors?

2 BOSTON MATRIX
Definition:
1. BCG matrix (or growth-share matrix) is a corporate planning tool, which is used
to portray firms brand portfolio or SBUs on a quadrant along relative market
share axis (horizontal axis) and speed of market growth (vertical axis) axis.
2. Growth-share matrix is a business tool, which uses relative market share and
industry growth rate factors to evaluate the potential of business brand portfolio
and suggest further investment strategies.

Understanding the tool

BCG matrix is a framework created by Boston Consulting Group to evaluate the
strategic position of the business brand portfolio and its potential. It classifies business
portfolio into four categories based on industry attractiveness (growth rate of that
industry) and competitive position (relative market share). These two dimensions
reveal likely profitability of the business portfolio in terms of cash needed to support
that unit and cash generated by it. The general purpose of the analysis is to help
understand, which brands the firm should invest in and which ones should be
divested.

Relative market share. One of the dimensions used to evaluate business portfolio is
relative market share. Higher corporates market share results in higher cash returns.
This is because a firm that produces more, benefits from higher economies of scale and
experience curve, which results in higher profits. Nonetheless, it is worth to note that
some firms may experience the same benefits with lower production outputs and lower
market share.
Market growth rate. High market growth rate means higher earnings and sometimes
profits but it also consumes lots of cash, which is used as investment to stimulate
further growth. Therefore, business units that operate in rapid growth industries are
cash users and are worth investing in only when they are expected to grow or maintain
market share in the future.
There are four quadrants into which firms brands are classified:
Dogs. Dogs hold low market share compared to competitors and operate in a slowly
growing market. In general, they are not worth investing in because they generate low
or negative cash returns. But this is not always the truth. Some dogs may be profitable
for long period of time, they may provide synergies for other brands or SBUs or simple
act as a defense to counter competitors moves. Therefore, it is always important to
perform deeper analysis of each brand or SBU to make sure they are not worth
investing in or have to be divested.
Strategic choices: Retrenchment, divestiture, liquidation.

Cash cows. Cash cows are the most profitable brands and should be milked to
provide as much cash as possible. The cash gained from cows should be invested into
stars to support their further growth. According to growth-share matrix, corporates
should not invest into cash cows to induce growth but only to support them so they can
maintain their current market share. Again, this is not always the truth. Cash cows are
usually large corporations or SBUs that are capable of innovating new products or
processes, which may become new stars. If there would be no support for cash cows,
they would not be capable of such innovations.
Strategic choices: Product development, diversification, divestiture, retrenchment.
Stars. Stars operate in high growth industries and maintain high market share. Stars
are both cash generators and cash users. They are the primary units in which the
company should invest its money, because stars are expected to become cash cows
and generate positive cash flows. Yet, not all stars become cash flows. This is especially
true in rapidly changing industries, where new innovative products can soon be
outcompeted by new technological advancements, so a star instead of becoming a
cash cow, becomes a dog.
Strategic choices: Vertical integration, horizontal integration, market penetration,
market development, product development
Question marks. Question marks are the brands that require much closer
consideration. They hold low market share in fast growing markets consuming large
amount of cash and incurring losses. It has potential to gain market share and become
a star, which would later become cash cow. Question marks do not always succeed and
even after large amount of investments they struggle to gain market share and
eventually become dogs. Therefore, they require very close consideration to decide if
they are worth investing in or not.
Strategic choices: Market penetration, market development, product development,
divestiture.

BCG matrix quadrants are simplified versions of the reality and cannot be applied
blindly. They can help as general investment guidelines but should not change
strategic thinking. Business should rely on management judgement, business
unit strengths and weaknessesand external environment factors to make more
reasonable investment decisions.

Advantages and disadvantages

Benefits of the matrix:
Easy to perform;
Helps to understand the strategic positions of business portfolio;
Its a good starting point for further more thorough analysis.
Growth-share analysis has been heavily criticized for its oversimplification and lack of
useful application. Following are the main limitations of the analysis:

Business can only be classified to four quadrants. It can be confusing to classify

an SBU that falls right in the middle.

It does not define what market is. Businesses can be classified as cash cows,
while they are actually dogs, or vice versa.
Does not include other external factors that may change the situation completely.
Market share and industry growth are not the only factors of profitability. Besides,
high market share does not necessarily mean high profits.
It denies that synergies between different units exist. Dogs can be as important
as cash cows to businesses if it helps to achieve competitive advantage for the
rest of the company.

Using the tool

Although BCG analysis has lost its importance due to many limitations, it can still be a
useful tool if performed by following these steps:

Step
Step
Step
Step
Step

1.
2.
3.
4.
5.

Choose the unit

Define the market
Calculate relative market share
Find out market growth rate
Draw the circles on a matrix

Step 1. Choose the unit. BCG matrix can be used to analyze SBUs, separate brands,
products or a firm as a unit itself. Which unit will be chosen will have an impact on the
whole analysis. Therefore, it is essential to define the unit for which youll do the
analysis.
Step 2. Define the market. Defining the market is one of the most important things
to do in this analysis. This is because incorrectly defined market may lead to poor
classification. For example, if we would do the analysis for the Daimlers Mercedes-Benz
car brand in the passenger vehicle market it would end up as a dog (it holds less than
20% relative market share), but it would be a cash cow in the luxury car market. It is
important to clearly define the market to better understand firms portfolio position.
Step 3. Calculate relative market share. Relative market share can be calculated in
terms of revenues or market share. It is calculated by dividing your own brands market
share (revenues) by the market share (or revenues) of your largest competitor in that
industry. For example, if your competitors market share in refrigerators industry was
25% and your firms brand market share was 10% in the same year, your relative
market share would be only 0.4. Relative market share is given on x-axis. Its top left
corner is set at 1, midpoint at 0.5 and top right corner at 0 (see the example below for
this).

Step 4. Find out market growth rate. The industry growth rate can be found in
industry reports, which are usually available online for free. It can also be calculated by
looking at average revenue growth of the leading industry firms. Market growth rate is
measured in percentage terms. The midpoint of the y-axis is usually set at 10% growth
rate, but this can vary. Some industries grow for years but at average rate of 1 or 2%
per year. Therefore, when doing the analysis you should find out what growth rate is
seen as significant (midpoint) to separate cash cows from stars and question marks
from dogs.
Step 5. Draw the circles on a matrix. After calculating all the measures, you should
be able to plot your brands on the matrix. You should do this by drawing a circle for
each brand. The size of the circle should correspond to the proportion of business
revenue generated by that brand.
Examples
Corporate A BCG matrix
Bran Revenu
d
es

% of
corporate
revenues

Largest
Relative
Your brands
rivals market
market
market share
share
share

Market
growth
rate

"1"

$500,0
00

54%

25%

25%

3%

"2"

$350,0
00

38%

30%

5%

0.17

12%

"3"

$50,00
0

6%

45%

30%

0.67

13%

"4"

$20,00
0

2%

10%

1%

0.1

15%

This example was created to show how to deal with a relative market share higher than
100% and with negative market growth.
Corporate B BCG matrix
Bran Revenu
d
es

% of
corporate
revenues

Largest
Relative
Your brands
rivals market
market
market share
share
share

Market
growth
rate

"1"

$500,0
00

55%

15%

60%

3%

"2"

$350,0
00

31%

30%

5%

0.17

-15%

"3"

$50,00
0

10%

45%

30%

0.67

-4%

"4"

$20,00
0

4%

10%

1%

0.1

8%

3 ADL MATRIX
The ADL matrix by Arthur D. Little is a portfolio management matrix which helps
managers discern their SBUs strategic position depending upon 2 dimensions:
1. SBUs life cycle and
2. Competitive position
Each of these dimensions can be further split up into the following categories to better
analyze a firm and accordingly determine the future strategic actions:
Life cycle stages can be
1. Embryonic
2. Growth
3. Maturity

4. Ageing
Competitive position can also be either of the following:
1. Dominant
The position of a company falls into this category if it is a clear market leader or has a
monopoly position. Exampl , Intel in microprocessors.
2. Strong
In this case, the company might not be a monopoly but definitely has a strong presence
and loyal customers.
3. Favorable
Companies with favorable competitive position usually operate in fragmented markets
and no single one controls all market share.
4. Tenable
Here each company caters to a niche segment defined by a product variety or
segmented demographically.
5. Weak
In this scenario, the company financials are too weak to gain a strong hold in the
market and is expected to die out within a short span of time.

Thus depending on where a particular firm lies on the ADL grid, a suitable set of
strategies should be adopted by it to gain greater market share and move to higher
stages of life cycle and competitive positions.

4- VRIO ANALYSIS
VRIO framework is the tool used to analyze firms internal resources and capabilities
to find out if they can be a source of sustained competitive advantage.

Understanding the tool

To understand the sources of competitive advantage we use tools to analyze external
(Porters 5 Forces, PEST analysis) and internal (Value Chain analysis, BCG Matrix)
environments. VRIO analysis is an internal analysis identifying four attributes that firms
resources must possess in order to become a source of sustained competitive
advantage. The resources must be Valuable? Rare? Costly to Imitate? And is a
firm Organized to capture the value of the resources? A resource or capability that
meets all four requirements can bring sustained competitive advantage for the
company.

Valuable
The first question of the framework asks if a resource adds value by enabling a firm to
exploit opportunities or defend against threats. If the answer is yes, then a resource is
considered valuable. Resources are also valuable if they help organizations to increase
the perceived customer value. This is done by increasing differentiation or/and
decreasing the price of the product. The resources that cannot meet this condition, lead
to competitive disadvantage. It is important to continually review the value of the
resources because constantly changing internal or external conditions can make them
less valuable or useless at all.

Rare
Resources that can only be acquired by one or very few companies are considered rare.
Rare and valuable resources grant temporary competitive advantage. On the other
hand, the situation when more than few companies have the same resource or uses the
capability in the similar way, leads to competitive parity. This is because firms can use
identical resources to implement the same strategies and no organization can achieve
superior performance.
Even though competitive parity is not the desired position, a firm should not neglect
the resources that are valuable but common. Losing valuable resources and capabilities
would hurt an organization because they are essential for staying in the market.

Costly to Imitate
A resource is costly to imitate if other organizations that doesnt have it cant imitate,
buy or substitute it at a reasonable price. Imitation can occur in two ways: by directly
imitating (duplicating) the resource or providing the comparable product/service
(substituting).
A firm that has valuable, rare and costly to imitate resources can (but not necessarily
will) achieve sustained competitive advantage. Barney has identified three reasons why
resources can be hard to imitate:
Historical conditions. Resources that were developed due to historical events or
over a long period usually are costly to imitate.
Causal ambiguity. Companies cant identify the particular resources that are the
cause of competitive advantage.
Social Complexity. The resources and capabilities that are based on companys
culture or interpersonal relationships.

Organized to Capture Value

The resources itself do not confer any advantage for a company if its not organized to
capture the value from them. A firm must organize its management systems,
processes, policies, organizational structure and culture to be able to fully realize the
potential of its valuable, rare and costly to imitate resources and capabilities. Only then
the companies can achieve sustained competitive advantage.

Using the tool

Step 1. Identify valuable, rare and costly to imitate resources
There are two types of resources: tangible and intangible. Tangible assets are physical
things like land, buildings and machinery. Companies can easily by them in the market

so tangible assets are rarely the source of competitive advantage. On the other hand,
intangible assets, such as brand reputation, trademarks, intellectual property, unique
training system or unique way of performing tasks, cant be acquired so easily and offer
the benefits of sustained competitive advantage. Therefore, to find valuable, rare and
costly to imitate resources, you should first look at companys intangible assets.
Finding valuable resources:
An easy way to identify such resources is to look at the value chain and SWOT
analyses. Value chain analysis identifies the most valuable activities, which are the
source of cost or differentiation advantage. By looking into the analysis, you can easily
find the valuable resources or capabilities. In addition, SWOT analysis recognizes the
strengths of the company that are used to exploit opportunities or defend against
threats (which is exactly what a valuable resource does). If you still struggle finding
valuable resources, you can identify them by asking the following questions:

Which activities lower the cost of production without decreasing perceived

customer value?
Which activities increase product or service differentiation and perceived
customer value?
Have your company won an award or been recognized as the best in something?
(most innovative, best employer, highest customer retention or best exporter)
Do you have an access to scarce raw materials or hard to get in distribution
channels?
Do you have special relationship with your suppliers? Such as tightly integrated
order and distribution system powered by unique software?
Do you have employees with unique skills and capabilities?
Do you have brand reputation for quality, innovation, customer service?
Do you do perform any tasks better than your competitors do? (Benchmarking is
useful here)
Does your company hold any other strengths compared to rivals?

Finding rare resources:

How many other companies own a resource or can perform capability in the same
way in your industry?
Can a resource be easily bought in the market by rivals?
Can competitors obtain the resource or capability in the near future?

Finding costly to imitate resources:

Do other companies can easily duplicate a resource?

Can competitors easily develop a substitute resource?
Do patents protect it?
Is a resource or capability socially complex?
Is it hard to identify the particular processes, tasks, or other factors that form the
resource?

Step 2. Find out if your company is organized to exploit these resources

Following questions might be helpful:

Does your company has an effective strategic management process in

organization?
Are there effective motivation and reward systems in place?
Does your companys culture reward innovative ideas?
Is an organizational structure designed to use a resource?
Are there excellent management and control systems?

Step 3. Protect the resources

When you identified a resource or capability that has all 4 VRIO attributes, you should
protect it using all possible means. After all, it is the source of your sustained
competitive advantage. The first thing you should do is to make the top management
aware of such resource and suggest how it can be used to lower the costs or to
differentiate the products and services. Then you should think of ideas how to make it
more costly to imitate. If other companies wont be able to imitate a resource at
reasonable prices, it will stay rare for much longer.
Step 4. Constantly review VRIO resources and capabilities
The value of the resources changes over time and they must be reviewed constantly to
find out if they are as valuable as they once were. Competitors are also keen to achieve
the same competitive advantages so theyll be keen to replicate the resources, which
means that they will no longer be rare. Often, new VRIO resources or capabilities are
developed inside an organization and by identifying them you can protect you sources
of competitive advantage more easily.
VRIO example
Googles capability evaluated using VRIO framework
Excellent employee management
Valuable?

Rare?

Costly to Imitate?

Is a company organized to exploit it?

Yes

Yes

Yes

Yes

Sustained Competitive Advantage

Googles ability to manage their people effectively is a source of both differentiation

and cost advantages. Unlike other companies, which rely on trust and relationship in
people management, Google uses data about its employees to manage them. This
capability allows making correct (data based) decisions about which people to hire and
the best way to use their skills. As a result, Google is able to hire innovative employees
that are also very productive ($1 million in revenue per employee). Besides being
valuable, it is also a rare capability because no other company uses data based
employee management so extensively. Is it costly to imitate? It is costly to imitate, at

least, in the near future. First, companies should build the highly sophisticated
software, which is both costly and hard to do. Second, HR managers should be newly
trained to make data based decisions and forget their old management methods. Is
Google organized to capture value from this capability? Certainly, it has trained HR
managers that know how to use the data and manage people accordingly. It also has
the needed IT skills to collect and manage the data about its employees.

SWOT Analysis
Discover New Opportunities. Manage and Eliminate Threats.
Technique for understanding your Strengths and Weaknesses, and for identifying both
the Opportunities open to you and the Threats you face.
Helps you carve a sustainable niche in your market.

Business SWOT Analysis

SWOT is powerful in helping you to uncover opportunities that you are well-placed to
exploit. And by understanding the weaknesses of your business, you can manage and
eliminate threats that would otherwise catch you unawares.
By looking at yourself and your competitors, using the SWOT framework, you can start
to craft a strategy that helps you distinguish yourself from your competitors, so that
you can compete successfully in your market.

How to Use the Tool

You can use it in two ways as a simple icebreaker helping people get together to "kick
off" strategy formulation, or in a more sophisticated way as a serious strategy tool.
Tip:

Strengths and weaknesses are often internal to your organization, while opportunities
and threats generally relate to external factors. For this reason, SWOT is sometimes
called Internal-External Analysis and the SWOT Matrix is sometimes called an IE Matrix.
worksheet
Strengths
What
What
What
What
What
What

advantages does your organization have?

do you do better than anyone else?
unique or lowest-cost resources can you draw upon that others can't?
do people in your market see as your strengths?
factors mean that you "get the sale"?
is your organization's Unique Selling Proposition (USP)?

Consider your strengths from both an internal perspective, and from the point of view
of your customers and people in your market.
Also, if you're having any difficulty identifying strengths, try writing down a list of your
organization's characteristics. Some of these will hopefully be strengths!
When looking at your strengths, think about them in relation to your competitors. For
example, if all of your competitors provide high quality products, then a high quality
production process is not a strength in your organization's market, it's a necessity.
Weaknesses
What could you improve?
What should you avoid?
What are people in your market likely to see as weaknesses?
What factors lose you sales?
Again, consider this from an internal and external basis: Do other people seem to
perceive weaknesses that you don't see? Are your competitors doing any better than
you?
It's best to be realistic now, and face any unpleasant truths as soon as possible.
Opportunities
What good opportunities can you spot?
What interesting trends are you aware of?

Useful opportunities can come from such things as:

Changes in technology and markets on both a broad and narrow scale.
Changes in government policy related to your field.
Changes in social patterns, population profiles, lifestyle changes, and so on.
Local events.
Tip:
A useful approach when looking at opportunities is to look at your strengths and ask
yourself whether these open up any opportunities. Alternatively, look at your
weaknesses and ask yourself whether you could open up opportunities by eliminating
them.

Threats
What obstacles do you face?
What are your competitors doing?
Are quality standards or specifications for your job, products or services
changing?
Is changing technology threatening your position?
Do you have bad debt or cash-flow problems?
Could any of your weaknesses seriously threaten your business?
Tip:
When looking at opportunities and threats, PEST Analysis can help to ensure that you
don't overlook external factors, such as new government regulations, or technological
changes in your industry.

Further SWOT Tips

If you're using SWOT as a serious tool, make sure you're rigorous in the way you apply
it:

Only accept precise, verifiable statements ("Cost advantage of US$10/ton in

sourcing raw material x", rather than "Good value for money").
Ruthlessly prune long lists of factors, and prioritize them, so that you spend
your time thinking about the most significant factors.
Make sure that options generated are carried through to later stages in the
strategy formation process.
Apply it at the right level for example, you might need to apply the tool at a
product or product-line level, rather than at the much vaguer whole company
level.
Use it in conjunction with other strategy tools (for example, USP
Analysis and Core Competence Analysis ) so that you get a comprehensive
picture of the situation you're dealing with.

Note:
You could also consider using the TOWS Matrix . This is quite similar to SWOT in that
it also focuses on the same four elements of Strengths, Weaknesses, Opportunities and
Threats. But TOWS can be a helpful alternative because it emphasizes the external
environment, while SWOT focuses on the internal environment.

Example
A start-up small consultancy business might draw up the following SWOT Analysis:
Strengths
We are able to respond very quickly as we have no red tape, and no need for
higher management approval.

We are able to give really good customer care, as the current small amount of
work means we have plenty of time to devote to customers.
Our lead consultant has strong reputation in the market.
We can change direction quickly if we find that our marketing is not working.
We have low overheads, so we can offer good value to customers.
Weaknesses
Our company has little market presence or reputation.
We have a small staff, with a shallow skills base in many areas.
We are vulnerable to vital staff being sick, and leaving.
Our cash flow will be unreliable in the early stages.
Opportunities
Our business sector is expanding, with many future opportunities for success.
Local government wants to encourage local businesses.
Our competitors may be slow to adopt new technologies.
Threats
Developments in technology may change this market beyond our ability to adapt.
A small change in the focus of a large competitor might wipe out any market
position we achieve.
As a result of their analysis, the consultancy may decide to specialize in rapid response,
good value services to local businesses and local government.
Marketing would be in selected local publications to get the greatest possible market
presence for a set advertising budget, and the consultancy should keep up-to-date with
changes in technology where possible.

Porters Five Forces

Assessing the Balance of Power in a Business Situation
Is used to understanding where power lies in a business situation. Helps you
understand both the strength of your current competitive position, and the strength of
a position you're considering moving into.
With a clear understanding of where power lies, you can take fair advantage of a
situation of strength, improve a situation of weakness, and avoid taking wrong steps.
This makes it an important part of your planning toolkit.

Conventionally, the tool is used to identify whether new products, services or

businesses have the potential to be profitable. However it can be very illuminating
when used to understand the balance of power in other situations.

Understanding the Tool

There are five important forces that determine competitive power in a business
situation:
1. Supplier Power: Here you assess how easy it is for suppliers to drive up prices.
This is driven by the number of suppliers of each key input, the uniqueness of
their product or service, their strength and control over you, the cost of switching
from one to another, and so on. The fewer the supplier choices you have, and the
more you need suppliers' help, the more powerful your suppliers are.
2. Buyer Power: Here you ask yourself how easy it is for buyers to drive prices
down. Again, this is driven by the number of buyers, the importance of each
individual buyer to your business, the cost to them of switching from your
products and services to those of someone else, and so on. If you deal with few,
powerful buyers, then they are often able to dictate terms to you.
3. Competitive Rivalry: What is important here is the number and capability of
your competitors. If you have many competitors, and they offer equally attractive
products and services, then you'll most likely have little power in the situation,
because suppliers and buyers will go elsewhere if they don't get a good deal from
you. On the other hand, if no-one else can do what you do, then you can often
have tremendous strength.
4. Threat of Substitution: This is affected by the ability of your customers to find
a different way of doing what you do for example, if you supply a unique
software product that automates an important process, people may substitute by
doing the process manually or by outsourcing it. If substitution is easy and
substitution is viable, then this weakens your power.
5. Threat of New Entry: Power is also affected by the ability of people to enter
your market. If it costs little in time or money to enter your market and compete
effectively, if there are few economies of scale in place, or if you have little
protection for your key technologies, then new competitors can quickly enter
your market and weaken your position. If you have strong and durable barriers to
entry, then you can preserve a favorable position and take fair advantage of it.

Using the Tool

worksheet .
Brainstorm the relevant factors for your market or situation, and then check against the
factors listed for the force in the diagram above.
Then, mark the key factors on the diagram, and summarize the size and scale of the
force on the diagram. An easy way of doing this is to use, for example, a single "+" sign
for a force moderately in your favor, or "--" for a force strongly against you (you can see
this in the example below).
Then look at the situation you find using this analysis and think through how it affects
you. Bear in mind that few situations are perfect; however looking at things in this way
helps you think through what you could change to increase your power with respect to
each force. Whats more, if you find yourself in a structurally weak position, this tool
helps you think about what you can do to move into a stronger one.
It analyzes the attractiveness and likely-profitability of an industry.
EXAMPLE:

Martin Johnson is deciding whether to switch career and become a farmer he's always
loved the countryside, and wants to switch to a career where he's his own boss. He
creates the following Five Forces Analysis as he thinks the situation through:
Figure 2 Porter's Five Forces Example: Buying a Farm

This worries him:

The threat of new entry is quite high: if anyone looks as if they're making a
sustained profit, new competitors can come into the industry easily, reducing
profits.

Competitive rivalry is extremely high: if someone raises prices, they'll be

quickly undercut. Intense competition puts strong downward pressure on prices.

Buyer Power is strong, again implying strong downward pressure on prices.

There is some threat of substitution.

Unless he is able to find some way of changing this situation, this looks like a very
tough industry to survive in. Maybe he'll need to specialize in a sector of the market
that's protected from some of these forces, or find a related business that's in a
stronger position.

Key Points
Tool for assessing the potential for profitability in an industry. With a little adaptation, it
is also useful as a way of assessing the balance of power in more general situations.
It works by looking at the strength of five important forces that affect competition:

Supplier Power: The power of suppliers to drive up the prices of your inputs.
Buyer Power: The power of your customers to drive down your prices.
Competitive Rivalry: The strength of competition in the industry.
The Threat of Substitution: The extent to which different products and
services can be used in place of your own.
The Threat of New Entry: The ease with which new competitors can enter the
market if they see that you are making good profits (and then drive your prices
down).

By thinking about how each force affects you, and by identifying the strength and
direction of each force, you can quickly assess the strength of your position and your
ability to make a sustained profit in the industry.
You can then look at how you can affect each of the forces to move the balance of
power more in your favor.

Organization Design
Is your organization well-designed, and how do you know? What does a well-designed
organization look like? How does it feel to work there? And how is it different from a
poorly-designed one?
These are the types of questions you need to explore when you look at organization
design.
Many people equate organization design with an organization's structure: The words
"lean" and "flat" are used to describe organization design as well as it's structure. In
fact, organizational design encompasses much more than simply the structure:
Organization design is the process of aligning an organization's structure with its
mission. This means looking at the complex relationship between tasks, workflow,

responsibility and authority, and making sure these all support the objectives of the
business.
Good organizational design helps communications, productivity, and innovation. It
creates an environment where people can work effectively.
Many productivity and performance issues can be traced back to poor organization
design. A company can have a great mission, great people, great leadership, etc. and
still not perform well because of poor organizational design.
Take the example of a company whose sales department and production department
both work well as separate units. Yet they need to communicate about customer needs
and have not been organized to do so: Company performance suffers as a result. Then
take the example of a company that wants to grow by acquiring new customers. Yet its
sales team is rewarded for customer retention instead: Again, company performance is
compromised as a result.
How work is done, business processes, information sharing and how people are
incentivized; all of these directly affects how well the organization performs. All of these
factors are facets of the organization's design and each facet is important to
organization's success.
Given the importance of organizational design, why is it so often to blame for
inefficiency and ineffectiveness? The reason is because organizations often evolve
rather than get designed. With little or no planning and intervention, the organization
design that emerges is likely to be flawed with misaligned incentives, processing gaps
and barriers to good communications.
Without due planning, an organization's design often takes on a hierarchical structure.
This structure is common because business executives and managers are often
reluctant to relinquish control. However, such structures can lack flexibility, soak up
resources and under-use key people and skills. When it comes to good organization
design, it's a question of getting the right balance getting the right controls, the right
flexibility, the right incentives; and getting the most from people and other key
resources.
In this article, we first look at types of organization design and their uses. We then look
in more detail at the key facets of organization design and offer some tips on how to
ensure your organization is aligned with your business objectives.

Types of Organization Structure

Most organizations are designed, or evolve, to have elements of both hierarchy and
more flexible, organic structures within. (Organic structures are more informal, less
complex and more "ad-hoc" than hierarchical structures. They rely on people within the
organization using their initiative to change the way they work as circumstances
change.)
Before looking at some of the common types of organization structure, its worth looking
at what characterizes a hierarchical structure and how it contrasts with an organic
structure. It's worth saying that one type of structure is not intrinsically better than
another. Rather, it's important to make sure that the organization design is fit for

organization's purpose and for the people within it. And the section on Making
Organization Design Decisions below discusses this in more detail.

Characterist
ic

Hierarchical
structure

Organic
structure

Complexity

High with lots

of horizontal
separation into
functions,
departments
and divisions

Usually lower less

differentiation or
functional
separation

Formality

High lots of
well defined
lines of control
and
responsibility

Lower no real
hierarchy and less
formal division of
responsibilities

Participation

Low
employees
lower down the
organization
have little
involvement
with decision
making

Higher
participation
lower level
employees have
more influence on
decision makers

Communicati
on

Downward
information
starts at the top
and trickles
down to
employees

Lateral, upward,
and downward
communication
information flows
through the
organization with
fewer barriers

Functional structures and divisional structure are both examples of hierarchical

organization structures.
In a functional structure, functions (accounting, marketing, HR etc) are quite
separate; each led by a senior executive who reports to the CEO. The advantage can be
efficiency and economies of scale where functional skills are paramount. The main
disadvantage is that functional goals can end up overshadowing the overall goals of the
organization.

In a divisional structure, the company is organized by office or customer location.

Each division is autonomous and has a divisional manager who reports to the company
CEO. Each business unit is typically structured along functional lines. The advantage
here relates to local results, as each division is free to concentrate on its own
performance. The disadvantage is that functions and effort may be duplicated. For
example, each division may have a separate marketing function, and so risk being
inefficient in its marketing efforts.
More organic structures include: simple, flat structures, matrix organizations and
network structures:
Simple Structure Often found in small businesses, the simple organization is
structure is flat. It may have only two or three levels; employees tend to work as a
large team with everyone reporting to one person. The advantages are efficiency and
flexibility, and responsibilities are usually clear. The main disadvantage is that this
structure can hold back growth when the company gets to a size where the founder or
CEO cannot continue to make all the decisions.
Matrix Structure In a matrix structure, people typically have two or more lines of
report. For example, a matrix organization may combine both functional and divisional
lines of responsibility. For example, in this structure, a marketing manager may report
both to the functional marketing director and the country director of the division he or
she works in. The advantage is that the organization focuses on divisional performance
whilst also sharing functional specialist skills and resources. The (often serious)
downfall is its complexity effectively with two hierarchies, and with the added
complexity of tensions between the two.
Network Structure Often known as a lean structure, this type of organization has
central, core functions that operate the strategic business. It outsources or
subcontracts non-core functions which, depending on the type of business, could
include manufacturing, distribution, information technology marketing and other
functions. This structure is very flexible and often can adapt to the market almost
immediately. The disadvantage is inevitable loss of control, dependence on third parties
and the complexity of managing outsource and sub-contract suppliers.

Making Organization Design Decisions

Given the many choices of structure, how do you go about making organization design
decision for your business? Different organization structures have different benefits in
different situations. What matters is the overall organization design is aligned with the
business strategy and the market environment in which the business operates. It must
then have the right business controls, the right flexibility, the right incentives, the right
people and the right resources.
Here are just some of the many things that you can consider when thinking about the
structure of your organization.

Strategy The organization design must support your strategy. If your organization
intends to be innovative then a hierarchical structure will not work. If however, your
strategy is based on low cost, high volume delivery then a rigid structure with tight
controls may be the best design.
Size The design must take into account the size of your organization. A small
organization could be paralyzed by too much specialization. In larger organizations, on
the other hand, there may be economies of scale that can be gained by maintaining
functionally specialist departments and teams. A large organization has more complex
decision making needs and some decision making responsibilities are likely to be
devolved or decentralized.
Environment If the market environment you work in (customers, suppliers,
regulators, etc.) is unpredictable or volatile, then the organization needs to be flexible
enough to react to this.
Controls What level of control is right in your business? Some activities need special
controls (such as patient services in hospitals, money handling in banks and
maintenance in air transport) whilst others are more efficient when there is a high
degree of flexibility.
Incentives Incentives and rewards must be aligned with the business's strategy and
purpose. When these are misaligned, there is a danger that units within the
organization become self-serving. Using the earlier example of a company that wants
to grow by acquiring new customers, the sale team is incentivized on customer
retention, and therefore is self-serving rather than aligned with the business purpose.
There is much more to organization design than deciding on its structure. This list
shows just some of the facets organization design that can be taken into account in
thinking about this. With each stage of growth or each change, the organization design
needs to be reassessed and realigned as necessary. The list can also help you identify
issues that might be causing team problems or holding back you business.
To learn more about organization design, we recommend three excellent books on the
subject available at Amazon.com: Designing Dynamic Organizations,Designing
Organizations, and Designing Effective Organizations.
Further articles at Mind Tools on the subject include: RACI , (focusing on
responsibilities and accountabilities); and the Greiner Curve (more on the stage of
business growth).