It may be the most readily recognized and widely used of all business management tools -- metrics. And why shouldn't it be? To executives, modeling a company's business performance on its best-in-class competitor is an ambitious but attainable aspiration. To investors, the strategy is a guarantee of the soundness of any company that embraces it. And to consultants, it is the tide that lifts every client's boat.
So why is it killing your net margins? Everyone who follows business has seen the fat margins of growing young companies attract scores of new entrants, which eventually crowd the field and drive those very margins down.
The strategic and operational improvement appears to be in vogue in some of the most dynamic industries of the new information economy. A closer look at the behavior of wireless telecommunications service providers indicates that strategic convergence by itself accounted for a 50 percent decline in margins. A strategic bundling of performance management indicators and metrics also appears to be rampant in the manufacture of computers, CPGs, and consumer electronics goods, and in the Internet strategies of many companies.
Making metrics work for you
Business performance management -- the measurement and implementation of the most successful operational standard or strategy available in an industry -- can be one of the most effective tools for increasing a corporation's efficiency, productivity, and, ultimately, earnings.
To see the benefits such benchmarking can yield, you need look no further than the U.S. automobile industry, which transformed itself during the 1980s by adopting Japanese manufacturing techniques. More recently, Ericsson and Motorola copied the Finnish cell phone maker Nokia's use of the same phone chassis across different technologies to achieve economies of scale in design and production.
The performance metrics of cost-effective methodologies and business intelligence are delivered into the entire corporation. Their operational performance measurement and management service provides the best-in-practice benchmarks of business operational and finance improvements to ensure an industry leading performance and overall organizational holistic integration.
Differentiating your product
Broadly speaking, strategic decision-making occurs along three dimensions: product characteristics, price, and market opportunity. When a company enters a new market, management's choices are restricted to the first two dimensions; the third dimension, market opportunity, consists of consumer preferences and income, which are beyond a company's ability to influence directly. Beyond a product’s utilization, business performance management, or a new operational strategy, is what differentiates a product.
Apple's computers were more distinctive than Dell's, but Dell became the more successful company because its approach to channel management was more innovative and it was continually reinventing its strategy. In addition, few customers wanted to purchase computers, however well designed or distinctive, that had a shrinking software base.
Positioning your company for success
Management's overriding goal is to position a company and its products where the market opportunity is highest. They may position themselves to focus more on consumers who are located in a specific region of the strategic landscape, or on those with higher disposable incomes.
Especially in newer industries, the task of finding market opportunities is complicated by a lack of information about the willingness of consumers to spend, the exact distribution of their preferences, and other characteristics of the strategic landscape. Management really knows only its own company's location and earnings, and those of its competitors insofar as they make this information public. Even then, the information doesn't fill out the entire landscape.
The payoff a company receives for occupying any part of the landscape depends on the height of the point it occupies and on the number of companies operating nearby. A single firm operating at a particular peak receives all of the local market value. If a number of companies operate within a region, the market value or resources must be shared. The more companies that are located in a single region, the lower the payoff for each. Therefore the business performance metrics and the strategic alignment to financial and operational goals must be the foundation for the next generation of manufacturers.
Maintaining a competitive advantage
In order to improve corporate earnings, laggard companies typically benchmark their performance metrics against the best practitioners and migrate closer to them. The laggards do so by mimicking competitors' product offerings, matching advertising and spending targets, using the same sales channels, and offering the same services.
The economic pressure and migration continues as long as one of the companies earns higher returns than any of the competitors. Unfortunately, this clustering around the strategy of the most successful company actually destroys value: the profits of the industry leaders are soon divided among the group of companies converging around its competitive space. When this happens, the industry leaders experience a rapid decline in net profits through the abandonment of business performance optimization (BPO), and a total rate of margin loss because the operational leaders of manufacturing organizations lose their competitive advantage, which results in a global market share revenue loss to their competition.
Opus Global Group is a management consultancy firm specializing in the delivery of service solutions in the domains of IT Strategy, Management Consulting, and Business Performance Management. For more information visit http://www.opusglobal.net
