Pull Platforms for Performance
John Hagel
Interesting concepts. I suggest going to Hagel’s site to see how he suggests focusing on these measures to enhance performance:
"We live in a world of mounting performance pressure. OurShift Index reveals that return on assets for all public companies in the US has eroded by 75% since 1965. Companies clearly are failing to respond effectively to these mounting pressures. If we hope to turn this around, we need to step back and take a systematic look at the performance levers that drive these results and question the approaches of the past.
What drives company performance? It’s actually quite simple.Most businesses can be understood as bundle of three core operating processes, each driven by a unique performance lever. These three operating processes are: customer relationship management, product innovation and commercialization and infrastructure operations.
Each of these core operating processes is under increasing pressure. Let’s look at each one in sequence.
Customer relationship management
Customer relationship management is all about connecting with a set of customers, getting to know them deeply and delivering more and more value to them. The metric that drives the performance of this core operating process is simple: customer life-time value. Customer life-time value itself is a function of three variables:
[(Profit generated per year) x (years of relationship)] – cost of customer acquisition
While simple to state, these variables are more and more challenging to manage. In fact, each one is under growing pressure. In most industries, customer loyalty is eroding, leading to a significant reduction of the average life of a customer. To make matters worse, margins are eroding as well, diminishing the profit generated per year of a customer relationship. In many industries, the cost of customer acquisition is also rising. Other than that, everything is find with the customer.
Product innovation and commercialization
This core operating process focuses on the research and development required to generate innovative new products and services, getting new products and services quickly into market, accelerating adoption of these products and services and then striving to extend their lives in the market as long as possible. Similar to customer relationship management, the metric that drives this core operating process is simple: product (or service) life-time value. This metric can also be decomposed into three variables:
[(Profit generated per year) x (years of market life)] – cost of developing the product
Once again, each of these variables is under increasing pressure. Across virtually all industries, product life cycle compression has become a fact of life. Product margins are under increasing pressure. Greater efficiencies in procurement can help to offset these growing margin pressures to some degree. Brand used to help a lot in charging a price premium, but the brand premiums are rapidly eroding in most industries. As if that is not bad enough, the cost of developing new products and services is also increasing in many industries. And yet we keep churning out more of them. In many cases, we seem to be compensating for diminishing product profitability by making more of them - we desperately hope to make it up on volume.
Infrastructure operations
Most businesses require some type of asset intensive infrastructure to operate. The nature of the infrastructure differs significantly across industries. In many product businesses, it might be factories to produce the products. For retailers, it would be the physical store fronts. For banks and brokers, it could be the back office processing facilities that they operate to execute transactions, not to mention the branch offices to engage with customers. Even digital Internet businesses typically require large data center operations.
Whatever the physical facilities, they typically consume significant assets and require substantial operating expense. In this context, managers tend to focus on asset life-time value:
[(Profit generated per year) x (years of asset operation)] – cost of building/acquiring asset
By now, the story becomes monotonously similar. Margin pressure reduces profit generated per year, accelerating technology and consumer preference changes diminish the average years of asset viability and cost of building/acquiring assets tends to increase. In this particular case, asset utilization can also have significant impact on profit generated per year. Finding creative ways to increase asset utilization can often help to offset increasing margin pressure"
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