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 / First Quarter 1997 / Issue 6(originally published by Booz & Company)


How to Stop Bad Things from Happening to Good Companies

You begin with the future to discard the baggage of the past, thereby minimizing the changes occurring and insuring a more accurate list of attributes.

2) Identify leading-edge customers and your market share with them over the past few years. Determine what makes these customers "leading edge."

If you do this every year, trends will become obvious: when you begin to lose market share among leading-edge customers, you are approaching the danger point in value migration.

3) Identify your worst-case scenarios. What competitive situation do you fear most? Why?

4) What is your market share with:

growing customer market segments;

emerging customer segments;

the most profitable customers;

the most influential customers in your industry.

Determine your customer loyalty and retention for these segments.

When you have made this assessment, you have determined your quality of market share.(1)

5) What is your customers' share of their industry?

Is the ratio of your served market to the total market increasing or decreasing? Many companies experiencing dramatic value outflow are actually increasing their share of their served market, yet their served market itself may be shrinking (e.g., disk drives for mainframe computers).

6) What is your ratio of profit from new products? How does it compare with your traditional and nontraditional competitors, and with your past performance?

7) What is the percentage of new product failures? What is the trend? How does this compare with traditional and nontraditional competitors?

For this diagnostic, you might need separate ratios for old product extensions and flankers as opposed to truly new offerings.

8) Map the previous value migration that enabled you to gain the position you now have. Who was the vanquished defender? Why?

9) What percentage of your business is done in the last week or two of each quarter? What percentage of your sales is sold on discount?

The Need to Move: Actions

If your organization scores low on the customers' most important future attributes, if your share with leading-edge customers is dropping, if your quality of market share is declining, if your customers' business is shrinking, if profits from new products are low, if most revenue comes in at the end of the quarter and most products are sold on discount, then your company's need to move may be an 8 or a 9 on a scale of 1 to 10. If all these indicators are lower, the need to move right now may be low but the need for continued monitoring remains high. In either event, and particularly if you need to move soon, we recommend the following actions:

1) Map your industry's value migration process. Value migration mapping should be done early enough so that your organization can take necessary action. Effective mapping uses the market capitalization/revenue measure to create a first approximation of relative position, but then elucidates the movement behind the ratios. It will assign approximate market capitalization/revenue indexes to business units within your company's structure, to understand the relative health and profit vitality of the major components of your business.

The basic questions you need to answer are: Where is your company (and its major business units) positioned on the market capitalization/revenue slope? Why? How is the ability to earn a profit changing in the industry? Where is it moving from? Where is it moving to? What factors are driving the movement? Is the migration of value complete and irreversible (e.g., the value outflow from minicomputing), or is it partial? How rapidly is value migrating?

Understanding the direction, velocity and magnitude of value movement is critical. Prior examples can be extremely helpful. In computers, the value flow was linear for several decades; in steel it was multidirectional toward different competitors. (See Exhibit IV.) Past examples can also help create a framework for estimating the speed and magnitude of market capitalization shifts for your industry. (See Exhibit V.)

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