Companies often struggle to fully realize the benefits of reducing complexity in their operations. This document discusses how companies can plan from the start to capture these benefits. It recommends explicitly considering benefit capture as part of complexity reduction efforts. Companies should identify which benefits, such as reducing costs or improving customer service, will provide the greatest value. They should also understand what changes are needed internally to achieve these benefits. With a clear plan to convert reduced complexity into financial gains, companies can better ensure the benefits of their efforts materialize.
The world is substantially more complex than it was when Lean Six Sigma was first developed. Stephen Wilson and Chris Seifert discuss how to adjust your approach to utilizing Lean Six Sigma to maintain its relevance and increase the success rate of your continuous improvement initiatives.
Creating a Culture of Operational Discipline that leads to Operational Excell...Wilson Perumal and Company
As the world becomes more complex, the best companies and leaders are beginning to realize that improving culture is their greatest lever for achieving Operational Excellence. Complex systems require a different kind of culture—one with a specific set of guiding principles. In order to instill these principles in your organization, it is necessary to learn what the current culture is and what people think it ought to be like, establish the guiding principles necessary to be successful, align them to every level of the organization, and develop and sustain them through committed leadership and integration into key management system processes.
Wilson Perumal & Company has a long track record of helping companies in all industries transform their cultures and dramatically improve operational results. In this Vantage Point, we will share the most important lessons we have learned through our research and experience working directly with High-Reliability Organizations (HROs) and our clients as they pursue Operational Excellence.
This presentation was delivered by Chris Seifert of Wilson Perumal & Company at the Canadian National Energy Board's 2015 Pipeline Safety Forum. It discusses the impact of increasing complexity on safety and environmental risk, and lessons that can be learned from high reliability organizations to mitigate that risk.
Infosys - Enterprise Business Innovation & Evolution | Corporate DNAInfosys
Businesses bear much resemblance to living organisms from an evolutionary, biological perspective. Alas, all too often, innovation in companies is hampered by misaligned incentive systems or inadequate organizational design, which don’t encourage creative thinking. By taking a broader view of innovation and realizing that the key enabler at the end of the day is corporate culture, we also realize that any process, system or employee is only as good as the corporate culture allows. Changing and improving corporate culture is one of the hardest undertakings one can pursue. Read the whitepaper to explore more.
Agile addiction patterns for changing organizationsEmiliano Soldi
How to transform a "simple" passion of a few, into a mission of true change of organizations? How does resilience, storytelling and assertiveness favor a constant movement towards agility? How does resistance to change translate into the journey of transformation? How to make agile roundtables, communities of practice and tribes, load-bearing structures of change?
We are firmly convinced of the creation of the stable and long-lasting agile team, both a key competitive element of any company that wants to compete as a protagonist in today's market.
The Agile teams were designed to proceed in that direction: small, self-managed, inter-functional teams, preferably located in the same room and possibly long-lasting.
we will understand together why traditional project management approaches for creating the work team present important problems.
We will understand the dynamics underlying the creation of the stable work team and we will review some of the techniques for creating the cohesive and high-performance team, completely changing the paradigm: from moving people towards work, towards work towards people.
Finally we will understand why an agile team created according to those standards, possibly more resources to successfully deal with any changes in its physiognomy, while continuing to produce constant value.
The world is substantially more complex than it was when Lean Six Sigma was first developed. Stephen Wilson and Chris Seifert discuss how to adjust your approach to utilizing Lean Six Sigma to maintain its relevance and increase the success rate of your continuous improvement initiatives.
Creating a Culture of Operational Discipline that leads to Operational Excell...Wilson Perumal and Company
As the world becomes more complex, the best companies and leaders are beginning to realize that improving culture is their greatest lever for achieving Operational Excellence. Complex systems require a different kind of culture—one with a specific set of guiding principles. In order to instill these principles in your organization, it is necessary to learn what the current culture is and what people think it ought to be like, establish the guiding principles necessary to be successful, align them to every level of the organization, and develop and sustain them through committed leadership and integration into key management system processes.
Wilson Perumal & Company has a long track record of helping companies in all industries transform their cultures and dramatically improve operational results. In this Vantage Point, we will share the most important lessons we have learned through our research and experience working directly with High-Reliability Organizations (HROs) and our clients as they pursue Operational Excellence.
This presentation was delivered by Chris Seifert of Wilson Perumal & Company at the Canadian National Energy Board's 2015 Pipeline Safety Forum. It discusses the impact of increasing complexity on safety and environmental risk, and lessons that can be learned from high reliability organizations to mitigate that risk.
Infosys - Enterprise Business Innovation & Evolution | Corporate DNAInfosys
Businesses bear much resemblance to living organisms from an evolutionary, biological perspective. Alas, all too often, innovation in companies is hampered by misaligned incentive systems or inadequate organizational design, which don’t encourage creative thinking. By taking a broader view of innovation and realizing that the key enabler at the end of the day is corporate culture, we also realize that any process, system or employee is only as good as the corporate culture allows. Changing and improving corporate culture is one of the hardest undertakings one can pursue. Read the whitepaper to explore more.
Agile addiction patterns for changing organizationsEmiliano Soldi
How to transform a "simple" passion of a few, into a mission of true change of organizations? How does resilience, storytelling and assertiveness favor a constant movement towards agility? How does resistance to change translate into the journey of transformation? How to make agile roundtables, communities of practice and tribes, load-bearing structures of change?
We are firmly convinced of the creation of the stable and long-lasting agile team, both a key competitive element of any company that wants to compete as a protagonist in today's market.
The Agile teams were designed to proceed in that direction: small, self-managed, inter-functional teams, preferably located in the same room and possibly long-lasting.
we will understand together why traditional project management approaches for creating the work team present important problems.
We will understand the dynamics underlying the creation of the stable work team and we will review some of the techniques for creating the cohesive and high-performance team, completely changing the paradigm: from moving people towards work, towards work towards people.
Finally we will understand why an agile team created according to those standards, possibly more resources to successfully deal with any changes in its physiognomy, while continuing to produce constant value.
Facing and overcoming challenges is embedded in the journey of an enterprise and the entrepreneur. Here are a few managerial and leadership challenges that every entrepreneur is most likely to face and only when these are addressed, the enterprise movers across the orbits called "firm" and "Organization" and reaches the destination called "Institution".
Agility boosts performance: Guide for your agile transformation journeySebastian Olbert
ORGANIZATIONAL AGILITY AS A COMPETITIVE FACTOR
The Agile Performer Index
In the Agile Performer Index, goetzpartners and the NEOMA Business School clearly demonstrate the correlation between agility and entrepreneurial success. The more agile the company, the better it performs financially. The purpose of the study was to investigate what agility can really do for organizations. Is it just a temporary trend? With the right methodology, can agility deliver sustainable success?
Resulting from a broad survey among 285 leading European companies, the Agile Performer Index documents that agility programs are a suitable way for organizations to achieve lasting performance and competitive advantage.
Selected key findings:
Agile companies perform ~ 2.7 times better than non-agile companies
CxOs rate their company’s agility higher than do middle managers.
Sector check: Digital maturity doesn’t guarantee agility
Rationale for adopting CREAM Report - Deming WayJAYARAMAN IYER
CREAM Report is the essence of Corporate Governance, Risk Management, Earnings, Accounting Quality and Management Quality. It establishes ACCESS - Accelerating Corporate Energy in Sustainable State.
Morphing continually to achieve Business AgilityEmiliano Soldi
Morphing is a special effect in motion pictures and animations that changes one image or shape into another, through a seamless transition.
That's a great metaphor to represent how companies should reinvent themselves continuously, to serve its customers and run after their ever changing needs. That state is today called "Business Agility".
Companies achieving that state, report increased revenues, better capacity to turnaround, higher quality offerings, improved relationships with clients and higher employees engagement.
Statistics say that they possess three fundamental aspects: Lean-Agile Funding Models, organizational structures re-arranged around value streams, revisited processes to sustain relentless improvement.
In this talk we'll see what kind of changes are needed to companies' operating models to develop those key aspects and how Agile can be thought as the best methodological and cultural platform to speed-up that change.
We will understand what is necessary to let our organizations to finally being able to morph continually to achieve Business Agility.
Synopsis of CREAM™ Report – Corporate Rating
crème de la crème of India Inc. of Hindustan Unilever Ltd.
Corporate Rating of Hindustan Unilever, India including Code of Business Principles (CoBP) of both Unilever and HUL India. 340 pages of analysis of a single company, a rating system covering 189 Process Blocks. Unique in presenting Return on Intangible for each Process Block that Rating Agencies would surely follow - Rating of Corporate as well as Governments.
The methodology adopted reverses the denominator, from Return on Investment to Return on Intangible, a pole shift theory of management. Useful for companies that want to know and understand the meaning of Capitalism and how best that could be applied. That's it, capitalism the denominator is human spirits, an enthusiasm of spontaneous action, rather than inaction, and certainly not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities, as Keynes describes Animal Spirits in its right perspective.
This analysis of a major organization should interest the world over, corporate as well as Government. What is crucial is to know that a material event is the collision point of Ethical and Fiscal Responsibility bringing the abstractions into reality, acknowledge value where value is due, and deconstruct what is valueless.
The CREAM™ Report – Corporate Rating, crème de la crème of India Corporate rates Hindustan Unilever on
1.Corporate Governance,
2. Risk Management
3. Earnings
4. Accounting Quality
5. Management Quality.
What CREAM™ Report – Corporate Rating does is to shrink the quantitative data to merge with Qualitative elements of Corporate Management by Subject-Object distinction. It is a beauty and simple. This unique rendering of aligning Ethical Responsibility with Fiscal Responsibility is made possible by Subject-Object Distinction of Qualitative and Quantitative Elements of Corporate management. If CoBP is rated, so are the Balance Sheet and Profitability statement, merging all to a single rating system for the Company.
The Subject is the pulsating energy and the Object the non-pulsating ones. The Subject either moves the Object or he/she does not, i.e., Action and Inaction. The denominator is Intangible the pulsating energy, the numerator Action or Inaction for an Object. By doing so CREAM strategy converts n-dimensional problems to n-problems of one dimension.
Secondly there are only two processes - Creative Process or Action process - relative to an Object. Either you create an Object or make use of it. During the creative process every man-made or Nature substance follow an identical pattern till it becomes tangible.
Hence n-dimensional problems are brought to a single dimension of binary value, either you are in the process of creation or moving the inanimate object from one space to the other. There are only two processes for Corporate management - of Policies and Practices. Nothing more to add.
[Whitepaper] The “Theory of Constraints:” What’s Limiting Your Organization?Flevy.com Best Practices
More Information:
https://flevy.com/browse/flevypro/theory-of-constraints-1883
The Theory of Constraints (TOC) is a methodology for identifying the most important limiting factor — i.e. constraint — and systematically improving it. It was developed by Dr. Eliyahu Goldratt, introduced in 1984 book, The Goal.
TOC differs from traditional management views, in that traditional methods seek to make improvements throughout the organization. They divide the organization into smaller, more manageable pieces. The objective, thus, is to maximize the performance of each part, resulting in global improvement.
On the other hand, TOC takes a more focused approach. Instead of improving everywhere, the TOC approach seeks only to improve the few variables (or constraints) that have the largest impact on the organization’s performance. By trying to improve everything everywhere, the risk is that nothing will be improved that really counts. TOC follows the adage “a chain is no stronger than its weakest link.” An interesting phenomenon about chains is that strengthening any link except the weakest one does not improve the strength of the whole chain. Strengthening the weakest link produces an immediate increase in the strength of the whole chain, but only up to the level of the next weakest link.
There are 3 types of constraints that exist in an organization:
Capacity Constraint. This constraint occurs when a resource which cannot provide timely capacity as demanded by the system.
Market Constraint. This is when the amount of customers orders is not sufficient to sustain the required growth of the system.
Time Constraint. This occurs when the response time of the system to the requirement of the market is too long to the extent that it jeopardizes the system’s ability to meet its current commitment to its customers as well as the ability of winning new business.
Business Performance Improvement in the Future of WorkDalia Katan
How can we accelerate group performance improvement in this increasingly unpredictable, fast-changing world? As the challenges we face at work become more and more complex, leaders will need to focus on the practices that help workgroups better handle exceptions, learn together, and create value. (Spoiler... Amp up the friction and play with possibilities!) Focus on 'process' is no longer enough.
Hul cream report why-ratings_are_far_lowerJAYARAMAN IYER
Addressing the issue raised: “I was pretty intrigued going through the presentation which you have prepared on Hindustan Unilever Ltd. Having gone through the presentation I should also share the information that HUL was given the most coveted Corporate Governance award by the Institute for the year 2011. However the grading given by you on all the parameters seems to be far lower than what the Institute felt in awarding Corporate Governance Award.- ICSI Institute Member”
Clarification include Letter to PM on how methodology was arrived and how CREAM™ Report can be applied for Country Ratings.
STAT Part 3: Failure at CTO (anonymized) mindful action without performance o...David Denyer
This article is the third of a five-article series on the Strategic Tensions Model for Organizational Resilience. The Strategic Tensions Assessment Tool (STAT) is an online Organizational Resilience survey. In this series of articles, I will discuss each of the four approaches to Organizational Resilience (preventative control, mindful action, performance optimization, and adaptive innovation).
STAT Part 5: Failure at Uber: adaptive innovation without preventative controlDavid Denyer
This article is the fifth of a 5-article series on the Strategic Tensions Model for Organizational Resilience.In this series of articles, I will discuss each of the four approaches to Organizational Resilience (preventative control, mindful action, performance optimization, and adaptive innovation).
STAT Part 2: Failure at Thorp (Sellafield): preventative control without mind...David Denyer
In this series of articles, I will discuss each of the four approaches to Organizational Resilience (preventative control, mindful action, performance optimization, and adaptive innovation).
STAT Part 3: Failure at CTO (anonymized) mindful action without performance o...David Denyer
In this series of articles, I will discuss each of the four approaches to Organizational Resilience (preventative control, mindful action, performance optimization, and adaptive innovation).
STAT Part 1: An Introduction to the Strategic Tensions Assessment Tool (STAT)David Denyer
We define Organizational Resilience as “the ability of an organization to anticipate, prepare for, respond and adapt to incremental change and sudden disruptions in order to
survive and prosper” BS 65000 Organizational Resilience, 2014.
Organizational Resilience is required for businesses to respond to disruptions as well as positively adapt in the face of challenging conditions, leverage opportunities, and deliver sustainable performance improvement.
Facing and overcoming challenges is embedded in the journey of an enterprise and the entrepreneur. Here are a few managerial and leadership challenges that every entrepreneur is most likely to face and only when these are addressed, the enterprise movers across the orbits called "firm" and "Organization" and reaches the destination called "Institution".
Agility boosts performance: Guide for your agile transformation journeySebastian Olbert
ORGANIZATIONAL AGILITY AS A COMPETITIVE FACTOR
The Agile Performer Index
In the Agile Performer Index, goetzpartners and the NEOMA Business School clearly demonstrate the correlation between agility and entrepreneurial success. The more agile the company, the better it performs financially. The purpose of the study was to investigate what agility can really do for organizations. Is it just a temporary trend? With the right methodology, can agility deliver sustainable success?
Resulting from a broad survey among 285 leading European companies, the Agile Performer Index documents that agility programs are a suitable way for organizations to achieve lasting performance and competitive advantage.
Selected key findings:
Agile companies perform ~ 2.7 times better than non-agile companies
CxOs rate their company’s agility higher than do middle managers.
Sector check: Digital maturity doesn’t guarantee agility
Rationale for adopting CREAM Report - Deming WayJAYARAMAN IYER
CREAM Report is the essence of Corporate Governance, Risk Management, Earnings, Accounting Quality and Management Quality. It establishes ACCESS - Accelerating Corporate Energy in Sustainable State.
Morphing continually to achieve Business AgilityEmiliano Soldi
Morphing is a special effect in motion pictures and animations that changes one image or shape into another, through a seamless transition.
That's a great metaphor to represent how companies should reinvent themselves continuously, to serve its customers and run after their ever changing needs. That state is today called "Business Agility".
Companies achieving that state, report increased revenues, better capacity to turnaround, higher quality offerings, improved relationships with clients and higher employees engagement.
Statistics say that they possess three fundamental aspects: Lean-Agile Funding Models, organizational structures re-arranged around value streams, revisited processes to sustain relentless improvement.
In this talk we'll see what kind of changes are needed to companies' operating models to develop those key aspects and how Agile can be thought as the best methodological and cultural platform to speed-up that change.
We will understand what is necessary to let our organizations to finally being able to morph continually to achieve Business Agility.
Synopsis of CREAM™ Report – Corporate Rating
crème de la crème of India Inc. of Hindustan Unilever Ltd.
Corporate Rating of Hindustan Unilever, India including Code of Business Principles (CoBP) of both Unilever and HUL India. 340 pages of analysis of a single company, a rating system covering 189 Process Blocks. Unique in presenting Return on Intangible for each Process Block that Rating Agencies would surely follow - Rating of Corporate as well as Governments.
The methodology adopted reverses the denominator, from Return on Investment to Return on Intangible, a pole shift theory of management. Useful for companies that want to know and understand the meaning of Capitalism and how best that could be applied. That's it, capitalism the denominator is human spirits, an enthusiasm of spontaneous action, rather than inaction, and certainly not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities, as Keynes describes Animal Spirits in its right perspective.
This analysis of a major organization should interest the world over, corporate as well as Government. What is crucial is to know that a material event is the collision point of Ethical and Fiscal Responsibility bringing the abstractions into reality, acknowledge value where value is due, and deconstruct what is valueless.
The CREAM™ Report – Corporate Rating, crème de la crème of India Corporate rates Hindustan Unilever on
1.Corporate Governance,
2. Risk Management
3. Earnings
4. Accounting Quality
5. Management Quality.
What CREAM™ Report – Corporate Rating does is to shrink the quantitative data to merge with Qualitative elements of Corporate Management by Subject-Object distinction. It is a beauty and simple. This unique rendering of aligning Ethical Responsibility with Fiscal Responsibility is made possible by Subject-Object Distinction of Qualitative and Quantitative Elements of Corporate management. If CoBP is rated, so are the Balance Sheet and Profitability statement, merging all to a single rating system for the Company.
The Subject is the pulsating energy and the Object the non-pulsating ones. The Subject either moves the Object or he/she does not, i.e., Action and Inaction. The denominator is Intangible the pulsating energy, the numerator Action or Inaction for an Object. By doing so CREAM strategy converts n-dimensional problems to n-problems of one dimension.
Secondly there are only two processes - Creative Process or Action process - relative to an Object. Either you create an Object or make use of it. During the creative process every man-made or Nature substance follow an identical pattern till it becomes tangible.
Hence n-dimensional problems are brought to a single dimension of binary value, either you are in the process of creation or moving the inanimate object from one space to the other. There are only two processes for Corporate management - of Policies and Practices. Nothing more to add.
[Whitepaper] The “Theory of Constraints:” What’s Limiting Your Organization?Flevy.com Best Practices
More Information:
https://flevy.com/browse/flevypro/theory-of-constraints-1883
The Theory of Constraints (TOC) is a methodology for identifying the most important limiting factor — i.e. constraint — and systematically improving it. It was developed by Dr. Eliyahu Goldratt, introduced in 1984 book, The Goal.
TOC differs from traditional management views, in that traditional methods seek to make improvements throughout the organization. They divide the organization into smaller, more manageable pieces. The objective, thus, is to maximize the performance of each part, resulting in global improvement.
On the other hand, TOC takes a more focused approach. Instead of improving everywhere, the TOC approach seeks only to improve the few variables (or constraints) that have the largest impact on the organization’s performance. By trying to improve everything everywhere, the risk is that nothing will be improved that really counts. TOC follows the adage “a chain is no stronger than its weakest link.” An interesting phenomenon about chains is that strengthening any link except the weakest one does not improve the strength of the whole chain. Strengthening the weakest link produces an immediate increase in the strength of the whole chain, but only up to the level of the next weakest link.
There are 3 types of constraints that exist in an organization:
Capacity Constraint. This constraint occurs when a resource which cannot provide timely capacity as demanded by the system.
Market Constraint. This is when the amount of customers orders is not sufficient to sustain the required growth of the system.
Time Constraint. This occurs when the response time of the system to the requirement of the market is too long to the extent that it jeopardizes the system’s ability to meet its current commitment to its customers as well as the ability of winning new business.
Business Performance Improvement in the Future of WorkDalia Katan
How can we accelerate group performance improvement in this increasingly unpredictable, fast-changing world? As the challenges we face at work become more and more complex, leaders will need to focus on the practices that help workgroups better handle exceptions, learn together, and create value. (Spoiler... Amp up the friction and play with possibilities!) Focus on 'process' is no longer enough.
Hul cream report why-ratings_are_far_lowerJAYARAMAN IYER
Addressing the issue raised: “I was pretty intrigued going through the presentation which you have prepared on Hindustan Unilever Ltd. Having gone through the presentation I should also share the information that HUL was given the most coveted Corporate Governance award by the Institute for the year 2011. However the grading given by you on all the parameters seems to be far lower than what the Institute felt in awarding Corporate Governance Award.- ICSI Institute Member”
Clarification include Letter to PM on how methodology was arrived and how CREAM™ Report can be applied for Country Ratings.
STAT Part 3: Failure at CTO (anonymized) mindful action without performance o...David Denyer
This article is the third of a five-article series on the Strategic Tensions Model for Organizational Resilience. The Strategic Tensions Assessment Tool (STAT) is an online Organizational Resilience survey. In this series of articles, I will discuss each of the four approaches to Organizational Resilience (preventative control, mindful action, performance optimization, and adaptive innovation).
STAT Part 5: Failure at Uber: adaptive innovation without preventative controlDavid Denyer
This article is the fifth of a 5-article series on the Strategic Tensions Model for Organizational Resilience.In this series of articles, I will discuss each of the four approaches to Organizational Resilience (preventative control, mindful action, performance optimization, and adaptive innovation).
STAT Part 2: Failure at Thorp (Sellafield): preventative control without mind...David Denyer
In this series of articles, I will discuss each of the four approaches to Organizational Resilience (preventative control, mindful action, performance optimization, and adaptive innovation).
STAT Part 3: Failure at CTO (anonymized) mindful action without performance o...David Denyer
In this series of articles, I will discuss each of the four approaches to Organizational Resilience (preventative control, mindful action, performance optimization, and adaptive innovation).
STAT Part 1: An Introduction to the Strategic Tensions Assessment Tool (STAT)David Denyer
We define Organizational Resilience as “the ability of an organization to anticipate, prepare for, respond and adapt to incremental change and sudden disruptions in order to
survive and prosper” BS 65000 Organizational Resilience, 2014.
Organizational Resilience is required for businesses to respond to disruptions as well as positively adapt in the face of challenging conditions, leverage opportunities, and deliver sustainable performance improvement.
Adventures in Business Analytics – Optimization and the Organization Garry, s...Tin Ho
Adventures in Business
Analytics – Optimization
and the Organization
Steve Garry
Marketing Optimization and the Organization
November 2014
Generating Better Business
Results Through Analytics
Enhancement in NDT inspection for operational effectiveness, efficiency and e...Innerspec Technologies
We intend to show that any change shall be linked, not only to improvement, but also to immediate cost reduction so that all management structure can conceive quick implementation as
part of its department strategy & enhancement in their budget cost.
For that, concepts such as effectiveness, efficiency and excellence must be approached. We will give clear saving cost ways which will follow the terminology.
In Financial terms and without a deep analysis, we can conrm cost savings above 30% from current prices are achieved.
The onset of an economic downturn presents business leaders with the need to reorient themselves towards value creation levers other than revenue growth.
By executing a strategic pivot away from a growth orientation and toward these other drivers of value, business leaders have the opportunity to create substantial value and position themselves favorably regardless of the economic climate.
With this study, we distill and prescribe characteristics, practices and best-in-class methods associated with "fast growers,“ which we define as companies with GAAP revenue growth rates of 30% or higher. As discovered in previous years and validated again this year, the central driving force for fast growers is the appropriate, aligned go-to-market model executed with excellence and coupled with financial discipline and investment.
Use this report to compare your business to like companies in the Edison portfolio, as well as industry guidance. These benchmarks and advice will enable you to map your own plan and journey to becoming a fast grower, or accelerate even faster to a $100M company.
INSTRUCTIONS Please read the case first and then answer specificall.docxmaoanderton
INSTRUCTIONS: Please read the case first and then answer specifically the proper questions asked
below. PLEASE ANSWER ALL THE QUESTIONS. PLEASE USE A SEPARATE SHEET OF PAPER TO ANSWER
YOUR QUESTIONS.
Backstory: General Electric Co. decided sustainability was a business opportunity rather than a cost and
pushed into the field in 2005 with its new initiative. But the products and services weren’t only for its
customers — they first transformed GE.
Key moves: GE began looking at sustainability as part of a demographic trend, realizing that scarcity would
increase with population growth. Energy and water use, waste, carbon emissions — all would decline
among the most efficient and sustainable companies. GE saw a profitable business opportunity in helping
companies along this sustainable path to offer environmental solutions.
GE also gambled that carbon would eventually be a cost, following the implementation of previous
regulatory regimes such as limiting acid rain. Although the precise way carbon would be regulated was
unknown, as it still is, the company had little doubt that regulation would happen. Rather than wait, GE
joined a climate coalition with nongovernmental organizations to press for a cap-and-trade system to
build certainty into the future.
Within the company, GE began engaging employees to see where energy savings could be found. That
might include turning off the lights when a factory was idle or even installing a switch so that lights could
be turned off. Ecomagination sold solutions within GE, whether the project involved installing LED lights
on a factory floor, recycling water at a nuclear facility or offering combined heat and power generation
units at a plant in Australia. Within GE, managers began to be measured on how much energy savings they
had achieved.
Impact: The company so far has saved $100 million from these measures and cut its greenhouse gas
intensity — a measure of emissions against output — by 41%, according to the company’s sustainability
report. The work inside GE became a proof of concept to external customers grappling with similar issues.
Ecomagination targeted C-level executives to build this business, since most problems cut across divisions
(improving energy efficiency, for example).
So far GE has invested $4 billion in this effort, much of it in research and development. But it reaped sales
of $17 billion in 2008, up 21% from a year earlier, and is striving for $25 billion in sales in 2010.
1. Describe the 3 Strategic Management Process GE used (please use terms that we had discussed
in class).
2. Explain the need for integrating and the use of strategic management for GE (Give 3 examples).
3. Please list 5 examples of strategic management that GE either can use or already is using.
4. What is the strategy formulation, implementation, and evaluation activities that GE can
potentially use to make its innovation better than what it is now (Give 3 recommendations).
5. If .
Learning ObjectivesUpon completion of Chapter 6 you will b.docxsmile790243
Learning Objectives
Upon completion of Chapter 6 you will be able to:
• Understand the importance of incremental after-tax cash flows.
• Be able to estimate incremental after-tax cash flows.
• Be able to calculate the tax consequences on an asset sale.
• Understand why sunk costs do not matter in capital budgeting.
• Know the three categories of cash flows typically seen in an investment proposal.
Relevant Cash Flows for
Capital Budgeting
6
iStockphoto/Thinkstock
byr80656_06_c06_141-160.indd 141 3/28/13 3:32 PM
CHAPTER 6Section 6.1 How to Compute Cash Flows
A company’s very first goal is staying financially healthy; a bankrupt company helps no one, neither owners nor employees nor customers. Financial health requires that bills and debts be paid in full and on time. This is done with cash. Cash
is what lets a company keep its doors open and the lights on. Cash keeps the machines
running, the raw materials flowing into factories, and the finished goods flowing out.
In Chapter 2 we explained why cash flow is more important than accounting profits. We
repeat that message here because it is so important. A company cannot pay its employ-
ees, suppliers, banks, or tax agencies with net income. Those entities only accept cash. In
Chapter 2 we also explained why cash flow and accounting profit (net income or profit
after tax) differ. As a quick reminder, it has to do with how revenue is recognized, how
costs are matched to sales, and how some costs are allocated over time via depreciation.
In this chapter we expand the discussion of cash flow to exactly which type of cash flows
we use when analyzing investment opportunities or determining a company’s financial
health. We draw on accounting, tax rules, and economic theory to arrive at the appropri-
ate cash flows for financial analysis. In a corporate setting, investment analysis is called
capital budgeting: the decision about how to best budget investment capital to create
wealth for shareholders.
6.1 How to Compute Cash Flows
We discussed how to use accounting statements to estimate cash flows in Chapter 2. There we showed a simple approach that gave a reasonable approximation in most cases and a more complete approach. The simple approach just added
depreciation expense back to net income to find an estimate of cash flow. This approach is
usually fairly close to the exact value because depreciation is usually the primary account
that causes net income and cash flow to differ.
The more complete approach begins with net income and subtracts increases in assets and
adds increases in liabilities. Note that depreciation expense will be included in changes in
fixed assets or property, plant, and equipment (PP&E), so is not treated separately as it was
in the simple approach. If you are not comfortable with translating accounting data into
cash flows, be sure to review the more detailed description of the process in Chapter 2.
The appropriate cash flows for eval ...
High-Reliability Organizations: Managing Risk In Complex Operating EnvironmentsWilson Perumal and Company
The environment companies operate in has become increasingly complex. With increased complexity, comes increased risk for high consequence/low probability events. At the same time, society’s expectations for performance have never been higher. In other words, achieving excellence in safety is both more important and more difficult than ever. Yet a select few High-Reliability Organizations (HROs), such as the U.S. Nuclear Navy, have defied this trend. This presentation will examine how these HROs leverage management systems and culture to thwart the impacts of complexity and achieve safety and operational excellence, while simultaneously creating the opportunity to significantly reduce operating costs.
Bigger is always better, right? Not always, especially in the world of business. The biggest challenge facing companies today is not how to continue growing, but how to grow profitably. We take a look at a few key things that separate those that simply grow and those that grow profitably.
WP&C's Complexity Workshop helps identify the most disruptive complexity drivers in your business, quantify the size of the opportunity, and chart a course to improved performance.
Achieving Operational Excellence is now more crucial than ever. As competition intensifies and expectations for high
performance rise, companies have increased their focus on achieving higher levels of operational performance. This is why about 80-90% of Fortune 500 companies have
implemented some form of a Lean, Six Sigma, or Operational Excellence program.
Unfortunately, only about 30% achieve their expected results. This is more disappointing when you consider that many have been left with greater levels of bureaucracy and
cost than they started with. In this Vantage Point, we will explore the characteristics of companies that defy this trend by successfully deploying management systems to achieve Operational Excellence while simultaneously removing large chunks of cost and overhead.
Increasing complexity is the biggest challenge for the supply chain. Learn more about how complexity impacts the supply chain and how to eliminate or reduce this complexity.
How Healthy is Your Company’s Product Portfolio?
Similar to your annual doctor’s check-up, your product portfolio needs a check-up too. Symptoms such as frustrated customers, product shortages, high inventory levels, or many unprofitable products, could be signs of an “unhealthy product portfolio”. Why should you care?—here is one of our client examples—“A technology client grew 2.4x by cutting products under development from 3,500 to 500, resulting in faster innovation, 63% increase in customer satisfaction, and 13% point increase in operating incomes”. The benefits resulting from discovering how healthy your product portfolio is, can often lead to transformative changes in your organization. Have we awoken your interest? please read on…
The world has changed. Throughout most of the 20th century a company’s cost structure and competitive advantage was driven by scale—larger operations typically had lower costs and could dominate their industries by offering consumers better products at lower prices. However, that is no longer the case. Complexity, driven by SKU growth, increased number of channels, lengthened supply chains and globalization, is now the most significant driver of most companies’ ability to compete. Risk and cost both rise exponentially with complexity, but most companies are ill-equipped to recognize, manage and remove the complexity that is inhibiting their success.
The first step in managing complexity is understanding it—where it comes from, how it manifests itself and knowing the difference between good and bad complexity. Doing so requires taking a different view of accounting for complexity; applying Square Root Costing to complexity-driven, NVA costs paints a truer picture of complexity’s impact. This understanding supports important decisions around product offerings, pricing, production scheduling, inventory levels, vendor selection, component rationalization and process standardization.
The adoption of a single management system to define key controls processes addresses a company’s organizational and process complexity by driving standardization and consistency and removing NVA complexity to drive performance. And the success of a management system is dependent on a well-defined and purposefully-managed culture that supports it.
Developing a true understanding of the sources and impacts of complexity and then addressing complexity in a systematic, thoughtful way will eliminate risk, decrease costs, improve service levels and prepare companies to compete in the 21st century.
In this presentation we will:
Explore the sources of supply chain complexity
Discuss how supply chain complexity manifests itself in high costs and poor performance
Explain the Square Root Costing approach for properly allocating the costs of complexity
Review strategies for eliminating NVA complexity and managing value-added complexity
Training session on identifying, eliminating and optimizing for complexity in supply chain. Presented by Chris Seifert, Scott Stallbaum, Francisco Soto and Ben Cormier during an APICS Houston meeting.
Mergers and acquisitions (M&A) are a critical enabler of strategy for many companies seeking to grow market share, acquire new technologies, or capture the advantages of scale. Unfortunately, M&A are a risky proposition, with more than half failing to create the value promised. Evidence suggests that the cost of complexity added by M&A frequently out paces any value created. This presentation delivered by Chris Seifert at the Chief Strategy Officer Conference, examines how a select few companies have been able to defy conventional wisdom, turning M&A into a strategic weapon, by systematically eliminating non-value added complexity in their day-to-day operations. - See more at: http://theinnovationenterprise.com/summits/chief-strategy-officer-summit-new-york-2014/schedule#sthash.0cmEWQTm.dpuf
Complexity in all aspects of business (products, processes, organizations) has made planning and forecasting more difficult and a fundamental lack of understanding of complexity often drives behaviors intended to reduce costs, but actually increase them while decreasing service level.
In this presentation delivered at the 2014 APICS International Conference, we explore the sources of complexity facing businesses today and how complexity manifests itself in poorer performance and higher costs. In doing so we will explore Wilson Perumal & Company’s Square Root Costing methodology for more accurately allocating complexity costs across an organization through a real-life client example.
Our roadmap to Operational Excellence highlights the key milestones for implementing an Operational Excellence Management System and a culture of Operational Discipline in order to achieve Operational Excellence. Along the roadmap, you will find links to some of our most popular blog articles. You will need to download the file to access the links.
Andrei Perumal, managing partner at Wilson Perumal and Company, presents "Simplify to Grow", how to build scale, speed and profitability in a complex world. This presentation was originally delivered during the 2014 CSO Conference in San Francisco, California.
Water supplies in the Permian Basin are tightening. 240 counties in Texas are now designated as primary natural disaster areas due to drought. Water recycling technologies are numerous with rapid innovation.We’ve catalogued over 50 different processes used to purify wastewater. There is no one-size-fits-all solution. Freshwater availability, waste disposal costs, and fracturing fluid specifications are just a sample of factors that influence decisions. In this presentation, delivered at the DUG Permian Basin Conference on May 21, 2014, Wilson Perumal & Company Consultant John Hughes presents key elements to consider when developing a comprehensive water management strategy.
Growing your business can easily add complexity and thus erode the profits you expected from growth. The key is in understanding the nature of complexity and how to simplify your business to grow in a profitable way.
Operational Excellence: Getting the most out of your Lean and Six Sigma programsWilson Perumal and Company
Operational Excellence is more important now than ever. Your customers demand it! However, evidence shows that traditional approaches to achieving Operational Excellence are not delivering the expected results. In this presentation delivered at the APICS Houston Professional Development Meeting on May 15, 2015, Chris Seifert, Manager at Wilson Perumal & Company, explains why traditional approaches to Operational Excellence are failing, and provides strategies you can use to make Lean and Six Sigma relevant in today's complex world.
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Vantage point 2012_issue2
1. ’
Volume 2012 | Issue: 2
Making Complexity Reduction Count:
How to Plan for Benefit Capture
from the Start
2. ’
Companies are rapidly waking up to the
issues of complexity – bloated portfolios,
inflated cost structures and poor service
levels. However, many companies that launch
complexity reduction initiatives struggle
to capture the full benefits. In our work,
we’ve seen that in order to realize benefits
from complexity reduction, companies
need to consider two key inseparable
elements. Removing complexity provides
the opportunity for financial and operational
benefits. But benefit capture, as a deliberate
set of actions, needs to be considered
explicitly at the onset, otherwise the benefits
usually fail to materialize.
A primary challenge is that existing incentives
may well conflict with your complexity
reduction efforts. Absent an explicit plan, the
status quo will prevail. For example, managers
who are financially rewarded for keeping the
factory full will invariably ensure this happens,
even if it is with low margin, high complexity
products. This is why complexity reduction
requires a holistic, “joined-up” approach
where benefit capture is coupled with
complexity removal.
Before undertaking a major complexity
reduction program, it is important to have a
specific plan for converting the reduced levels
of complexity to financial benefit.
How Complexity Reduction can Translate
to Benefits
Any time a company embarks on a program
to remove portions of a product and service
portfolio, there is the opportunity to see the
following benefits:
Increase profits via a lower cost base
(Focus Area 1)
Increase profits by boosting customer
willingness to pay (Focus Area 2)
Focus Area 1: In practice, this translates
to unlocking enough spare capacity to allow
for fixed cost release. Companies may find
the consolidation of plants to be the most
dramatic way to boost their profitability. The
transformation that Cadbury UK embarked
upon in 2007 provides a prime example of
this option. At that time the company had 8
production/feedstock plants, 18 stockholding
locations, around 6,000 employees, 30
key brands, and 1,000 different SKUs.
Following a massive complexity reduction
campaign, Cadbury cut stock-keeping units
(SKUs) by 75% and reduced the number of
distribution depots from 18 to 5. The results
over a 4-year period ending in 2011 where
impressive: the company achieved a 15%
reduction in factories, a 10% increase in
margins, and revenue growth of 7% on a
3. 2
Following a massive complexity reduction campaign, Cadbury cut
stock-keeping units (SKUs) by 75% and reduced the number of
distribution depots from 18 to 5. The results over a 4-year period
ending in 2011 where impressive: the company achieved a 15%
reduction in factories, a 10% increase in margins, and revenue
growth of 7% on a like-for-like basis.
like-for-like basis.1
This illustrates a common
phenomenon: often the biggest benefit of
variable cost reduction is the opportunity it
affords for fixed cost release.
Focus Area 2: This translates to using spare
organizational capacity to improve service
levels and offerings, resulting in improved
revenue and profit. Service levels and
offerings can be re-aligned with customer
needs around quality and delivery features
such as shorter lead time, less frequent
stock-outs, and augmented product options.
Effectively, companies increase the focus on
delivering their most attractive opportunities
flawlessly and price the offerings
commensurate with what the market is willing
to pay for “good complexity.”
As part of a turnaround in the early 2000s,
Motorola Computer Group significantly
reduced complexity by trimming 85% of
their product portfolio and deploying the
organizational capacity made available from
the SKU reduction to improve quality and
ratchet up on-time delivery from 70% to
90%. This increase in service levels resulted
in customer satisfaction leaping from 27% to
90% over a two year period.2
It also improved
the company’s cost base and helped raise
operating margins from -6% to +7%.3
Developing the Plan for Benefit Capture
In many cases, complexity reduction can lead
to benefits across both Focus Areas. Indeed,
the power of complexity reduction is that it
exposes many trade-offs to be false (e.g.,
complexity reduction can, in fact, decrease
costs and improve service levels). The key here
though is having the clarity from the outset as
to the areas of benefit that will give the business
the most lift, based on current operational
and strategic gaps. For Motorola above, the
focus was on increasing service levels and that
became the anchor motivation. As an added
benefit, they also saw their cost base decrease.
At a high-level, the identification of the plan for
benefit capture occurs through 3 key steps:
Take an “outside-in” view to assess the
areas of biggest opportunity
Identify and quantify existing
interdependencies and internal changes
for the benefits to materialize (above and
beyond the complexity reduction itself)
Translate the What to the How and move
to execution!
It is important to remember when following
these steps that the enemy is analysis-
paralysis and victory is achieved not when
theoretical benefits are identified, but when
1
Stephen A. Wilson, Andrei Perumal. Waging War on Complexity Costs (New York McGraw-Hill, 2009)
2
Michael L. George, James Works, Kimberly Watson-Hemphill. Fast Innovation (New York McGraw Hill, 2005)
3
Even though fixed cost release and/or increasing service levels are the focal areas of this article, managers should not view these outcomes as an “all
or nothing” endeavor. Companies can continually improve margins through complexity-reducing activities like standardizing raw materials, consolidating
product designs, utilizing Lean tools to simplify value streams, cutting excess inventory, pricing enhancements, and refining the value proposition.
4. actual benefits land. General George S. Patton
once said, “A good plan violently executed
now is better than a perfect plan executed next
week.” In that same vein, the key to capturing
complexity-reduction benefits is to be “principally
right,” move quickly, and learn as you go.
Step 1: Take an outside-in view to assess the
areas of biggest opportunity
The core exercise here is to benchmark
your company’s performance against peer
organizations using two common metrics
within your industry: Asset Turnover and
Operating Margin. Neatly, when the two metrics
are multiplied together and compared over
time, it closely approximates changes to a
business’s Return on Invested Capital (ROIC).
Asset Turnover effectively incorporates
elements of the company’s asset intensity
and efficiency of operating decisions to
generate revenue. Asset Turnover helps
outline whether a company is operating
at capacity and fully utilizing its plant and
equipment in its operations.
Operating Margin is a measurement of a
company’s operating profitability taking into
account the company’s strategy with regard
to pricing, differentiation, and utilization
of costs, including costs associated with
complexity. Operating Margin does not
account for expenses such as interest
and taxes, so it is a good measure of
the profits of a company’s underlying
operations independent of capital structure
or one-time expenses.4
After data collection, create a grid showing
where your company falls relative to your peers
on both the above metrics. The result will be an
Asset-Margin Matrix like that shown in Figure 1.
’
4
Operating Margin and Asset Turnover tend to vary inversely. Companies with high margins tend to have low asset turns and vice versa. This is
due to low margin companies typically not adding much value to products and thus requiring high turns to generate profit (e.g., grocery stores).
However, it should be the goal of companies to achieve high levels on both metrics. Best-in-class organizations are able to do this and thus have
corresponding high returns on invested capital.
2.2 x
2.0
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
5 6 7 8 9 10 11 12 13 14 15 16 17 18%
AssetTurnover
Boost Service Levels
Reduce
Fixed
Assets
Hyperactive Winning
Under
Performing
Near
Greatness
FLO
HRL
RAH
CAG
KFT
HNZ
CPB
HSY
SJM
GIS
K
SLE
$15B
Rev.
Operating Margin (TTM)
Figure 1: Example Asset-Margin Matrix Analysis of the US CPG Food Industry*
* Cross bars indicated relative performance via medians. Data includes trailing twelve months based on most recent SEC filing as of February 17th
,
2012 for 12 major US CPG food companies (source: company SEC filings).
5. 4
Many investment professionals have championed
ROIC as one of the best measures of a firm’s ability
to generate superior returns. Praise for ROIC’s
virtues appears in popular pieces ranging from Joel
Greenblatt’s value investing books, to investment
white papers, to advice from renowned strategist
Michael Porter who advocates:
“ROIC is the appropriate measure of
profitability for strategy formulation, not to
mention for equity investors.” 5
While many nuances can be applied to the ROIC
equation, it is commonly calculated as:
Asset Turnover and Operating Margin are
typically calculated as:
For Asset Turnover x Operating Margin
compared over time to closely approximate
changes to ROIC over time, the following
justifications are required:
A (1- tax rate) expression found in the
numerator of ROIC must be accounted for
B Assets - Cash and Cash equivalents, the
denominator of Asset Turnover, must
approximately equal Debt + Book Value
of Equity (i.e., Invested Capital), the
denominator of ROIC
Regarding A , (1-tax rate) is relatively constant
over a short period of time. Therefore, comparing
changes to a company’s Asset Turnover
x Operating Margin over time will closely
approximate ROIC changes over time.
Regarding B , from a balance sheet perspective,
Invested Capital can be computed as follows:
So long as Current Liabilities are minimal
compared to Assets, Assets - Cash and Cash
equivalents will approximately equal Debt + Book
Value of Equity. For most companies, this is true.6
Given that Operating Margin and Asset Turnover
are the two key components of the Asset-
Margin Matrix it is logical that those companies
that are able to move to the top right –
effectively improving their ROIC – will be those
that are most successful.
Return on Invested
Capital (ROIC)
Operating Income* (1 - tax rate)
Debt + Book Value of Equity
=
Invested Capital = Fixed Assets + Current Assets –
Current Liabilities – Cash Equivalents
Asset Turnover
Revenue
Assets – Cash and Cash Equivalents
=
Operating Margin
Operating Income
Revenue
=
ROIC and the Asset Margin Matrix
5
Porter, Michael. “The Five Competitive Forces That Shape Strategy,” Harvard Business Review, January 2008
6
This relationship generally holds true but there are balance sheet exceptions whereby Fixed Assets + Non-Cash Working Capital do not equal
Debt + Book Value of Equity. One such example is when a company has minority holdings in other companies that are classified as assets on the
balance sheet.
6. Companies in each quadrant exhibit different
characteristics and will benefit from various
uses of the spare capacity created by
complexity reduction. If you look behind
the numbers, there are clear patterns in
how companies in each quadrant are using
their resources and the resulting business
challenges they face. There are four
categories, as shown in Figure 2.
Under Performing
Characterized by both lower Asset Turnover
and lower Operating Margin than competitors,
‘Under Performing’ companies also have the
greatest opportunity and urgency, for dramatic
improvements. They will need to consider a
broad range of operational and market-facing
improvements to reduce complexity and better
their competitive stance.
The focal point will be a meaningful improvement
in the business model, both in terms of service
levels/differentiated offerings and costs. The
company’s leaders must drive a return to
focusing on their customers, understanding
what drives their satisfaction, and conduct
a robust review of complexity, both good
and bad (note: customers value and are
willing to pay for “good complexity”). They
can then make better decisions about right-
sizing operations to profitably deliver the good
complexity and eliminating bad complexity.
Hyperactive
Characterized by high Asset Turnover but low
on Operating Margins, these companies are
either working too hard for their results or, as is
less often the case, they are concentrating on
relatively high revenue but low margin products.
’
Figure 2: Interpretation of Matrix Locations
HIGH
Hyperactive
Typically rush to fill spare
capacity, overly manage
inventory, and erode
profitability in the process
Winning
Have the balanced
formula of right-sized
operations (both
capacity and complexity)
and high margins
Under Performing
Have excess capacity
and are not financially
efficient with the capacity
being utilized
Near Greatness
Close to winning with high
margin product mix, but
currently suffer from
underutilized or potentially
overly complex operations
LOW
Operating Margin
LOW
AssetTurnover
HIGH
7. 6
Companies that are ‘Hyperactive’ often
focus on operational metrics without
fully understanding the implications for
customers and profitability. For example, in
an effort to keep inventory costs low, these
companies might frequently stock out of
items that customers demand. Alternatively,
a company might focus on high machine
utilization and fill spare capacity with low
margin products and/or entice customers
to buy additional volume at a discount. This
increases revenue to cover fixed costs, often
an incentive, but destroys profit and long-
term competitiveness.
‘Hyperactive’ companies should aim to
utilize complexity reduction and spare
capacity to improve service levels/
differentiate offerings to their customers.
For example, by using freed up capacity
to have more changeovers in a production
environment, companies are able to keep
work-in-process (WIP) and inventory costs
low but increase service levels via shorter
lead times.
Near Greatness
Characterized by high Operating Margins
but low Asset Turnover, companies in
this category have the right focus on their
customers and product offerings. But
compared to the competition, they require
more assets to produce each dollar of
revenue. ‘Near Greatness’ companies would
benefit by reviewing their asset portfolio and
potentially achieving fixed cost release.
Often, profitable companies are reluctant
to take cost cutting measures that remove
options. Examples include divestiture of
infrequently used equipment or consolidation
of under-utilized assets. Though this is
understandable due to a general desire
for operational flexibility, ‘Near Greatness’
companies often like to keep options open
and desire more flexibility than is required
based on forecasted demand. Maintaining
lean operating discipline will benefit these
companies, as complexity will have fewer
places to hide and the costs associated with
complexity will thus be kept at bay.
Winning
Characterized by a Strong Capability in
Optimizing Complexity, companies in this
category will still benefit from performing
ongoing reviews of their product portfolio,
proactively preventing complexity from
creeping back into their business, and
utilizing tools to drive profitable growth. Be
wary of a focus on a singular metric as they
typically give only a partial answer. Complexity
creeps in over time, so even the best run
organizations need to guard against gradual
product proliferation, erosion of service
levels and inflation of costs. A key leading
question for ‘Winning’ companies may be:
is the complexity of your portfolio growing
faster than your revenues over time? If so,
take action promptly to preserve the good
fundamentals of your business.
Step 2: Identify and quantify existing
interdependencies and internal changes for
the benefits to materialize
Once you’ve established an outside-in view,
the management team will have a strong
sense for what needs to be the “anchor”
goal for driving benefit: fixed cost release,
or focus on service levels, or potentially
both. Step 2 clarifies the end state through
analysis, accounting for interdependencies
and changes required for benefit capture.
8. Embarking on Step 2 is where many
management teams stumble as uncertainty
takes hold and teams find themselves in a
state of analysis paralysis.
The reason paralysis sets in is that identifying
and accounting for interdependencies can
be dizzying! Take, for example, a recent
manufacturing company client in the ‘Near
Greatness’ quadrant aiming to improve service
levels and, correspondingly, revenues. To
do so, a determination was required as to
how increased service levels would equate
to increased customer willingness to pay.
Operationally, increasing service levels required
smaller batch sizes and freed up capacity to
allow for more product line changeovers. More
changeovers resulted in higher scrap costs,
but reduced WIP and associated working
capital. From a commercial perspective,
training was required to augment sales force
skills. Customer call centers required refined
service-oriented processes. And so on…
It is important to consider interdependencies
such as those mentioned above in advance.
For Focus Areas 1 and 2, you will need to
consider areas such as:
Product profitability after correcting for
complexity costs. This is a critical facet for
identifying the optimal portfolio. The key
is to make the link between products and
their fully-loaded profitability, taking into
account both the fixed and variable costs
required. From our experience, low-volume
products as well as those with high variation
in demand are almost always under-costed
using traditional costing techniques.
Conversely, high-volume products and
those with low variation in demand are over-
costed. It is crucial to correct for imprecise
cost allocation techniques.
Cost and Service Breakpoints. This will
tell you how much capacity is required
to achieve Focus Areas 1 and/or 2. With
respect to fixed cost release, you need to
explicitly define the cost-level breakpoints
at which assets can be released by either
cutting products or moving their production
to alternate facilities. Regarding service
level increases, you need to conduct
customer research and competitor
analysis or leverage current management
understanding to ascertain customer
willingness to pay corresponding to
augmented service levels.
Migration paths and one-time costs.
This will detail the costs associated
with transitioning the business to the
desired future state, which may include
costs associated with closing facilities,
discontinuing or moving production.
Moreover, this will highlight the
“choreography” required to execute on the
SKU reduction plan and adjacent initiatives.
To make complexity reduction count,
there are nearly always a set of “before”
processes and “after” processes, which
need to be planned and executed.
Step 3: Translate the What to the How and
Move to Execution!
Step 3 is robust project planning, translating
what in Step 2 to how by layeringin
deliverables, activities, timing and
responsibilities. While volumes have been
written on the topic, a few complexity
reduction best practices will greatly increase
your odds of capturing full benefits:
Invest sufficient time educating the team on
how complexity reduction will benefit the
business. Any time you change peoples’
’
9. 8
jobs, you’ll encounter resistance. Also
it’s not uncommon for the internal team
to become attached to the idea that a
particular asset or product category is
critical, and should not be touched, no
matter what the data says. It’s essential to
keep reinforcing the messages around the
business case.
Sustain project momentum through the
right cadence and right team structure.
Ensure the team includes “doers” (analysts/
line management) and “thinkers” (senior
people that can make decisions), and
includes key representatives from major
functions involved. Appoint a senior project
sponsor to quickly remove roadblocks and
make final decisions. This person should
be capable of holding the line, the point
of elevation for dealing with the (almost
inevitable) set of issues that crop up. Use
weekly Steering Group meetings to keep
urgency high, elevate issues and ensure
tight deadlines.
Actively manage customers’ expectations
and commercial risk. One common barrier
to complexity reduction is the perceived
fear of losing a customer with a portfolio
change. However, this is often overstated,
particularly if communication with
customers is handled well. Bring out the
positive messages. Promote the benefits
of complexity reduction (e.g., improved
response time, sales force focus, etc.) and
if necessary, offer meaningful assistance
transitioning customers from one product to
another, such as a promotional price break.
The 5% profit uplift
Many executives know that their business
is too complex and want to affect change
to make their business simpler to operate
and more profitable. From our experience,
their instincts and judgment are right: many
companies achieve a bottom-line boost of 5%
or higher by attacking complexity.7
Complexity
reduction is not easy; it often requires
companies and people to work differently,
and may require a direct engagement with
customers. Given the arduous nature of the
task, companies need to be confident of
realizing the benefits at the end of the day.
With the approaches and mindsets described
in this article, companies can more confidently
attain the rewards from their complexity
reduction initiatives.
7
Wilson Perumal & Company project experience
From our experience,
low-volume products as well
as those with high variation
in demand are almost always
under-costed using traditional
costing techniques.
10. Since the start of their turnaround in
January 2008, Starbuck’s share price has
more than doubled, outperforming an index
of its peers by 50%.To achieve this relative
outperformance, Starbucks launched an
aggressive, effective, and well chronicled
turnaround that serves as a model for
companies moving from the ‘Under
Performing’ to the ‘Winning’ quadrant.
Starbucks’ stock price declined more
than 40% in 2007 with dire prospects
as the recession took hold. Operating
Margins were in freefall and the company
seemed burdened by overexpansion, rising
competition in the premium coffee market,
and an increasing “commoditization” of
the brand. It was not merely an issue of
cyclical forces at play because many of
Starbucks’ competitors were profiting,
as shown by the modest gain in the
Dow Jones Restaurant and Bar index or
McDonalds’ near 40% gain in 2007.
Starbucks recognized the need to take on
both fixed costs and boost service levels.
During the turnaround the company closed
more than 900 stores, reined in expansion
and associated capital expenditures, and
eliminated more than 1700 non-store
support and management positions and
6000 associate jobs. On the service
Starbucks TurnaroundKey Takeaways
Complexity removal provides
the opportunity for financial and
operational benefits. But benefit
capture, as a deliberate set of
actions, needs to be considered
explicitly at the outset; otherwise the
benefits usually fail to materialize.
Complexity reduction can expose
perceived trade-offs – the notion
that you can have either cost
improvement or service-level
improvements. Complexity reduction
often yields both.
Complexity reduction efforts that
fail to identify where the benefits will
come from tend to falter in the face
of concerns about the impact of
revenue loss. Conversely, complexity
reduction is most likely to succeed
when it is simply an enabler to
reaching a significant and meaningful
benefit (such as fixed cost release).
Identifying and executing the best
option requires the following 3 steps:
• Take an “outside-in” view, utilizing
the Asset-Margin Matrix to assess
the areas of biggest opportunity.
• Identify and quantify existing
interdependencies and internal
changes for the benefits to
materialize (above and beyond the
complexity reduction itself).
• Translate the What to the How
and move to execution!
’
11. 10
$35
30
25
20
15
10
5
0
25%
20%
15%
10%
5%
0%
1/1/08 7/1/08 1/1/09 7/1/09 1/1/10 12/31/107/1/10
SBUX share price ROIC
Figure 3: Bold changes made by Starbucks from 2008-2010 and the correlation between ROIC improvement and stock price
side, Starbucks invested in new technologies,
training, and processes to improve the customer
experience. Some of the renewed quality
practices moved the store-front operations away
from previous efficiency-oriented practices. For
example, the baristas “returned to the practice
of grinding whole beans” and brewed “smaller
batches with a hold time of no more than 30
minutes.” These changes paid off as indicated in
the 2009 improvement in YOY same-store sales,
growing cash balance, elevated 2010 forecast 8
,
and significantly increased ROIC.
8
Starbucks annual reports, 10-K and 10-Q filings, Investor Conference Call Transcripts 2007-2010
Jan 2008: Announce return
of Schultz as CEO with plan to:
a improve customer experience,
b slow store openings and
close under-performing stores,
realign organization and
management, and accelerate
growth abroad
Mar 2010: Gains continue
with cash surplus enabling
first cash dividend and
authorization for additional
share buyback
July 2008: Announce closing
of 600 stores and reduction of
1000 non-store positions at a
cost of ~$340M
Sept 2009: Reduced store
openings cut Capex by 50%
from $985M in 2008 to
$450M in 2009.
H2 2009: Cost reduction
targets ahead of forecast; EPS
improves 50% yr-over-yr and
operating. margin moves from
(0.8%) to 8.5%. Growing cash
balance enables payoff of all
short-term debt.
May 2008: Investments in
tools and training to boost
quality and consistency of
in-store experience including
changes to brewing methods
and introduction of newly
acquired brewing tech
Jan 2009: Announce closing
of 300 additional stores and
6000 associated positions
plus the elimination of 700
non-store positions
General
Fixed Assets Focus
Service Focus
12. Wilson Perumal & Company, Inc.
Two Galleria Tower
13455 Noel Road, Suite 1000
Dallas, TX 75240
contact@wilsonperumal.com
www.wilsonperumal.com
Wilson Perumal & Company, Ltd.
100 Pall Mall
London SW1Y 5NQ
United Kingdom
This article was authored by:
Stephen Wilson, Managing Partner with
Wilson Perumal & Company, Inc. Contact
Stephen at swilson@wilsonperumal.com.
Craig Foos, Manager with Wilson
Perumal & Company, Inc. Contact
Craig at cfoos@wilsonperumal.com.
Gabriel Wilmoth, Consultant with Wilson
Perumal & Company, Inc. Contact Gabriel
at gwilmoth@wilsonperumal.com.
About Wilson Perumal & Company:
Wilson Perumal & Company is a premier
management consulting firm and the leading
advisor on how to manage and capitalize upon the
complexity of today’s world. To learn more, visit
www.wilsonperumal.com.