Marketing Maths: How to calculate the worth of a new customer?

It’s strange, but many small-business people have no idea what a good regular customer is worth to their business. By calculating that figure, you should gain a better idea of what you’re willing to invest or risk to attract a good, regular customer. The calculation will also tell you how important it is to keep your existing customers happy.

The cost of retaining a customer and even expanding a customer’s value is much less then getting a new customer.

To determine what you’re willing to invest in marketing, first discover what an average new customer is worth to you. To determine their value, answer the following questions:

1. What is your average sale (transaction amount)?

2. What is the frequency of your average customer? This calculation can be expressed in transactions or visits per week, month or year, depending on the type of operation you run.

3. What percentage of new customers become average regular customers? We call this the “conversion ratio.” This will undoubtedly vary depending on how that new customer was generated. For example, someone buying for the first time using an aggressively priced coupon would less likely be a repeat customer than one who bought based on a personal recommendation of a friend. To be more accurate, you may want to calculate this information based on several different criteria and then take an average.

4. What is the average life cycle of a new customer? Once you get a customer, how long will that customer continue to buy from you before he or she moves, gets mad, or no longer has a need for your product or service? This length of time can generally be expressed in months or years. It may be a more difficult number to get, but do your best.

5. How many new customers are referred to you by your existing customers? When you gather information about a new customer, ask how they found out about you. One possible answer is “referred by a friend.”

How to Determine the Value of a New Regular Customer
In order to figure out how much in gross sales a new regular customer brings you in a year, you need to define what a regular customer is. Through a careful audit you can determine this information. Obviously, “regulars” can range from several times a week or several times a year. So, set those criteria. For example, a typical fast, casual food operation may set that number at three or four times a month, while a more upscale operation may set it at three or four times a year.

  

Then you simply multiply that average regular frequency number by your average check. We use the average check, not the average guest, because for local store marketing (LSM) it will be a more accurate number, in that you have one person who influences the dining decision. For the purposes of illustration, let’s say that we have determined that your average regular frequency is once a week with an average check of $10. By simply multiplying 52 weeks by $10, we then have calculated that the value of a new regular customer is $520 annually. As simple as it sounds, many operators don’t bother to figure this out, which means they’re flying blind.

What’s Your Targeted Increase?
Simple question, but let’s break it down. Let’s say our sample unit does $1,000,000 in annual sales. The goal for the year is to show an increase of 5 percent in gross sales, $50,000 in additional sales attributable to LSM is needed.

Now, How Many New Regulars Do You Need to Hit Your Sales Target?
Divide the sales goal of $50,000 by the value of a new regular customer ($520). The answer is 96.1. You need 96.1 new regular customers to generate $50,000 in additional sales.

What’s Your Conversion Ratio?
There’s just one more important piece of the LSM puzzle now. How many first-time buyers does it take to generate one new regular customer? In our experience, it ranges from as low as 12 percent to around 25 percent, though it can be as high as 50 percent for newer locations with super operations. The point is you should not guess. Your research tells you with certainty what you have to work with so you have no illusions of what it’s going to take to make your sales numbers. Let’s say you determine that you get a 25percent conversion ratio. You know you need 193 new regulars to hit your goals. Therefore you need four times as many “first-time buyers” to end up with 193 regulars.

Simply put, by bringing in 772 first-time buyers (under the right circumstances), you are very likely to end up with 193 new regular customers. Those 193 will generate an additional $50,000 in this year and another $50,000 in the following year. So your goal will be attract between 64 and 65 first-timers each month on average.

 

Source: Entrepreneur.com

Veggies 365 – Restaurant Review

I visited the restaurant this week, when I was carving for some decent vegetarian food in Madhapur, Hyderabad.

The ambience was quite good. However, people will be disappointed with the interiors after seeing the attractive hoarding which is placed in front of the restaurant. The name is creative and the design is also pretty good.

The staff were good, but not well trained. The menu card was big but I was surprised with the items as there are very few. The menu has 12-15 combos, 5-6 items in Al-a-carte and few more soft drinks at the end. The pricing of items are bit high for a new restaurant which doesn’t even hold a brand value.

We chose ‘dhakshin combo’ which had a dosa, an idly, a vada, a small uthappam and a gulab jamun. The quantity was very less and it was priced around Rs. 125. The taste was not that great and the chutneys they provided were awful. However, the lassie which we ordered was one of the best in the city and it was priced at Rs. 35.

Keeping Nandini Cafe and Hotel Tamaram at walkable distance, Veggies 365 has to come up with something innovative and more tasty food in order to sustain in Hitech City.

Ambience: 3.5/5
Food: 3/5
Value for money: 3/5

The North Indian Food lovers can give it a shot.

What is VPEC-T analysis?

VPEC-T stands for Values, Policies, Events, Content and Trust.  Green and Bate propose this as a framework for thinking about activities involving the exploitation of information in companies:

• Value represents what the company, the users, everyone involved (and that turns out to be important as we’ll see later) is looking to gain from an information system.
• Policies are controls that limit how the information is handled.  The policies may have internal or external origins.
• Events are things that happen in a business that trigger a chain of actions that lead to the business serving its customers, collecting its income, managing its staff and generally meeting its obligations.
• Content comprises information in any form of message that flows around the business and, where appropriate, outside it.
• Trust is something that can can be an issue almost anywhere, and is proposed by Green and Bate to be considered throughout the investigation and design of an information system. 

You know the things – put them on the front of a camera lens and you get five different views of the world. Not a bad analogy: Consciously looking at a planned information system through this lens first, provides views from five different directions.  If you’re familiar with de Bono’s Six Thinking Hats, this could be seen as a similar but more specialized thinking tool.

Considering Values, Policies and Events means that information systems practitioners will have to think about the business, not information technology (yet).  The Content considered is not just the data in computer systems, but all the information flowing around.  Some examples:

• an email about a customer order that seems out of line with past ones;
• an instant message asking for a memory jog on a customer’s name;
• notes from one shift to the next, left on a whiteboard;
• phone calls asking for a physical stock check;
• SMS messages to arrange a delivery.

And the issue of Trust is not where, perhaps, you might expect.  This is not about trust between the company and customers – a bank and someone who purports to be an account holder, for example.  Designers of information systems are used to having to deal with that type of trust, even if they are not always able to get it right.  This kind of trust belongs under Policies.  The bank has a policy on how those accessing a bank account through an on-line system must identify themselves.

“Trust” in the context of a VPEC-T study is different – it is about the hidden, or sometimes open, relationship between any two groups involved in handling the company’s information.  It can even be about the lack of such a relationship.  For example, between front-line staff who represent the business and IT people who developed an maintain the computer system used to handle customer enquiries.

I have often seen manual systems kept as a backup because computer users just didn’t trust the system.  I remember front-desk staff in a large hotel who had their own 3 x 5 cards of past-guest information; insurance adjusters with separately-maintained spreadsheets on their own PCs duplicating information in the main IT system; and order takers with a small forest of yellow tags for prices of most popular products stuck on a notice-board.

Shadow IT: Green and Bate refer to these alternative systems as ‘Shadow IT’ and point out that web-based applications available publicly – Web 2.0; Software as a Service – make it much easier to establish shadow systems. Sometimes it’s a matter of speed: Those post-it tags, for example.  But in all these cases, and many similar ones I’ve seen, the information was held in the computer but they did not trust it, or “just wanted to check”.

Sometimes, the lack of trust was based on real events rather than perceptions, but recognizing this and dealing with it openly hardly ever happened.  I have struggled to think of a single case where user’s and IT people sat round a table while someone said “You don’t trust this system to deliver reliable and accurate information.  What steps do we need to take to make you feel safe with the data and comfortable with the new system?” I have heard arguments (sorry, ‘robust discussions’) where “we don’t trust the system” was the underlying message, but raised voices on both sides and innuendo flying back and forth were more an exercise in venting frustration than a help in resolving this kind of problem.

This absence of trust may be justified, or it may have been justified once, but manual backup systems often just take on a life of their own, no one having said ‘stop’ when the IT system stabilized.  Lack of trust can then become frozen into the culture of a user department: new staff are inducted into the same way of thinking, long after any evidence of unreliability has disappeared.

The T in VPEC-T brings this out into the open (for the first time that I’ve seen) and says that we have to be looking constantly for evidence of lack of trust, discussing it openly and dealing with it, if information systems are to succeed.

It’s easy to see that this could be a challenge to bring off successfully, and Green and Bate have no illusions about this being a magic bullet.  In fact, they point out that it’s probably one of the hardest topics to broach and deal with constructively, but it is something we have all known subconsciously.  No one has talked about before.  If it is routinely considered and dealt with, there is at least a good possibility that it can be removed as one of the obstacles to successful implementation of systems.

Click on the picture to view the larger version of VPEC-T mindmap

 

Courtesy: Informationtamers

What is CATWOE Analysis?

CATWOE was defined by Peter Checkland as a part of his Soft Systems Methodology (SSM). It is a simple checklist for thinking. It is one of the generic techniques that Business Analyst use to identify the what the business is trying to achieve, what are the problem areas and how is the solution going to affect the business and people involved in it.

 

Let us again take the example of Automation of  Leave approval Process to better understand this analysis.

There are six elements of CATWOE:

1. Clients

Customers or clients are stakeholders who are the users of the system or process. These are the people who’ll benefit of suffer due to the change in the system/process. The first step in a CATWOE analysis is to identifying such customers and understanding how the process or system affects them.

Few Helpful Questions would be:

• Who is on the receiving end?
• What problem do they have now?
• How will they react to what you are proposing?
• Who are the winners and losers?

In the above mentioned example, employees are at the receiving end. Due to the present manual system, they are facing the problem of long processing time for application and tedious job of tracking their application. There could be mixed reaction from the employees on this change. The people familiar with the computer technology may be happy but the senior citizens who are not comfortable with computers might resist the change.

2. Actors

These are the people involved in the implementation of the changes in the system/changes.

Few Helpful Questions would be:

• Who are the actors who will ‘do the doing’, carrying out your solution?
• What is the impact on them?
• How might they react?

In our case these would be the development team from the IT dept. and the HR department.

3. Transformation

These are the changes that the system or process brings about. A CATWOE analysis requires listing the inputs and the nature of change inputs undergo to become outputs.

Few Helpful Questions would be:

• What is the process for transforming inputs into outputs?
• What are the inputs? Where do they come from?
• What are the outputs? Where do they go to?
• What are all the steps in between?
   

The transformation in our example would be from manual paper work to online application.

 
 

4. Weltanschauung

Weltanschauung, also known as “Worldview” is the big picture and the wider impact of the transformed system/process. The system/process is analyzed to come up with the positive and negative impact on the overall business. This is the most crucial step in CATWOE analysis as different stake holders have different approaches to the same issue. The primary difference in the CATWOE analysis prepared by each stakeholder lies in Weltanschauung, and the purpose of a CATWOE analysis is to make explicit such different worldviews.

Few Helpful Questions would be:

• What is the bigger picture into which the situation fits?
• What is the real problem you are working on?
• What is the wider impact of any solution?

The overall impact of automation of Leave approval Process would be increased efficiency of the HR department and all employees as the time duration of the whole leave approval process reduces.

5. Owner

These are the Decision makers who have the authority to make the changes, stop the project, or decide on whether to go ahead with the change.
Few Helpful Questions would be:
Who is the real owner or owners of the process or situation you are changing?

• Can they help you or stop you?
• What would cause them to get in your way?
• What would lead them to help you?

In our example the process owner would be the Head HR.

6. Environmental constraints

These are the external constraints and limitation affecting the success of the solution. These can be ethical limits, regulations, financial constraints, resource limitations, limitations of project scope, limits set by terms of reference and others.

Few helpful questions would be:

• What are the broader constraints that act on the situation and your ideas?
• What are the ethical limits, the laws, financial constraints, limited resources, regulations, and so on?
• How might these constrain your solution? How can you get around them?
   

Leave Policies of the organisation, integration with third party system, specified time limit can be some of the limitation in our example.

What is MOST Analysis?

MOST Analysis is a simple framework tool for analysing or planning the detail of what an organisation does. In a consulting role, it helps you frame questions, starting from the high-level mission of the organisation and digging right down to the detail of individual tactics. When planning, it is useful to ensure that all bases are covered and that there is a logical connection from the mission all the way down to what is done every day.

In case you have been guessing, MOST stands for: Mission, Objectives, Strategy and Tactics.

Mission

The mission of an organisation should be the answer to the question ‘What do you do?’ It is usually framed in terms of stakeholders and benefits. 

Any organisation has multiple stakeholders who have an interest in the company, typically including shareholders, customers, suppliers and employees. Government organisations also include politicians, assorted interest and pressure groups, as well as assorted other agencies. The mission statement selects key stakeholders and outlines ‘what’s in it for them’. Stakeholders may or may not be explicitly named.

For example:

“XY Genetics creates innovative gene therapies for inherited disease control.”

“We feed the nation every day with passion and concern, using only ethically sound and delicious food and drink. Our people care because we know our customers care.”

Note that the mission is not the vision, values or other high-level directional statement, but is very similar. A vision is a motivating view of the future, not about what happens every day. Values typically describe aspired behaviours.

Objectives

Objectives start with the translation of the mission into overall intent that drives the strategy process. More detailed objectives also appear from strategic and tactical planning.

Common criteria for objectives are that they should be ‘SMART’. That is Specific, Measurable, Achievable, Relevant and Timely.

For example:

“Deliver three new gene therapies per year.”

“Create an efficient and ethical value chain, from producer to consumer.”

Strategy

‘Strategy’ is one of those words that has as many different meanings as there are strategists, and is easily confused with tactics. Strategy includes the high-level decisions that shape what is done and how it is done, for example:

·         Selection of markets and market segments to target.

·         Decisions on where the organisation will be geographically located.

·         Decisions on what products and services to offer.

·         Overall approach to competition, for example on cost or quality.

·         ‘Make or buy’ decisions, including what to outsource.

Tactics

Tactical planning takes strategic decisions and figures out how to implement them in practice. This is the place where the ‘rubber hits the road’, where discipline and innovation are needed to efficiently and effectively operationalise the strategic intent.

Example tactical activities include:

·         Heavy advertising and discounting when a competitor is launching a new product.

·         Selecting a supplier for machine parts.

·         Designing an efficient call centre.

·         Recruitment of graduate engineers from universities.

What is Heptalysis?

Heptalysis refers to the method of analysing seven factors that should be considered in the early stage of starting a business. It is mostly used in analysing of venture capital funding for a novel idea or product where recognizing the risk is an important factor. In this technique one  reviews a business planning with respect to the current knowledge of the potential market  and also the resources that are needed. The following factors are the subjects of the early stage analysis in this method.

• Market Opportunity. Business in one word is best explained by the name of  a product, service or solution. If there is no market, even the best idea and product has no economical value. Here we list a few questions that must be answered about the potential market for a product.

1. Who are the potential customers for this product?
2. What is the benefit of it for the customers?
3. Where and how it can be used?
4. What is our advantage over the competitors who produce the same product?
5. Is there a sustainable market for the product?
6. When is the best time to introduce the product to the market?
7. …

• Product/Solution. 

1. What are we going to bring to market? service, product or a combination of them?
2. Are there any follow-up products?
3. Are the follow-up products in the scope of our activity?
4. …
   

• Execution Plan. Here the main question is “how to do it?”. Making a good and detailed plan for each activity is a main factor in running a business smoothly and with less trouble.  These items must be covered in each planning

1. Marketing and Promotion
2. Sales and Distribution
3. Production and Quality
4. Compensation
5. Growth

Each of those items should be studied with respect to the available financial and human resources.  Also to  monitor their progress  one must define proper milestones and measurements.

• Financial Engine. From the first day of running a business there are expenses that consume constantly the resources, such as salaries, lease,  maintenance fees and marketing expenses. They may be paid by internal resources like current cash flow or from external resources. If there is a bright horizon in front of the business then the required funding may be taken from an external source, say loan. As another option we have to mention  factoring

• Human Capital. Human are a very important source for a business. Finding a good team and keeping them together to achieve the business goal is very vital. Also having a knowledgeable group of employees is a very important factor if the growth and sustainability of a company. With respect to the level of the activity and the technology that is uses,  employee needs constant training. Also for changing the roles and promotion to a higher rank need not only experience but also knowledge. Accounts receivable factoring is an alternative solution for managing cash flow problem in a business.
  

• Potential Return. Having a realistic idea of the market situation is the first step in forecasting the potential revenue. There are some question that must be answered for a better understanding of the expected revenue of a business.

1. What is the expected share of market?
2. What is the pricing strategy?
3. Is  the price affordable by the majority of potential customers?
4. How long does it take to achieve profits?
5. …

• Margin of Safety.  To prevent a catastrophe one need to have a realistic assessment of risks that involved in a business planning.  There are two class of risks that involved in each activity. The internal risks that generally result from bad planning or mismanagement. The external risk refers to events that are out of ones control, like global recession or changes in laws or policies. From those risks the external risk is the hardest to anticipate and mange. Since with a deep and thorough study one can prevent the planning risk. Also the mismanagement risk is avoidable in human resources.  No matter what is the source of a risk,  it is vital for a business to have a good risk management plan for different scenarios.

How to price a product or a service?

Will I? Which one? These are two questions your customers ask themselves and answer every time they deliberate about a purchase. Will I buy a product (or service) in this category? If so, which one will I buy?

 

These two questions are important to consider when it comes to pricing your products and services.

If someone is in the market to buy a new car (Will I? — Yes), then she is probably looking at her options (Which one?). If she is not in the market for a new car (Will I? — No), then she probably isn’t shopping around. Before a shopper chooses which bag of chips to buy (Which one?), she first must decide that she wants a bag of chips (Will I? — Yes). 

Let’s explore these two buying decisions your customers make.

Will I?
Before making a purchase, customers must decide to purchase a product in your product category. In other words, they have to choose to allocate money from their limited income or budget to your industry.

Pricing is relatively powerless at convincing someone to purchase a product in a specific category. Pricing is much more powerful when influencing consumer choice within a category (the “Which one?” decision). Buyers typically require very large price changes to influence a change to their budget, but relatively small price changes to influence their product choice behavior.

However, there are three circumstances where pricing influences the “Will I?” decision that leads directly to purchase without a “Which one?” decision. Consider the following scenarios.

1. You have a monopoly. When Pacific Gas and Electric raises my electricity prices, I think about how to use less electricity. This is an example of me choosing to purchase less in the product category. 

2. It’s a brand-new product category. In this case, pricing plays a major role in potential customers’ choosing to purchase or not. Let’s look at a hypothetical example. If a pharmaceutical company invented a drug that would make us lose weight (one that actually worked), how would it price this? There isn’t really any competition, so price wouldn’t be based on choice value. Instead, it would estimate how many people value (use) the pill at different prices and set its prices based on whether people will buy in the category. In this case, think of brand-new product categories as short-term monopolies where the pioneer has a monopoly until competition enters the market.

Is the new product like an aspirin or a vitamin? This is an interesting analogy to help understand how much value potential customers place on a new product. Customers pay a lot for aspirin-like solutions, ones that solve a real problem or somehow ease our pain. Customers tend to undervalue vitamin-like solutions, ones that are good for us, but don’t solve an immediate problem. The weight-loss pill discussed above would certainly be an aspirin-like product, solving the pain of millions of people who don’t wish to be overweight.

3. There are large decreases in the lowest price in a market. In many markets, especially relatively new ones, there are a lot of potential customers who have not yet chosen to purchase a product in the category because even the lowest-priced item is too expensive relative to their income. Even today, many Chinese do not own television sets. However, as the price of TVs comes down dramatically, which has happened recently, more people purchase them. This is a highly elastic market exhibiting much higher sales as a result of price reductions.

Although we have identified three instances where pricing influences purchases directly through the “Will I?” decision, this is the exception, not the rule. There are other examples as well, like pricing for impulse purchases, where the consumer does not compare alternatives. Even in these situations where “Will I?” decisions lead directly to purchases, price does not play that large of a role. It takes large price changes to get someone to change their “Will I?” behavior, while much smaller price changes can influence the “Which one?” decision. 

Which One?
Customers make choices. With a few exceptions, they choose between relatively similar offerings every time they make a purchase. They choose which car to buy, which computer to purchase, which laundromat to frequent, which airline to fly, which Realtor to use, and which restaurants to visit. B2B buyers are even more deliberate when choosing their suppliers. 

Potential customers trade off perceived attributes with price. Because the features of the alternatives are often similar, small differences in price can swing a purchase decision. In the world of pricing, this is where the leverage is. Not only is the “Which one?” decision most commonly the last decision the customer makes, it is also the decision where price has the biggest influence. 

You need your product development team to create real value by differentiating your products from those of your competitors. You need your marketing team to translate this difference into significant perceived value to influence the “Which one?” decision. And then you want to use this differentiation, this added value, to price this offering as high as you can, as long as the customer chooses our product over your competitors’ products.

“Will I?” “Which one?” is a simple concept, but I use it a lot when coaching small businesses to determine what pricing model to use. Every time you approach a pricing problem you need to know which one of these is the final decision. If the customer buys your product after answering only the “Will I?” decision, then you need to use a different pricing model than if the customer goes on to ask and answer the “Which one?” decision.

Courtesy: Mark Stiving, Entrepreneur.com

How to name your business?

Entrepreneurs fret over packaging and a host of other details as they get started, and then leave one of the most important aspects as an afterthought.

 

The sad truth is that the right name can sometimes make all the difference when it comes to propelling a business to success, rather than just slogging on.

Consider this: Would you like “Patagonian toothfish” on your plate tonight for dinner? Hmm… not so much? Ok what about “Chilean Sea Bass?” That’s much better, right? Or another example is how Marion Morrison put on a cowboy hat, slung on a six-shooter and became “John Wayne.”

Names are quite powerful. I pretty much started as a copywriter. I know that words are incredibly important. Each one has a distinct difference. Get the name right, and you get branding as a by-product of your advertising.

Here are seven things I consider when determining a business-related name: 

1. The name needs to sound good when it’s said aloud. I’m a big fan of alliteration, using words that start with the same consonant, Coca-Cola or Jimmy John’s. Just make sure to say it aloud — a lot — and make sure this isn’t a “she sells seashells on the seashore” situation. People need to say the name on the radio, a video or in conversation.

2. Use a name that has meaning to it and conveys a benefit. If you heard it you’d know right away what it is. For example, my first “real” book was called, “Moonlighting on the Internet.” The word “moonlighting” instantly conveyed that this was about using the Internet in your spare time to make extra money. Also make sure the name isn’t too generic. Personally, I think Boston Chicken made a mistake when it changed its name to Boston Market. Don’t try to be everything to everybody with your name.

3. Avoid Web 2.0-ish syndrome. I still don’t know if you spell Flickr with an “er” or not. And I definitely have no idea how to spell delicio.us without looking it up. This sort of mildly dyslexic spelling is so last decade. Potential customers for your new venture of “Computer4You” should be able to easily look up the name, and they shouldn’t be asking whether a “you” is a “u.” 

4. Beware initials. They are so boring. Yes, IBM and 3M have gotten away with initials, but these are multibillion-dollar corporations that have been around for decades. You can do the same when you’ve brought in billions of dollars over a hundred years. Until then, rely on a name that is interesting.

5. Use specifics. Don’t use a generic name that doesn’t mean anything. I like names that take advantage of details such as numbers and days. My buddy Tim Ferriss found a pretty specific and compelling name for his book “The 4-Hour Work Week.” Other titles that use numbers to focus in on specifics include “8 Minute Abs” and “5-hour Energy.”

6. Make sure you can trademark the name. Depending on how big you want to build the brand, this is an important consideration. It’s worth it to check USPTO.gov — or a new site called Trademarkia.com — before settling on a name.

7. Test it out on Google AdWords. One of the great features of the “find keywords” tool on AdWords is that it will list similar search phrases, along with how many global and local monthly searches each are getting. Some AdWords searches with the name you are considering can ensure there isn’t a slightly different name out there that might get more attention on the Internet.

If you really want to get advanced, try to come up with a name that could be eventually used as a verb, or lends itself to the creation of your own “language.” 

Think it through, and your name will be a multiplier in your favor. 

Courtesy: Yanik Silver, Entrepreneur.com

What is Boston Matrix?

If you enjoy vivid visual metaphors for business, then you’ll love the Boston Matrix!

Also called the BCG Matrix, it provides a useful way of screening the opportunities open to you, and helps you think about where you can best allocate your resources to maximize profit in the future.

Note:
The origin of the Boston Matrix lies with the Boston Consulting Group in the early 1970s. It was devised as a clear and simple method for helping corporations decide which parts of their business they should allocate their available cash to. Following the credit crunch, this is newly important in some sectors because of the limited availability of credit.

However, the Boston Matrix is also a good tool for thinking about where to apply other finite resources: people, time and equipment.

Understanding the Model

Market Share and Market Growth

To understand the Boston Matrix, you need to understand how market share and market growth interrelate.

Market share is the percentage of the total market that is being serviced by your company, measured either in revenue terms or unit volume terms. The higher your market share, the higher the proportion of the market you control.

The Boston Matrix assumes that if you enjoy a high market share you will be making money. (This assumption is based on the idea that you will have been in the market long enough to have learned how to be profitable, and will be enjoying scale economies that give you an advantage).

The question it asks is, “Should you be investing additional resources into a particular product line just because it is making you money?” The answer is, “not necessarily.”

This is where market growth comes into play. Market growth is used as a measure of a market’s attractiveness. Markets experiencing high growth are ones where the total market is expanding, meaning that it’s relatively easy for businesses to grow their profits, even if their market share remains stable.

By contrast, competition in low growth markets is often bitter, and while you might have high market share now, it may be hard to retain that market share without aggressive discounting.  This makes low growth markets less attractive.

Understanding the Matrix 

The Boston Matrix categorizes opportunities into four groups, shown on axes of Market Growth and Market Share:

These groups are explained below:

Dogs: Low Market Share / Low Market Growth
In these areas, your market presence is weak, so it’s going to take a lot of hard work to get noticed. You won’t enjoy the scale economies of the larger players, so it’s going to be difficult to make a profit. And because market growth is low, it’s going to take a lot of hard work to improve the situation.

Cash Cows:
High Market Share / Low Market Growth
Here, you’re well-established, so it’s easier to get attention and exploit new opportunities. However it’s only worth expending a certain amount of effort, because the market isn’t growing, and your opportunities are limited.

Stars:
High Market Share / High Market Growth
Here you’re well-established, and growth is exciting! There should be some strong opportunities here, and you should work hard to realize them.

Question Marks (Problem Child):
Low Market Share / High Market Growth
These are the opportunities no one knows what to do with. They aren’t generating much revenue right now because you don’t have a large market share. But, they are in high growth markets so the potential to make money is there.

Question Marks might become Stars and eventual Cash Cows, but they could just as easily absorb effort with little return. These opportunities need serious thought as to whether increased investment is warranted.

How to Use the Tool:

To use the Boston Matrix to look at your opportunities, first download the free worksheet, and then use the following steps:

Step One: Plot your products on the worksheet according to their market share and market growth.

Step Two: Classify them into one of the four categories. If a product seems to fall right on one of the lines, take a hard look at the situation and rely on past performance to help you decide which side you will place it.

Tip1:
There’s nothing “magical” about the position of the lines between the quadrants. There may be very little real difference, for example, between a Problem Child with a market share of 49%, and a Star with a market share of 51%. It’s also not necessarily true that the line should run through the 50% position. As ever, use your common sense. 

Tip 2:
A similar (and equally powerful) tool is the Action Priority Matrix, which helps you pick projects which legitimately give you the quickest and highest value returns. By using the BCG Matrix and Action Priority Matrix together, you get the best of both worlds!

Step Three: Determine what you will do with each product/product line. There are typically four different strategies to apply:

• Build Market Share: Make further investments (for example, to maintain Star status, or to turn a Question Mark into a Star).
• Hold: Maintain the status quo (do nothing).
• Harvest: Reduce the investment (enjoy positive cash flow and maximize profits from a Star or a Cash Cow).
• Divest: For example, get rid of the Dogs, and use the capital you receive to invest in Stars and Question Marks.

 

Tip 3:
From a personal perspective, you can evaluate the opportunities open to you by substituting the dimension of Market Share with one of Professional Skills. Plot the options open to you on the personal version of the BCG Matrix, and take action appropriately.

 

Key Points

The Boston Matrix is an effective tool for quickly assessing the options open to you, both on a corporate and personal basis.

With its easily understood classification into Dogs, Cash Cows, Question Marks and Stars, it helps you quickly and simply screen the opportunities open to you, you – and identify where best to invest the finite amount of money, time, and effort you have available.

What is 7S framework?

How do you go about analyzing how well your organization is positioned to achieve its intended objective? This is a question that has been asked for many years, and there are many different answers. 

Some approaches look at internal factors, others look at external ones, some combine these perspectives, and others look for congruence between various aspects of the organization being studied. Ultimately, the issue comes down to which factors to study.

While some models of organizational effectiveness go in and out of fashion, one that has persisted is the McKinsey 7S framework. Developed in the early 1980s by Tom Peters and Robert Waterman, two consultants working at the McKinsey & Company consulting firm, the basic premise of the model is that there are seven internal aspects of an organization that need to be aligned if it is to be successful.

The 7S model can be used in a wide variety of situations where an alignment perspective is useful, for example to help you:

• Improve the performance of a company.
• Examine the likely effects of future changes within a company.
• Align departments and processes during a merger or acquisition.
• Determine how best to implement a proposed strategy.

Tip:

 
The McKinsey 7S model can be applied to elements of a team or a project as well. The alignment issues apply, regardless of how you decide to define the scope of the areas you study.

 

The Seven Elements

The McKinsey 7S model involves seven interdependent factors which are categorized as either “hard” or “soft” elements:

Hard Elements	Soft Elements
Strategy Structure Systems	Shared Values Skills Style Staff

“Hard” elements are easier to define or identify and management can directly influence them: These are strategy statements; organization charts and reporting lines; and formal processes and IT systems. 

“Soft” elements, on the other hand, can be more difficult to describe, and are less tangible and more influenced by culture. However, these soft elements are as important as the hard elements if the organization is going to be successful.

The way the model is presented in Figure 1 below depicts the interdependency of the elements and indicates how a change in one affects all the others. 

 

Let’s look at each of the elements specifically:

• Strategy: the plan devised to maintain and build competitive advantage over the competition.
• Structure: the way the organization is structured and who reports to whom.
• Systems: the daily activities and procedures that staff members engage in to get the job done.
• Shared Values: called “superordinate goals” when the model was first developed, these are the core values of the company that are evidenced in the corporate culture and the general work ethic.
• Style: the style of leadership adopted.
• Staff: the employees and their general capabilities.
• Skills: the actual skills and competencies of the employees working for the company.

Note:
Placing Shared Values in the middle of the model emphasizes that these values are central to the development of all the other critical elements. The company’s structure, strategy, systems, style, staff and skills all stem from why the organization was originally created, and what it stands for. The original vision of the company was formed from the values of the creators. As the values change, so do all the other elements.

How to Use the Model

Now you know what the model covers, how can you use it?

The model is based on the theory that, for an organization to perform well, these seven elements need to be aligned and mutually reinforcing. So, the model can be used to help identify what needs to be realigned to improve performance, or to maintain alignment (and performance) during other types of change. 

Whatever the type of change – restructuring, new processes, organizational merger, new systems, change of leadership, and so on – the model can be used to understand how the organizational elements are interrelated, and so ensure that the wider impact of changes made in one area is taken into consideration. 

You can use the 7S model to help analyze the current situation (Point A), a proposed future situation (Point B) and to identify gaps and inconsistencies between them. It’s then a question of adjusting and tuning the elements of the 7S model to ensure that your organization works effectively and well once you reach the desired endpoint. 

Sounds simple? Well, of course not: Changing your organization probably will not be simple at all! Whole books and methodologies are dedicated to analyzing organizational strategy, improving performance and managing change. The 7S model is a good framework to help you ask the right questions – but it won’t give you all the answers. For that you’ll need to bring together the right knowledge, skills and experience. 

When it comes to asking the right questions, we’ve developed a Mind Tools checklist and a matrix to keep track of how the seven elements align with each other. Supplement these with your own questions, based on your organization’s specific circumstances and accumulated wisdom.

7S Checklist Questions

Here are some of the questions that you’ll need to explore to help you understand your situation in terms of the 7S framework. Use them to analyze your current (Point A) situation first, and then repeat the exercise for your proposed situation (Point B).

Strategy:

• What is our strategy?
• How do we intend to achieve our objectives?
• How do we deal with competitive pressure?
• How are changes in customer demands dealt with?
• How is strategy adjusted for environmental issues?

 

Structure:

• How is the company/team divided?
• What is the hierarchy?
• How do the various departments coordinate activities?
• How do the team members organize and align themselves?
• Is decision making and controlling centralized or decentralized? Is this as it should be, given what we’re doing?
• Where are the lines of communication? Explicit and implicit?

 

Systems:

• What are the main systems that run the organization? Consider financial and HR systems as well as communications and document storage.
• Where are the controls and how are they monitored and evaluated?
• What internal rules and processes does the team use to keep on track?

 

Shared Values:

• What are the core values?
• What is the corporate/team culture?
• How strong are the values?
• What are the fundamental values that the company/team was built on?

 

Style:

• How participative is the management/leadership style?
• How effective is that leadership?
• Do employees/team members tend to be competitive or cooperative?
• Are there real teams functioning within the organization or are they just nominal groups?

 

Staff:

• What positions or specializations are represented within the team?
• What positions need to be filled?
• Are there gaps in required competencies?

 

Skills:

• What are the strongest skills represented within the company/team?
• Are there any skills gaps?
• What is the company/team known for doing well?
• Do the current employees/team members have the ability to do the job?
• How are skills monitored and assessed?

7S Matrix Questions

Using the information you have gathered, now examine where there are gaps and inconsistencies between elements. Remember you can use this to look at either your current or your desired organization.

• Start with your Shared Values: Are they consistent with your structure, strategy, and systems? If not, what needs to change?
• Then look at the hard elements. How well does each one support the others? Identify where changes need to be made.
• Next look at the other soft elements. Do they support the desired hard elements? Do they support one another? If not, what needs to change?
• As you adjust and align the elements, you’ll need to use an iterative (and often time consuming) process of making adjustments, and then re-analyzing how that impacts other elements and their alignment. The end result of better performance will be worth it.

 

Key Points

The McKinsey 7Ss model is one that can be applied to almost any organizational or team effectiveness issue. If something within your organization or team isn’t working, chances are there is inconsistency between some of the elements identified by this classic model. Once these inconsistencies are revealed, you can work to align the internal elements to make sure they are all contributing to the shared goals and values. 

The process of analyzing where you are right now in terms of these elements is worthwhile in and of itself. But by taking this analysis to the next level and determining the ultimate state for each of the factors, you can really move your organization or team forward.