IN THE FEBRUARY 2008 ISSUE OF THE Harvard Business Review, Gott fredson et al1 look at the role of the incoming CEO or general manager. From 1999 to 2006, they note, the average tenure of departing CEOs in the United States fell from 10 years to just over eight, and in 2006, around 40% of departing CEOs had lasted an average of 1.8 years. The article states, “Some of these short-timers were simply a poor fit and left of their own accord, but many others were ushered out the door because they appeared unable to improve” the performance of their businesses. “Nobody these days gets much time to show what he or she can do.”1
That is why it is crucial for a new leader to identify ways to boost profitability, broaden market share, or edge out the competition within the first few months of his or her tenure in the new position. Vital to this process is a detailed and accurate assessment of the organization’s strengths and weaknesses, as well as the threats and opportunities that it faces. What’s needed, the authors write, “is a systematic diagnostic template that can be tailored as necessary” 1 to suit the situation of the individual business.
The diagnostic template prescribed by the article must meet three criteria: it must reflect an understanding of the fundamentals of business performance; it must be simultaneously comprehensive and focused; and it should be easy to communicate about it and take action on it. The authors offer a template based on four key performance-improvement principles. First, a decline in both costs and prices nearly always takes place. Second, the company’s options are determined by its competitive position. Third, stasis will occur in neither customers nor profit pools. Fourth, results stem from simplicity.
Analyze Costs and Prices
The first tenet of the template states that costs and prices almost always decline. The article notes that despite inflation and special circumstances that can drive costs and prices upward, “It is a well-established fact that inflation-adjusted costs—and therefore inflation-adjusted prices—decline over time in nearly every competitive industry.”1 The same principle is, of course, true of competitors, meaning that it is possible to determine whether costs are declining at the rate necessary for your organization to remain competitive.
When analyzing costs and prices, determine the trends affecting price changes in your industry for the types of products and services that your company offers. Compare cost curves for your business, your industry, and your competitors (and, for key competitors, compare curves within each cost area). After finding out which company has the highest efficiency and effectiveness in the most important areas, decide where you can make the most improvement. Ask yourself why your profitable products and services are making money and apply that knowledge to the others.
Evaluate Your Competitive Position
Knowing your organization’s competitive position determines the options for improving its standing. Although every industry has its own drivers of profit leadership, in general, a strong predictor of any organization’s performance is its relative market share (RMS). To calculate RMS as a market leader, divide your organization’s share by the share held by your closest competitor; to calculate RMS as a follower, divide your organization’s share by that of the market leader. For most companies, higher relative market share corresponds with a higher return on assets (ROA).
The authors recommend building a chart that maps the relationship between your RMS and ROA, as well as those of your key competitors. “Companies in a well-defined industry typically line up in a fairly narrow band, reflecting the fact that market leaders usually outperform market followers on ROA,”1 they note. This band analy sis reveals your organization’s oppor tunities and constraints.
When analyzing your competitive position, ask how the ROA and RMS figures for your company and your competitors compare. Find out what the leading companies have as their profit sources, the size of the market and its areas of most rapid growth, and the potential implied by your company’s current business position. Determine where you are gaining RMS and which capabilities are creating that competitive advantages, as well as where you are losing RMS and which capabilities must be added or strengthened to stop the drain.
Understand Your Industry’s Profit Pool
Customers and profit