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Strategic Positioning & Competitive Advantage

How To Differentiate Your Accountancy Practice

I’ve been interested in the big question of “how to differentiate an accountancy practice” since 1981.(This article was first posted on my Differentiate Your Business blog in July 2011 but I believe it is still very relevant.)

That was when I was in the last year at University studying Economics and Accounting and I started looking for a job as a Chartered Accountant trainee.

At that time the profession was dominated by the Big Eight and Price Waterhouse and Coopers & Lybrand were head-to-head competitors, KPMG were known as Peat Marwick Mitchell, Arthur Andersen were seen as the brash newcomers and Spicer & Pegler (a name I always liked) were just outside the big eight.

I must admit the big ones did seem to be pretty much the same although there were two common preferences amongst my classmates – Peats (because they were the biggest) and Price Waterhouse (because they were the poshest).

Being different, I turned down job offers from both and was one of four to join Neville Russell (now Mazars) in Birmingham in 1981, mainly because they seemed less stuffy because they had a young, female staff partner and because they offered plenty of small business accounts work which for me meant variety and contact with entrepreneurs while still offering the full training support.

I left Neville Russell and the accountancy profession in 1985 with ACA after my name and since then, I’ve been looking at the accounting market with interest as an outsider. At one stage in my consulting and coaching career (since 1995) I thought I’d take advantage of the qualification and branded myself as a chartered accountant, even though I didn’t do accounts and tax because it added credibility to my strategy and financial management services. All it did was cause a lot of confusion and I quickly changed.

“Accountancy Practices Can’t Differentiate Themselves – Accountancy Is A Commodity Service”

If that’s how you think, then you’re right.

You won’t be able to differentiate yourself as an accountant because you won’t make the decisions needed to create a clear position in the market.

There’s no argument that the tangible output of an accountancy assignment – in terms of the set of statutory annual accounts and the various tax returns – are going to look remarkably similar because the formats are prescribed and many of the details will be the same.

The numbers may be very different.

It’s like the old joke of an employer interviewing candidates for the job of company accountant.

To test their skills and professional opinions, he devised an exercise where each accountant had to go away and calculate the profit for the period.

The first went away and came back with the answer, “the profit is £567,387.” The entrepreneur looked at the very detailed calculations and the very conservative assumptions that supported the profit figure and made certain judgements about the candidate.

The second came back quickly and said “profit is around £600k” and presented the entrepreneur with a “back of the fag-packet” calculation with some broad assumptions. This time, the judgement of the entrepreneur was very different.

The third took the bit of paper with the exercise on it and before he stood up, he leant forward and asked “what profit do you want it to be?”

The Big Impact An Accountant Can Have On A Business

You and I know that the impact of one accountant compared to another on a business is much than some calculations,decisions on accounting policies, assumptions and judgements.

The underlying numbers can be affected even more by the advice given by the accountant to the business owner, either directly or indirectly through referrals.

The impact of a good accountant compared to a weaker accountant can be seen in the profit, cash flow and tax paid by the business and in the money that finds its way to the business owner’s personal bank account.

The Professional Accountancy Bodies Are A Commoditising Force On The Profession

It’s inevitable but the role of the professional bodies like the Institute of Chartered Accountants In England & Wales is to keep standards high and that narrows the opportunities for differentiation.

You have to do certain things in a certain way because it’s required. And accountants who don’t are disciplined, fined and even expelled from membership.

This is a grievance for me personally because I have a practising certificate from the ICAEW because I “give financial advice” even though I don’t provide any of the standard services Chartered Accountants do.

The Big Marketing Advantages Accountants Have Which Hinders Differentiation

Accountants have two big advantages which help them to attract clients which other professional service providers don’t have.

  1. The output of the accountancy service in terms of accounts and tax computations are required by law and they are too complicated and scary for the vast majority of business owners to do on their own.
    .
  2. The work has to be done every month (PAYE returns), every quarter (VAT) or every year (accounts and tax assessments).

Effectively accountancy is a compulsory purchase and it’s one that business owners have to make each year.

Just like banks, accountants keep clients, even if they are not particularly happy, because of customer inertia. It’s seen as too much trouble to change.

So if all accountants appear to look virtually the same, and the professional bodies keep standards high, the business owner may as well pick one at random – often based on convenience – and if the fees seem reasonable based on the effort of talking to more accounting firms, decide to become a client.

Of course the client doesn’t look at the decision the right way because he or she doesn’t factor in the inertia issue.

The difference between the £1,000 free from accountant A or £1,300 fee from accountant B is only £300 but over ten years, it becomes a £3,000 difference assuming fees don’t change. A 10% increase in fees per year increases the difference significantly.

The Downside Of Client Inertia

If a client thinks that “all accountants are the same” or more negatively, “all accountants are as bad as each other” then there is little incentive to change.

Clients can even test the water by looking in Yellow Pages or taking a look at competing firms websites. Unfortunately what they are likely to see is a lot of the same phrases being used time after time – see Marketing Bingo For Accountants

It’s a case of “better the devil you know”.

And that makes it difficult for an accountant to attract clients which are already established businesses unless the client is extremely unhappy with the incumbent, has a new, special requirement which the existing accountant can’t handle or is being pushed hard by a third party to move to another (often better known) firm of accountants.

So many of the new clients an accountancy firm are start-up businesses who have very little money, are unsure what an accountant does, are unable to tell a good accountant from a bad one and are daunted by the big fees for uncertain value.

And the accountant is unsure of the business start-up. Even if the talk is big, will it succeed and grow into a substantial business which justifies an investment of time and attention?

Differentiating Your Accountancy Practice – Creating A Positive Reason For Choosing You As The Accountant

In contrast, if your accountancy practice is differentiated from competitors, you provide a positive reason for some clients to choose you rather than your competitors, both for start-ups and for established businesses.

Even better, the established businesses may be relatively happy with the service they get from their existing accountants but your differentiated offer of services is strong enough to motivate them to change and to pay a premium price to work with you.

Attracting Some Means Repelling Others – Nobody Buys OK

There are only four levels:

  • You can be worse than your competitors – and obviously you don’t want that.
    .
  • You can be the same as your competitors – this is the big problem because many accountants are perceived as the same.
    .
  • You can be better than your competitors – it’s an easy claim to make but much more difficult to prove. You can taste all the different types of tinned tomato soup and eventually decide that Heinz is best but you can’t do it with accountants. You can get testimonials to say something along the lines of “XYZ accountants are much better than our previous accountants and we wish we’d changed years ago” but it’s a very limited comparison.
    .
  • You can be different from your competitors – and communicate those differences to your target market.

But being different is a bit like being a magnet. You attract some clients but repel others.

One of my popular sayings is that “nobody buys OK”. People don’t buy an average product if something better is available in some dimension of customer value.

Accountancy services may be the exception that proves the rule. Many small business owners do buy OK and put up with it year after year because they can’t see that anything better is around.

How To Differentiate Your Accountancy Practice

I use the seven big questions of business success as the basis for thinking about how to differentiate one business from it’s competitors.

These questions are who, what, where, when, how, why and how many and are designed to move attention away from the profit killing question “how much do you charge?”

Can Accountants Differentiate By Who?

The who dimension of differentiation can be applied to:

  • Who are your clients? Are they different or special in any way?
  • Who are your employees? Are they special in any way?
  • Who are your suppliers? Is a supplier unique to you in the local area?
  • Who are you and your fellow partners? Are you or can you be a celebrity in some way so that clients feel privileged to have you as their accountants?

It has always struck me that a very easy way for accountants to differentiate their practices is by type of client.

“We provide accounting and tax advice to small manufacturing businesses…” or

“We provide accounting and tax advice to subcontractors…” or

“We provide accounting and tax advice to privately owned retailers…”

I see this kind of differentiation by who regularly in the coaching market and it works very well.

People like dealing with specialists because it makes them feel special. It’s a hit directly in the marketing bullseye.

Of course specialising in one type of client means ignoring or at least discouraging other types of clients.

It significantly weakens your positioning if you cop out and say “we provide accounting and tax advice for independent retailers but if you’re a service business or manufacturer we’d be happy to have you as a client.”

Don’t laugh… it’s the type of think that I’ve seen and it becomes anti-marketing i.e. it actually puts off your target market.

While I think about differentiating by who, I should mention the accounting umbrella organisations (I don’t think I’m supposed to call them networks) like AVN and PROBIZ.

In my opinion they are both positive and negative forces for differentiation. Where membership has geographical restrictions, then being the PROBIZ representative can be helpful because you are the only one. I live close to the West Bromwich Albion football ground which is covered with PROBIZ Tax signs.

But across the membership it is another commoditising force. One PROBIZ accountancy practice offers same products and services as another.

How Accountants Can Differentiate By What

What is the answer to the basic question asked by clients of “what do you get for your money?”

The core services are accounts preparation, tax preparation and tax advice but many other services can be included.

Some accountancy practices have differentiated so much by what that they’ve stopped being general practice accountants and instead are tax specialists or insolvency practitioners which can then create their own sub-specialisms.

Others have taken focus from the differentiation by who and developed specialist services for their niche markets. If you concentrate on retail businesses, you can see how you can develop very focused services based on your unique insights into the problems and issues of the clients.

Claiming to be a specialist means that you’re very knowledgeable about the subject.

Not compared to your clients who know little but to your competitors.

This means that you can make a big mistake in claiming to be a specialist in too many things unless you have the scale of a PWC or KPMG and you really do have a narrow specialist (or department) in just about everything.

If you’re a small firm and have few resources, then the broader your coverage, the shallower will be the perception of your expertise. It’s the opposite of a recent PhD who knows all there is about a tiny field.

Differentiating Your Accountancy Practice by When

I’m not sure there is much scope in this dimension of differentiation for accountants since it refers to when the service is available (think all night chemists) or how fast the service can start or finish.

Having said that I’m shocked by accountancy practices who offer a management accounting service or part time FD service and think it’s OK to get the monthly accounts out by the end of the fourth week of the month. Experienced industry based accountants know that a lot has changed by then and the only value of old numbers is for trend purposes.

Differentiating Your Accountancy Firm By How

To be honest for basic compliance work, clients don’t care how you produce their statutory accounts and tax returns.

The effort that goes into providing the service is invisible to them and that is one of the reasons why they complain about high fees. While having the accountants in on site can be irritating, at least business owners get to see the hours being put in and even want a reasonable number of questions.

How can be more interesting with specialist services, even if the client doesn’t really understand the process.

Think tax schemes. The end result may be similar but one tax saving scheme may fit much better with the business owner than another.

Or a service like SystemBuilder from AVN members which is software which helps you to document and formalise systems following the E Myth idea. I haven’t seen SystemBuilder in practice and have no idea about the numbers but something that has been used more than 1,200 times would be much more appealing to me as a client than a proprietary system for one accountancy practice which has been used three times.

The other “how” which is important to accountancy practices and the clients is how you charge, since Ron Baker’s value pricing ideas have been so popular. For the client fixed fees gives certainty and for the accountancy practices who use it, fees often increase and cash flow improves since you can introduce monthly direct debits during the year rather than waiting for payment after the service is provided.

Differentiating By Where Is The Classic Way For Many Rural Accountants

Once you get out of the cities and big towns, the choice of accountants is often easy because there is only one in the local area.

Of course differentiation become an issue if another one moves into the territory – perhaps a breakaway by one or more partners of the existing firm.

One of the nice things about having competition is that it gives you something to be compared against and that can help you to look good.

The human brain finds decisions easiest to make if there is a choice – not too big a choice – but it’s much easier to decide if something is good or bad based on whether it is better or worse than something similar.

Differentiating By Why You Became An Accountant

The why differentiation dimension is an interesting one because people are attracted to people with passion or a cause.

My story about why I’m a small business advisor and passionate about helping small business owners make more money relates back to one of my first accounting assignments and a small transport company which didn’t make it through the early eighties recession. I really liked the owner and he was kind to me as a raw novice and i wish I knew a small fraction of what I know now because it could have made a big difference.

Perhaps you have an interesting story which shows that accountancy is not just a way to earn a living but something that you care passionately about.

Differentiating By How Many

Our focus here is to focus on the value element of the value for money to provide a reason for engaging your accounting firm instead of a competitors.

It’s the same idea as a bottomless cup of coffee or eat as much as you want at your favourite Chinese restaurant.

I’ve already mentioned fixed fee pricing as part of the “how” differentiation but the call our accounting, finance and tax helpline as many times as you want in the year as part of our service can provide important reassurance to some clients.

Small businesses are all to wary about the money clock running up a big bill when they talk to professional advisers and they may have been stung by a lawyer, consultant or previous accountant. That creates a problem. It stops many asking for advice they need and it stops you deepening your relationship with the client and referral opportunities.

There Are Many Different Ways To Differentiate An Accountancy Practice

I realise this is a long article but I have really just scratched the surface of what can be done with the 7 big questions approach. It’s also important to realise that what you can do to differentiate your business depends on what competitors do at the moment, what they might want in the future and what clients and potential clients want.

Some clients will just want a cheap and cheerful service. I’m like that with banks.

Others want and need much more and provided there is genuine value in what you do (i.e. the benefits to the client far exceed the fees), they will be willing to pay.

As you think about how you can differentiate your accounting firm, please realise that differentiation can be shallow or deep.

Shallow differentiation is jazzing up your marketing communications a bit to make your firm sound special or unique.

Deep differentiation is taking the differentiation concept and making sure that it is reflected in everything you and your staff do consistently and reliably.

Advice On Differentiating Your Accountancy Practice

If you’re based in the UK and you have a small accountancy practice or you’re planning to start one, I’d love to help you to differentiate your business. Give me a call on 0121 554 4057.

It can be difficult to recognise what makes your business special because you take so much for granted and you may miss the WOW factor.

What Makes An Accountancy Firm Special To You?

It would be great if you could share your thoughts on what differentiates one accountant from another by leaving a comment.

If you’ve already differentiated your accountancy firm by one or more of the dimensions I’ve gone through, I’m happy for you to do a bit of self promotion by sharing your niche, speciality, story etc. Just don’t try to keyword spam the comments because I won’t publish.

in 3 – Your Strategic Positioning

Marketing Bingo For Accountants

Marketing Bingo is my game for checking that your marketing hasn’t fallen into the trap of being too similar to your competitors.

This is a practical example of applying Yellow Pages Bingo to the Accountants market.

When I wrote this article (originally posted on my Differentiate Your Business blog in February 2011) I looked at the Yellow Pages for accountants in Central Birmingham.

I find accountants are a good example to use because it’s a service used by nearly all small businesses and many struggle to select the right accountant for their needs.

I’ve split it into three sections – description of the accountancy firm, services and offer – of phrases that are regularly repeated.

Description of firm

  • For the self employed
  • For business and individuals
  • Specialists in local businesses
  • Small business specialist
  • Friendly
  • Professional service

Services

  • Accounts preparation
  • Tax returns /  self assessment tax returns
  • VAT
  • PAYE
  • Corporation tax
  • Construction industry scheme
  • Payroll
  • Book-keeping
  • Management accounts
  • Business start-ups
  • Company formations

Offers

  • Free initial consultation
  • Sensible fees

I have to admit that in the latest edition of the Yellow Pages, there weren’t as many advertisements from accountants as there have been in the past. Perhaps the recession has forced some to cut back and others believe that the Internet is a more natural place to look for an accountant.

What happens in any market when every supplier looks the same?

The choice comes to either the cheapest or the most convenient.

Neither is a very good way for selecting a service which could have a very big effect on your business success.

This damages the accountancy firms who do a great job of supporting small businesses because their differentiation factors are not being communicated (see How To Differentiate An Accountancy Practice) and even worse, it damages the small businesses which don’t get the essential finance advice they need to grow successfully.

It’s Your Turn To Play Marketing Bingo For Accountants

Take your pick, yellow pages or websites because both bring local accountants together which emphasises the importance of being differentiated.

Then have a look to see if you can see any examples of accountants who do stand out, who have differentiated themselves.

Or can you just see the clichés – “we are a friendly and professional accountancy practice which specialises in small businesses…

Then Take A Look At Your Own Market & Play Marketing Bingo

My purpose of this blog is not to make fun of accountants but to make a serious point about marketing which in many ways is “anti-marketing” (doing the opposite of what you want) in a service you can relate to. Indeed, you may well have struggled with the choice “which accountant should I go to?”

Be brave and take a look at your own website, your own website, yellow pages advertisement, your own brochure and compare it with your competitors.

If you are saying the same things – blah, blah, blah – then you have a problem and you need to fix it by:

  • Identifying what makes you special and different; and then
  • Communicating it to the market
in 3 – Your Strategic Positioning, 4 – Lead Generation

Marketing Bingo, Yellow Pages Bingo Or Website Bingo

Management-speak bingo is a fun game employees can play while listening to senior executives give a rallying call to the troops.

They pick ten popular management buzzwords or phrases along with their fellow players and wait for the esteemed leader to call them out.

If one gets a full house – every phrases they’ve selected has been mentioned – then they win.

That may seem silly to you as a small business owner – although I’m sure you’re hoping that your staff don’t play management speak bingo on you – bit what if you’re doing it to yourself in your marketing.

I have a variation on the management-speak bingo game called Marketing Bingo, Yellow Pages bingo or Website bingo, depending on which is your main source of leads who are looking for what you sell.

This time you select the five or ten words or phrases which best describe your business – they will be on your website home page and Yellow Pages advertisement won’t they?

And then you play Bingo by seeing how often they appear on your competitors yellow pages and websites.

In my Marketing bingo game, you’re not looking for the words to be repeated. Just the opposite.

You win if half or more of your keywords are not used by competitors.

That means that your message is different and has a chance of standing out and attracting attention.

But if more than half your keywords are also used by competitors, then your marketing messages merge into one and your customers get confused.

And a confused customer is a reluctant buyer.

Here is an example of Marketing Bingo – Marketing Bingo For Accountants

in 3 – Your Strategic Positioning, 4 – Lead Generation, Business Problems And Mistakes

When you are thinking about business strategy it is important to focus on the business competition and the different levels of competitions. The 5 C”s Model of Competition is a very useful framework for assessing the level of competitive intensity in your market and thinking about the opportunities and threats that competition presents.

It is easy to take competition for granted and not to recognise the subtle different forms that exist. I know from my experience with price wars, your actions can influence your competitors for better or worse, intentionally or unintentionally.

What is Business Competition?

According to Wikipedia competition is

“a contest between individuals, groups, animals, etc. for territory, a niche, or a location of resources.”

The Five Levels of Business Competition

The Five C’s of Competition are:

  • Collusion
  • Co-operation
  • Coexistence
  • Competition
  • Conflict

Level 1 Collusion

Collusion is when competitors work together to control the market supply and price by forming cartels or coming to an arrangement to fix prices.

Collusion is illegal in many countries including the UK, European Union and USA. Don’t go there. If found guilty of price fixing, penalties are harsh. The airline industry has been found guilty of conspiring together in a number of cases.

Level 2 Co-opetition

In co-opetition, competitors cooperate and work together in alliances and joint ventures but not in ways that distort the price customers pay.

The motor industry has seen companies to work together to develop new engines which gives each participant the chance to benefit from sharing costs for research and development while providing economies of scale and experience in the manufacturing stage.

There is a famous book Co-opetition that looks at how competitors can work together whilst still competing using a game theory perspective.

Level 3 Co-existence

In coexistence, competitors don’t have a formal agreement but recognise each other’s position in the market and don’t try to compete aggressively.

A simple example would be if two chains of discount shoe stores compete in the same general geographic area. Each could have a policy that it will open new stores in towns with a  population of 20,000 or more but won’t open a competing store unless the population is over 100,000. The logic is that it is better to have a few highly profitable stores than many stores that struggle to break even.

This coexistence strategy recognises that competition can be a zero-sum game where if one wins, the other loses.

It is one of the reasons why the idea of finding a special niche can work so well. Once you establish “ownership” of a strategic position in the market, any competitor will recognise that you are established and has a simple choice:

  • to ignore the niche; or
  • to challenge you in the niche with all the dangers of a frontal aggressive strategy, going up against your existing strengths.

No formal agreement is required for the co-existence level of competition to exist between competitors and to be stable. It is just common sense based around plentiful opportunities for making money.

The strategic threat is if profit opportunities dry up and one or more competitors are committed to further growth.

Level 4 “Competition”

This is the normal situation as businesses compete head to head for customers.

Prices are kept in check by the other competitors but everyone behaves sensibly, recognising that a price war is bad for the long term profit prospects in the entire industry.

Level 5 Conflict

In conflict, competitors fight toe to toe and slug it out for any and all customers with a combination of offensive strategies and defensive strategies.

The aim has moved to making short terms profits to hurting the competition and potentially either permanent weakening them or even driving them out of business.

Price is often the common weapon but mass marketing campaigns, product bonuses and higher levels of service can all be used to slug it out.

But just like collusion, conflict can be illegal.

While customers benefit from lower prices, predatory pricing is deemed anti-competitive. While legal definitions of just what predatory pricing vary – and can be difficult to prove – think of it as selling at a price below the variable cost of production.

Five Levels of Business Competition Model

So there we have the five levels of business competition – collusion, co-opetition, coexistence, competition and conflict.

Can you use these ideas and make money by thinking more carefully about your competition and how your competitive rivalry helps or hinders your search for profit?

A mistake I see too often is that businesses plan for growth but don’t take their competition and how they are likely to react into account. It’s therefore no surprise that this superficial level of strategic thinking and planning doesn’t prepare the business for long term success.

Michael Porter and Competitive Rivalry

The Five Forces model created by Michael Porter is a very useful way to look at industry analysis.

At its core is the rivalry among existing firms which creates its own profits to compete away profits but its effects are exaggerated by the other forces. His book Competitive Strategy is an important read if you want a deeper understanding of business competition.

What Do You Think About The Five Levels of Competition?

As always I am eager to read what you think about the different levels of competition.

Do you have stories about how you have co-operated with a competitor in an alliance to create value for customers that you couldn’t on your own?

Have you been caught in a competitive conflict? I have and I’ve seen profits fall at an alarming rate as prices plummeted – each of us convinced that the other person started it that our reactions were just defending our turf. I’ve even worked for one side of a price war (as a senior manager) and later worked as a consultant in the major competitor.

in 3 – Your Strategic Positioning

Balanced Scorecard As A Performance Measurement System

The Balanced Scorecard is the most famous of the performance measurement systems that can be used to implement and monitor a new strategy or group.

What Is The Balanced Scorecard

The Balanced Scorecard is a short summary report of the key performance measures of a business, both financial and non-financial.

It tells the story of what the business is trying to achieve through its business strategy and how well it is succeeding in its implementation.

The Origins Of The Balanced Scorecard

Like many others who were using a broad mixture of measures to monitor performance in business in the late eighties and early nineties to overcome the shortcomings of traditional financial performance reporting (like driving by looking through the rear view mirror) I was astonished by how the idea of the balanced Scorecard caught fire as a bold, new concept.

Wikipedia reports that the first balanced scorecard was created by Art Schneiderman (an independent consultant specialising in the management of processes) in 1987 at Analog Devices, a semi-conductor company in the USA.

He shared his ideas with Robert Kaplan and David Norton and it became the basis for two popular articles in the Harvard Business Review and then a successful book.

  • “The Balanced Scorecard – Measures that Drive Performance”, Harvard Business Review, Feb. 1992
  • “Putting the Balanced Scorecard to Work”, Harvard Business Review, Sept. 1993
  • “The Balanced Scorecard: Translating Strategy into Action”  (1996)

Since then, Kaplan and Norton have extended the balance scorecard system with more books

  • The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment (2000)
  • Strategy Maps: Converting Intangible Assets into Tangible Outcomes (2004)
  • Alignment: How to Apply the Balanced Scorecard to Corporate Strategy (2006)

Before I go deeper into the Balanced Scorecard, let’s just step back and think about performance measurement as a general topic.

Introduction To Performance Measurement

“What gets measured gets done” may be a cliché but given the problems of implementing strategies it highlights the need to link performance measures with the developed strategy.

A performance measure has three key aspects:

  • It communicates to staff that performance in the chosen area is important.
  • It indicates the level of performance being achieved.
  • It provides a benchmark and target for improvement efforts.

Establishing a measure allows the four basic performance management questions to be asked:

  • What has happened?
  • Why has it happened?
  • Is it going to continue?
  • What can we do about it?

Traditional Performance Measures

Financial performance measurements often dominate the formal reporting in a business with the monthly management accounts and performance weekly or daily financial summaries.

But these are essentially looking backwards at the effects of past decisions rather than looking at whether the business is building the necessary capabilities for future success.

Financial forecasts of the future help because they focus attention on what may happen, but they are not the full answer for an effective performance measurement system.

Other non-financial information may be produced and distributed in the business but often there is little link between the different performance areas and the overall financial position of the business.

Sometimes there is a proliferation of measures with the inevitable confusion. Here the problem is not having performance measures but having too many.

The Balanced Scorecard

The concept of the scorecard developed by Kaplan and Norton has been heavily publicised and promoted and it became another management fad to use and abuse. That undermines the contribution that a well-designed balanced scorecard can have in a business.

The Four Perspectives In The Balanced Scorecard

The idea of the balanced scorecard is to look at a limited number of measures that are balanced across four perspectives.

  • Financial – how does the company look to its shareholders?
  • Customer – how does the company look to the customer?
  • Internal Process – is the company developing its internal processes to deliver the necessary performance for shareholders and customers?
  • Learning and growth – is the company developing a capacity to develop the future?

Balanced Scorecard Performance Measurement System

The key aspect is that the measures in each of the perspectives must be linked by the business strategy in a unique series of cause and effect relationships. For example;

  • We will make a profit because customers will buy sufficient quantity at a fair price and margin.
  • Targeted customers will buy because the value we provide exceeds the price and the relative value offered from competitors.
  • We are able to deliver that value because we excel at the necessary efficient internal processes.
  • We will survive any attempts by our competitors to copy our advantage by continuing to innovate.

The scoreboard effectively tells the story of the strategy and its implementation. I like this Theory Z scorecard example from the old Halifax Bank in the UK.

After allowing for time-lags, performance in the balanced scorecard indicates whether the strategy is valid.

Different Measures For Different Functions And Levels

The scorecard is intended to give a top-level picture of the company’s current and intended performance across each of the four perspectives but it is essential that the objectives built in to the scorecard are cascaded down through the business.

The ultimate aim is for each person or team to have a series of objectives and measures that encourage everyone to act in a way consistent with the overall business strategy.

More Information About The Balanced Scorecard

At some stage I will be reviewing the books I’ve read on the balanced scorecard and the other performance measurement systems.

Have You Used A Balanced Scorecard?

If your business has developed a balanced scorecard or another performance measurement system to help you to implement your strategy I’m very interested to hear about your experiences.

Please leave a comment.

in 1 – Your KPI, 3 – Your Strategic Positioning

The New 7 S Model For Business Strategy

Richard D’Aveni argues that in Hypercompetition, the opposition can use the old 7-s framework against the firm because it makes the business predictable, so he came up with the new 7 S model.

The New 7 S

  • Superior stakeholder satisfaction
    .
  • Strategic soothsaying
    .
  • Positioning for speed
    .
  • Positioning for surprise
    .
  • Shifting the rules of competition
    .
  • Signalling strategic intent
    .
  • Simultaneous and sequential strategic thrusts

The first two create a vision for market disruption, the third and fourth are key capabilities to use across markets and the final three are disruptive tactics in a hypercompetitive environment.

My Thoughts On The New 7 S Model

The New 7 S model gains attention because it uses the same alliteration as the original but I believe Richard D’Aveni makes an interesting point. When competition become intense, the easiest competitors to beat are those who are predictable because you understand where they are going and how they will try to achieve their aims. You can have appropriate offensive strategies and defensive strategies in place to reduce the effectiveness of what they do.

in 3 – Your Strategic Positioning

McKinsey 7 S Framework For Strategic Fit

The McKinsey 7 S framework or model for strategic fit was developed over thirty years ago by strategy consultants McKinsey and in particular Tom Peters and Robert Waterman, co-authors of the classic book “In Search of Excellence” to help implement strategies.

What Is The McKinsey 7 S Framework?

It was originally thought that to implement strategy you needed to align strategy with structure (and vice-versa).

This wasn’t enough and McKinsey developed the 7-S model to show that a softer set of issues also needed to be considered when implementing strategy.

The 7 S’s are:

  • Strategy – how the business intends to create a competitive advantage and achieve its overall goals.
    .
  • Structure – the hierarchy of responsibility and accountability within the organisation and how the business is organised functionally, geographically or by product-market.
    .
  • Systems – the way activities and processes get the work of the business done effectively and efficiently.
    .
  • Style – the culture of the business and the way the leaders behave towards customers, employees and other stakeholders. What’s said is much less important than what’s done.
    .
  • Staff – the personnel within the business and their individual skills, abilities and attitudes. Different people are right for different organisations.
    .
  • Skills – specialist skills that the business has access to through the combination of systems and staff – think core competences or distinctive capabilities.
    .
  • Shared values or subordinate goals depending on which version you read – the core values and beliefs of the business.

The “hard elements” are strategy, structure and systems.

The “soft elements” are style, staff, skills and shared values.

The idea is that all these seven elements are interlinked and you need to consider how any changes impact on and can be impacted by the other elements of the McKinsey 7 s framework.

Personally I’d have liked explicit focus on the role of performance measures (it could fit into the 7-S alliteration as Scorecard) because I believe “what gets measured gets done.” Techniques like the Balanced Scorecard are important additional strategy implementation tools.

The Classic McKinsey 7 S Framework Diagram

As well as being an important contribution to the “implementation gap” and a clever alliteration, the 7-S’ model also had this neat diagram. Notice that all the S’s are connected but the Subordinate Goals or Shared Values are what bind the organisation together.

How To Use The McKinsey 7 S Framework

You’ll find the 7S framework more useful for asking the right questions than coming up with the answers but that’s a great start in a strategic change programme.

The 7S model is very flexible and you can use it in several ways.

First, if there is a performance issue where things aren’t as they should be, you can use the 7 S framework as a diagnostic tool.

The problems lie in some kind of inconsistency between the 7 S’s.

If the strategy is right, then perhaps the problem lies in the structure of the business or in its systems. Or perhaps its at odds with the core shared values of the business or the personal style of the owner or CEO.

Second, if you’re implementing strategic change you can audit the organisation through the 7 S framework in terms of “as-is” and then think through your strategy and how the 7 S model should be.

This will highlight differences which need to be resolved. it may even be that the strategy you want to implement is out of reach for the business as it is and you need to make smaller incremental steps.

The third way to use the McKinsey 7 S framework is to look back at a strategic change that hasn’t worked as well as expected and to look for gaps or overlooked areas in the implementation plan through the lens of the 7 S model. While it’s too late, it is a powerful learning exercise when you appreciate how one factor can stop a strategy from working.

Criticism Of The McKinsey 7S Framework

The 7 S model is about achieving strategic fit across the organisation. Richard D’Aveni in his book Hypercompetition argues that this consistency makes the business predictable and therefore easier for a competitor following an aggressive strategy to anticipate and beat.

It’s an interesting idea and a case of “your strength becomes your weakness”. With the 7 S Model, your chances of implementing strategy increase but competitors can guess what you’re trying to do. Without the consistency embedded in the 7 S model, the strategy has little chance to be turned from a plan into reality.

Richard D’Aveni developed a New 7 S Model to compete effectively in hyper-competitive markets.

Models Like The 7-S Are Important

While using a model like the McKinsey 7 S framework can seem cumbersome, it is a very useful aide-memoire to make sure that you’re not overlooking an important issue and it’s helpful to focus discussions on implementation issues and to bring assumptions and unsaid expectations to the surface.

The McKinsey 7-S Framework is included in my summary of Strategic Planning Models.

Have You Used the McKinsey 7 S Model?

If you’ve used the McKinsey 7 S model I’d like to know how you found it.

Did it help you to succeed or focus on strategy implementation issues that you may have otherwise overlooked?

 

in 3 – Your Strategic Positioning

Ansoff Growth Matrix – Four Ways To Grow A Business

The Ansoff Growth Matrix is also known as the Ansoff Product-Market Growth matrix or the Four Ways To Grow A Business model.

This is not to be confused with the Three Ways To Grow A Business model from marketing consultant Jay Abraham which is another, more tactical way to think through business growth issues. It has its strategic uses when thinking about your business model and how you can generate profit from the opportunity.

What is the Ansoff Growth Matrix?

It first appeared in the Harvard Business Review in 1957 and was created by strategist Igor Ansoff to help management teams to focus on the options for business growth.

In common with other popular strategy models, it is build around a two by two matrix.

  • current products or new products
    .
  • current markets or new markets

The Four Growth Options Of The Ansoff Growth Matrix

  • Market penetration strategy – current products and current markets
    .
  • Product development strategy – new products and current markets
    .
  • Market development strategy – current products and new markets
    .
  • Diversification – new products and new markets

These are best seen in a diagram.

Option 1 In The Ansoff Growth Strategy Matrix – Market Penetration

Market penetration strategy is the preferred route to growth for many businesses because it appears safe.

Focus is on selling more of the existing products to:

  1. Existing customers
    .
  2. Customers similar to your existing customers who are buying from your competitors
    .
  3. Customers similar to your existing customers who should be buying buying the product because they have a clear need but aren’t doing so.

The emphasis is on increasing market share through more marketing promotions, more effective marketing and by strengthening the offer by creating more customer value.

This market penetration option within Ansoff’s growth matrix uses existing resources and capabilities and can be thought of as “business as usual but on steroids”.

The downsides of the market penetration strategy are:

  1. If you already have a high market share, the opportunities for growth may be limited. Some markets (and customers) naturally limit the share of the leading player because they feature the concentration of market power.
    .
  2. Aggressive market penetration strategies will increase competitive rivalries in the industry and may provoke a price war of similar competitive battle which damages industry profitability. To make significant increases in market share, the business must be willing to drive competitors out of the market.
    .
  3. Increasing exposure to one product-market segment can make the business more vulnerable to future changes in competition because of the “all the eggs in one basket” problem.
    .
  4. The business may become complacent and ignore opportunities and threats from new products and service solutions to the customers’ underlying problems which are made possible through technological advances.

Option 2 In The Ansoff Growth Matrix – Product Development

In product development, businesses continue to focus on the needs of current customers and the wider customer market they represent  but they seek to understand their underlying needs and wants better so they can see opportunities for new products:

  1. To replace existing products with something better
    .
  2. To provide complementary products that customers need to buy before, during or after purchase of the main product sold by the business.
    .
  3. To sell other products the customer buys as a way to strengthen or leverage the relationship and to provide added convenience. Think “one stop shop”.

New products in the product development option of the Ansoff Growth Matrix don’t need to be “bleeding edge” new developments to the world although they can be. The business can work with existing supplier businesses with established resources and capabilities and offer them new routes to market.

This option in the Ansoff Growth matrix suits businesses following a customer intimacy strategy in the three value disciplines. It allows a broader definition of the business. Remember marketing myopia and the idea that you can change focus from the railroad industry to the transportation industry as focus remains on the underlying customer need.

The danger lies in its exposure to one type of customer so the business must actively scan the economic environment, look for potential problems and be ready to take proactive steps to respond to any serious risks. Businesses exposed to the property market for example have had a very tough time since the 2008 financial crash.

You may attract new competitors into your market as a respond to you offering the products they traditionally sell. Competition has shifted up a level from coexistence selling your specific products to active competition selling the same broader range.

Option 3 In the Ansoff Growth Strategy Matrix – Market Development

The third option suggested by Ansoff is to take the current products and find new markets for them.

There are different ways to do this

  1. Opening up previously excluded market segments through pricing policies e.g. discounts for students and old age pensioners at theatres.
    .
  2. New marketing and distribution channels. Making a product available on the Internet with the necessary search engine optimisation means that anyone looking can find it, rather than rely on your marketing message to reach them by convention means. The supermarkets sell financial services to people who wouldn’t contact a broker or agent.
    .
  3. Entering new geographic markets by moving from local to regional to national and finally international. This may require the business to acquire new capabilities including exporting, understanding different cultures and language skills.

The strength of this option from the Ansoff Growth matrix is that it puts the pressure on the marketing and sales functions of the business and leaves the operations/supply side to concentrate on what it does best.

Some product development may be inevitable as there are few global products that don’t make any concessions to local market needs. Success depends on being able to identify the best markets to develop which offer a genuine opportunity and where you have an effective competitive advantage. It also requires knowing which markets to avoid either because they are too difficult, too different or risk competitive reaction.

Again your action to expand your market may attract the attention of competitors who currently only trade in zones where you don’t.

Option 4 In The Ansoff Growth Matrix – Diversification

This option is the most controversial since diversification involves taking new products to new customers.

There are three levels of diversification:

  1. Diversification into related markets – while the customers and products are both new, there is a logic about the move that makes sense to the outside world.
    .
  2. Diversification into unrelated markets using existing resources and capabilities – while the customers and products are different, they all rely on the existing strengths of the business. Metal fabricators and plastic extrusion manufacturers are able to move across markets and produce custom designed products relatively easily because customers are buying access to the core competences.
    .
  3. Diversification into unrelated markets which require new resources and capabilities.

Diversification is the most risky growth strategy in Ansoff’s growth matrix and especially if it requires the development of new resources and capabilities. It has even been referred to as the “suicide cell”.

The big advantage of diversification is that while each move is risky, if it is successful it reduces the overall risk of the business to factors outside of the control of the business like the wider economic environment, climate change etc. It may also make the business much less seasonal – think bikinis and other swimwear for the summer, umbrellas for the spring and autumn and heavy overcoats for the winter.

It may also help the business to move away from industries that are unattractive because they are super-competitive or in long term decline to fast growing, new markets.

How To Use The Ansoff Growth Matrix

There are two ways to use the Ansoff Growth Matrix

  1. As a tool for brainstorming to help identify possible strategic options
    .
  2. As a tool for assessing preferred strategic options to check for some kind of balance. there aren’t right or wrong answers but you might be shocked to discover that all six growth strategies you intend to follow fall into the diversification box.

Developments To The Ansoff Growth Matrix

The original matrix developed by Ansoff was the simple 2 x 2 matrix presented above.

Ansoff later refined the matrix into a 3 dimensional version by adding geography.

Others have turned the matrix from 2×2 into 3×3 by introducing middle categories for expanded markets and modified products to give more flexibility to the tool. This allows shading from ” a little different” to “very different”.

Reflections On The Ansoff Matrix

The Ansoff Growth Matrix is a popular and useful strategy model for identifying growth options.

It doesn’t help you to evaluate which opportunities are worth pursuing and which should be rejected. It’s therefore a starting point and not the end.

Yes it can help you to identify opportunities to include in your SWOT Analysis but each needs to be carefully vetted to make sure it’s a potential source of cash and profit and not a drain.

Some opportunities can be quickly rejected but for the possibles, you should look in more detail at the product-market to identify the key success factors. I recommend you use a tool like the SPACE Analysis to check that you are in a strong position which is suitable for an aggressive growth strategy.

The Ansoff Growth Matrix And The Six Step Profit Formula

I use the Six Step Profit Formula to help keep strategic planning focused on what really increases profit in a business.

The Ansoff Growth matrix is useful for helping you to focus on step one, finding the starving crowds. With a hungry market, business is comparatively easy but it gets much more difficult if no one has an urgent need or desire for what you sell.

The new products to the existing market square in the Ansoff matrix also helps you with step 5, persuading your customers to buy more from you more often.

A Video On The Ansoff Growth Matrix

Here is an interesting video on the Ansoff Growth Matrix and the risks involved in the strategy for growing the business by Professor Malcolm McDonald, Professor of Marketing at Cranford University School of Management.
https://youtube.com/watch?v=AORoMxgp428%3F

in 3 – Your Strategic Positioning

Competitive Advantage Matrix aka BCG Advantage Matrix

The Competitive Advantage Matrix (also known as the Advantage Matrix or even the Strategic Environments Matrix) is one of the more interesting generic strategy models and was created by the famous strategy consulting firm, the Boston Consulting Group (BCG).

The Two Dimensions Of the Competitive Advantage Matrix

This is a two-by-two matrix which looks at two factors:

  • The number of different approaches to competitive advantage available
  • The potential size of the competitive advantage

The Four Categories In The Competitive Advantage Matrix

The competitive advantage matrix therefore has four boxes

  • Few advantages – and those that exist are small – Stalemate.
    .
  • Few advantages – but those that exist are large – Volume.
    .
  • Many advantages – but those that exist are small – Fragmented.
    .
  • Many advantages – and they can be large – Specialised.

Since most of the possible advantages will refer to differentiation, the Competitive Advantage Matrix can also be thought of as a Differentiation Advantage Matrix.

The Origins Of The Competitive Advantage Matrix

The Boston Consulting Group had developed and popularised the ideas of managing to achieve scale economies and learning curve economies and developed the famous Growth Share matrix (this split businesses into stars, cash cows, question marks and dogs based on the growth of the industry and the relative market share of the business.)

The Competitive Advantage Matrix helped to bring out the key assumptions which made the ideas behind scale, learning and the Growth Share Matrix and explains why they worked well in some strategic environments (volume) and didn’t work so well in others.

A More Detailed Look At the Competitive Advantage Matrix Categories

Volume businesses benefit from large scale which helps them to lower production and service costs by spreading out a cost over a larger number of units. A great example is software – initial costs are enormous to develop a software program but incremental costs for the next copy are tiny. In this environment average unit costs fall quickly as volume increases.

Volume businesses also benefit from being able to spread their marketing and brand building costs over numerous sales. This is the advantage that Coca-Cola has over Pepsi. It costs each the same to create advertisements and to buy the time on TV but because Coke has approximately twice the market share, its unit costs are about half – giving Coca-Cola the choice of taking the cost advantage or spending twice as much on promotion.

Volume businesses thrive where customer needs are very similar and get into trouble as customer needs disperse across many customer value attributes.

Stalemate businesses – where there are few competitive advantages and those that could exist are small – are often trapped into thinking determined by standard industry recipes – “That’s the way this industry works, it always has done and always will do.”

As technology changes, these industries can be shaken up and the old approach made to look foolish. Think of Amazon versus music CD stores.

The Fragmented and Specialised sections are where most small businesses should be positioned, and they deserve their own special posts focusing on the opportunities. If you think that you’re trapped in a stalemate industry, you need to listen to my mp3s on the 7 big questions of business success.

Why I Like The Competitive Advantage Matrix

I like the Competitive Advantage Matrix for several reasons:

  • First it shakes up the idea that big is better. It works in volume businesses but in other businesses, getting too big and expanding outside the niche damages the differentiation that creates success.
    .
  • Second, it’s not that well known. I’ve seen it mentioned in a few books on strategy but they rarely go into much detail and instead prefer to trot out the traditional thinking from the Growth Share Matrix.

What Do You Think About The Competitive Advantage Matrix?

Do you find the insights from the Competitive Advantage Matrix useful?

Is it a self-fulfilling prophecy where businesses who think they are in a stalemate will act as if they are in a stalemate and businesses who think they can specialise will develop significant competitive advantages?

The Competitive Advantage Matrix As A Strategic Planning Model

The Advantage Matrix is one of many strategic planning models which helps you to think through a particular situation, understand the implications and possibly identify the way to improve the position of the business.

One of my favourites which isn’t as well known as it should be is SPACE Analysis which puts the level of competitive advantage into perspective with three other critical dimensions of strategy.

in 3 – Your Strategic Positioning

A business health check is a chance to stand back and look at your business with fresh eyes as it looks at many different aspects of your current business performance and the factors that determine future business performance.

Why You Need A Business Health Check

As the owner of a small business and a coach to other small business owners, I know how easy it is to get caught up in the day to day issues of managing your business.

Stephen Covey the time management expert splits activities into four sections:

  • Not Urgent Not Important
    .
  • Urgent Not Important
    .
  • Urgent & Important
    .
  • Not Urgent & Important

I suspect that like many managers you can get caught up in the urgent categories as you fire-fight your way through your business day.

You probably know that you shouldn’t be doing the first category – not urgent and not important. If the tasks need to be done at all, then they should be delegated or outsourced.

But do you realise that the category that can have the most impact on your performance is the fourth and last one – not urgent and important?

Think about it.

If you spend your time doing important things when they are not urgent, you don’t have to make compromises because of time pressures so the most important things get the attention they deserve.

You do them better and that leads to superior performance.

The purpose of the business health check is to help you to find these “important but not yet urgent” tasks before they become urgent and dominate your time and energy.

My Business Health Check – The Strategic Snapshot

I first developed my business health check – what I now call my Strategic Snapshot – as part of my MBA dissertation when I looked in detail at how business advisors can prevent SME clients (small and medium sized businesses)  getting into financial difficulty.

The idea is simple, prevention is much easier than cure.

Businesses can be turned around but if performance is declining sharply, then the time and money needed to put the business on the right track is often not available when the business owners and management team ask for help. This causes many businesses to fail or even become bankrupt unnecessarily.

My business health check is much more strategic than many I’ve seen which focus on tactics which the business owner/management is or isn’t doing.

I believe that if you’re going to use a business health check to look at your business health, you need to look much broader than tactical activities. Businesses get into trouble for a wide variety of reasons but often it’s a strategic problem at the route cause.

My Business Health Check Format – The Five Pathways To Profit And Loss

  1. Pathway 1 – market attractiveness – growing or declining
    .
  2. Pathway 2 – market competitiveness – growing or declining
    .
  3. Pathway 3 – competitive advantage – increasing or decreasing
    .
  4. Pathway 4 – management skills, planning and control – effective or ineffective
    .
  5. Pathway 5 – the business owner’s inner game – str0nger or weaker

The main emphasis is on the first four pathways although over time I’ve come to realise that the inner game of the business owner and his or her vision for the business, passion and commitment and the way it translates into priorities, goal-setting and time management is a vital issue.

But it’s personal and I prefer to explore these issues, with the owner’s permission verbally rather than through a business health check questionnaire.

The idea of the pathways is simple – a weak rating in one or more area either needs to be corrected there or compensated for elsewhere by a much stronger performance.

For example, if the business is trapped in a market that can only be described as unattractive and extremely competitive, then the management team must focus on its own management skills, planning and control procedures and look to develop competitive advantages. This is a similar idea to SPACE Analysis.

The Value Of A Business Health Check

The value of the business health check comes from three sources:

  1. Completing the business health check questionnaire may make you acknowledge issues and uncertainties that have been nagging away at the back of your mind and undermining your confidence without being formally recognised. You’ll know what I mean if you’ve ever felt anxious about something but not known why – you just had a bad feeling – and you’ve been frustrated because until you pinpoint the underlying issues, you can’t take actions to reduce your concerns.
    .
  2. Your internal feedback to yourself – the health check helps you to identify what needs to be done and can give you incentive to do something. For example, if you’re always struggling to balance cash flow, then it’s logical that you should spend some time on cash flow forecasting to give you advanced warning of issues and time to do something about it.
    .
  3. External feedback on your answers in the business health check questionnaire. My health check draws on the major strategic planning models to identify performance patterns and issues which you probably won’t see on your own.

Is A Business Health Check A Cynical Way To Sell Business Consultancy, Coaching & Advice?

My business health check is my preferred diagnostic tool when I first get involved with a business and certainly with a business of ten or more employees. It provides structure to the review process.

Unfortunately I found resistance from prospective clients and it hasn’t been the effective lead generator I expected.

I now believe that a business health check offered by a business coach or consultant is viewed suspiciously by an entrepreneur as a cynical way to sell consultancy services rather than a problem identifier.

I can understand that.

Holding your hand up and saying that X, Y and Z are problems is admitting that you do need to do something.

But whatever a free business health check says about your business problems, it doesn’t mean that you have to do something about it or that you have to buy from the business coach or consultant providing the health check.

Just as you take a medical health check and you may be advised to take more exercise, eat more fruit, lose weight, stop smoking and cut back on the booze, it doesn’t mean that you will follow the advice.

On my last health check I was told that I needed to lose about a stone in weight but I didn’t do anything about it. Now I need to lose about two stone! The basic rule seems to be that if you ignore a problem, then it tends to get worse.

I recommend that you see the business health check as an input into how you run your business. It will confirm some things that you already knew but it may tell you about other issues that you hadn’t appreciated but which are easily cured.

I’d like to know your thoughts. Do you reject offers of a business health check from a business coach or consultant because you don’t want to be “sold”?

in 3 – Your Strategic Positioning, Business Coaching, Business Problems And Mistakes