Six Frameworks Used By Consultants and Business Analysts: an Overview
Note: this article contains links to Bain & Company, McKinsey, and BCG, all American consulting firms. DPA has no relationship with any of these firms, and the links are provided for information only.
Below is introductory information on some common frameworks used by consultants and business analysts when they are looking at the performance of a specific company to assess its performance and to spot signs of potential trouble. While all can be useful to you as a small business owner, the ones we most recommend are Porter's Five Forces, the BCG Growth-Share Matrix and Core Competencies. These can be easier to work out for your firm, and therefore can be more relevant to you. We've used a small business/entrepreneurial focus when possible.
In a nutshell, these tools are:
- Benchmarking: comparing your firm's performance in key areas to competitive business or industry leaders can be useful. This is normally financially focused.
- Balanced Scorecard: looking beyond financial information helps you find other important metrics for comparison.
- Porter's Five Forces: five identified areas you can use for an assessment of your business, especially when you are preparing a strategic plan.
- The GE-McKinsey Nine-Box Matrix: this is a tool for assessing the attractiveness of existing or potential business opportunities.
- The BCG Growth-Share Matrix: consultants love a good matrix. In this, products or product lines are grouped into four classes to help you think about your product/service offerings.
- Core Competencies: a tool to help you identify your business's strengths and unique advantages.
Benchmarking is comparing your own results to those of industry leaders, whether they are international, national or local. You would choose the results you want to assess and seek information on companies you want to compare with. Results for international and national companies, provided they are publicly traded, are relatively easy to find. Often, they are posted on their websites. However, you should look for an investors' website, as results are not normally available on their public-facing sites. Be aware that their annual reports, or reports to the Securities Exchange Commission, won't necessarily contain all the information you'd like to have, but they are a good source of standard financial data - gross profit, net profit, cost of goods sold, etc.
Not as specific, and requiring careful reading, Statistics Canada publishes average financial data for companies in a given industry. This data may reflect current conditions (especially those we are seeing during COVID), but it can give youa feel for what all reporting companies in the industry (not just publicly traded ones) are experiencing as of a given date.
Local data is much harder to come by, although it might be most relevant to you. An industry association might maintain aggregate average data, but this will be similar to Statistics Canada's information and won't necessarily reflect your community.
Don't feel you are restricted to businesses in your industry. If there is a particularly innovative company you'd like to compare yourself with, you can search for information on it as well.
Typical areas used for benchmarking are:
- Production costs
- Gross and net profits
- Employee turnover
The Bain & Company article is here.
When it comes to comparative metrics, money isn't everything. The balanced scorecard approach looks beyond financial results at broader indicators of performance. This is not to say that finance is ignored; it's just treated as part of the story. In this analytical approach, you can compare your performance against your goals in a variety of areas:
- Revenues (looking at growth)
- Gross and net profits (as a percentage of sales)
- Market share (you'll need to look at census data to assess the available market)
- Quality (this is more for manufacturing, and looks at reject rates and returns/customer complaints)
- Employee morale (measured through discussions or, as your business grows, surveys)
- Customer satisfaction (surveys again, but also focus groups, etc.)
You may want to identify other metrics as well. The important thing is to look at data over time so you can identify trends and see how you're progressing.
The article from Bain & Company is here.
This approach was developed by Michael Porter, an American author of books on business strategy. As such, it takes a higher-level look at the forces impacting an industry as a set of inputs determining a company's strategy. This type of analysis is also useful in the initial planning stages for a business, to help you judge between competing attractive opportunities. The five forces Porter identified are:
- Competitor rivalry (as you might expect, this looks at how other organizations in the industry compete, what their competitive advantages are, and how they are perceived in their markets)
- The bargaining power of buyers (customers rarely consciously act as a bloc, but they do have power of choice and are sensitive to pricing and the perceived benefits bundle offered by competitors)
- The bargaining power of suppliers (if the potential number of suppliers is small, they have more power; if they have very unique products or (especially) tools they supply, the cost of switching can be high)
- The threat of new entrants (among other things, this is determined by the barriers to entry - financial, technological, labour, etc.)
- The threat of substitute offerings (these are not products or services that compete head-to-head with you; instead, they are other choices a customer might make - water or juice instead of cola, for example)
By assessing the five forces at the outset and as your gusiness grows, you are able to keep ahead of changes in your competitive landscape.
This matrix, developed by General Electric and the large American consulting firm McKinsey, is a good way of evaluating whether you should take advantage of a particular business opportunity. It requires you to evaluate the opportunity in terms of its general attractiveness by rating it "high", "medium" or "low" on two axes -" industry attractiveness" and "competitive strength":
- Industry attractiveness considers market factors (size, growth potential, profit potential, etc.) along with competitive factors (barriers to entry, number of industry participants, product life-cycle stage, innovation, etc.)
- Competitive strength looks at your company's resources (financial, human, production, etc.) and ability to use those resources to succeed
An opportunity with a growing, profitable market in which you are well-positioned to take a leadership position would be rated "high" and one you would want to take advantage of, while one with a mature product, high barriers to entry, little or no opportunity to innovate, and a stable or decreasing market would be "low" and one you would avoid. "Medium"? You would want to do more research and/or more thinking before arriving at a decision.
Read more about this at McKinsey.
This analytical tool, developed by the Boston Consulting Group (BCG), another large US consulting firm, can be used to help you evaluate the relative strengths of your products or product lines. In this matrix, products/product lines are broken into 4 categories:
- Cash cows - products with dependable revenues, good profit margins, and solid market share (among other desirable qualities). They may not be glamourous, but they are the bedrock on which your business is built
- Stars - products that, as the name suggests, have extraordinary profitability and in which you have a solid and growing market share. These, in other words, are exceptional products or product lines with the potential to take your business to new highs
- Question marks - products about which you are unsure. They may have great potential but have not yet shown any positive (or negative) signs of success. At some point, you will need to decide whether you can make them into cash cows or stars, or whether you should cut your losses
- Dogs - products with low profit, low (and possibly decreasing) market share and other undesirable qualities that you may well wish to abandon
In classifying your products/product lines, do not forget to evaluate whether your question marks and dogs contribute or lead to sales of stars or cash cows. You can read about this at BCG's site.
This analysis gives you insight into some components of the other analyses above. They help you define your positioning and competitive advantage. What do you do that your competitors cannot (or will not) easily replicate? Your core competencies may be in the following areas:
- Production/process - what efficiencies have you designed into the making of your products or delivery of your services that your competitors haven't got or aren't using? These may help you provide your products/services less expensively or at a higher quality
- Pricing - this may be related to production/process efficiencies, allowing you to share cost savings with your customer base. While competing on price is not our preferred option, it can give you a leg up in a crowded marketplace
- Human resources - these may be ways of engaging your employees or your overall company culture, or the skill set your employees have
- Marketing/customer service - are you doing something innovative with your marketing? It might be a tactic no one has yet thought of, or it could be an approach that has fallen out of fashion and therefore your competitors wouldn't think of using
Individually or together, your core competencies provide an edge on your competitors and may be your unique selling proposition. More information is available at Bain & Company.