Here is this month’s piece from Brand Velocity, an Atlanta-based consulting firm that is putting Peter Drucker’s ideas into practice at major corporations.
With his X-Ray vision, Superman was able to look through walls, see the bad guys and save the good people of Metropolis. Peter Drucker also suggested companies use X-Ray techniques to generate value. Fortunately, today’s managers don’t need to come from Krypton to achieve this.
By using Drucker’s “Business X-Ray,” which he introduced in his 1964 book Managing for Results, companies can attain a clear and precise understanding of how each area of the business creates value. Specifically, Drucker’s X-Ray is used to determine where a product or service sits in terms of its life cycle: Is it on the rise and thus deserving of more investment? Or is it in a state of decline—or about to be? If so, how fast is it likely to fall? And what should then replace it?
Such analysis goes well beyond traditional accounting measures—which, as we’ve explored in a previous post, correlate poorly with changes in shareholder value. Fortunately, alternative measures based on return on capital are highly correlated with share price (generally above 70%) and deliver much better insights that help ensure an enterprise thrives over the long term. In fact, what we’ve found is that by using certain advanced shareholder-value frameworks (what we call Value Risk Management), along with Drucker’s Business X-Ray, companies can become top market performers.
The process begins by evaluating each operating unit for its actual and projected shareholder-value contribution. Managers then look at each of their units through the lens of their suppliers and customers to understand where the greatest opportunities exist to grow value. This, in turn, guides capital investments, process changes, product development, research and market targeting.
One of our colleagues, for example, assisted a company that was struggling in the industrial packaging business. Profitability was constrained by intense competition, strong price pressures and excess industry capacity.
Off the bat, the company realized that it needed to change its supply-chain structure, plant network and technology applications. The result: Shareholder value increased more than 10% over two years. Yet, while a good start, this initial work did not address pricing pressures or slow revenue growth.
So, our client used Drucker’s Business X-Ray to focus on its product mix. This analysis revealed that most of the company’s customers purchased packaging from a variety of sources and were forced to heavily reconfigure these products—at considerable time and expense—before using them.
Through the X-Ray, our client determined what to stop doing (emphasizing traditional product sales), what to start doing (selling customer-specific solutions) and what to continue doing (increasing customer trust and perceptions of value). Over a period of months, the company began bundling current products with complementary ones, and offered to perform value-added configuration work inside their customers’ own facilities. Drawing on its logistics capability, the company even began delivering finished products to its customers’ customers.
The results were striking. In the first year, our client gained more than $50 million in new revenue—a jump of more than 12%. Profit also climbed. In the second year, the company increased market share by more than 10% while overall industry sales declined. Moreover, the company’s increased return on capital helped increase its stock price more than 20%. The company continues to be a leader in its field to this day.
Long-term value creation doesn’t require the powers of a superhero. It starts with putting the customer first, understanding real value drivers and thinking carefully about how to create new opportunities.
— Wally Buran and Jack Bergstrand