NO PLAGIARISM!! NO PLAGIARISM!! NO PLAGIARISM!! NO PLAGIARISM!!

NO PLAGIARISM!! NO PLAGIARISM!! NO PLAGIARISM!! NO PLAGIARISM!!

Start with a chart of the history of a resource whose growth you want to understand and control.

Identify, separately, the history of its inflows and outflows. You may have to do some investigation and reasoning. If, for example, you know your historic staff numbers, the change from month to month is the net inflow. You may not know the loss rate. However, you may know the hiring rate; in which case the loss rate is the difference between this hiring history and the history of net staff changes.

The key variables you now want to explain are these separate inflows and outflows.

Discuss the most likely factors driving a flow and find or estimate how these have changed over the same history. How many new staff did you try to hire month by month, and how many did you succeed in hiring? (Target hiring is clearly likely to influence actual hiring!) How have you changed starting salaries, for example, and how have your competitors starting salaries moved?

Resources have a special characteristic: They fill and drain over time, like water in a bathtub. This chapter explains this behavior, shows why it is so important, and also does the following: - explains how to work out what the numbers do when resources fill and drain - shows where management control lies - outlines how managers can develop resources through time 3.1 Bathtubs Rule! Resources Fill and Drain Since a firm's performance at any time directly reflects the resources available, it is essential that we understand how these resources develop over time and how we can control the process. Think about the regular customers using your restaurant. These people did not magically come into existence at a particular moment in time; they have become loyal customers. Some have been visiting your restaurant for years; others have begun only recently. There will also be people who used to be customers but then stopped. Perhaps they had a bad meal, got tired of the menu, or found another restaurant they preferred. This idea is captured in Figure 3.1 "Building and Losing Customers". The tank in the middle holds the number of customers you have right now. To the left is the outside world, where there are many people, some of whom may become future customers. The big "pipe" flowing into the tank has a pump that determines the speed at which the tank stock is filling with new customers. On the right, another pump on a pipe flowing out of the tank shows how quickly you are losing customers, and again you can see people in the outside world who include your former customers. Because the tank in this diagram holds the inventory or "stock" of customers, this diagram is known as a stock-and-flow structure. This idea is captured in Figure 3.1 "Building and Losing Customers". The tank in the middle holds the number of customers you have right now. To the left is the outside world, where there are many people, some of whom may become future customers. The big "pipe" flowing into the tank has a pump that determines the speed at which the tank stock is filling with new customers. On the right, another pump on a pipe flowing out of the tank shows how quickly you are losing customers, and again you can see people in the outside world who include your former customers. Because the tank in this diagram holds the inventory or "stock" of customers, this diagram is known as a stock-and-flow structure. Figure 3.1 Building and Losing Customers Let us see how this works. By mailing out discount vouchers to local homes, you hope to pump some new consumers into the tank. However, if you do not have enough staff to provide good service, you will inadvertently increase the speed of the outflow pump and soon lose them again. The number of customers will have filled up, but then drained away again. After customer numbers have fallen back, your staff should be able to provide good service once more. The outflow pump slows, and your tank returns to a more stable state. The process is a familiar one but difficult to estimate over time. Figure 3.2 "Working Out Growth and Loss of Customers Through Time" shows what would happen to the number of customers in your business if you were to win 50 new people per month but also lose an increasing number of customers every month. You lose 40 people in the first month and an extra 5 people every month thereafter. The case was made in Chapter 1 "Performance Through Time" and Chapter 2 "Resources: Vital Drivers of Performance" that you should always be looking at how things change over time, so these monthly numbers, too, can be shown as time charts. We can still keep the image of the bathtub or tank of customers and the pipes and pumps showing the rate at which customers are flowing in and out of your business (Figure 3:3 "The Change in Customer Numbers Over Time"). The idea that resources fill and drain over time has long been recognized in strategy research (Dierickx \& Cool, 1989), so what we will do here is make this mechanism practical to use and connect it to how the rest of the business system works. Figure 3.2 Working Out Growth and Loss of Customers Through Time 3.2 How Management Control Affects Resources Why are we so concerned about this "bathtub behavior" that all resources follow? Remember the problem we set out to solve, namely, what determines performance through time and how can management affect performance in the future. The logic is simple: - The resources in place drive performance at every moment. - Therefore we must know how the quantity of each resource changes through time. - These quantities are only explained by their inflows and outflows. - Thus to manage performance through time, the only way of exerting control is by managing the flows of resources into and out of the system. Consider your restaurant and see how these connections work (Figure 3:4 "How Changing Customer Numbers Drives Performance Over Time (for clarity, some items are not shown)"). In Chapter 2 "Resources: Vital Drivers of Performance" we looked at how the number of meals sold and the operating profits had changed during the previous 12 months and showed how these figures were driven by the number of customers and staff. Following the same logic, we next need to know what happened to customers and staff to bring about the performance history in Figure 2.1 "The Explanation for Restaurant Sales and Labor Costs" and the inflows and outflows to these two resources. It is crucial to explain why the resource of customers developed over time as it did, and the only way to do this is to understand the flows (Figure 3:5 "The Net Flow of Customers Into and Out of Your Regular Customer Group"). Doing It Right: Units for Resources and Flows Figure 3.2 "Working Out Growth and Loss of Customers Through Time" and Figure 3:3 "The Change in Customer Numbers Over Time" label the flows entering and leaving the customer resource as "Customers won/lost during the month." This is always the relationship between resources and the flows that fill or drain them: Whatever the resource in the tank, the flows are "[resource] per [time period]." There is never any exception to this rule! - It looks as if you had an early small inflow of customers, but this slowed. - So you did some serious marketing, which brought a flood of customers. - But this soon died away again, and your customer stock settled down at a steady but higher level, with seemingly no inflow or outflow at all. - Toward the end of the year, you experienced another flood of customers, but this time it was negative (the downward slope on the customer flow): You were losing customers fast. - Once again the flood soon slowed to a mere trickle and your stock of customers steadied at a lower level, again apparently with no inflow or outflow. Figure 3.5 The Net Flow of Customers Into and Out of Your Regular Customer Group Doing It Right: Separating Inflows From Outflows If your restaurant experienced only the flows shown in Figure 3:5 "The Net Flow of Customers Into and Out of Your Regular Customer Group", you might be tempted to take the complacent view that nothing much is happening. Apart from the two puzzling spikes of customer gains around month 7 and losses around month 11 , everything seems to be ticking along steadily enough. But appearances are misleading. During the middle period, turbulent activity is taking place, with lots of customers arriving and many others leaving. In fact, customer churn is so rapid that by months 9 and 10 , you are almost certainly losing many of the customers that your marketing efforts brought in just a short time before. The factors driving resource gains are typically quite different from those driving losses, so you stand little chance of solving these challenges without distinguishing between the two flows. Always try to identify resource "gain" and "loss" rates separately. 3.3 Developing Resources External Resources Trying to build resources can be frustrating. For example, take hiring: Suitable staff may be scarce, and you may have to fight your competitors for the limited number of good people. Even if you win that battle or you have no strong competitors, potential staff may be looking at other opportunities External Resources Trying to build resources can be frustrating. For example, take hiring: Suitable staff may be scarce, and you may have to fight your competitors for the limited number of good people. Even if you win that battle or you have no strong competitors, potential staff may be looking at other opportunities that have nothing to do with the market in which you operate. A customer service person at Ryanair could leave to work in a hotel or even to become a teacher, for example. At least with staff, there may be a continuous stream of new talent coming onto the market. Many other resources are finite. Once everyone has a cell phone, for example, there is no one left to be won and sales efforts have to switch to upgrades and luring people away from rivals. Similarly, chain stores run out of new locations, airlines run out of good routes that passengers may want to fly, and so on. To capture this phenomenon, we need to be explicit about the stock of potential resources as well as the stock of developed resources, plus the rate at which we convert one to the other. Figure 3.7 "Developing Potential Locations for a Retail Chain" shows these elements for a new retail company that has developed a specialty store format and now wants to build outlets in all the towns where it may be successful. On the left are the towns thought to have enough of the right consumers to provide the demand for the stores; there are 100 of these at the outset. On the right is the increasing number of stores operating, and in between is the rate at which stores are being opened. Understanding how to manage the development of resources from a potential pool is vital. - Identify the scale of potential resources-just how many are there in the potential pool? - Assess the rate at which the potential resource can be developed. - Look for ways to accelerate this development rate. - Look to stimulate growth of the potential resource itself. The story of Alibaba.com in Chapter 1 "Performance Through Time" is a great example of a company identifying a specific potential resource-the large number of smaller Chinese companies seeking to go global-and developing that potential very rapidly. Once that opportunity was well exploited, it moved on to repeat the trick in other markets. Resources Within the Business The challenge of resource development is not confined to the bringing of potential resources into your business system: Certain resources must continue to be developed within the organization. The most common of these is staff, though the same challenge also applies to products and customers. Figure 3.8 "The Staff Promotion Chain" shows an organization that has become badly out of balance because the flows of people through its internal development chain have been running at the wrong rates. At the most senior levels, promotions appear to be happening slowly, at just six per year. But turnover among senior staff is also low, so the upper ranks have become crowded. The organization has clearly been promoting experienced staff to senior positions faster than other senior people have been leaving. But things are not quite that simple. Promoting 6 experienced people out of 50 each year, as we were in year 1 , meant that experienced people had to wait more than 8 years for promotion. By the time we get to year 5 , the wait has grown to 20 years, because of the 100 experienced staff we have, only 5 are promoted each year. So reducing the promotion rate risks The challenge of resource development is not confined to the bringing of potential resources into your business system: Certain resources must continue to be developed within the organization. The most common of these is staff, though the same challenge also applies to products and customers. Figure 3.8 "The Staff Promotion Chain" shows an organization that has become badly out of balance because the flows of people through its internal development chain have been running at the wrong rates. At the most senior levels, promotions appear to be happening slowly, at just six per year. But turnover among senior staff is also low, so the upper ranks have become crowded. The organization has clearly been promoting experienced staff to senior positions faster than other senior people have been leaving. But things are not quite that simple. Promoting 6 experienced people out of 50 each year, as we were in year 1 , meant that experienced people had to wait more than 8 years for promotion. By the time we get to year 5 , the wait has grown to 20 years, because of the 100 experienced staff we have, only 5 are promoted each year. So reducing the promotion rate risks leaving experienced staff frustrated and may increase the rate at which they leave. Juniors, on the other hand, are not being hired fast enough to replace those who are leaving or are being promoted. The "Choice Chain" The last extension of this resource development idea concerns an almost universal phenomenon: the development of awareness, understanding, and choice among customers, employees, investors, donors, and other stakeholder groups (Desmet et al., 1998; Finskud, 2009). We can start by considering a new consumer brand: a soft drink such as Coca-Cola's Powerade sports drink, for example. An individual is unlikely to switch on a single day from complete ignorance of the brand to being a regular and loyal consumer. So we do not simply have a tank of "potential" consumers and a tank of "loyal" consumers; rather, consumers move through a series of stages (Figure 3.9"The Choice Chain for Consumers"): - Initially, the consumers who we may want will be unaware that our brand exists. The first challenge is to pump them into being aware: ensuring that they will have at least heard of the brand, even if it means nothing to them. - Once they are aware, we need them to understand the brand and associate meaning with itpreferably a meaning relating to values that are significant for them. - When they understand that the brand means something they can relate to, we can hope that they will try the brand, at least on a disloyal basis. They may continue purchasing competing brands, but at least we are on their list of options. - Ideally, we would like consumers to be loyal and always choose our brand. This "certain future choice" is rare, but highly valuable if it can be achieved. Coca-Cola itself has attained this status for many consumers, as have brands such as BMW, Wal-Mart, and CNN. Now, these pumps are expensive to drive. Every advertising and promotional activity costs money, so it is vital to make judicious choices about which ones to drive and how fast, and how to change priorities as time passes. Moreover, while you are trying to do all this, your pool is draining back Resources have a special characteristic: They fill and drain over time, like water in a bathtub. This chapter explains this behavior, shows why it is so important, and also does the following: - explains how to work out what the numbers do when resources fill and drain - shows where management control lies - outlines how managers can develop resources through time 3.1 Bathtubs Rule! Resources Fill and Drain Since a firm's performance at any time directly reflects the resources available, it is essential that we understand how these resources develop over time and how we can control the process. Think about the regular customers using your restaurant. These people did not magically come into existence at a particular moment in time; they have become loyal customers. Some have been visiting your restaurant for years; others have begun only recently. There will also be people who used to be customers but then stopped. Perhaps they had a bad meal, got tired of the menu, or found another restaurant they preferred. This idea is captured in Figure 3.1 "Building and Losing Customers". The tank in the middle holds the number of customers you have right now. To the left is the outside world, where there are many people, some of whom may become future customers. The big "pipe" flowing into the tank has a pump that determines the speed at which the tank stock is filling with new customers. On the right, another pump on a pipe flowing out of the tank shows how quickly you are losing customers, and again you can see people in the outside world who include your former customers. Because the tank in this diagram holds the inventory or "stock" of customers, this diagram is known as a stock-and-flow structure. This idea is captured in Figure 3.1 "Building and Losing Customers". The tank in the middle holds the number of customers you have right now. To the left is the outside world, where there are many people, some of whom may become future customers. The big "pipe" flowing into the tank has a pump that determines the speed at which the tank stock is filling with new customers. On the right, another pump on a pipe flowing out of the tank shows how quickly you are losing customers, and again you can see people in the outside world who include your former customers. Because the tank in this diagram holds the inventory or "stock" of customers, this diagram is known as a stock-and-flow structure. Figure 3.1 Building and Losing Customers Let us see how this works. By mailing out discount vouchers to local homes, you hope to pump some new consumers into the tank. However, if you do not have enough staff to provide good service, you will inadvertently increase the speed of the outflow pump and soon lose them again. The number of customers will have filled up, but then drained away again. After customer numbers have fallen back, your staff should be able to provide good service once more. The outflow pump slows, and your tank returns to a more stable state. The process is a familiar one but difficult to estimate over time. Figure 3.2 "Working Out Growth and Loss of Customers Through Time" shows what would happen to the number of customers in your business if you were to win 50 new people per month but also lose an increasing number of customers every month. You lose 40 people in the first month and an extra 5 people every month thereafter. The case was made in Chapter 1 "Performance Through Time" and Chapter 2 "Resources: Vital Drivers of Performance" that you should always be looking at how things change over time, so these monthly numbers, too, can be shown as time charts. We can still keep the image of the bathtub or tank of customers and the pipes and pumps showing the rate at which customers are flowing in and out of your business (Figure 3:3 "The Change in Customer Numbers Over Time"). The idea that resources fill and drain over time has long been recognized in strategy research (Dierickx \& Cool, 1989), so what we will do here is make this mechanism practical to use and connect it to how the rest of the business system works. Figure 3.2 Working Out Growth and Loss of Customers Through Time 3.2 How Management Control Affects Resources Why are we so concerned about this "bathtub behavior" that all resources follow? Remember the problem we set out to solve, namely, what determines performance through time and how can management affect performance in the future. The logic is simple: - The resources in place drive performance at every moment. - Therefore we must know how the quantity of each resource changes through time. - These quantities are only explained by their inflows and outflows. - Thus to manage performance through time, the only way of exerting control is by managing the flows of resources into and out of the system. Consider your restaurant and see how these connections work (Figure 3:4 "How Changing Customer Numbers Drives Performance Over Time (for clarity, some items are not shown)"). In Chapter 2 "Resources: Vital Drivers of Performance" we looked at how the number of meals sold and the operating profits had changed during the previous 12 months and showed how these figures were driven by the number of customers and staff. Following the same logic, we next need to know what happened to customers and staff to bring about the performance history in Figure 2.1 "The Explanation for Restaurant Sales and Labor Costs" and the inflows and outflows to these two resources. It is crucial to explain why the resource of customers developed over time as it did, and the only way to do this is to understand the flows (Figure 3:5 "The Net Flow of Customers Into and Out of Your Regular Customer Group"). Doing It Right: Units for Resources and Flows Figure 3.2 "Working Out Growth and Loss of Customers Through Time" and Figure 3:3 "The Change in Customer Numbers Over Time" label the flows entering and leaving the customer resource as "Customers won/lost during the month." This is always the relationship between resources and the flows that fill or drain them: Whatever the resource in the tank, the flows are "[resource] per [time period]." There is never any exception to this rule! - It looks as if you had an early small inflow of customers, but this slowed. - So you did some serious marketing, which brought a flood of customers. - But this soon died away again, and your customer stock settled down at a steady but higher level, with seemingly no inflow or outflow at all. - Toward the end of the year, you experienced another flood of customers, but this time it was negative (the downward slope on the customer flow): You were losing customers fast. - Once again the flood soon slowed to a mere trickle and your stock of customers steadied at a lower level, again apparently with no inflow or outflow. Figure 3.5 The Net Flow of Customers Into and Out of Your Regular Customer Group Doing It Right: Separating Inflows From Outflows If your restaurant experienced only the flows shown in Figure 3:5 "The Net Flow of Customers Into and Out of Your Regular Customer Group", you might be tempted to take the complacent view that nothing much is happening. Apart from the two puzzling spikes of customer gains around month 7 and losses around month 11 , everything seems to be ticking along steadily enough. But appearances are misleading. During the middle period, turbulent activity is taking place, with lots of customers arriving and many others leaving. In fact, customer churn is so rapid that by months 9 and 10 , you are almost certainly losing many of the customers that your marketing efforts brought in just a short time before. The factors driving resource gains are typically quite different from those driving losses, so you stand little chance of solving these challenges without distinguishing between the two flows. Always try to identify resource "gain" and "loss" rates separately. 3.3 Developing Resources External Resources Trying to build resources can be frustrating. For example, take hiring: Suitable staff may be scarce, and you may have to fight your competitors for the limited number of good people. Even if you win that battle or you have no strong competitors, potential staff may be looking at other opportunities External Resources Trying to build resources can be frustrating. For example, take hiring: Suitable staff may be scarce, and you may have to fight your competitors for the limited number of good people. Even if you win that battle or you have no strong competitors, potential staff may be looking at other opportunities that have nothing to do with the market in which you operate. A customer service person at Ryanair could leave to work in a hotel or even to become a teacher, for example. At least with staff, there may be a continuous stream of new talent coming onto the market. Many other resources are finite. Once everyone has a cell phone, for example, there is no one left to be won and sales efforts have to switch to upgrades and luring people away from rivals. Similarly, chain stores run out of new locations, airlines run out of good routes that passengers may want to fly, and so on. To capture this phenomenon, we need to be explicit about the stock of potential resources as well as the stock of developed resources, plus the rate at which we convert one to the other. Figure 3.7 "Developing Potential Locations for a Retail Chain" shows these elements for a new retail company that has developed a specialty store format and now wants to build outlets in all the towns where it may be successful. On the left are the towns thought to have enough of the right consumers to provide the demand for the stores; there are 100 of these at the outset. On the right is the increasing number of stores operating, and in between is the rate at which stores are being opened. Understanding how to manage the development of resources from a potential pool is vital. - Identify the scale of potential resources-just how many are there in the potential pool? - Assess the rate at which the potential resource can be developed. - Look for ways to accelerate this development rate. - Look to stimulate growth of the potential resource itself. The story of Alibaba.com in Chapter 1 "Performance Through Time" is a great example of a company identifying a specific potential resource-the large number of smaller Chinese companies seeking to go global-and developing that potential very rapidly. Once that opportunity was well exploited, it moved on to repeat the trick in other markets. Resources Within the Business The challenge of resource development is not confined to the bringing of potential resources into your business system: Certain resources must continue to be developed within the organization. The most common of these is staff, though the same challenge also applies to products and customers. Figure 3.8 "The Staff Promotion Chain" shows an organization that has become badly out of balance because the flows of people through its internal development chain have been running at the wrong rates. At the most senior levels, promotions appear to be happening slowly, at just six per year. But turnover among senior staff is also low, so the upper ranks have become crowded. The organization has clearly been promoting experienced staff to senior positions faster than other senior people have been leaving. But things are not quite that simple. Promoting 6 experienced people out of 50 each year, as we were in year 1 , meant that experienced people had to wait more than 8 years for promotion. By the time we get to year 5 , the wait has grown to 20 years, because of the 100 experienced staff we have, only 5 are promoted each year. So reducing the promotion rate risks The challenge of resource development is not confined to the bringing of potential resources into your business system: Certain resources must continue to be developed within the organization. The most common of these is staff, though the same challenge also applies to products and customers. Figure 3.8 "The Staff Promotion Chain" shows an organization that has become badly out of balance because the flows of people through its internal development chain have been running at the wrong rates. At the most senior levels, promotions appear to be happening slowly, at just six per year. But turnover among senior staff is also low, so the upper ranks have become crowded. The organization has clearly been promoting experienced staff to senior positions faster than other senior people have been leaving. But things are not quite that simple. Promoting 6 experienced people out of 50 each year, as we were in year 1 , meant that experienced people had to wait more than 8 years for promotion. By the time we get to year 5 , the wait has grown to 20 years, because of the 100 experienced staff we have, only 5 are promoted each year. So reducing the promotion rate risks leaving experienced staff frustrated and may increase the rate at which they leave. Juniors, on the other hand, are not being hired fast enough to replace those who are leaving or are being promoted. The "Choice Chain" The last extension of this resource development idea concerns an almost universal phenomenon: the development of awareness, understanding, and choice among customers, employees, investors, donors, and other stakeholder groups (Desmet et al., 1998; Finskud, 2009). We can start by considering a new consumer brand: a soft drink such as Coca-Cola's Powerade sports drink, for example. An individual is unlikely to switch on a single day from complete ignorance of the brand to being a regular and loyal consumer. So we do not simply have a tank of "potential" consumers and a tank of "loyal" consumers; rather, consumers move through a series of stages (Figure 3.9"The Choice Chain for Consumers"): - Initially, the consumers who we may want will be unaware that our brand exists. The first challenge is to pump them into being aware: ensuring that they will have at least heard of the brand, even if it means nothing to them. - Once they are aware, we need them to understand the brand and associate meaning with itpreferably a meaning relating to values that are significant for them. - When they understand that the brand means something they can relate to, we can hope that they will try the brand, at least on a disloyal basis. They may continue purchasing competing brands, but at least we are on their list of options. - Ideally, we would like consumers to be loyal and always choose our brand. This "certain future choice" is rare, but highly valuable if it can be achieved. Coca-Cola itself has attained this status for many consumers, as have brands such as BMW, Wal-Mart, and CNN. Now, these pumps are expensive to drive. Every advertising and promotional activity costs money, so it is vital to make judicious choices about which ones to drive and how fast, and how to change priorities as time passes. Moreover, while you are trying to do all this, your pool is draining back