References to wet your framework appetite from industry leaders:
Before we begin it is really important for today’s generation to be financially literate. Financial literacy is the possession of knowledge and understanding of financial matters. Financial literacy is mainly used in connection with personal finance matters. It often entails the knowledge of properly making decisions pertaining to certain personal finance areas like real estate, insurance, investing, saving (especially for college…jeez), tax planning and retirement. It also involves intimate knowledge of financial concepts like compound interest, financial planning, the mechanics of a credit card, advantageous savings methods, consumer rights, time value of money, and more!
However financial literacy is not only important for personal decisions, but also for corporate decisions. This section discussing pro forma’s is included in consulting but it is directly applicable to any aspect of doing good business.
Pro forma, a Latin term, literally means “for the sake of form” or “as a matter of form.” In the world of investing, pro forma refers to a method by which financial results are calculated. This method of calculation places emphasis on present or projected figures.
Financial statements that utilize the pro forma method of calculation are often designed to draw focus to specific figures when an earnings announcement is issued by a company and made available to the public, particularly potential investors. These pro forma statements may also be designed to indicate a change proposed by a company, such as an acquisition or a merger. Investors should be aware a company’s pro forma financial statements may hold figures or calculations that are not in compliance with generally accepted accounting principles (GAAP). In some instances, pro forma figures are vastly different than those generated with GAAP. However for consulting these pro forma’s help make accurate decisions, and directions a company should take.
A very popular financial statement is the P&L or intuitively the Profit and Loss statement for a company in a given quarter or fiscal. P&L statements center around a simple equation: revenues less expenses equals profit. This basic formula plays out over the course of the entire statement, finally culminating in a profit figure at the bottom of the statement, essentially creating the colloquial expression of a “bottom line.” Oh aka Income Statement.
Regression Modelling is another tool in the consultant toolkit that can be used in a wide variety of ways. The most common use of regression in business is to predict events that have yet to occur. Demand analysis, for example, predicts how many units consumers will purchase. Many other key parameters other than demand are dependent variables in regression models. Predicting the number of shoppers who will pass in front of a particular billboard or the number of viewers who will watch the Super Bowl may help management assess what to pay for an advertisement. Insurance companies heavily rely on regression analysis to estimate how many policy holders will be involved in accidents or be victims of burglaries. Another key use of regression models is the optimization of business processes. A factory manager might, for example, build a model to understand the relationship between oven temperature and the shelf life of the cookies baked in those ovens. A company operating a call centre may wish to know the relationship between wait times of callers and number of complaints. A fundamental driver of enhanced productivity in business and rapid economic advancement around the globe during the 20th century was the frequent use of statistical tools in manufacturing as well as service industries. Today, managers considers regression an indispensable tool.
Linear regression is a common Statistical Data Analysis technique. It is used to determine the extent to which there is a linear relationship between a dependent variable and one or more independent variables. There are two types of linear regression, simple linear regression and multiple linear regression.
In simple linear regression a single independent variable is used to predict the value of a dependent variable. In multiple linear regression two or more independent variables are used to predict the value of a dependent variable. The difference between the two is the number of independent variables. In both cases there is only a single dependent variable. The dependent variable must be measured on a continuous measurement scale (e.g. 0-100 test score) and the independent variable(s) can be measured on either a categorical (e.g. male versus female) or continuous measurement scale. There are several other assumptions that the data must satisfy in order to qualify for linear regression. Simple linear regression is similar to correlation in that the purpose is to measure to what extent there is a linear relationship between two variables. The major difference between the two is that correlation makes no distinction between independent and dependent variables while linear regression does. In particular, the purpose of linear regression is to “predict” the value of the dependent variable based upon the values of one or more independent variables.
It is all about massaging data. And a very neat way to manipulate large sums of data is a Pivot Table on Excel. A pivot table is useful when analyzing a large amount of data, as it allows users to apply specific criteria to summarize, organize and reorganize data tables and create reports.
For example, when a store manager reviews the sales of a specific item over a six-month period, he must sift through many pages of relevant and irrelevant data. A pivot table, however, simplifies this process by automatically counting, summarizing and sorting data. Summarized data may then be used to create a report tailored to the item’s activity within the specified six-month parameter, reducing data output and table columns and rows. This process may be used to accommodate various data requirements.
You can also use third party software like Stata, or anyother data manager.
There is also many other models consultants may throw in a deck to sway the client or to visually aid what they are trying to explain. For example BCG is famous for their growth model and GE- McKinsey have their nine box model. There are others. Bain and Company have identified a few key steps in benchmarking.
- Select a product, service or process to benchmark
- Identify the key performance metrics
- Choose companies or internal areas to benchmark
- Collect data on performance and practices
- Analyze the data and identify opportunities for improvement
- Adapt and implement the best practices, setting reasonable goals and ensuring companywide acceptance
Companies use this tool too:
- Improve performance. Benchmarking identifies methods of improving operational efficiency and product design
- Understand relative cost position. Benchmarking reveals a company’s relative cost position and identifies opportunities for improvement
- Gain strategic advantage. Benchmarking helps companies focus on capabilities critical to building strategic advantage
- Increase the rate of organizational learning. Benchmarking brings new ideas into the company and facilitates experience sharing
Business frameworks and methodologies may be a concept foreign to many business professionals, but it is one near and dear to all management consultants. As a management consultant, you will either have used many of these, or at least know what they are so you can nod in agreement when others talk about them! If you are thinking about a career in consulting, even before entering the field, all good consulting candidates will begin familiarizing themselves with basic business frameworks in preparation for consulting case interviews.
As the name suggests, a “framework” provides a structured approach to analyzing and solving a common business problem. It allows consultants to address a client’s business issue in an organized, thorough, and efficient manner.
There are hundreds of business frameworks available, and which ones you use will often depend on which firm you are working for and the needs of your clients. Listed below are commonly used frameworks in consulting, categorized into the areas of Industry and Market Analysis, Company Analysis, Product Strategy and Process Improvement.
Industry and Market Analysis
Sometimes we are lucky enough to be assigned to a high-level strategy project, where evaluation of the competitive landscape of our client’s industry is a must. This process is often completed during the company’s strategic planning session or when launching a new product line or business unit. The frameworks are a sample of those which can be used to structure this process:
Blue Ocean Strategy (BOS)
Sometimes called Value Innovation, BOS is a growth framework focused on the idea of creating an uncontested market space–i.e. a “blue ocean”. This framework is very innovative, as its principles challenge the conventional business strategy principles (defined by Porter, see below) of fighting competitors head-on.
A powerful tool in BOS is the Value Curve, which depicts where incumbent players are placing their value. It allows us to visualize where competition places value, where customers place value, and where there are potential opportunities to disrupt the market. This then allows us to determine which specific value attributes to eliminate, reduce, raise, and create. By creating new value attributes, we create a “blue ocean” to compete in.
The Consolidation-Endgame Curve framework is not a well-known framework, but is one that offers incredible insights into market dynamics and competitive strategies. In my opinion, it is one of the most insightful frameworks. This framework was developed by AT Kearney after they performed a study on 25,000 firms, representing 98% of the global market cap. The firm realized that all industries go through the same 4-stage lifecycle.
By appropriately identifying a client’s stage and understanding the defining traits and behavior of the stage, we can better understand and predict market and competitive behavior and trends. Every major strategic and operational move should be evaluated with regard to the industry’s stage in the Consolidation Curve. The industry stage also governs what type of management and leadership works best for the company.
Using the Consolidation Curve as guidance, we can strengthen consolidation strategies and facilitate merger integrations. A niche player can also determine the appropriate niche strategy to use and when the best time to be acquired is.
Porter’s Five Forces
A framework we have probably all used at some point, developed by Michael Porter (considered by some as the father of modern business strategy), Porter’s Five Forces is the most recognized and classic strategy framework. This framework helps us understand the various dynamics among industry players and external “forces.” It is based on the theory that competition in any industry is dependent on 5 basic forces—Potential Entrants, Internal Rivalry, Suppliers, Buyers, and Substitutes (or Complements). The collective strength of these forces determines the ultimate profit potential and allocation in the industry.
Using this framework, we can determine how attractive it is to compete in any industry as well as what the overarching strategy should be to compete successfully in the industry. Success is determined by the ability to develop a sustainable competitive advantage. Five Forces Analysis can also be used to assess which industry trends may pose as opportunities or threats.
There is a whole suite of frameworks focused on analyzing the client organization itself. For the most part, these frameworks can also be used to analyze competitor organizations, and thus are often also used for purposes of market analysis.
Evaluates the Strengths, Weaknesses, Opportunities, and Threats of an organization. It provides basic directions for structuring strategic analysis. This is often done in conjunction with PEST (Political, Economic, Social, and Technological) analysis.
Developed by Michael Porter, the Value Chain framework helps us analyze specific activities through which an organization can create value and a competitive advantage.
There are 3 value disciplines to consider: Product Innovation, Cost Leadership, and Customer Intimacy. Since a company’s resources are limited, this framework helps a company determine on what dimension it should compete.
BCG Growth-Share Matrix
This matrix can be used to identify the positioning of an organization’s portfolio of products. Products located in each of the quadrants will be in fundamentally different cash flow positions and should therefore be managed differently.
Similar to the BCG Matrix in intent, this framework also allows us to see the positioning of an organization’s portfolio–against the axes of Competitive Strength and Market Attractiveness.
This framework presents 4 possible product-market strategies, with each strategic positioning presenting its own growth options and strategies.
Also known as the Strategic Triangle, the 3 Cs framework offers a strategic look at a client’s Customer, Competitors, and Company, with the thinking being that all 3 factors should be considered to form a successful strategy.
Benchmarking allows us to identify performance gaps (based on KPIs—Key Performance Indicators) compared to competitors in a similar industry. Many consultancies provide their own benchmarking data for such analysis or purchase it from a variety of benchmarking organizations depending on the data required.
These frameworks deal with analyzing a particular product or service offering. These are often used when developed a go-to-market product strategy for a client:
When evaluating a product strategy, consultants look at the marketing mix: Price, Product, Promotion, and Placement. This framework has been extended to 7 Ps (to also include Physical Evidence, People, and Process). Pricing Strategy is often its own project with its own set of frameworks (e.g. Value-based Pricing).
Product Lifecycle analysis is a tool to predict how sales will develop based on the age of the product category. This analysis is used to predict sales growth, associated customer and competitor behaviors, and, in turn, devise the appropriate product marketing strategy.
Consumer Adoption Curve
The Consumer Adoption Curve is defined by 5 sequential stages. By understanding what stage of the Consumer Adoption Curve a client is at, we can gain invaluable insights into who our target customer are, as well as their defining attributes.
Rogers’ Five Factors
This framework (named after Professor Everett Rogers), offers insight into the diffusion and adoption of product, as the rate of innovation diffusion is largely driven by 5 product-based factors: Relative Advantage, Compatibility, Complexity, Trial-ability, and Observability.
There are numerous Lean Six Sigma (LSS) and Operational Excellence frameworks that can be leveraged for creating continuous process improvement, and many consulting firms also have their own in-house tools and templates used for process improvement. Below is a very, very small sampling of such tools.
Balanced Scorecard (A strategic management system)
DMAIC (Define, Measure, Analyze, Improve, Control) and DMADV (Define, Measure, Analyze, Design, Verify)
SIPOC (Suppliers, Inputs, Process, Outputs, Customers)
Kaizen (Japanese word for “change for better”)
Gemba (Japanese word for “the place where value is added”)
If you want to check out a few of these in more detail, you can download this free primer on the 12 core strategy frameworks. Of course, this article isn’t intended to be an exhaustive list of all possible frameworks (that would make for a much longer read!) rather, it is a review of some of the most commonly used ones.
What are your favorite frameworks? If there is a framework you like to use that you don’t see listed above, please share it in the comments section below and let us know what insights it offers and when you use it.
Picked from The Consulting Lounge