Brief Logic of the Framework

I am proposing to use this framework as a basis for decision making when we meet in Paris next week. It eliminates emotionality and focuses on business drivers to make the right decisions, identify ideas, collaborate on the input. And triage them for importance based on criticality.

The framework has its roots in the definition of strategy. Since I would suggest that we can define NN’s ideation / PMO / project or innovation strategy as the set of activities that it performs to create and appropriate value, we can assess the strategy by examining how and the extent to which these activities contribute to value creation and appropriation. Since not all activities contribute equally to value creation, the types of activity which NN chooses to perform, when it chooses to perform them, where it performs them, and how it performs them are important—that is, NN has to choose the right set of activities to perform to increase its chances of creating the most value possible and capturing as much value from its services value system as possible.

Thus, the Activities component of the framework is about determining whether the right set of activities has been chosen. For NN to keep making money from the value that it has created, there must be something about the value that makes customers prefer to buy from NN rather than from its competitors—the value should be unique

The Value component is about whether the activities, collectively, contribute enough to value creation for our customers to prefer the perceived benefits in the value as better than those from competitors. Since not even unique value can always guarantee profits, it is also important that NN translates the value into money—that NN finds a way to appropriate

the value. NN should be positioned well enough vis-à-vis its competitors to make sure that the competitors do not capture the value that it has created. In fact, if it positions itself well, it can capture not only the value that it has created but also the value created by its competitors.

The Appropriability component, which is about whether the activities performed are such that NN makes money; NN will continue to create and capture value using the same activities and underpinning resources only if there is no major change, or when there is change, the change reinforces what NN is doing, or NN can react well to it.

The Change component that is behind the question: does or will NN take advantage of change in value creation and appropriation?

Effectively, the activities component of the analysis tells us which activities make up the strategy, what and how each activity contributes to value creation and appropriation, and where or when the contribution is made.

The value component explores the extent to which the contributions made by the activities are unique enough for customers to prefer NN’ services to competitors’ services.

The appropriability component explores whether the contributions made by the activities are large enough to put NN in a superior position vis-à-vis its competitors and for NN to profit from the position and the value created.

The change component is about whether NN is doing what it can to exploit existing change or future change.

DETAIL of the Framework

Activities (Is NN Performing the Right Activities?)

The activities which NN performs, when it performs them, where it performs them, and how it performs them determine the extent to which NN creates and appropriates value and the level of competitive advantage that it can have.

Therefore the central question is whether NN is performing the activities that it should be performing, when it should be performing them, where it should be performing them, and how it should be performing them to give it a competitive advantage?

We should endeavor to answer this question indirectly by exploring whether or not each activity contributes to value creation and appropriation.

When NN performs an activity, does the activity contribute to lowering the cost of our services, differentiating the service, moving its price towards the reservation price of customers, increasing the number of customers, or finding alternative profitable sources of revenue?

An activity also needs to be leveraged to improve NN’s position vis-à-vis its competitors by, for example, dampening or reversing repressive competitive forces while reinforcing favorable ones, or improving relationships from adversarial to friendly. Thus, two questions that can give us a good idea of whether NN is performing the right activity are, if the activity contributes, (1) to low cost, differentiation, better pricing, reaching more customers, and better sources of revenues, and (2) to improving NN’s position vis-à-vis competitors—for example, dampening repressive competitive and macro-environmental forces while reinforcing friendly ones.

Moreover, resources and capabilities play two crucial roles in creating and appropriating value in a consulting organization, and especially for NN. We have a legacy labor pool that’s uniquely positioned to perform currently contracted services, but besides a few,… if we want to go in a new direction, we’ll need to have a hard look at the competencies we currently have and how we can develop them – if we want to do this. . We need to ask ourselves some hard questions. Do we have the right skill mix to drive our business forward? Are our resources better skilled than our main competitors?. In consulting, quality of resources is at the root of all activities and definitely are a source of competitive advantage. For example, NN’s brand or reputation or the excellence in service, analytics or thinking should be the reason why customers buy our services rather than competitors’ services.

Therefore, we need to be able to answer the question which can tell us if an activity is the right one is—does the activity contribute to building new distinctive resources/capabilities, or to translating existing ones into unique positions and profits? Finally, in choosing how many activities to perform, NN is guided by two rather opposing forces. On the one hand, we do not want to leave out some activity that could have made a significant contribution to value creation and appropriation. We want our set of activities to be as comprehensive as possible— to include as many relevant activities as possible. On the other hand, having too many activities, especially low value-adding activities, can be costly. NN wants to be parsimonious—perform as few activities as possible without leaving out key activities.

Thus, NN not only has to perform the right types of activities, it also has to perform the right number of activities. Therefore, the final question that NN ought to ask in assessing its strategy is—is it performing superfluous activities, or are there some activities that it should be performing?

Effectively, analyzing the Activities component of the framework consists of determining the extent to which each activity.

Let’s ask and answer for ourselves the following questions: do activities –

1. Contributes to low cost, differentiation, better pricing, reaching more customers, and better sources of revenues;

2. Contributes to improving our+ position vis-à-vis competitors

3. Takes advantage of industry value drivers. 4. Contributes to building new distinctive

resources/capabilities or translating of a Strategy existing ones into unique positions and profits (including complementary assets).

5. Fits the comprehensiveness and parsimony criteria.

I now explore all five questions.

Do NN Services Contribute to Low Cost, Differentiation, or other rivers or profitability?

The idea is to determine whether each activity which NN performs, when it performs it, how it performs it, and where it performs it contributes towards lowering its cost, differentiating its services, increasing the number of its customers, improving its pricing, or better identifying and serving profitable sources of revenues.

If the activity does, the answer to the question is Yes. If it does not, the answer is No. For example, when a luxury goods maker advertises to the affluent, the activity may be contributing to differentiating its services, and therefore contributing to value creation. Thus the answer to this question would be Yes. If NN obtains a second source for a critical input, it may be able to extract lower prices from its suppliers, thereby lowering its cost, and contributing to the value that it creates and appropriates. Activities that contribute to increasing the number of customers that buy a service, getting the price right, and pursuing the right sources of revenue also make a contribution to the revenue earned.

Contribute to Improving NN’s Position vis-à-vis Competitors?

An activity contributes to improving NN position vis-à-vis its competitors if it improves the extent to which clients need NN more than it needs them. When I talk of improving NN’s position, it does not necessarily mean that NN is starting from a bad situation. We could in effect already be in a good position and perform an activity that improves the situation, putting us in an even better position vis-à-vis our competitors.

Take Advantage of Industry Value Drivers?

The next question is, whether, in performing an activity, NN has taken advantage of industry value drivers. NN takes advantage of industry value drivers if the activity exploits an industry-specific factor to reduce cost, further differentiate its services, or improve other profit drivers such as the number of its customers.

Answering this question entails listing the industry value drivers in the industry and identifying which activities take advantage of them. The answer to the question is Yes, NN’s activities take advantage of the industry value drivers identified.

Contribute to Building New Distinctive resources/Capabilities or Translating Existing Ones into Unique Value?

Each activity that NN performs exploits some of its resources and capabilities, or contributes to building new resources/capabilities. Thus, one of the questions that NN should ask about each activity that it performs is whether the activity contributes to exploiting its existing resources/capabilities better, or to building distinctive resources /capabilities (new or old). By identifying the resources/capabilities that are valuable to NN, one can determine which of them are being exploited by existing activities or are being built by these activities.

Are Comprehensive and Parsimonious?

Whereas the other questions are about each individual activity, the comprehensiveness and parsimony question is about the whole set of activities that constitutes NN’s strategy. ANNer laying out the set of activities, NN should carefully explore what other activities it should be performing, that it is not presently performing. It should also think about dropping some of the activities that make the least contribution towards value creation and appropriation. If there are no activities that it should be performing, or that it should drop, the answer is Yes, since the strategy is comprehensive and parsimonious. Effectively, the Activities component of the framework starts out by identifying all the key activities that make up the strategy. Then, for each question, see if any of the identified activities make the contribution called for in the question. If the answer to a question is a No, NN may need to take another look at the particular factor and find ways to reverse things. When the answer is a Yes, there is still always room for improvement. Take Question 1, for example. If an activity contributes to low costs but does not contribute to differentiation, etc., Question 1 still gets a Yes. However, we now know that something could be done to improve differentiation, increase number of customers, etc.

Assessing the Profitability Potential of the new NN GTM Strategy Value (Is the Value Created by the Strategy Preferred by Many Customers? Yes/No)

The Activities component tells us whether or not each activity contributes to value creation, but it does not tell us whether the contributions are enough to make a difference with customers. It does not tell us if the contributions of all the activities, when added together, are unique enough to make customers prefer NN’s services to competitors’ services.

The Values component allows us to explore whether the set of activities that is NN’s strategy creates value that is unique enough for customers to prefer it to competing value. If customers are going to keep buying from NN, its strategy needs to create benefits that they perceive as being unique compared to competitors’ offerings. Thus, the first question in the Value component is whether the value created is unique enough, as perceived by customers, for them to prefer it to competing value.

Since the number of customers that perceive value as unique is also important, the next question is, do many customers perceive the value as unique? The more customers that perceive the benefits created, the higher the revenue potential is likely to be and the better the chances of having economies of scale and of reducing the per unit costs; also, the more valuable a customer, the better the profitability potential of NN is likely to be in selling to the customer. A customer is valuable if it has a high willingness to pay, represents a decent share of revenues, and does not cost much (relative to the revenues from the customer) to acquire and maintain. Finally, nearby white spaces into which NN can easily move, can also increase the profitability potential of NN. A white space is a market segment that is not being served—it has potential customers. Effectively, an analysis of the Value component is about determining the extent to which NN’s strategy results in differentiated or low-cost services that are targeted at many valuable customers. Such an analysis is done by answering the following simple questions with a Yes or No

1 Do customers perceive the value created by the strategy as unique? 2 Do many customers perceive this value? 3 Are these customers valuable? 4 Are there any nearby white spaces? If the answer to the first three questions is Yes, the strategy is OK as far as the Value component is concerned. NN can then work on reinforcing the Yesses. If any of the answers are No, NN may need to take another look at its strategy by asking the following questions: how can the value be improved?

How can NN gain new valuable customers or enter new market segments? If the answer to the fourth question is Yes, NN may want to explore the possibilities of getting into the white space. Finally, any opportunities and threats to value, such as shiNNs in customer tastes or demographics, or a technological change that can influence expected customer benefits, are also examined.

Appropriability

The Activities component tells us whether the activities which NN performs contribute to better positioning it vis-à-vis its competitors, but it does not tell us if the contributions are enough to put NN in a superior position relative to its competitors. Neither does it tell us if NN that has a superior position vis-à-vis competitors exploits that position by, for example, setting its prices as close as possible to the reservation prices of customers, or obtaining other concessions from customers.

The Appropriability component tells us whether NN has a superior position vis-à-vis competitors, and whether NN translates the customer benefits created and its position vis-à-vis competitors into money. The analysis consists of asking whether:

1. NN has a superior position vis-à-vis its competitors. 2. NN exploits its position vis-à-vis its competitors and customer

benefits. 3. It is difficult to imitate NN. 4. There are few viable substitutes but many complements.

Does NN Have a Superior Position vis-à-vis Competitors?

NN has a superior position vis-à-vis its competitors if clients need the competitors less than they need NN. Two factors determine whether clients needs a competitor more, or vice versa: industry factors, and firm-specific factors.

Does NN Exploit its Position vis-à-vis Competitors, and Profit from Customer Benefits?

The next question is whether NN exploits its position vis-à-vis competitors and whether it profits from the benefits that customers perceive in NN’s services.

The value that NN captures is a function of how well it exploits its position. For example, if NN has a superior position vis-à-vis its competitors, it can extract better prices from clients, thereby increasing it margins and increasing the value that it captures. (Recall that value captured equals price paid by customers less the cost of providing the customer with the service.)

The value that NN captures is also a very strong function of NN’s pricing strategy. Developing low-cost or differentiated services is great; but the services must be priced carefully so as not to drive customers away or leave money on the table. The closer that NN can set its prices to each customer’s reservation price without driving customers away, the more money that NN is likely to make. Recall that a customer’s reservation price for a service is the maximum price that the customer is willing to pay for the service. If the price is higher than the reservation price, the customer may be lost. If the price is below the customer’s reservation price, the customer might perceive our services not to be as valuable as the (more pricey) competition. Back to the question, does NN exploit its position vis-à-vis competitors, and profit from customer benefits? The answer is Yes, if either NN sets its prices as close as possible to the reservation prices of customers, or if it exercises its superior position in some other way.

Is it Difficult to Imitate NN?

If the value that NN creates can be easily imitated, it will be difficult for the firm to make money. Thus, an important question for NN is whether it is easy for existing rivals and potential competitors to imitate or leapfrog NN’s set of activities.

Two factors determine the extent to which NN’s activities can be imitated. The complexity of the system of activities that NN performs can also prevent competitors from imitating its set of activities. Imitating one activity may be easy; but imitating a system of activities is a lot more difficult since one has to imitate not only the many activities that form the system but also the interactions among the components. Resources and capabilities can also be difficult to imitate when they are protected by law, are rooted in a history that cannot be re-enacted, are scarce and cannot be recreated, or require a critical mass to be effective.

Second, whether NN’s set of activities can be imitated is also a function of the potential imitators. Sometimes, potential imitators are unable to imitate a firm not so much because of NN and its system of activities and resources but because of the potential competitors’ prior commitments and lack of what it takes to imitate. Thus, in exploring appropriability, it is important to ask the following two questions: is there something about NN and its set of activities and resources that makes it difficult for competitors to imitate its strategy? Is there something about competitors that impedes them from imitating NN?

Are There Few Substitutes but Many Complements?

If NN offers rare value that is difficult to imitate, it may still not be able to profit enough from the value if there are services that can act as substitutes for the value that customers derive from competitor services. Thus, NN may be better off understanding the extent to which competitors can take away NN customers. Complements have the opposite effect (compared to substitutes) on NN’s services. Availability of complements tends to boost services sales. Thus, customers would perceive NN’s services as being more valuable if such a service required complements and there were many such complements available at fair prices. For example, availability of soNNware at low prices boosted the sale of PCs.

Two important questions for NN, then, are:

1. Is the value that we create non-substitutable? 2. Do complements (if relevant) play a good enough role to boost the

benefits that customers perceive from NN?

Change: The New Game Factor

What do we want to be as a Firm, when do we want to be there, and what do we need to do to get there? Markets change. Technologies change. Expectations change. The competition changes…. Change can have a profound effect on NN’s ability to create and appropriate value. Change can originate from NN’s environment, or from its new game strategies. It can come from NN’s go to market portfolio or macro-environment.

In any case, NN has to deal with existing change and potential future changes. It has to create and appropriate value in the face of existing change but must also anticipate and prepare for future changes. Without constantly anticipating and preparing for future change, NN’s existing competitive advantage can easily be undermined by events such as disruptive technologies or better, more effectively delivered services.

The role of change and the extent to which NN can take advantage of it are analyzed in two parts: determination of strengths and handicaps, and the exploration of some key change questions.

Determination of Strengths and Handicaps

When NN considers a new game, some of its pre-new game strengths remain strengths while others become handicaps. These strengths and handicaps play a key role in determining the extent to which NN can perform value chain activities to create and appropriate value, in the face of the change. Strengths and handicaps can be resources, portfolio of services, new technologies, new partnerships, complementary services or a leverage of core competencies in new spaces. (for instance – Portfolio management : Procurement portfolio or innovation portfolio management, a fully managed service offering), marketing know-how, leveraging partner brand-name reputations, technological know-how, client or supplier relationships, dominant managerial logic, routines, processes, culture, and so on), or service positions (low-cost, differentiation, or positioning vis-à-vis competitors).

Thus, the first step in a Change analysis is to determine which of NN’s pre-change strengths remain strengths and which ones become handicaps in the face of the change.

The Questions

Having determined NN’s strengths and handicaps, the next step is to determine how NN can take or is taking advantage of the change by asking the following questions:

Given its strengths and handicaps in creating and appropriating value in the face of the change, does or will NN take advantage of:

1. The new ways of creating and capturing new value generated by the change?

2. The opportunities generated by change to build new resources or translate existing ones in new ways?

3. First mover’s advantages and disadvantages, and competitors’ handicaps that result from change?

4. Competitors’ potential reactions to its actions? 5. Opportunities and threats of environment? Are there no better

alternatives?

Does NN Take Advantage of the New Ways of Creating and Capturing Value Generated by Change?

NN takes advantage of new ways of creating and appropriating value generated by a change if, given the change and NN’s associated strengths and handicaps, it can still offer customers the benefits that they prefer, position itself well vis-à-vis competitors, and profit from the benefits and position. Identifying the new ways of creating and capturing value generated by change consists of picking those activities that are being

performed differently—or should be performed differently—in the face of the change, and verifying that these new game activities have made (or will make) a significant contribution towards value creation and appropriation. The activities make a significant contribution if customers prefer the value from them, or NN profits from them.

Thus, the question here is, do the new game activities (1) create value that customers prefer over value from competitors, and (2) enable NN to make money? If the answer to any of these questions is Yes, the answer to the question, does the firm take advantage of the new ways of creating and capturing value generated by change? is Yes.

Does NN Take Advantage of Opportunities Generated by Change to Build New Resources, or Translate Existing Ones in New Ways?

In the face of change, both new and old resources need to perform the new game activities. The first step towards seeing whether NN has taken advantage of these resources is to identify them. To identify them, we need to construct the value chain, and pinpoint the activities that are being performed differently or should be performed differently as a result of the change. The relevant resources are those that are needed to perform the new activities. The next step is to answer the question, do the identified resources make a significant contribution towards (1) creating value that customers prefer over value from competitors, (2) enabling NN to make money? If the answer to either question is Yes, then NN takes advantage of the opportunities generated by change to build new resources, or translate existing ones in new ways.

Does NN Take Advantage of First-mover’s Advantages and Disadvantages, and Competitors’ Handicaps?

If NN initiates change, or is the first to take advantage of change, it has an opportunity to build and take advantage of first-mover advantages. A first-mover advantage is a resource, capability, or service position that (1) NN acquires by being the first to carry out an activity, and (2) gives NN an advantage in creating and appropriating value. These include pre-emption of scarce resources. The first step towards seeing whether NN has taken advantage of first-mover advantages is to identify them.

The next step is to establish whether the advantages make a significant contribution to the benefits that our (potential) customers perceive, or to the profits that NN makes.

First-mover disadvantages are those shortcomings that NN has by being the first to pursue a particular activity. For example, NN that moves first into a virgin market spends a great deal to establish the market. Followers that move into the established market are effectively free-riding on the investments that the first mover made to establish the market. A first mover would rather the follower did not get so much free. Interestingly, the cure to first-mover disadvantages can be better first-mover

advantages. NN can also take advantage of competitor’s handicaps. Thus, the answer to this question is Yes, if NN takes advantage of first-mover advantages and disadvantages, OR of competitors’ handicaps in performing its activities.

Does NN Anticipate and Respond to Competitors’ Reactions to its Actions?

NN is better able to perform the activities that allow it to create and appropriate value in the face of change if NN anticipates and responds to its competitor’s actions and reactions to the change. To determine if NN’s strategy anticipates and responds to competitors’ reactions, I list the activities that NN performs as a result of the change and ask whether, for each of the key activities, NN took the actions and reactions of the relevant competitor into consideration.

Identify and Take Advantage of Opportunities and Threats from the Macro environment? Are there no Better Alternatives?

In taking advantage of change, it is critical for NN to identify and take advantage of opportunities and threats, beyond the change, from its environment. The benefits of changes are oNNen ended by other changes. For example, many innovations are usually displaced by so-called disruptive technologies. Thus, paying attention to our environment can enable NN to be better prepared for disruption. Sometimes, by looking into its environment, NN may find better alternatives to its new game. ANNer developing its search engine, Google found an alternative monetization model in paid listings that was much better than pop-up ads.

Applications of the Framework

What Can be Analyzed Using the framework?

Since the framework can be used to analyze the profitability potential of NN’s strategy, it can also be used to analyze the profitability potential of most things whose profitability rests on performing a set of activities.

Thus, the framework can be used to analyze business models, business units, products, technologies, brands, market segments, acquisitions, investment opportunities, partnerships such as alliances, corporate strategies, and so on.

Take brand, for example. The first question is, does NN perform the right activities for building and exploiting the brand? Is the value created using the brand preferred by customers compared to the value from competitors? Does NN make money from the brand? And finally, in building and exploiting the brand, does NN take advantage of change or expect to take advantage of it?