Business Strategy: Chapter 5. Metrics Disclaimer: All images such as logos, photos, etc. used in this presentation are the property of their respective copyright owners and are used here for educational purposes only Some material adapted from: Sorger, Stephan. “Marketing Analytics: Strategic Models and Metrics. Admiral Press. 2013. © Stephan Sorger 2015; www.StephanSorger.com; Ch 5. Business Strategy (Metrics) 1

Outline/ Learning Objectives Topic Description Scenarios Review strategic scenarios facing most companies Metrics Discuss metrics to measure strategic-level performance Brand Review metrics to measure brand-related performance Customer Review metrics to measure customer-related performance Product Review metrics to measure product-related performance © Stephan Sorger 2015; www.StephanSorger.com; Ch 5. Business Strategy (Metrics) 1

Analytics Approach to Strategy Marketing Mix: 4Ps: Product Price Place Promotion Identify 3 typical strategic scenarios Marketing Mix Results Strategy Business Operations Strategic Metrics Business Operations: Supporting Functions Strategic Metrics: “Big Picture” © Stephan Sorger 2015; www.StephanSorger.com; Ch 5. Business Strategy (Metrics) 1

Strategic Scenarios Market Entry Market Approach Market Growth Typical Major Strategic Decisions for Most Companies: Market Entry: Should I enter this market? Market Approach: How should I engage with this market? Market Growth: How can I grow within the market? © Stephan Sorger 2015; www.StephanSorger.com; Ch 5. Business Strategy (Metrics) 1

Strategic Scenario: Market Entry Example: Diaspora in social networking Market Entry Market Entry Example: Siemens in radiation therapy Market Exit Market Entry: Apply competitive advantages to characteristics of market Market Exit: Leave flat or shrinking markets, or those suffering from intense competition Organic growth: Entering markets by growing internal process and product/service line Acquisition-driven growth: Entering markets by acquiring companies already in the market © Stephan Sorger 2015; www.StephanSorger.com; Ch 5. Business Strategy (Metrics) 1

Strategic Scenario: Market Approach Southwest Airlines in airlines Cost Leadership Generic Strategy New York Times in newspapers Differentiation Sunglass Hut in niche retailing Focus © Stephan Sorger 2015; www.StephanSorger.com; Ch 5. Business Strategy (Metrics) 1

Product/Service Development Strategic Scenario: Growth Expedia in travel booking Market Penetration Existing offerings; Existing markets Dunkin Donuts in international expansion Market Development Growth Existing offerings; New markets L’Oreal in haircare Product/Service Development New offerings; Existing markets GE in multiple markets Diversification New offerings; New markets © Stephan Sorger 2015; www.StephanSorger.com; Ch 5. Business Strategy (Metrics) 1

Strategic Metrics: Strategic Scenarios Strategic Scenario Relevant Strategic Metrics Market Entry/ Exit Market size Market growth rate Market Approach Revenue Profit Market Growth Year on year growth CAGR © Stephan Sorger 2015; www.StephanSorger.com; Ch 5. Business Strategy (Metrics) 1

Strategic Metrics: Market Entry and Exit Metric Description and Example Market Size Calculation of potential revenue available in market Example: Smartphone apps: Market size of $15B + Execution: See chapter 2 for market sizing Market Growth Rate Periodic evaluation of market to monitor growth Wang Laboratories: Failed to notice shrinking market for word processors Execution: See growth rates slides later in this module © Stephan Sorger 2015; www.StephanSorger.com; Ch 5. Business Strategy (Metrics) 1

Strategic Metrics: Market Approach Metric Description and Example Revenue Sales of goods and services into market Example Reports Total Revenue Revenue by Business Unit Revenue by Product/ Service Revenue by Geographic Region Revenue by Segment © Stephan Sorger 2015; www.StephanSorger.com; Ch 5. Business Strategy (Metrics) 1

Strategic Metrics: Market Approach Metric Description and Example Profit Revenue, less costs of doing business Example Reports Profit by Business Unit Profit by Product/ Service Profit by Geographic Region Profit by Segment Contribution Margin (Selling Price per Unit – Variable Cost per Unit) (Selling Price per Unit) ROMI Return on marketing investment (Revenue from Marketing) * (Contribution Margin) – 1 Marketing Spending © Stephan Sorger 2015; www.StephanSorger.com; Ch 5. Business Strategy (Metrics) 1

Strategic Metrics: Market Growth Metric Description and Example Year on Year Growth Increase (or decrease) in revenue, profit, etc. from one year to the next; also called Y.OY. Growth Y.O.Y Calculations Example: Apple Annual Report, 2011 Revenue (2010)=$65.2B; Revenue (2011) = $108.2B Y.O.Y. Growth = [$108.2B - $65.2B] / $65.2B = 66% CAGR Compound Annual Growth Rate Increase over a period of years (more than 2 years) Microsoft Excel: XIRR function to calculate CAGR CAGR Calculations (Ending Value) ^ (1 / Number of Periods) – 1 (Starting Value) Revenue grows from $100K to $150K over 3 years: $150,000/$100,000 ^ 1/3 - 1 = 14.5% © Stephan Sorger 2015; www.StephanSorger.com; Ch 5. Business Strategy (Metrics) 1

Strategic Metrics: Brand Development Metric Description and Example Brand Recognition Ability to confirm prior exposure to the brand Kellogg’s: Recognize cereal box in supermarket aisle Brand Recall Ability to retrieve brand from memory Roto-Rooter: First name people remember © Stephan Sorger 2015; www.StephanSorger.com; Ch 5. Business Strategy (Metrics) 1

Strategic Metrics: Brand Development Metric Description and Example Brand Depth Ease with which brand comes to mind GE: Associated with appliances Brand Breadth Range of usage scenarios for brand Greyhound: Limited use by professionals © Stephan Sorger 2015; www.StephanSorger.com; Ch 5. Business Strategy (Metrics) 1

Strategic Metrics: Brand Development Metric Description and Example Brand Equity Index Measures relative strength of brands Equation (Effective market share) * (Relative Price) * Durability Effective Market Share Weighted average of brand’s market share in all segments, weighted by each segment’s proportion of sales Relative Price (Price of our brand ) / (Price of other brands) Durability % of Customers who continue to purchase brand in the following year © Stephan Sorger 2015; www.StephanSorger.com; Ch 5. Business Strategy (Metrics) 1

Strategic Metrics: Customer Development Metric Description and Example CLV Customer Lifetime Value Example: Netflix: Long-term retention important to high CLV Equation Margin * (Retention Rate) / (1 + Discount Rate–Retention Rate) Margin Revenue generated by the customer, less costs to service Discount Rate Cost of capital; Similar to interest rate on loan Retention Rate % of Customers who remain loyal over time Calculation If margin = $72/year; Retention = 99.5%/year; Discount = 5%/yr CLV = ($72) * (0.995) / (1 + 0.05 – 0.995) = $1302.55 © Stephan Sorger 2015; www.StephanSorger.com; Ch 5. Business Strategy (Metrics) 1

Strategic Metrics: Customer Development Metric Description and Example Customer Profit Profit made per customers (Customer revenues) – (Customer costs) Example: American Airlines AAdvantage customer loyalty program Tier 1: Executive Platinum Tier 2: Gold, Platinum Tier 3: No loyalty status © Stephan Sorger 2015; www.StephanSorger.com; Ch 5. Business Strategy (Metrics) 1

Product/Service Development: Metrics Categories Development Process Metrics Development Innovation Metrics Measure competitive advantage in product or service development Measure ability to innovate © Stephan Sorger 2015; www.StephanSorger.com; Ch 5. Business Strategy (Metrics) 1

Product/Service Development: Process Metrics Customization Capabilities Quality-Oriented Capabilities Dell: Configure PC to your liking Development Process Metrics Oneida Healthcare: Ongoing training Low Cost Capabilities Responsiveness Capabilities Boeing: DFM and DFA on F-18 Zynga: Daily software builds © Stephan Sorger 2015; www.StephanSorger.com; Ch 5. Business Strategy (Metrics) 1

Product/Service Development: Innovation Metrics Breakthrough Products Major Enhancement Changes industry Example: Original Apple iPhone Development Innovation Metrics Noticeable improvement Example: iPhone 4S Siri Next Generation Products Minor Enhancement Significant advancement Example: iPhone 3  4 Extend product to new users Example: 8GB  16GB Correction/ “Bug Fix” Fix mistake Example: iPhone 4 antenna © Stephan Sorger 2015; www.StephanSorger.com; Ch 5. Business Strategy (Metrics) 1

Product/Service Development: Innovation Metrics Innovation Category Quarter 1 Quarter 2 Quarter 3 Q4 Breakthrough 5% 10% 10% 10% Next Generation 10% 20% 20% 20% Major Enhancement 15% 30% 30% 30% Minor Enhancement 40% 30% 30% 30% Correction/ Bug Fix 30% 10% 10% 10% Total 100% 100% 100% 100% Track % of each type of project over time © Stephan Sorger 2015; www.StephanSorger.com; Ch 5. Business Strategy (Metrics) 1

Check for Understanding Topic Description Terminology Know terms relating to basic strategic scenarios Strategic Metrics Review metrics for market entry, approach, and growth Brand and Customer Review metrics for brand and customer performance Products and Services Review metrics to measure product performance © Stephan Sorger 2015; www.StephanSorger.com; Ch 5. Business Strategy (Metrics) 1