35

The Methodology for Proper Analyses, Conclusions, and Recommendations

This phase of the process is where the heavy lifting takes place and where analytical skills and insightfulness rise to the forefront. This is the phase that counts most in making the correct observations and reaching the optimal solutions. It is also where potential flaws and deficiencies may come into play, resulting in subpar or even erroneous outcomes. Fortunately, there are ways to mitigate them.

First, I’ll identify a generic conceptual methodology for you to follow, which will more likely lead you to higher-quality results. Then, I’ll point out some insightful observations that should help elevate the quality of your work significantly. I will also point out where and how the most common mistakes are made so that you may be able to recognize and avoid them. Finally, I’ll walk you through a detailed, step-by-step example to liven it all up for you.

The methodology is appropriate for most, if not all, the issues you may be called upon to deal with. Many of those issues will likely focus on the competitive dynamics and financial performance of a company or product. For this reason, I will tailor my comments and explanations to more specifically align with these kinds of analyses.

Before I get into the specifics, I would like to address a nuance, and as usual, one that is front and center in achieving optimal results. The nuance lies in the difference between the end results of shallow and simple perspectives versus deeper and more insightful analyses.

The following may appear to be an oxymoron, but it is not. It may appear to be insignificant, but it is not. It is an important observation to ensure that conclusions and recommendations are well communicated and understood by the decision makers. Otherwise, they will not be adopted and implemented:

Whereas most compromised conclusions and recommendations are a result of relatively shallow and simplified analyses and perspectives, deep and thorough analyses, conclusions, and recommendations must be conceptually simplified in order to be well communicated, understood, and properly adopted.

In other words, it is difficult to tell compromised conclusions and recommendations apart from the correct ones, since they both appear simple and only give a “top of the wave” perspective when communicated to management. The real difference stems from the quality of the analyses that led to them, which is rarely communicated at higher management-level presentations. That is why, when you are in a management position, you must understand the quality of the analyses behind any conclusions and recommendations before accepting them.

Insight: The Key to Achieving Quality of Analysis

Analyzing competitive situations is never simple. There are many variables and interrelationships to consider. In most cases, significant insight is necessary to enable the best understanding of these variables and interrelationships, and therefore, the most accurate conclusions and recommendations. The professionals behind the analyses spend an inordinate amount of time and energy in the process. They become intimately involved and familiar with every aspect of it. They know the many inflection points and the different branches of the decision-tree that led them there. They know all the nuances and see all the details, without losing sight of the overall relevance and importance of each. They understand exactly how the complex details led to the final conclusions and recommendations.

This is not the case for management or, for that matter, anybody else not involved with the actual analyses. Those people have limited time to absorb the essence and full details behind the analyses, conclusions, and recommendations. Thus, the challenge is to reduce the complexity inherent and embodied in the analysis phase into a simplified, clear, and convincing presentation that management can quickly comprehend and feel comfortable with when subsequently endorsing the necessary recommendations.

There are two parts to doing it properly. One deals with how to conceptually summarize and explain the actual findings, conclusions, and recommendations, without sacrificing the full picture and the essence of what is important. The other part deals with the actual writing of the presentation deck/report itself. The two involve different aspects and are reasonably independent activities, other than the fact that the conceptual simplification of the analyses and conclusions must occur first; otherwise, it would be impossible to simplify the writings. I am addressing only the former in this section and won’t discuss how to compose and generate well-written presentations. (Recall how I emphasized the importance of the actual written reports/presentations at Booz Allen, which added about an extra one-third to the project time.)

The process of simplification is done through framing, defining, categorizing, and grouping variables with common logic that leads to the same outcome. Then, these groupings are further consolidated into still higher-level categories until the most macro-level, top-down perspective is achieved. To do so properly, the important must be separated from the trivial; the high-priority from the low; and the variables with the most impact from those with a lesser impact. The following three rules will help one do so properly:

1.The groupings must be logically sound. This means that, in the minimum, there is obvious logic for why the groupings are correct. Variables grouped together would have either individually led to the same conclusion or would have had no impact on the final conclusion.

This way, the new groupings continue to focus on and lead in the desired direction.

2.The groupings must remain independent from each other. In other words, all the important interrelationships should be fully captured within a single group and should not spill over into other groups.

3.The groupings should represent and emphasize the more relevant and important variables that drive the final conclusions and recommendations. In other words, the grouping is done so as to emphasize the most important aspects of the entire analyses that will maximize succinctness and comprehension while maintaining focus on the most important and relevant variables, conclusions, and recommendations.

This book is full of these kinds of simplifications. I define concepts and terms more precisely to help categorize them in more appropriate, logical ways. I frame and reframe issues to create better-defined groupings and a clearer focus on the higher-priority and more impactful variables. I also use top-down and bottom-up approaches to allow for the more convincing logical flows.

It is the exact same process that should be applied when it comes to simplifying any and all business analyses for the purpose of better defining and explaining the logic flow and reasoning of findings, conclusions, and recommendations. There are some common “tricks,” which I will point out, that can make the process a bit easier to accomplish.

A quick side note: I mentioned in an earlier chapter that in job interviews one can score higher on the analytical skills by describing the methodology that can be used to resolve an issue or reach conclusions before diving into any specific conclusions. The methodology discussed in this section could be used in any case-study discussions to frame the approach you plan to take. Use it if you can. It sounds impressive and will further differentiate you from others.

The Methodology for Market and Competitive Analyses

This methodology comprises eight distinct steps and an iterative process that lead toward successful analyses, conclusions, and recommendations. The steps are:

1.General assessment of the current situation

2.Trend analyses and current competitive dynamics and segmentation

3.Development of key success factors

4.Evaluation of competitors and the company relative to the key success factors

5.Drawing primary conclusions

6.Devising alternative recommendations

7.Analyzing trade-offs of alternative recommendations

8.Reaching final conclusions and recommendations

Step 1: General Assessment of the Current Situation

In this step, background and performance-related information is assimilated for context. It defines the basic, big-picture competitive “lay of the land.” It assesses recent industry dynamics and the company’s performance, and identifies the issues and challenges that may need to be addressed. It may also include a description of the exact methodology that will be followed to address and resolve the identified issues and challenges. It is generally a straightforward undertaking.

Step 2: Trend Analyses and Current Competitive Dynamics and Segmentation

It is in this step where most of the basic analyses that lead to the more important observations are carried out. It builds the necessary foundation upon which the observations, conclusions, and recommendations will follow. This step identifies and explains the important market and competitive dynamics currently at play. The most important aspect of the analyses is to accurately define the segmentation of the market. It is in the definition of various segments where most of the insights occur, as well as where many of the compromised subpar conclusions take place.

Segmentation of the Business and Markets

Note: This topic regarding segmentation is reasonably complicated and represents a “Level 3” teaching (per the three levels I mentioned in the Author’s Note). A reader without an MBA, and/or one not deeply involved in the analyses of competitive and corporate strategies, may find some parts regarding the theory somewhat confusing or unclear. However, it is not essential to fully understand the theories in order to gain the full benefits and insights I intend to share with all readers. The more important take-away observations from what follows are summarized toward the end of this segment.

Segmentation reflects the activity of dividing a broad consumer or commercial business market into subgroups based on some type of shared, common characteristics. Segmentation can be done along many different dimensions, such as different businesses, different product lines, different customers, different demographics of customers, different income levels, different geographies, different countries, different distribution channels, and so on. Each segmentation scheme or grouping of customers is generally designed for some specific objectives. For example, segmentation to help devise specific marketing and advertising campaigns may be done along demographics, age groups, income levels, product preferences, geographies, and so on. Segmentation for the purpose of financial reporting and measuring profitability can be done by product lines, geographies, distribution channels, and so on.

However, whereas most segmentations aid in the management of some specific objectives and/or activities, there is one category of segmentation that is most critical in determining overall competitive strategies. This category is referred to as Business and Market segmentation (as opposed to customer segmentation, geographic segmentation, demographic segmentation, product lines segmentation, financial segmentation, etc.). This Business and Market segmentation is specifically designed to capture the most important aspects of how to compete successfully and outperform other competitors. As such, this segmentation represents critical building blocks that help shape and differentiate overall competitive strategies, thereby representing the highest level of potential impact on the performance of a product, company, or enterprise. It is not a trivial undertaking and is mired with pitfalls. It requires competence and expertise to be done well. One can find many books and articles that address this topic and how to go about correctly defining Business and Market segments. In this section, I plan to cover only a specific aspect of it, one that is not well addressed elsewhere and that would be of benefit for you to understand. However, some background information is first needed for context.

About forty years ago, the concept of business segmentation changed dramatically. It evolved from straightforward segmentations generally along a single dimension like different customer groupings and/or product lines and/or geography to more complicated and sophisticated segmentations that were generally defined along multiple variables that fully captured and put boundaries around the most strategically important competitive dynamics. They were referred to and became known as strategic business segments (or, in short, strategic segments).

The proper, more complicated, and multidimensional strategic segmentation required a higher degree of specific analytical skill and expertise, which at the time few corporations possessed. It required a deep understanding of the competitive dynamics in the industry of all the players, including direct competitors, indirect competitors, supply-chain companies, distribution channels, sales activities, and customer behavior, to name a few. Segmentation was no longer a discrete, independent, automatic classification exercise, as was the practice before. It had been transformed to acknowledge many different, broader competitive forces that were at play in shaping the competitive landscape.

For example, before the introduction of the new business segmentation concept, a kitchen appliance company may have defined its segments by its various product lines; a competitor may have used a different segmentation, like different geographies; a third could have segmented along the various buyer categories, like direct sales, wholesalers, and retailers; a fourth may have segmented along the various distribution channels it used, like large specialized appliance stores, large general-purpose department stores, medium-size specialized appliance stores, medium general-purpose department stores, small general-purpose department stores, small retailers, and on and on. Yet, all those competitors essentially sold the same products to the same potential end users/customers. So how could different competitive strategies be effectively formulated when each competitor used an arbitrary, single segmentation scheme?

The new theory argued that there are definitive, common-to-all-competitors business segments that capture the real competitive dynamics in the marketplace and explain the relative success of the various competitors. Each of the segments represented different competitive dynamics and success factors. Thus, each competitor needed to devise different competitive strategies to compete in each of the segments, and competitors were not required to compete in all the segments. It also explained why competitors had varying degrees of success—they could be successful in some segments but not others. In other words, different competitors had different strategies that were better suited to compete in specific segments but not necessarily in others. Examples of such multidimensional business segments in the appliance industry could include large builders who bought direct from the manufacturers; large specialized appliance stores; small- to medium-size specialized appliance stores; large general-purpose department stores; and so on. There could even be additional and more refined segments; for example, a single segment like large builders who buy directly from the manufacturer could be broken up into multiple business segments, such as large builders in rural areas versus those in urban centers.

To determine the new strategic segmentation, one needed to understand everything about the competitive dynamics in the industry. Such deep and insightful understanding was not a trivial exercise. At Booz Allen, for example, we would read everything available about the industry, including information published by the different competitors. In addition, we would interview on average between thirty and sixty different executives who represented the various players in the industry to broaden our understanding. A commitment to an undertaking like this requires resources and expenses to a degree that are rarely available to internal corporate staff.

Furthermore, such preparation was just the legwork—the data collection phase for the analysis stage. One would think that after thirty to sixty interviews of high-level executives and other industry experts, a consistent picture of the actual competitive dynamics would easily emerge, but this is not true. The perspectives and opinions as to what is important vary substantially. Everybody has their own perspective based on their own individual experiences, and nobody has a handle on the correct overall picture and insightful understanding of the totality.

This reminds me of, and is analogous to, an observation I made while at Wharton. As part of our class material, we used case studies to learn how various theories can be applied in real situations. Generally, the case studies were based on companies that had experienced poor and deteriorating performance. We students were asked to analyze the case studies. This meant that we were to reach an understanding of the reasons for the deteriorating performance and come up with the proper recommendations that would either help the company to avoid the deteriorating performance or reverse the trend.

What I noticed fascinated me. In all of the case studies we were given, without a single exception, the problems were always and exclusively related to the subject of the class, and so were all the solutions. Meaning, if the case study was part of a finance class, all the problems that led to the company’s deteriorating performance and the commensurate solutions were finance related. In the marketing class, they were marketing related; in the human resources class, they were human resources related; in the accounting class, they were accounting related; and so on. Most of the professors were not even cognizant that there may have been other factors involved, some perhaps even more important to understanding and solving the performance-related issues of the whole company. This is also how easy it is to have a narrow perspective in business and remain convinced that such a perspective is an accurate one. This is why developing a total and complete picture with real, deep, and insightful understanding is not a trivial task. Proper strategic segmentation became the underpinning of such a complete and correct understanding.

As stated, the concept of segmentation changed in a fundamental way about forty years ago. The Boston Consulting Group (BCG) was the main driver. This is what propelled the firm’s initial reputation and success. Until that time, segmentation tended to focus on categorizing the various customers. The implicit assumption that underscored segmentation was that the better a company understood its various customers and their needs, the better it could address those needs with the right products and services. In turn, the more the customers’ needs were met, the more products they would buy from the company, and thus the more financially successful a company would become. This changed dramatically with a new concept introduced by BCG. It coined and introduced the new concepts called strategic business units and strategic business segments.

The introduction of these concepts fundamentally changed a long-standing common wisdom that “customer segmentations lead to a better understanding of the customers and, therefore, better financial results.” BCG suggested that it was fallacious and that there were completely different reasons for the relative performance of the different competitors. BCG claimed that those competitors that have the lowest overall cost structures stand the best opportunity to outperform others. The logic was simple: The lower the cost, the lower the price; the lower the price a competitor can offer to its customers, the higher the number of customers who will buy; the higher the number of customers who will buy, the more sales and thus the more successful the company.

Accompanying this new theory were a couple of other observations, which I alluded to earlier. The first was that the competitive dynamics in each of the strategic business segments were different and unique. Thus, each competitor needed to devise unique strategies for each of its strategic business segments. The second was that the overall cost structure of the company as a whole didn’t matter much. Rather, the lowest cost structure theory applied for each of the strategic business segments, separately and independently. Thus, the cost structure associated with each of the strategic business segments needed to be understood and managed separately. BCG coined the term “cost to serve,” meaning all the costs associated with competing and serving a specific strategic business segment. This required changing most of the allocated direct and indirect overhead costs so that they would more accurately reflect the real costs related to serving each of the different strategic business segments. This represented very complicated and complex analyses that could easily be applied incorrectly if done by a less-experienced person.

Another observation was that for each strategic business segment, the bigger a company’s market share, the lower its costs relative to its competitors, and therefore the more successful they would be in that strategic business segment. This was explained by the theory of the “economies of scale.” It suggested that the larger a competitor is in any strategic segment, the lower its costs to serve that segment. This led to a change in the strategic imperative for companies. They began to pursue strategies that would enable them to increase market share in each of their newly defined strategic business segments. If they deemed it impossible to increase market share, they would strongly consider exiting that particular segment, because the theory claimed they would likely lose money in that segment. In my view, the methodology used to define the various strategic business segments has since been somewhat corrupted and not well applied in practice, but the importance of market share within each of the segments is still considered a sound theory.

Since then and over the years, how companies defined such strategic segments got corrupted. There were many factors that influenced how and why the strategic business segments were corrupted over time. First, companies slowly transitioned back into “market/customer-driven” segmentation, because those were easier to define, comprehend, and evaluate. At the same time, industry associations continued to use market-driven and/or distribution channel–driven segmentations, because those were the statistics that they had always aggregated. Financial research firms have their own segmentations to help create “comparables” for stock analyses, as well as help set valuations in merger and acquisition situations. The SEC requires its own accounting segmentations in financial statements, and so on. All these various segmentations, in one way or another, and over time, bleed into each other and modify the purity of what was intended to be the true strategic business segments, thereby diminishing one’s ability to devise sharp and insightful competitive strategies. Perhaps a personal example will demonstrate just how widespread is the misapplication of the concept of proper strategic segmentation.

My daughter, Beth, worked as an analyst for one of the top investment banking firms in New York. These firms really work their analysts—about seventy to one hundred hours a week, every week, without a break. I knew the time pressures placed on her, so I coordinated a dinner with her months in advance. I would fly in from Chicago for the occasion. I asked her to make sure that her managers were aware of the dinner so that she would not be assigned a last-minute task that would preclude her from attending. She got approval and all was fine. On the morning of the dinner, I called to confirm that she would be able to have dinner with me that evening. She checked and reconfirmed that all was fine. I hopped on a plane and flew to New York. I called her upon landing, and in a despondent voice she said, “Daddy, I’m sorry. I got a last-minute assignment that will keep me up and working the whole night. I will be able to give you no more than twenty minutes.” We decided to meet for pizza near her office. She didn’t look all that well. In fact, she looked quite distressed.

I asked her what was wrong, and she told me that her manager assigned her a job that was due the very next morning. The team was supposed to make a presentation to a large logistics/trucking company the next day. Beth’s manager gave her a list of data that she needed to collect and display in graphs, charts, and table forms the next morning. Most of the data she asked her to collect was not very common, and even peculiar. Beth couldn’t find the needed information anywhere, not even a reference to it. (Remember, those were the days without internet and online data repositories everywhere.) Her firm had a senior managing director who was presumably an expert in the logistics business. Beth thought that he might know where she could find the data. She was hesitant to call him in the evening at home. She first told me her dilemma and asked if I thought it would be okay to call the senior partner, whom she didn’t know personally. My answer was that she should. She said she would do so after our hasty dinner.

Beth knew that I was quite adept at data collection. She told me the specific data she was after. I told her that I had no idea where to find such data. I added that it appeared to me that the data were uncommon, and that I doubted they could easily be found. She almost started to cry. I then innocently asked her why she was looking for those specific data, since they looked so peculiar to me. She then told me how her manager was planning to use the data.

Investment bankers’ presentations always included a breakdown of the industry and the competitive segmentation of all the players, along with commentary on the relative differentiation of the company they made the presentation to. Her manager gave her what she believed would be the proper segmentation in the trucking industry and needed Beth to collect the data for the graphs and charts she left with her, so that she could incorporate these in her presentation to the potential client. I said, “Beth, there is no way you will get the data you are looking for overnight. There might be another option for you. The segmentation your manager gave you makes no sense to me. I know what investment bankers’ presentations generally contain. I recommend you provide a different segmentation scheme, one that would be much more accurate, and for which the data would be easily available. Why don’t you submit that, instead of what you were asked to do?”

She looked at me, still distressed, and said, “But, Dad, she specifically asked me to complete the graphs and chart for that data and nothing else. Won’t she be angry with me?”

I replied, “Beth, there is no way you can give her the data she asked for. This is your next best choice. What have you got to lose? Not just that, but I’ll predict she will actually accept what you provide and will be happy with the result. Let me help you with the presentation and segmentation and show you what data you will need.” She agreed.

In my previous life as a consultant, I was involved with a couple of projects that dealt with logistics and trucking companies, so I was familiar with the industry and its segmentation. We spent the next hour writing a presentation with all the charts and graphs hand-drawn. She only needed to fill in the numbers and properly display the various graphs and charts. She was still very nervous when we parted. I knew that she would spend the entire night collecting the data and preparing the presentation for the meeting.

The next afternoon, Beth called, and as soon as I picked up the phone, she repeated a favorite sentence of hers on such occasions: “Dad, you are a genius!” She proceeded to tell me that her manager was so impressed with what she gave her that she took the presentation and Beth directly to the managing director so that Beth could explain it to him as well. He loved it, too. She, in turn, had just made a name for herself.

I wrote this example to show how widespread and pervasive is the misconception about the role segmentation plays. It is not a nice, informative display of a competitive mapping to be treated as an afterthought or as background information. Rather, it should be a potent tool and a driver in the foreground of formulating competitive strategies. Unfortunately, if one of the premier firms on Wall Street can so offhandedly deal with segmentation and how it is used, what should be the expectation for the rest of corporate America?

I thought it might be of value to point out some telltale signs that segmentation might be corrupted, just in case you come across them. The telltale signs rely on the fact that in theory the different segments represent unique and different competitive dynamics. When this is not the case, segmentation may be improper. The telltale signs include the following:

•When the competitive dynamics within each segment appear not to be consistent, it might likely point to an inappropriately defined strategic business segment.

•When two separate segments appear to have similar, or undifferentiated, competitive dynamics, it may suggest that they might be a single segment, rather than two separate ones.

•When within a single segment there are substantially different reasons as to why customers purchase products or services, this may suggest an improperly defined segment.

•When within a single segment there are substantially different needs and service requirements by customers, this may suggest an improperly defined segment.

•When within a single segment there are substantially different salesforces required to reach the customers, this may suggest an improperly defined segment.

•When within a single segment there are substantially different and independent distribution channels required to reach the customers, this may suggest an improperly defined segment.

•When within a single segment there appear to be small competitors who perform well, and perhaps better than the larger ones, this may suggest that there are two separate segments, where one of them is defined by where the smaller competitor thrives.

A quick note to keep in mind: Unless you are a senior manager, do not criticize a segmentation scheme or claim it is wrong unless you can identify the correct scheme with convincing evidence to prove it.

To summarize, segmentations are used for different purposes. Of the highest importance is the strategic business segmentation. The main purpose of this segmentation is to explain the competitive dynamics facing the company in each of the segments so that effective competitive strategic plans can be developed. The most important observation is that each of the segments, at least theoretically, has its own independent competitive dynamics and therefore should have its own specific competitive strategies.

Although it is potentially somewhat corrupted in practice, you should be well aware of the concept and rationale of segmentation, because it still represents a very important theory. Also, as a business manager, and in job interviews, you would be expected to be well versed in it.

As I pointed out, there are some situations where segmentation has a more direct impact on performance, both on the positive and the negative side. Be cognizant of those situations, and perhaps one day you will be in a better position to add substantial value and differentiate yourself.

Before I leave the segmentation topic, I would like to make another pertinent observation. This book was written to make you aware of insight and being insightful, with the hope that it will allow you to become more insightful yourself. Did you notice that the invention of the concept of the strategic business segmentation is an illustration of creative and insightful thinking? It was indeed very insightful—different, logical, and quite convincing. Anyone could theoretically have thought of the idea. In fact, a story circulating at the time suggested that a summer intern at BCG came up with this concept. Maybe you can change the world, too!

Step 3: Development of Key Success Factors

The previous segmentation topic was very long, and so by now you may have forgotten that we were enumerating and explaining the eight-step methodology of conducting sound business analyses. The segmentation topic was step 2, and so we are on to step 3. This step is critical in formulating overall effective competitive strategies, but is often not done well. It starts with identifying the competitive strengths and weaknesses of a company. Once those have been determined, then a company can devise strategies that build on its strengths and take advantage of competitors’ weaknesses. The mapping of the strengths and weaknesses is therefore a fundamental building block in the process of devising competitive strategies.

To do this step well, one must focus on the more relevant aspects of the business and competitive dynamics and ignore the trivial ones. Just as in the case of segmentation, the outcome of this step is also vulnerable to misjudgments. A poor or incorrect understanding of the various strengths and weaknesses will inevitably lead to less effective strategies. In my experience, just like in segmentation, it is not practiced all that well. Here, too, and for almost the same reasons, the implications are for the most part also inconsequential. However, in some cases they can be very consequential. The good news is that, unlike segmentation, which requires substantial analytical skills and time-consuming data collection and analyses, to do well in this step is relatively easy. The poor practice is not due to the difficulty level and the complexity required in the analyses. Rather, it is simply due to a poor understanding of how to apply it well. It is easy to correct by explaining a few nuances. These few nuances represent the difference between a pedestrian application with minimal positive or negative consequences and an insightful application with potentially substantive implications for strategy. It is these few nuances that I will bring to your attention. When you understand the nuances, you will be in a much better position to contribute more value and outperform others.

To demonstrate the difference in the way this is applied in practice, I’ll start with an example. Assume a group of people is asked to list the strengths and weaknesses of a well-known person. Let’s, for the sake of this example, use Arnold Schwarzenegger. Born in Austria, Arnold immigrated as a young adult to the U.S. He was a bodybuilder, about six foot two and 250 pounds, with nothing but muscles. He won the title of Mr. Universe in his twenties, which landed him an acting career. He became a popular star, despite a very strong accent. Years later, he was elected governor of California. Here is a list of characteristics any group is likely to observe:

Strengths	Weaknesses
Big	Thick accent
Strong	Not well educated
Handsome	Large ego
Wealthy	Not American born
Famous
Intelligent
Street-smart
Speaks multiple languages
Wants to help other people
Loves the country
Knows how to act
Not nervous in front of cameras
Has influential friends in Hollywood
Persistent
Ambitious
Strong willpower
Willing to work hard
Charismatic

Look at the list and ask yourself whether you would switch any of the descriptors to the other column. That is, would you consider an item listed under the strength category to be more of a weakness, and vice versa? My guess is probably not.

Herein lies the problem. People interpret certain things with a preconceived view based on a bias. For example, we all have a common conception of the difference between “good” and “bad,” “attractive” and “unattractive,” “good smell” and “bad smell,” “happy” and “sad,” and so on. The same is true for “strengths” and “weaknesses.” It is why most readers would accept the items on the list. However, it is a mistake to apply a preconceived view to an exercise wherein one draws a list of strengths and weaknesses. In reality, there is no such thing as absolute strengths and weaknesses. Strengths and weaknesses can only be defined relative to a specific situation, challenge, or task.

Let’s look at the list. Let’s assume a group of people is stranded in a cave that is filling up with water, with apparently no way out. Without a way to escape, everybody is destined to drown. Somebody discovers an opening above that will save them. However, the opening will only permit small bodies to pass through. Now, list the strengths and weaknesses relative to this situation. Clearly, an earlier perceived strength of Schwarzenegger, of being strong and big, has just become a significant (even fatal) weakness.

Perhaps using another and more realistic example, a group of people, including Arnold Schwarzenegger, is being evaluated for an ambassadorship to another country. Schwarzenegger’s heavy accent will be perceived as a real weakness and may likely disqualify him for such a position. However, if the country were Austria, where he speaks the language fluently and is a native, the previous weakness actually becomes a strength.

This insight has profound implications for devising competitive business strategies. Before one can identify the true strengths and weaknesses of a company and its competitors, one must first well define the specific challenges, actions, or tasks that would apply or will need to be achieved to do as well as competitors. In other words, define a list of factors that will enable a competitor to do well, which I call a list of success factors.

To put the importance of the above observation in its right perspective, notice that all the previous steps of the methodology—data collection, analyses, and segmentation—are done as precursors to enable us to accurately arrive at the success factors. The success factors are the foundation upon which business strategies are developed. To define the success factors well is likely to yield better, more precise, and effective strategies. Do it poorly and performance is likely to be compromised.

For example, a company erroneously classifies something as a strength, which in reality, given the challenges the company needs to overcome, is a weakness. It devises a strategy to play more aggressively on the perceived strength. Clearly, and unbeknownst to them, they will be making things worse, since this new strategy more heavily relies on what is perceived to be a strength, whereas in reality it is a weakness, thereby exacerbating a problem. The same poor outcome would be created in reverse, wherein the company perceives something a weakness when it is actually a strength. Situations like these offer a great opportunity for an insightful individual to have a more significant impact on the performance of a company. The above nuance, that of correctly classifying the strengths and weaknesses, was the first of five insightful observations. The other four will be discussed next.

Now that we understand what we are after, the key question becomes how we generate the list of proper success factors. How do we ensure that we identify the key ones that will lead to the correct strategies, as opposed to trivial ones, which would likely lead to the wrong strategies?

Clearly, the “right” success factors should comprise a list that strategically represents the most important factors in determining potential competitive success. I’ll adopt the definition that Booz Allen used and refer to such a list as the key success factors—key as in “the most important” as opposed to more trivial, less determinative factors.

The list of the key success factors is one of the more important aspects of strategic analyses. All strategies should be devised to meet them; anything else, by definition, is less important or consequential. Compromised or erroneous key success factors will most certainly lead to compromised or erroneous strategies. After the fact, this list would look to be simple to generate, but simple it is not. Getting the correct list is a challenging undertaking. Ask the thirty to sixty higher-level executives whom we would interview in the course of studying an industry to generate such a list, and you can expect a huge variety of responses, with many success factors, and each “expert” is likely to have their own perception of the factors’ relative importance. Reducing the list from the many success factors mentioned during interviews into the few most important key success factors is where the creativity, insight, perspective, and consulting expertise come into play. Once the list is determined, the subsequent challenge is to have everybody at the executive management level agree to, accept, and own the list—that is the way successful implementation of the resulting strategies will occur. It also follows that each of the strategic business segments should have its own key success factors and resulting strategies, reflecting the unique competitive dynamics in that segment. An example at the end of the section (chapter thirty-six) will clearly demonstrate everything mentioned above.

Most corporate staff professionals are not aware of the nuance and the need to generate the distinct list of the key success factors, nor its importance in the process of generating strategies. They do consider it, and are aware of it, in a roundabout way. It is implied in how they do the overall strategic analyses, and how they arrive at the recommended strategies. However, by not making it a distinct step that focuses all attention on prioritizing the many potential success factors into the very few that become the key success factors, it becomes an afterthought, just one of the many considerations when devising strategies, and not the centerpiece and driver of such strategies. This nuance is the difference between pedestrian strategies and insightful ones, between potentially compromised strategies and well-conceived ones.

The second nuance relates to the number and relative importance of factors that are identified as the key success factors. It is almost impossible to deal with a long list of success factors. If one doesn’t understand the purpose of creating a list, then one’s tendency is to list more rather than less, practically everything they can think of, and not be very sensitive to their relative importance, which is very often the case. First, the list should be as short as possible, no more than three to five factors. Second, the factors must be properly prioritized. The reason is simple. From a practical standpoint, it would be difficult to devise a strategy that needs to address and incorporate a long list of factors. It becomes even more difficult, or almost close to impossible, if some of them conflict with each other. For example, assume that three of the most important success factors are the price of the product (the lower, the more product people will buy), the features offered (the more features offered, the more attractive the product becomes to the buyers), and the perceived “quality” of the product (how durable it is, meaning if it is of poor quality, people won’t buy it). Notice that the three factors conflict with one another to some degree. A strategy to increase the number of features, which addresses the second factor, will add to the cost of the product and therefore conflict with the lower price factor. A strategy to bring down the price, which addresses the first factor, can only be done by taking away some features or using cheaper components, thereby conflicting with the second and third factors. Clearly, the answer is in either addressing some factors while completely ignoring the others, or reaching some reasonable balance between them. Both would be difficult to do with a long and unprioritized list of success factors.

The third nuance relates to the interdependency (one can’t be achieved without the other) between the success factors, as opposed to the potential conflict between them. If some are dependent on each other, then it is impossible to prioritize them separately and just as difficult to decide which to use in the strategy and which to potentially ignore. Any such interdependencies suggest that the items should be combined into a single factor.

To summarize: The list of the key success factors must be very short, reflecting only the highest priority factors; they must be prioritized, and without interdependencies. Note that they may be conflicting. But, when the conflicts become an issue when devising the corresponding strategy, the prioritizations of the factors should be used to deal with it properly; the higher the priority on the list, the more precedence that success factor should receive. In other words, the strategy needs to address first the highest priority success factors, even at a cost to a lower priority factor. This makes it apparent why the judgment on the prioritization of the success factors is so important. It is not a trivial judgment, since all are considered critically important; otherwise, they would not be on the list in the first place. The judgment should be based on real facts that emerge from the findings in the analyses step. Unfortunately, it is very easy to arrive at erroneous priorities. Worse, in some cases, it is almost impossible to discern whether the prioritization was well arrived at or not, yet the implications could be significant. This is so because all factors are very important, and the relative importance and prioritization requires refined judgments and discerning understanding that can only be achieved with skilled fact-findings and questions. This is where the skillful expert is separated from the pedestrian practitioner.

The fourth nuance is the most important one. It has to do with the difference between a pedestrian application of the list of the key success factors and an insightful one. The following observations are somewhat unique and based on my experience at Booz Allen. The concept I will cover here has broad implications beyond just dealing with the key success factors, in that it applies to many different aspects of the business world and is likely to be just as unique in those applications as well.

I touched on this concept in the context of getting experts’ advice regarding job interviews. I suggested that most experts will provide advice they think is the most important, advice that would be at the top of their list. Indeed, the advice may contain their most important factors, but the experts tend to ignore the fact that there will be multiple candidates who will successfully meet those important criteria. At that point, different screening criteria will be applied, yet no expert is likely to point it out in the initial conversation. I referred to their initial advice as addressing only the factors related to how to enter and stay in the game (i.e., not failing before even getting an opportunity to play), but not at all addressing the issue of how to subsequently compete and win the game.

The exact same observation is applicable when generating the list for the key success factors. Everyone focuses on the most important elements in their minds, but those apply to a company’s capability to stay in the game. Often, the secondary ones that apply to competing and winning are not well addressed. At Booz Allen, we referred to the initial list as the “fatal flaw criteria,” meaning that you must pass those criteria at an acceptable level to continue to stay in the game. But a secondary list becomes critical to compete effectively and win the game. Under specific circumstances, I discovered that there could even be a third level of screening criteria that are mostly ignored when devising corporate strategies. In fairness, marketing departments may be aware of them for the purpose of trying to devise specific marketing programs, or in recommending specific changes to a product and its features. However, I discovered that oftentimes the professionals responsible for evaluating and formulating overall company strategy don’t give them the necessary attention required.

To help understand why the fourth nuance is so easy to overlook, we only need to examine the methodology people use to arrive at the list of key success factors. Look back at the various ways data are collected, whether through direct interviews and feedback, or surveys and questionnaires, or focus groups, etc. The question asked of the respondents will always be the same: “What were the most important reasons for buying a product from any competitor?” Pay attention to the wording of the question, because here is where the mistake is made. When asked for the most important reasons, one will most likely get the fatal flaw reasons, since they would be top of mind for the respondent. Thus, everyone is convinced that they are the most important reasons because they came directly from the buyers.

The problem is that everyone in the industry would most likely arrive at and use the same list of factors. More often than not, those factors would reflect the price, features, reputation for quality, and (if applicable) warranty or return policy. They may assign different priorities to those factors, and formulate strategies that address those priorities. This is the pedestrian application of the methodology. Just think about it: They all work from the exact same list and devise strategies based on them. Assume multiple companies assign the same priority to this list and formulate their strategies accordingly. Logic would therefore suggest that their strategies would be almost identical. Herein lies the problem: How could strategies that do not address the differentiation from other competitors be of much value? Where would be their relative competitive advantage?

It goes without saying that all the competitors must meet the fatal flaw criteria; otherwise they would never survive as competitors. However, the fatal flaw criteria rarely explain the reasons why some competitors perform better than others. Hence, the need for the secondary criteria. At Booz Allen we always separated the fatal flaw criteria from the secondary criteria. I refer to them as differentiating success factors.

To arrive at these important secondary criteria, one must ask a different set of questions. The first in the series of questions would be, “Which of the competitors did you consider at the beginning of your purchasing process?” You will easily get a list of between two and six competitors. The next question would be, “Which of those competitors were still viable before making the final purchasing decision?” The list will be narrowed down to between one and three. The next question would be, “What criteria did you use to narrow it down to those specific competitors?” Then the last question should be, “What were your reasons for selecting your final choice?” Only when one has those answers can one really understand the true competitive dynamics and differentiations that affect the purchasing behavior and the actual competitive performance in the industry.

However, these answers are not easy to arrive at. Although the questions are reasonably straightforward, the answers rarely are. A respondent’s first answer to each question would be to repeat the most important reasons they came up with in the first place—price, features, quality, and so on. This is so because these factors are the ones that are always the most important and overriding factors in their minds. They don’t change, even when narrowing the number of competitors. What changes are the additional secondary criteria that they used to help narrow down the options. One needs to prod with leading questions and suggestions to let them know and understand that they should focus on the next level of reasons. This is what experienced consultants understand and learn how to do well. To put it in perspective, I had to spend between five and ten minutes prodding the customer before I was convinced that I had received the real reasons.

In one of my projects, I discovered that there could be, in some cases, yet another level of screening criteria, which I refer to as the final purchasing decision criterion.

The final purchasing decision criterion is mostly applicable in businesses that sell products to consumers (B2C) as opposed to companies that sell their products to other companies (B2B). The questions that lead to discovering the final purchasing decision criterion are rarely asked and prodded at the depth and thoroughness they require to get accurate and insightful answers. The questions are: “Was there anybody who influenced your decision in making your final choice?” or “Did somebody help you in reaching your final decision, when you were debating the final options?” or “What, or who, convinced you that you had made a wise choice at the very end?” Just like in the secondary differentiating criteria, these questions need to be asked in a variety of ways because the person from whom you are eliciting answers has likely never been asked to reflect on their decisions in this way. So, their first inclination is to give the first answer that comes to mind. It may or may not be an accurate answer. Asking more questions gives the responder an opportunity to reflect further. It is amazing what further reflection reveals. A whole new dimension may open up that nobody considered before. As stated, the professionals working in the marketing department might attempt to ask those questions, and may receive thoughtful responses that lead to a reasonable understanding of the dynamics, but these rarely get elevated to solve fundamental corporate strategies.

Just to make sure I am not misunderstood when I say that I “discovered” the third level of criteria, I don’t mean to imply that nobody would get the right answers but me. In fact, I have no doubt that others could reach the correct understanding as well. What I mean to say is that I made it part of my formalized methodology so that it doesn’t just become an accidental discovery, but the outcome of a deliberate search. I followed this practice over and over in my career. It always paid dividends. More importantly, it was always perceived as very insightful.

In summary, the fourth nuance is that the key success factors must be understood on at least two levels, and at times three: the fatal flaw, the secondary differentiation, and the final purchasing decision.

You are now ready to see how everything I mentioned in this section comes together in a real project situation. I will describe a project I was involved with that demonstrates it all. It will also show how the remaining steps of the overall methodology for market and competitive dynamics (steps 4–8) come into play. To make it a real, teachable example, I will lead you through my thoughts and observations as they progressed on the project. I plan to show you in detail how decisions are made and conclusions drawn, and how the theory is applied in practice. It will also serve as an example of how insightfulness is attained. It is not about a sudden discovery. It is a step-by-step logical analysis that leads one there. One just needs to constantly look for nuances and potential exceptions.