Strategic Planning Concepts & Principles (cont...)

COST OF COMPLEXITY
Very important idea that the more complex a business, the higher the costs, for any given level of scale. Complexity arises when a company extends its product line, customers, areas of expertise and/or use of different technologies in order to expand. The wise company seeks extra scale without extra complexity, or reduces complexity without sacrificing scale.

Waging war on complexity can lead simultaneously to stunning cost reductions and improvements in customer value. Some clues to reducing the cost of complexity are: reducing the number of current suppliers and entering more collaborative relationships with them; buying in (outsourcing) components and services rather than "making" them oneself wherever possible; avoiding products or customers where added complexity is not fully compensated; eliminating complexity from product design and making product families modular; reducing the number of process steps; improving factory/work area lay-out; creating small business units within the company that take charge of a whole product/process from design to customer delivery; decimating head office; abolishing management hierarchy; reducing the information collected and disseminated; and generally not doing anything that is not essential to making customers happy.

CUSTOMER RETENTION
The extent to which customers repeat-purchase. Losing customers is expensive, because the marketing costs to win them over in the first place are so high. A 5 per cent shift in customer retention can result in 25-100 per cent profit swings.

Customer retention arises from customer loyalty, which arises when superior value has been delivered. The effect can carry through to employees, who are proud to be offering such good value to customers, and who in turn reinforce the value proposition by particularly good service. With turnover going up and costs going down, profits increase, which in turn allows further investment in product quality and service and in hiring and retaining the best employees.

CYCLE TIME (also see "Time-Based Competition")
The time it takes for a full process to run its course e.g. the production of a product from start to finish; or the elapsed time since a service order is placed, till it is fully delivered.

DATA WAREHOUSE (also see "Business Intelligence")
A collection of data which is extracted from other systems, and packaged together, with the express purpose of making it available to the business for meeting its information needs (access to information is crucial for gaining strategic advantage).

The data warehouse manages the complexity of merging together data from disparate systems and expresses this data in the language of the business.

The data warehouse is updated on a regular basis, and normally made available via the Internet or a company's Intranet.

DELAYERING
Removing whole layers of management, resulting in a more FLAT STRUCTURE, lower costs, less bureaucracy, and greater accountability of executives.

DIFFERENTIATION (also see "Competitive Advantage")
Successful strategists select positions that are different (that differentiates them) from their competitors, and which give them clear and distinct competitive advantage.

This may include differentiation through innovative products/services, cost, quality, responsiveness, competence, distribution channels, etc (called differentiators).

To sustain differentiation, a company must become a moving target through constantly seeking improvement and innovation.

E-COMMERCE
Over the next few years, electronic commerce (E-business) via the Internet will transform the way most South Africans do business.

E-commerce is "an exchange of information or value across a trusted electronic network" e.g. electronic data/information interchange, electronic banking and payments, electronic transaction processing and invoicing, on-line advertising and shopping (the "virtual shopping mall").

There are two types of business being conducted this way: business-to-business, and business-to-consumer.

ECONOMIES OF SCALE
Reduction in unit costs through having greater scale. One of the main reasons why the high market share competitor has lower costs than the smaller players.

EIGHTY/TWENTY RULE; 80/20 RULE; PARETO RULE
A general phenomenon that 80 per cent of sales or profits, or any other variable, may come from 20 per cent of the products or services that a company offers. Invented by Italian Alfredo Pareto, the nineteenth century economist.

The 80/20 rule applies to individuals as well: 80 per cent of the value you provide in your job may come from 20 per cent of your time, so if you delegated the activities that take the remaining 80 per cent of your time to a lower cost or less experienced person (or stopped doing them altogether), you could multiply your impact up to five times. For both companies and individuals, some of the low-value 80 per cent may actually have negative value.

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