Performance Improvement Diagnostic℠

There is a constant stream of business fads and approaches, but a good general manager will conduct a hard-nosed, comprehensive review of the business to identify the most critical areas for improvement. Bain & Company has developed a full-potential, performance improvement diagnostic framework that points the way. It starts from our understanding of the four critical variables in any performance improvement undertaking: costs, market position, changing customer behaviors and–perhaps the least understood–complexity.

We help firms attack complexity in order to serve customers better. Our research shows that companies with the lowest complexity grew 30 percent to 50 percent faster than their average competitor. High complexity is often a symptom of a larger problem, such as poor understanding of customers' needs in the case of product proliferation or poor accountability and decision making in the case of organizational complexity. Tackling the root cause pays off handsomely. For example, by providing the right level of product variety, companies can grow revenue by 5 percent to 40 percent while reducing costs by 10 percent to 35 percent.

What results can you expect? Our diagnostic work leads to tangible goals and ready-to-launch initiatives to achieve them. As an example, one company we helped through such a diagnostic process targeted–and achieved–these concrete objectives:

• Reduce costs by $200 million to move relative cost position from 110 percent of best competitor to 90 percent.
• Increase relative market share from 0.9 to 1.2; move share of high-profit segment from 40 percent to 60 percent, with a customer retention increase of six percentage points.
• Increase share of profit pool from 40 percent of $2 billion to 70 percent of $2.8 billion by expanding into a downstream service business in the most profitable product segments.
• Cut SKUs from 100,000 to 2,000; reduce organizational layers in SG&A from five to three; outsource 20 percent of all G&A costs.

Bain has written the book on how companies can reliably achieve breakthrough results. It entails an understanding of the four fundamental laws of business–and the gathering of essential related facts needed to create an effective diagnosis of the business. The laws and related questions are these:

1. Costs and prices always decline.
   • How does your cost experience slope compare with competitors'?
   • What is the slope of price changes in your industry?
   • Which of your products or services are making money (or not), and why?
2. Competitive position determines your options.
   • What is your relative market share? How big is your market and how fast is it growing?
   • Is your profitability in line with your relative market share? Which capabilities create/reinforce your competitive advantages? What capabilities are you lagging on?
3. Customers and profit pools don't stand still.
   • Which are the biggest, fastest-growing and most profitable customer segments?
   • What is your customer retention by key segment?
   • What is your share of the competitive profit pools? How is that changing?
4. Simplicity gets results.
   • How complex are your business lines, products, organization and business processes, and what is all that costing?

Based on these insights, we have developed and tested our proprietary Performance Improvement Diagnostic℠. It allows executives to gather a comprehensive set of data enabling them to understand their current performance level (we call this the "point of departure") and the gap between that and an accurate measure of their full potential ("point of arrival")–and then set specific goals and define initiatives to achieve them.