Move guide
Know your own numbers and your market
Your report suggested a move on at least one of these two practices:
- whether the business knows its own numbers;
- how finely the market is understood.
This move guide puts two pages on the table. One shows where your business makes money, product by product, customer by customer and region by region. The other shows which parts of your market make money for anyone. Every later choice starts from these two pages.
1. When it applies
Use this move guide if your report placed either practice in the lowest two stages.
| Practice | Where it may sit today | Where this move guide aims |
|---|---|---|
| Whether the business knows its own numbers | Lagging: "Profitability by product, customer or region is unknown once shared costs are allocated properly." Basic: "Gross margins are known; where value truly concentrates after real cost allocation is not." |
Competent: "Properly allocated profitability shows where value concentrates and what it cross-subsidises." |
| How finely the market is understood | Lagging: "The market is discussed as one number; where profit actually pools is unknown." Basic: "Market size and growth are known at headline level, from industry reports everyone else also reads." |
Competent: "Growth and profitability are mapped at segment level, and the strategy names which segments matter." |
If both already sit at the middle stage or higher, skip this move guide.
If your report gave the foundation moves, this is one of them. Run one strategy cycle in order: this step, then facing the real challenge, then setting the goals and making the choices.
2. What to do
Five steps. They take four to six weeks.
- Work out the profit of each product, customer group and region once. Give each its own share of costs, not an average. The own-economics worksheet does this.
- Put the result on one page, from most to least profitable. Mark the profitable core, and what it pays for.
- Break the market one level deeper than you manage it today. Use growth and profit by segment. The market-granularity worksheet does this.
- Mark the segments where you make money, and the ones that make money for others.
- Take both pages to the leadership team. Ask what they change.
The two free worksheets do the recording:
- /worksheets/strategy/own-economics for the profit by product, customer and region;
- /worksheets/strategy/market-granularity for the market one level deeper.
3. What to produce
One table, plus the two worksheets above.
Table A. Where we make money, beside where the market does
| Segment | Share of our revenue | Share of our profit | Market growth a year | Market's profit margin | Our move |
|---|---|---|---|---|---|
A segment whose share of profit is well below its share of revenue is being paid for by the others.
4. A worked example
Illustrative. Written for this move guide. It describes no client.
A facilities services business runs four service lines for offices, hospitals, schools and factories.
Before.
- Overheads were spread across the lines as a share of revenue, so every line showed the same margin.
- The leadership believed hospitals were the best business, because they were the biggest.
The numbers.
- With costs carried by each line, hospitals earned a fifth of the profit on two fifths of the revenue.
- Schools earned a third of the profit on a sixth of the revenue.
- The market page showed school contracts growing fastest, and hospital contracts carrying the thinnest margins.
Two months on.
- 4 of 4 service lines with their own costs
- 1 page profit from most to least profitable
- 2 segments named as the ones that matter
- Each service line carried its own costs, and the profit page went to every leadership meeting.
- The strategy named schools and factories as the segments that matter.
On a retake, both practices could be answered at the middle stage.
What it looked like in our work
From our own work. Figures changed.
An asset finance business set each segment of its market against two tests. The first was its share of the market's profit. The second was the return it earned on the equity it tied up.
| Segment | Share of the market's profit | Return on equity | Market growth a year |
|---|---|---|---|
| Segment A | 45% | 52% | 2% |
| Segment B | 4% | 47% | 4% |
| Segment C | 20% | 33% | 3% |
| Segment D | 15% | 31% | 4% |
| Segment E | 10% | 20% | 2% |
| Segment F | 6% | 16% | 3% |
Two segments earned high returns on the equity they used. Two earned low returns. The strategy later chose the two low-return segments as the ones to put less weight on.
Returns by segment
Illustrative.
Set each segment's return beside the business's, and show how the segments add up to the total. Costs and assets that sit with no segment are shown separately, so nothing hides in an average.
| Contribution ($m) | Assets used ($m) | Return (%) | |
|---|---|---|---|
| Segment A | 6 | 45 | 13 |
| Segment B | 5 | 25 | 20 |
| Segment C | 8 | 20 | 40 |
| Not allocated | -4 | 10 | |
| Whole business | 15 | 100 | 15 |
The biggest segment earns the lowest return. The smallest earns the highest return and the largest contribution.
A standard tool: the five forces
A generic diagram in our own words. The idea is Michael Porter's.
Michael Porter's five forces explain why some industries earn more than others. Use them to say why each of your segments earns what it does.
Rivalry among existing firms How hard they fight on price and capacity
- Substitutes
- Price and performance of the alternatives
- Cost of switching to them
- How ready buyers are to switch
- Suppliers
- How concentrated suppliers are
- Inputs with no substitute
- Cost of changing supplier
- Whether suppliers could do your part of the chain themselves
- Buyers
- How concentrated buyers are
- How much each buys
- Cost of changing supplier
- How much buyers know about price
- Whether buyers could make it themselves
- New entrants
- Economies of scale
- Brands and product differences
- Access to channels
- Capital needed to start
- Rules and licences
After Michael Porter. Each force pushes the industry's profit down when it is strong.
5. Effort and dependencies
- Chief financial officerLeads the profit work, with an analyst.
- Head of strategy or marketingBreaks the market down one level deeper.
- Leadership teamReads both pages and decides what they change.
What you need
- Revenue and costs by product, customer group and region.
- Market data by segment: size, growth and, where you can find it, margin.
How long
- Four to six weeks.
What gets in the way. We have seen these in our own work:
- The core paying for the hobbies. An asset finance business offered everything to everyone, with every product class and channel still alive. Nobody could say which parts made the money.
- Numbers that flatter. A food processor kept a loss-making second plant running and did not measure its yields accurately. The losses stayed hidden in the totals.
6. How will you know it worked?
The test is whether the two pages change a decision. Retake the check after the next planning round. Each of these should be true when you answer:
| Practice | You can answer Competent when | A document alone does not count if |
|---|---|---|
| Whether the business knows its own numbers | Profit by product, customer and region carries its own costs, and shows where value concentrates and what it pays for. | The page exists, but the profit still comes from an average spread. |
| How finely the market is understood | Growth and profit are mapped by segment, and the strategy names the segments that matter. | The segments are mapped, but the strategy still speaks of the market as a whole. |
The worked example is illustrative.
Think we've used your work without proper credit? Tell us and we'll fix it.