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Granular Metrics,Granular Metrics, Feedback and ExperimentationFeedback and Experimentation
Arnoldo HaxAlfred P. Sloan Professor of Management
Contributions of the Delta ModelContributions of the Delta Model
Opening theOpening the The BestThe Best Three Strategic Options:Three Strategic Options:mindset to newmindset to new Product doesProduct does zz Best ProductBest ProductThe TriangleThe Triangle strategic positionstrategic position not always winnot always win
zz Total Customer SolutionsTotal Customer Solutionszz System LockSystem Lock--inin
Linking StrategyLinking Strategy Execution is notExecution is not with Executionwith Execution the problem,the problem,
AdaptiveAdaptive linking tolinking toProcessesProcesses strategy isstrategy is
Execution is captured through ThreeExecution is captured through Three Adaptive Processes:Adaptive Processes:zz Operational EffectivenessOperational Effectivenesszz Customer TargetingCustomer Targetingzz InnovationInnovationwhose roles need to change to achievewhose roles need to change to achieve
different Strategic Positionsdifferent Strategic PositionsMeasuringMeasuring Good financialsGood financials successsuccess do not alwaysdo not always
AggregateAggregate lead to goodlead to goodMetricsMetrics resultsresults
Aggregate performance metrics need toAggregate performance metrics need to reflect each of the Adaptive Processes andreflect each of the Adaptive Processes and their role based upon the strategic positiontheir role based upon the strategic positionzz Product performanceProduct performancezz Customer performanceCustomer performancezz Complementor performanceComplementor performance
DiscoveringDiscovering Managing byManaging by Business is nonBusiness is non--linear. Performance,linear. Performance,GranularGranular performanceperformance averages leadsaverages leads particularly bonding, is concentrated.particularly bonding, is concentrated.Metrics andMetrics and driversdrivers to belowto below Granular metrics allow us to focus onGranular metrics allow us to focus onFeedbackFeedback averageaverage underlying performance drivers, to detectunderlying performance drivers, to detect
performanceperformance variability, to explain, to learn, and to act.variability, to explain, to learn, and to act.
The Delta Model and Granular MetricsThe Delta Model and Granular Metrics
Select Performance Indicators
Explain Variability
• Identify performance drivers
• Correlate drivers with variability
Detect Variability
• Drill down to detailed segmentation
• Isolate variability
• Define program • Define structured tests • Rollout
• Hypothesize cause and effect
• Evaluation
Act from Variability
Learn from Variability
Drivers of variability for selected performance indicatorsDrivers of variability for selected performance indicatorsPerformance indicatorsPerformance indicators Drivers of variabilityDrivers of variabilityProduct cost and qualityProduct cost and quality zz ScaleScale
zz DensityDensity--e.g. concentration of servicee.g. concentration of servicezz LocationLocationzz Labor productivityLabor productivity-- practices and trainingpractices and trainingzz Equipment productivityEquipment productivity-- designdesignzz Process designProcess designzz And so onAnd so on
Customer profitCustomer profit zz Customer sizeCustomer sizezz Customer revenueCustomer revenuezz TenureTenurezz Acquisition costAcquisition costzz Channel mixChannel mixzz Customer care supportCustomer care supportzz Customer investments in relationshipsCustomer investments in relationshipszz And so onAnd so on
Complementor contributionComplementor contribution zz Size of relevant complementor productsSize of relevant complementor productszz Complementor investment in businessComplementor investment in businesszz Relative size in customer value chainRelative size in customer value chainzz Complementor contribution to customer economicsComplementor contribution to customer economicszz Exclusivity of relationshipExclusivity of relationshipzz And so onAnd so on
Business segment economic valueBusiness segment economic value zz ROI (return on investment)ROI (return on investment) –– profitabilityprofitabilityzz RiskRisk-- volatility and covariancevolatility and covariancezz Option valueOption valuezz Investment baseInvestment basezz CashflowsCashflows
Experimentation as the basis for effective changeExperimentation as the basis for effective change
LargeLarge
Size ofSize of ChangeChange
SmallSmall
The middle road:The middle road: lower returns, orlower returns, or
unacceptable whenunacceptable when first mover advantagefirst mover advantage
is highis high
Unacceptable risk, asUnacceptable risk, as a starting point.a starting point.
Highly desirable asHighly desirable as endpointendpoint
Ineffective: lowerIneffective: lower returns, orreturns, or
unacceptable whenunacceptable when first mover advantagefirst mover advantage
is highis high
Testing: the relevantTesting: the relevant area for experimentsarea for experiments
leading to largeleading to large changechange
SlowSlow FastFastSpeed ofSpeed of ChangeChange
Cost DeCost De--Averaging:Averaging:Using Granular Metrics ToUsing Granular Metrics To
Drive PerformanceDrive Performance
The drivers of the cost of orderThe drivers of the cost of order--fulfillmentfulfillment
Cost of order fulfillment
EquipmentLocation of work centers
Activities of order fulfillment
Manpower productivity
The behavior of cost by type of defectsThe behavior of cost by type of defects
ClientClient
% of% of % of% of % of% of % of% of
Business Data Service Orders
Business Data Service Orders
Business Data Service Orders
Defect-free
Average
71%71% $100$100 5 Days5 Days 18%18%
5.0%5.0% $1,800$1,800 45 Days45 Days 22%22%
24.0%24.0% $900$900 25 Days25 Days 60%60%
1 $395 12.3 Days
ordersorders ordersordersordersorders ordersorders
Focus ofFocus ofprogramprogram
developmentdevelopment
Profit DeProfit De--Averaging:Averaging:Using Granular Metrics ToUsing Granular Metrics To
Drive PerformanceDrive Performance
The drivers of customer profitability in the credit card businesThe drivers of customer profitability in the credit card businesss
Profit by customer
Months of tenure
Revenue per customer
Number of customers
Balance level per month
Customers’ targeting behaviorsCustomers’ targeting behaviors
BehaviorsBehaviors Typical competitorsTypical competitors Capital OneCapital Onezz OfferOfferzz Test/yearTest/yearzz Service tierService tierzz Key metricKey metriczz TargetsTargetszz Solicitations/yearSolicitations/yearzz Segmentation frequencySegmentation frequencyzz Risk orientationRisk orientationzz Data sourcesData sourceszz Staff analystsStaff analysts
75 products75 products303044ROE, DelinquencyROE, DelinquencyHigh response likelihoodHigh response likelihood50 million50 millionBiannualBiannualRisk averseRisk averse80802020
5,000 products5,000 products15,00015,0001313NPVNPVHigh NPV potentialHigh NPV potential400 million400 millionOngoingOngoingPrice for riskPrice for risk50,00050,000150150
Capital OneCapital One-- achieving a Total Customer Solutions through Customerachieving a Total Customer Solutions through Customer TargetingTargeting
FurtherFurtherimprovementimprovement
Select Offers
•• Interest ratesInterest rates•• FeesFees•• PromotionPromotionss
MassMass marketingmarketing
Screen for profitability
•• Full lifeFull life cycle customercycle customer profitabilityprofitability
Variation 2
Variation 1
Test cells
Offer Creation
Variation 2
Variation 1
Core offer
Collect customer response
Success metricsSuccess metrics
Typical competitorTypical competitor Capital OneCapital One
zz Customer NPVCustomer NPVzz Acquisition costAcquisition costzz ActivationActivationzz Percent with revolving balancesPercent with revolving balanceszz Fee income per accountFee income per accountzz ChargeCharge--off per accountoff per accountzz TenureTenure
$62$62$77$7758%58%25%25%$55$55$71$71
4 years4 years
$427$427$67$6779%79%40%40%$73$73$54$54
6 years6 years