Stategy Dynamics Briefing 26: Three ways to change resource quality

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The previous briefing looked at how adding larger customers and removing smaller ones can raise the average size of a firm’s customer base. To these mechanisms must be added a third element. What is it?

The third mechanisms that must be added is raising the size of customers that remain with the organization over time. This may arise if the customers themselves increase their purchase rate – perhaps consumers increase their demand for your product, or in the case of business-to-business firms, your customers’ own business may grow so they buy more from you. Where customers are shared with competitors, it may also be possible to raise average sales by capturing a larger share of business with each customer.Taken together, these are the only three mechanisms that can cause a change in average customer size, as the following table shows. Changes in quality are not always in a positive direction, of course — large customers may be lost, new customers may be smaller than those we already supply, and existing customers may decline.

Increase average customer size Decrease average customer size
Add larger customers Lose larger customers
Lose smaller customers Add smaller customers
Increase sales to existing customers Suffer a fall in sales to existing customers

More generally, the same mechanisms apply to changes in quality of any attribute, as the next table shows.

Improve average quality Decrease average quality
Add better quality resource items Lose better quality resource items
Lose lower quality resource items Add lower quality resource items Improve average quality of existing resource items Suffer a fall in average quality of existing resource items

See the side-bar for how the bath-tub analogy helps understand these three mechanisms.

Applying the attribute principle to staff resources

Customers are clearly important in most commercial cases, but other resources also have important qualities that contribute to performance, especially through their influence on how others parts of the strategic architecture develop.

People have many characteristics, but two that affect their contribution are skills and experience. At the simplest level are the basic task skills needed to do routine jobs, such as food preparation in fast-food outlets, or document processing in banks. Organizations are often very explicit about such skills, documenting exactly what tasks people need to be able to do, providing detailed training on exactly how to do them, and giving recognition to those who have demonstrated their mastery, for example through a badge system.

In the figure below, a call center manager has 80 staff, each of whom needs a number of skills if they are to deal adequately with customers’ enquiries. Ideally, each person would be able to respond to the full range of 20 issues that may arise from customers’ calls, but that ideal is hard to achieve because of staff turnover, which is running at five per month. Initially, the average person knows how to answer 12 of the maximum 20 issues.

Depicting changing customer quality as larger customers are won.

Diagram: changing customer quality as larger customers are won.

New staff have none of the necessary skills (only cold water is available to add to this particular bathtub! – see side-bar), so training is provided, both to give new staff some basic skills, and to increase the skills of existing staff. Staff also forget the skills that they were trained in, because some customer issues arise too infrequently for them to be reinforced through practice. In the base case (dashed lines) there is no staff turnover, and no hiring, so all the training builds skills amongst existing staff. Improvement slows to a standstill because improvements become increasingly overtaken by the forgetting rate (the hotter the water in the bathtub becomes, the faster it cools down). In the second case (solid line and bold text values), staff turnover adds to the rate at which skills are lost (warm water is lost, to be replaced by the cold water of unskilled staff). By the end of the 24 months, training is adding 120 units of skill to the population, but 40 of these are being lost with people leaving (four people per month with 10 skills each) and 80 are being forgotten (10 % of the 803 that remain by that time).

This simple structure can replicate a wide range of realistic behaviors for staff numbers and average skill levels, including, for example, the diluting effect that arises when staff groups grow without adequate training, and the improvement in average skill that can arise if lower skilled individuals are removed from a mixed-ability group. In some cases, this can even mean that losing people from a group can result in better overall performance, because the skilled people who remain are not having to deal with difficulties caused by unskilled colleagues.

Until next time…

 

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Doing more with the bathtub analogy

Strategic Management Dynamics book coverThe three mechanisms for improving resource quality can be easily understood by extending the idea that resources act like water in a bathtub. The attribute of interest for people taking a bath is the temperature of the water. If this is too cold, you have two options: add hot water (equivalent to adding bigger customers), or using a heater—of appropriate safety design!—to warm up the existing water (equivalent to increasing the business you do with existing customers). The third option, of losing smaller customers, cannot be done with real bath water, but would imply finding cold drops among the hot and taking them away!

This briefing summarises material from chapter 5 of Strategic Management Dynamics, pages 250-253.

Read more about the book on our website

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