Summary of the article
“The new leader’s guide to diagnosing the business”
by Gottfredson, Schaubert and Saenz (2008)
From 1999 to 2006, the stay of CEO’s decreased from 10 to 8 years (some even had an
average of 1.8 years)
They are often unable to improve business performance
It’s hard because they have to get to know a company in a few months while
companies nowadays have big differences
Template is needed to assess an individual business’s situation
The template has to meet at least 3 criteria
1. It must reflect an understanding of the fundamentals of business performance – the
basic constraints under which any company must operate
2. It must be comprehensive and focused – covering all the critical bases of the
business
3. It should lend itself to easy communication and action
Goal of this article
To present a template that we think meets the above criteria
The template is built on 4 principles
1. Costs and prices almost always decline
2. Your competitive position determines your options
3. Customers and profit pools don’t stand still
4. Simplicity gets results
Be careful: You need to gather a lot of data quickly within first 3-4 months as being CEO
1. Analyze costs and prices
Costs and prices almost always decline (you would think otherwise because of inflation, but
this is not the case)
Experience curve = a graph showing the decline in a company’s or industry’s costs or prices
as a function of accumulated experience/ helps you estimate where your costs will be in the
future
Compare your company’s cost curve with industry’s price curve and determine whether
your costs are declining at the rate necessary for your company to remain competitive
Identifies your top priorities (e.g. if industry prices are going down while your costs
are going up, cost reduction is priority)
After identifying overall cost trends, examine where the central challenges and
opportunities for costs lie
After that, identify your cost position within the industry: what are your competitor’s costs?
Figure out which firm is the best in each area
, Lastly, assess the profitability of your product lines: which products are making money and
which are not and why
2. Evaluate your competitive position
Your competitive position determines your options
In most industries one of the strongest predictors of performance is Relative Market Share
(RMS): your share divided by share of closest competitor
After, plot the companies in your industry according to RMS and return on assets =
ROA/RMS chart
Higher RMS corresponds to higher ROA (return on assets), which shows that market
leaders outperform market followers
ROA/RMS chart has 5 generic positions
1. In-band leaders (can raise the bar for competitors by investing in still-greater market
share and product improvements)
2. In-band followers (need to work hard just to keep up, sometimes jump in leadership
role through heavy innovation)
3. Distant/ below-band followers
4. Below-band leaders
“The new leader’s guide to diagnosing the business”
by Gottfredson, Schaubert and Saenz (2008)
From 1999 to 2006, the stay of CEO’s decreased from 10 to 8 years (some even had an
average of 1.8 years)
They are often unable to improve business performance
It’s hard because they have to get to know a company in a few months while
companies nowadays have big differences
Template is needed to assess an individual business’s situation
The template has to meet at least 3 criteria
1. It must reflect an understanding of the fundamentals of business performance – the
basic constraints under which any company must operate
2. It must be comprehensive and focused – covering all the critical bases of the
business
3. It should lend itself to easy communication and action
Goal of this article
To present a template that we think meets the above criteria
The template is built on 4 principles
1. Costs and prices almost always decline
2. Your competitive position determines your options
3. Customers and profit pools don’t stand still
4. Simplicity gets results
Be careful: You need to gather a lot of data quickly within first 3-4 months as being CEO
1. Analyze costs and prices
Costs and prices almost always decline (you would think otherwise because of inflation, but
this is not the case)
Experience curve = a graph showing the decline in a company’s or industry’s costs or prices
as a function of accumulated experience/ helps you estimate where your costs will be in the
future
Compare your company’s cost curve with industry’s price curve and determine whether
your costs are declining at the rate necessary for your company to remain competitive
Identifies your top priorities (e.g. if industry prices are going down while your costs
are going up, cost reduction is priority)
After identifying overall cost trends, examine where the central challenges and
opportunities for costs lie
After that, identify your cost position within the industry: what are your competitor’s costs?
Figure out which firm is the best in each area
, Lastly, assess the profitability of your product lines: which products are making money and
which are not and why
2. Evaluate your competitive position
Your competitive position determines your options
In most industries one of the strongest predictors of performance is Relative Market Share
(RMS): your share divided by share of closest competitor
After, plot the companies in your industry according to RMS and return on assets =
ROA/RMS chart
Higher RMS corresponds to higher ROA (return on assets), which shows that market
leaders outperform market followers
ROA/RMS chart has 5 generic positions
1. In-band leaders (can raise the bar for competitors by investing in still-greater market
share and product improvements)
2. In-band followers (need to work hard just to keep up, sometimes jump in leadership
role through heavy innovation)
3. Distant/ below-band followers
4. Below-band leaders
