CASE 6: Identifying Profitable Revenue Streams at a Manufacturing Service Provider

Company Context and Strategic Situation
This case was a part of an engagement with an engineering company that had recently started providing testing and maintenance services in a separate business unit. The main objective of the engagement was to conduct a diagnostic review of the business unit’s strategy and operations. The diagnostic process consisted of four stages: (1) strategic analysis, (2) functional diagnostic, (3) implementation planning and (4) execution. A key step in the first stage of the process was the identification the company’s revenue streams. The company was generating revenues by offering a wide array of services to a diverse group of customers. A Product-Market Network (PMG) Diagram was developed to analyze the structure of the company’s revenue streams and identify opportunities and develop strategic alternatives.

Method Description: Product Market Group Network Diagram
The PMG Network Diagram is essentially a connectance diagram examples of which can be found in various different fields such as operations research and computer science. Connectance diagrams are used to visually represent relationships (edges) between the elements of a system (nodes). A PMG network diagram is a customized diagram used to identify and classify a company’s products (and/or services) and markets, so that a full understanding of the value-streams is established.

Participants first make a list the company’s products and the customers that it sells to. Then on a white board they construct the first cut of the PMG network diagram.

Figure 4: PMG Network Diagram of Manufacturing Service Provider

If the number of nodes and edges are too crowded or there are redundancies, the participants engage in discussions to consolidate products and customers (markets) with a convergent frame of mind using the appropriate criteria to facilitate grouping. Products may be grouped together according to:

• Product attributes: material, specification, configuration, size, shape and degree of customization.
• Process attributes: production, assembly and packaging technologies (e.g. automated vs. manual)
• Value stream attributes: outsourced, factored-in, licensed-out or franchised products or services.

Likewise, customers can be grouped together according to geography, demographics, or customer type (e.g. b2b, distributors, retailers, end users etc). It has to be noted that there can be company specific product and customer attributes other than the ones listed above which provides a more appropriate criteria for grouping. After the consolidation exercise was performed in our case study, the number of PMGs reduced from 35 down to 10.

Figure 5: Consolidated PMG Network Diagram

It is also useful to indicate the revenue breakdown per PMG, product group, and market group. The size of the rectangles may be adjusted to indicate the relative size of revenues generated from each product or market group.

The PMG network diagram can also be enriched with the use of different shapes, sizes and colours for different nodes and edges if additional information is to be embedded.

Evaluation
There are a number of cognitive benefits of using a PMG network diagram. First, the revenue breakdown by product-market group rather than only product or market group enables a different perspective on the strategic analysis process. Second, the exercise that managers have to go through in the development of the diagrams stimulates thought as to how products and customers can be segmented most sensibly. A number of strategic options usually emerge during this exercise such as the option to stop selling to an unprofitable customer, or to cross-sell products from other product portfolios to an existing customer. And last but not least, the PMG network diagram is a powerful tool to visualize a comprehensive picture of the company’s revenue streams.

There are also some challenges that need to be overcome. The main challenge is experienced when a company has too many different products and customers. The network diagram then becomes too large, overriding its intended cognitive benefits. It nevertheless represents the reality and even a complicated diagram provides valuable insights. One measure to reduce the complexity of the diagram is by grouping products and customers into groups. By introducing a hierarchy using these groups, the appropriate level of detail can be selected. Software tools with zoom-in/zoom-out and hiding characteristics can be very useful to facilitate this.

Case Learnings
Understanding revenue streams is one of the key steps in strategic analysis. It is easy to lose sight of the core revenue streams in companies where the revenue structure is complicated. A PMG network diagram enhances understanding of the revenue streams and stimulates the development of new strategic options both during its construction and after it is complete. It is particularly useful to go through the development of the diagram in a group setting where representatives from top management and finance are present so that a common understanding and a shared vision can be achieved. Use of software tools with grouping and hiding characteristics may reduce development time and maximise cognitive and communication benefits. It should also be noted that some participants prefer physical media rather than a software tool.