Where Exactly is the Room for Improvement?An article by Margeaux Cvar and John A. Quelch in the June 2007 issue of the Harvard Business Review is something of a teaser. It describes an intriguing approach to identifying ways of increasing a company's profitability, but it is too short less than a page to provide a sense of the robustness of the methodology described.
Still, the technique outlined in "Which Levers Boost ROI?" invites consideration by companies that believe in using a systematic approach to maximizing their return on invested capital.
The technique Cvar and Quelch present is essentially an exercise in benchmarking. There are six steps:
- Identify companies in other industries that have similar structural characteristics fixed capital, market concentration, industry growth, etc. Cvar and Quelch explain that "looking to companies that are facing the same environmental conditions is essential to generating new insights and avoiding the mere replication of competitors' tactics."
- Rank these "parallel companies" according to ROI.
- Compare the characteristics of the highest-performing companies those whose ROI is at least two standard deviations above the mean with the characteristics of the lowest-performing companies those whose ROI is at least two standard deviations below the mean.
- Look at the variables your company can control reasonably directly, e.g., "the number of customers and suppliers, vertical inegration, product-line innovation and breadth, relative product quality, working capital, and employee compensation levels."
- Use regression analysis to measure how important each controllable variable is in explaining differences in ROI across companies.
- Based on the preceding analysis, identify the variables your company should adjust in order to have a good shot at raising its ROI.