Stax

a global strategy consulting firm

FAST FRAMEWORKS SERIES

TEst aND LEaRN: StaRt SMall, THINK BIG By Rafi Musher, CEO April 2013
When it comes to introducing new products or launching organizational strategies, many companies wait to have a fully formed, world-changing idea before moving forward. Once they believe they have it, theyll pull out the stops and unleash it on the worldwith great effect if theyre right; and a disastrous one if theyre wrong. A test and learn approach, in contrast, lets you try a lot of different things on a smaller scale to gather the facts you need to determine which offers the most promise. Weve seen this being an effective way of jump starting innovation at some organizations or encouraging evolution at others. We think that what has traditionally been viewed as a tactical tool should be elevated to a strategic framework for the C-Suite. Whether you view this expansion as a dynamic version of scenario planning or as something biggereven a way to develop new ideas and fast market responses that challenge the most knowledgeable of industry thinkers and investorstest and learns strategic application holds great but largely untapped potential.

About the Author

GREatER OPPoRtUNItY FoR tHE C-SUItE

Over time, test and learn has expanded from being the private domain of larger companies to becoming more democratic, with businesses in the $5B dollar category and under regularly applying it to try out things like store format, product, pricing, staffing levels, technology, and, of course, advertising and promotional strategies. At Stax, we believe that, with the right setup, it should be used to a far greater extent at higher levels of the management hierarchy. With the expansion of big data and managements greater comfort with relying on market indicators to lead, the C-Suite has more of an opportunity to apply test and learn to new mission-critical, organization-wide strategies. While the marketing guys are testing granular tactics like couponing, the C-Suite can be using it to address broader strategic issues like crossdepartmental comparisons to help guide capital investments or budgeting decisions. For example, which is likely to get a higher ROI or ROE: a new media buy or a new plant? Cutting prices or adding new distribution channels? Being able to test which allocation will deliver the highest return makes your capital-allocation decisions more informed and effective. Similarly, investors such as private equity firms developing post-deal-closing 90-day plans may not focus solely on the three big levers to grow the company. They may, in fact, find it better to test multiple levers that can work collectively to move a portfolio companys business forward and keep it on a steady profitable growth plan. Using test and learn at these levels is new and may be subject to some internal resistance. But the benefits of a smoother strategy implementation resulting from testing in advance should quickly win over the naysayers. The way to think about test and learn is this: It doesnt matter if youre right the first time, as long as you get it right in the endand use that right answer to make right-sized efforts and investments. As long as you start small, you can contain the costs of ideas that do not work, and then build on positive results. Say, hypothetically, an idea has a range of potential outcomes from a 1% sales increase to a 2% decrease, there is real risk involved in moving forward with it systemwide. If, instead, you try it first on 0.5% of the customer base, the range of potential impact drops to between 0.0005% and -0.001%essentially miniscule. If its a failure, you walk away. If it works, you roll it out. If it produces some improvement but falls short of targets, you can adjust and re-test. To borrow an analogy from the race track, you need to go slow in order to go fast. You start by setting

Founder and CEO of Stax Inc., and Stax Dev Corp., based in Staxs New York office. For the past 20 years, Rafi has been leading corporate management consulting engagements and working with investment firm leadership teams to identify profit opportunities and mitigate risks across industries. In 1996, two years after founding Stax, he launched the firms private equity and M&A due diligence practice and in 2011 he founded Staxs Dev Corp. to develop new deal situations in partnership with Stax clients.

Stax Locations
Boston tel: 617-747-3400 Chicago tel: 312-873-2900 New York tel: 212-299-7500 Colombo, Sri Lanka tel: +94-11-288-7815

Stax Inc. All Rights Reserved.

Stax

a global strategy consulting firm

FAST FRAMEWORKS SERIES

TEst aND LEaRN: StaRt SMall, THINK BIG (CONT.)

things up correctly so you can drive smoothly, and then step on the gas when you see that straightaway. This approach also works in customer segmentation, helping you address important variations within your business. Not all customers have the same needs, nor does your business face the same competitors across various categories and customer segments. Great operating and marketing teams need to have more items, more ways to merchandise, and more configurations than in the past. Management teams may find that certain growth strategies are more effective in some businesses than others. A system to sort out potential improvements before moving forward full steam is invaluable.

It Is MatH, WEll stRUctURED aND PatIENtlY aPPlIED

Sample sizes in the test and learn approach may be small, but the science around it is not. In fact, the smallness of the samples makes it even more important to make sure that the analysis is quantitatively pure for the results to have any meaning. The small test groups must be carefully selected to provide a valid representation of the broader customer base or specific target market. The various groups need to be comparable among each other when setting up what is, effectively, a competition between alternative ideas. The math to do all this correctly is complex. You dont personally need to understand it, but its important that youor a designee close to your business strategywork with someone who does understand the analytical components to ensure that the findings are actionable. There also needs to be discipline around the analytic approach being applied: Is it a straightforward comparison of A vs. B, looking to see which works better? Or is it a multivariate analysis looking at an intricate issue on several dimensions simultaneously, such as a combination of performance attributes like revenue and profitability along with functional attributes such as store size, location, and proximity to a competitor location? Stax is constantly working with clients to help them identify profitable opportunities to grow their companies and create valueoperationally and investment-wise. Actionable and datadriven results are our calling card. We see great opportunity to apply big data and seemingly tactical methods to what has classically been the ivory tower of industry knowledge and highlevel strategic thinking. By bringing more facts, analysis and market agility to their strategic decision making, the knowledgeable can become even better, faster, and more successful in leading their organizations in a dynamic world.

Staxs FastFramework Series

Test and learn is part of Staxs fast-framework family of services that are highly intuitive, are highly actionable across the organization, can be delivered in twoto-three months, and then implemented in a similar timeframe to deliver returns almost immediately. Our success across PE firms, their portfolio companies, and corporate clients has helped businesses win share, accelerate growth, expand overall margins and equity value. Staxs experience has shown that a little bit of practical, actionable work deployed in a fast framework format can really help a management team succeed. Thats good business all around.

About Stax
Stax Inc. is a global strategy consulting firm with a nearly 20-year track record. Stax has offices in Boston, Chicago, New York, and Colombo, and it serves clients ranging from 27 of the Fortune 500 and 14 of the 20 largest LBO firms In the world, to middle-market private equity firms and their portfolio companies. Stax provides clients with an array of services to help management grow organically and make better M&A decisions. Its services to support these goals may be broad ranging, but the firm prides itself on structuring all engagements around a consistent approach: Work closely with the client to frame the problem, dig deeply to uncover fact-based market insights, identify implications, and get out quickly. Most important, leave behind specific, actionable recommendations that the client can implement quickly to enhance profits or increase value.

Stax Inc. All Rights Reserved.