EY Performance Journal - Volume 5, Issue 4

Volume 5 │ Issue 4

Providing insight and analysis for business professionals

Harmonizing
rhythms
Victory from strategy

Staying ahead of the competition

Problem solving

Spotting the “X” factors

Welcome

Recently, the International Monetary Fund (IMF) revised its global economic growth
projections to 2.9% for 2013, rising to 3.6% in 2014 (compared with 3.2% in 2012). It
commented that, “Global growth is in low gear, the drivers of activity are changing and
downside risks persist.”1
The implications of this forecast for business are manifold, but the bottom line is
that growth is picking up, albeit slowly, and opportunities are there for the taking if
organizations are prepared to face the drivers and risks that the IMF refers to in its
recent report.
For example, the Southeast Asian pharmaceuticals industry is predicted to see strong
growth over the next few years. It’s a great opportunity for companies in that sector,
but there are a range of distribution risks that need to be overcome in the short term.
“Feeling the pressure: managing supply chain risk in Southeast Asia” examines these
risks but argues that, by embracing the challenges they present, companies have
the opportunity not only to improve margins but, more importantly, provide safe,
affordable products.
Staying with a sector focus, “Energy demands: what are the emerging risks for the
oil and gas industry?” explores challenges such as IT security, counterparty risk and
increasing project scale and complexity. The article argues the benefits of managing
uncertainty, to ensure the industry is equipped and ready to meet the opportunities
presented by the energy needs of a growing global population.

Governments also have to step up to the mark. For example, “Solving unemployment
for GCC2 nationals: a sectoral approach” acknowledges how GCC governments
have been proactively working to reduce unemployment for their nationals. But
the article explains why a generic approach will never be as successful as one that
targets a specific sector. A bespoke, strategic solution is what’s needed to create job
opportunities in the region.
The message is clear: if organizations want to maintain a competitive edge, as global
growth returns, they must have an effective strategy in place that is understood
by everyone. “Victory from strategy: are you evolving ahead of the competition?”
discusses the core elements every company needs for a successful strategic approach.
“Who are your organization’s problem solvers?” is an article that highlights the
significant impact these people can have on a business. Often, it is the chief operating
officer who takes on this role, but how good is your business at spotting and
developing this potentially undervalued talent?
Other articles explore the essential role of the finance function when establishing
an internet start-up company, psychological motivation in revenue management
decisions, and the key strategic leadership challenges in high-growth markets.
I hope the articles in this edition of Performance provide valuable insight and
information to help your business innovate, grow, optimize and protect.
Enjoy reading this issue!

Markus Heinen
Chief Patron, Performance
1. MF, World Economic
I
Outlook, 2013.
2. ulf Cooperation Council.
G


Contents
02

10

02

Reducing human error in revenue
management decision-making

10

26

Solving unemployment for GCC
nationals: a sectoral approach

18

Victory from strategy: are you
evolving ahead of the competition?

32

26

18

Feeling the pressure: managing supply
chain risk in Southeast Asia

32

Culture: the elusive path to
business success

40

40

Who are your organization’s
problem solvers?

48

Internet start-ups: the essential role of
the finance function

62

48

56

Energy demands: what are the
emerging risks for the oil and
gas industry?

62

56

The anatomy of high-growth markets:
key strategic leadership challenges

01

Reducing human
error in revenue
management
decision-making
Recent revenue management (RM) research
has demonstrated what appear to be
systematic deviations from optimization
models of decision-making. It turns out that
decision complexity exacerbates specific
elements of biased RM decision-making.
There are ways, however, in which managers
can use this information to improve the
quality of RM decision-making in their
companies. More fundamentally, companies
can learn from these predictable patterns to
design programs that minimize RM decisionmaking error.

02


Authors
Elliot Bendoly Associate Professor
Goizueta Business School
Emory University, US
Michael Alan Sacks Associate Professor
Goizueta Business School
Emory University, US

03

Reducing human error in revenue management decision-making

RM is the science of
maximizing the sales
and price per unit
of inventory.

H

ave you noticed recently that
airline flights almost always
fill to capacity? If you’re a
seasoned traveler, you may
have also observed that full
flights are more common
today compared with even only a few years
ago. The reason: sophisticated RM systems
that maximize the yield for seat sales.
RM is the science of maximizing the sales
and price per unit of inventory. The airlines
industry has developed highly sophisticated
dynamic computer models for its pricing
structure. These models make real-time
pricing decisions based on the number of
seats available at the time of purchase,
amount of time remaining prior to the
flight, and past purchase history for that
specific flight. With a significant amount of
meaningful data available, these systems
optimize revenue and seat capacity, largely
eliminating the role of human judgment in
the process.
However, the airline industry is an
extreme case where all such RM decisions
can be made via optimization models. For
most other industries, a mix of computer
models and human judgment are required
for RM decision-making. The hotel industry
serves as an ideal example. RM packages
designed for the hotel industry allow for
real-time monitoring of capacity utilization,
integration with forecasts, and advanced
analytics. However, individual RM judgment
is still viewed as essential to appropriately
manage the nuances confronted in realworld RM settings. For example, complex
large group bookings, last-minute
purchases, cancelations, weather-related
changes and trip adjustments all complicate

04

the RM system. Hence, the effectiveness of
many of the applications of these systems,
and their associated operating policies, is
still very much human driven.

Predictable human errors in
RM judgment
Given the central role of human decisionmaking in RM decisions, one might question
the extent to which people make optimal
versus suboptimal RM decisions. A wealth
of research shows that human beings
make common, predictable errors in
general decision-making. However, little is
known about decision-making errors in RM
judgment specifically, and how to mitigate
them moving forward. Just how good are
people at making challenging RM decisions?
It turns out that the answer is complex, yet
understanding decision-making errors in
RM can make a big difference in optimizing
RM outcomes.
A recent study by Bendoly1 sheds light
on this very question. The author sought
to measure the extent to which human
decision-making in an RM context differs
from optimal levels, then study the reasons
for such decision errors. The author
carefully designed a controlled experiment
to test pricing decisions across variations of
resource capacity and time urgency.
In the experiment, a revenue manager
had S total units of capacity available for
allocation to clients over a time frame of T
discrete periods. The goal of the experiment
was to maximize total revenue by selling as
much of S as possible, and at the highest
possible price levels, prior to the end of
the total time T available (think of a hotel
manager selling rooms for a specific date in


the future). The experiment began at time
T=40 (the full amount of time) then slowly
advanced until T=0 (no time remaining),
with subjects charged to sell five units
at the highest possible levels of revenue.
Subjects would receive computerized bids
along the way, which they had to either
accept or reject. The actual decision faced
in each period is, therefore, whether to
allocate the requested capacity, thus
generating an associated level of revenue,
or reject the request, assumedly with the
hope of allocating that capacity to a higherpaying customer later (with the associated
risk that such an opportunity might
never surface).
To address how complexity affects
optimal RM decision-making, three
experimental contexts were designed (see
Figure 1). Experiment A was the most
straightforward and experiment C was the
most complex. Thus, the goal was to assess
human decision-making on RM across
three levels of increasing complexity, then
compare the results to the same decisions
made by optimization models.
The final twist in the experiment is
perhaps the most intriguing. The author
used the latest theories within behavioral
operations to assess how, and why,
subjects make distinct types of decisionmaking errors, specifically looking at the
relationship between motivational levels
and performance. The first motivational
dynamic might be categorized as
indifference, in which a lack of sufficient

1. . Bendoly, “Linking task conditions to physiology and
E
judgment errors in RM systems.” Production and Operations
Management 20(6), pp. 860-876, 2011.

With too little
challenge and plenty
of time, people are
more likely to reject
offers they otherwise
should accept.

challenge in a task results in a low state
of motivation for the individual worker.
Typically, such a lack of motivation is
ultimately associated with lower measures
of objective performance in a task. The
second dynamic revolves around increasing
the level of challenge associated with a
task by a sufficient, but not an excessive,
amount. Challenging, yet attainable, tasks
can raise a decision-maker’s motivational
level and increase attentiveness and arousal
regarding the task, generally resulting
in enhanced performance. The qualifier
‘‘not an excessive amount’’ is critical here,
as excessive challenge raises the third

well as their impact on performance. The
number of blocks simultaneously managed
by an RM is, of course, only one possible
contributor to the level of challenge
associated with a task. Also ostensibly
relevant to the management of these tasks,
is the comparison of time remaining to
capacity yet to sell. For example, it may
be that individuals faced with seemingly
high levels of capacity still unallocated
close to the deadline may feel particularly
challenged. In an attempt to fill this
capacity and, hence, avoid non-occupancy,
individuals might operate with lower than
normatively modeled price thresholds.

dynamic: distraction, stress and a general
reduction in motivation driven by a kind
of hopelessness from perceptions of
being overwhelmed by unattainable work
expectations. Together, these findings
imply an inverted-U relationship between
challenge and performance outcomes
(see Figure 2).
Because the concurrent management of
multiple blocks of capacity (in experiments
B and C) can generally be viewed as more
challenging than the management of a
single block (in experiment A), one would
expect to see differences in the dynamics
of arousal, indifference and stress, as

Figure 1. Assessing human decision-making on RM across three experiments of increasing complexity

Experiment

A

B

C

Units of capacity available
for sale by revenue manager

One block of
five units

Two independent
blocks of five units

Four independent
blocks of five units

Example

One hotel with
five rooms

Two hotels in different cities
with five rooms

Four hotels in different cities
with five rooms

City 1

City 1

City 3

City 1

City 2

City 2

City 4

Source: Authors’ own.

05


Given the central
role of human
decision-making in
RM decisions, one
might question the
extent to which
people make optimal
versus suboptimal
RM decisions.

Alternatively, those with limited capacity
remaining near the deadline may feel that
earlier efforts to use ambitious thresholds
yielded the result desired, and are sufficient
in securing their net performance over the
horizon considered. They may, in turn, be
less likely to seek out ambitious revenue
levels for the remaining capacity, either by
virtue of a fundamental lack of motivation
(indifference) or the view that pursuing
ambitious revenues on such capacity is
simply less realistic (overwhelming), given
their own assumptions regarding the pool
of demand. The result that follows might
be a tendency to use less than normatively
modeled thresholds at these low capacity
levels, irrespective of the time remaining.
The overall expectation was that low
levels of time remaining, coupled with
high levels of capacity yet to allocate,
should be particularly associated with
feelings of stress related to overwhelming
workload. Additionally, such effects should
be particularly relevant in increasingly
complex contexts (experiments B and
C) where multiple blocks of capacity are
managed concurrently. These compounded
issues, if in fact serving to generate stress
rather than simply arousal, are expected
to be associated with increases in ‘‘accept’’
errors (agreeing to bids priced at lower
than necessary rates) more so than ‘‘reject’’
errors (taking a pass on bids that otherwise
should be accepted). That is, people will
accept bids that they should objectively
reject due to the aforementioned biases.
Conversely, with high amounts of time
remaining and no imminent decision
necessary, people may be more likely to
make reject errors due to low motivation

06

caused by under-stimulation. This would be
most likely in the least complex situations
(experiment A) as compared to more
complex scenarios (experiments B and C).

Measuring motivational state
The only way to determine whether certain
types of deviations from anticipated RM
(i.e., certain errors) are being driven by
either a lack of arousal or a sense of being
overwhelmed, is to simultaneously study
hypothetical markers of such emotional
reactions more directly. Fortunately,
objectively observable physiological
markers of emotional and cognitive states,
such as arousal (or lack thereof in the case
of indifference) and stress, exist. Markers
that have been studied in the past, range
from neuroelectrical activity in the brain,
as measurable by electrodes, or functional
magnetic resonance imaging to heart
rate variance. Physiological responses
that require less obtrusive means for
measurement, such as those measurable
through the video-monitoring of the eye,
have also proved useful and increasingly
cost-effective.
Eye tracking offers the advantage of
allowing the simultaneous observation of
multiple potentially idiosyncratic markers
(e.g., pupil size, blink rate, x-y fixation).
Pupil size has consistently been shown to
increase upon heightened levels of mental
workload and arousal. A typical range of
pupil diameters for humans is 2mm–8mm,
with relative variations from an individual’s
relaxed state (i.e., when not engaged with
work) typically used to denote increases
in arousal. In contrast to the observed
linkage between pupil size and arousal,


blink frequency is largely thought to reflect
negative mood states, such as nervousness,
stress and feeling overwhelmed by a task.
An often-cited reference for this marker is
“the Nixon effect,” referring to the former
president’s increased blink frequency (50
times per minute) during a discussion of his
removal from office. Conversely, blink rate
is thought to slow down when individuals
engage in successful and comfortable
problem-solving endeavors. Thus, the
author utilized pupil size to measure arousal
and motivation, and blink frequency to
measure stress and anxiety.

The result
In the single-block experiment (A), reject
errors were more commonly made with
high levels of capacity and time remaining
as compared to the optimization model. In
other words, subjects took a pass on bids
that they otherwise should have accepted
when they had plenty of time and capacity
remaining. Conversely, accept errors were
more commonly made with low amounts
of time remaining and resources yet to
allocate. In this case, subjects settled for
lower offers than they needed to accept.

The next step was to assess the extent
to which motivational levels drove these
behaviors. As predicted, pupil-dilation levels
(indicative of arousal levels) rose as capacity
decreased and as the number of blocks
increased. In contrast, blink rates (measures
of stress and discomfort) increased with
higher levels of remaining capacity,
combined with lower levels of time left.
This shows that the low levels of arousal at
the early stages of the experiment (where
high levels of time and capacity remain)
are associated with reject errors, and

higher levels of stress in the latter stages
(where time is limited and capacity remains)
contribute to the accept errors.
In experiments with multiple concurrent
blocks to manage (B and C), reject errors
appeared much less common, or at least
smaller in magnitude on average. Pupil
dilation rates suggest that the greater
complexity in managing multiple blocks
appears to mitigate the lower levels of
engagement. In contrast, accept errors
appear much more common in the
more complex experiments (B and C),
when compared with those observed in
experiment A. Thus, in the comparatively
more complex context, subjects were less
likely to reject offers they should accept but
more likely to accept suboptimal offers they
should reject.
The impact of time remaining and
capacity appear to have the greatest
impact on blink rate in experiment C, and,
conversely, to be significantly reduced
in experiment A. In experiments B and
C, blink rate seems consistently on the
rise, with decreasing time and increasing
capacity levels. Interestingly, the point of
this inversion seems to map to the point
at which individuals appear to shift from
a tendency to commit reject errors to a
tendency toward accept errors.
The findings of this study shed important
light on the biases that people may have
in making RM decisions. With too little
challenge and plenty of time, people are
more likely to reject offers they otherwise
should accept. Conversely, overwhelmed
by limited time and capacity yet to allocate,
people are more likely to accept offers
they otherwise should reject. This effect is

07


Knowing the types of
errors that take place
in RM decisions, and
why they occur, helps
to build actionable
tools for preventing
and overcoming
such biases.

magnified in conditions of complexity. In
especially complex RM decisions, people are
less likely to be bored by any decision, thus
less reject errors take place. The concern
in complex scenarios is higher rates of
accept errors, where the combination of
complexity and time scarcity with resources
yet to allocate adds significant levels of
stress. Knowing the types of errors that
take place in RM decisions, and why they
occur, helps to build actionable tools for
preventing and overcoming such biases.

stressful, one solution may be simply to
artificially lower the apparent amount
of capacity that needs filling. Such an
adjustment might involve a reallocation
of some of that capacity task to another
revenue manager or an individual cross-

trained sufficiently to deal with it, or even
to a more automated, if imperfect, artificial
intelligence (AI) mechanism. Alternately,
portions of capacity might be held in buffer,
beyond the purview of RMs, until other
capacity units are allocated, and the threat

Figure 2. Motivation and performance: inverted-U relationship between

challenge and performance outcomes

Implications for practice

08

Negative
stress
effects

Cognitive
limit?

Blink rate

Arousal

Pupil dilation

Indifference

Visual engagement

Level of challenge

Level of challenge

l
usa
Aro

Performance

As a starting point, managers should be
aware of the conditions under which RM
decision-makers will make suboptimal
decisions, reject or accept errors
specifically. By doing so, they can begin
to monitor for the root causes of such
behaviors and reduce their frequency.
The onset of stress due to excessively
challenging work (to the detriment of
performance) may be dealt with simply
through creating mechanisms to bolster
self-confidence commensurate with
difficulty level. A broad approach to
achieving this state is suggested in the
form of increased training and resource
availability to bolster awarenessRecommendations
of these
important dynamics. If successful, these
Business culture
programs can reduce the negative effects
check
of stress, and consequently reduce costly
Cost optimization
accept errors.
check
Aside from these general tactics,
Growth strategy
check
however, the present work suggests that
certain more nuanced approaches to
managing workload might be applied. For
example, if the amount of capacity to be
filled in a limited amount of time appears

Few errors

Errors of some kind are made

Level of challenge

Source: Authors’ own.


Str
ess

Data val

of stress-based complications in judgment
are mitigated. By selectively reducing
capacity, RM decision-makers will feel less
stress and thus have a reduced tendency to
make accept errors.
Having access to accurate measures
of work arousal (through pupil dilation
measures as in this study) and stress
(through blink frequency) could deliver
a huge impact in real-time adjustments
to work conditions. On first thought, it is
difficult to imagine a typical workplace
adopting the type of software necessary
for such measurements today. However, it
is conceivable that at some point certain
workers themselves may be willing to have
stress levels monitored with an interest
in allowing management to take action
to reduce it. If acceptable, such statemanipulations might be applied more
effectively. Based on the views of revenue
managers participating in a related followup study, this manipulation tactic appears
to be a tenable prospect.

Finally, we can use the above tools to
help pinpoint thresholds where stress levels
affect the quality of RM decisions across
specific industries. The challenges of RM
decisions within the airline industry, for
example, may be distinct to those within the
bed mattress industry. Examining the role
of psychological motivation in RM decisions
within industries can help solidify measures
specific to that industry. From there,
interventions can be designed specific to
employee needs within industries and even
within unique firms. These efforts can help
maximize human decision-making in an RM
context and improve working conditions
at the same time, a win for companies and
their employees. 

These efforts can
help maximize human
decision-making in
an RM context and
improve working
conditions at the
same time, a win
for companies and
their employees.

09

Solving
unemployment
for GCC nationals:
a sectoral
approach
Creating sustainable and attractive
employment for their national populations
is a top priority for the countries of the
Gulf Cooperation Council (GCC). A range of
initiatives have had partial success but, in
this article, the authors recommend that
these approaches are complemented by
sector-specific solutions.

10


Authors
Stephen Farrell Deputy Advisory Leader,
Middle East and North Africa (MENA), and
MENA Markets Leader
EY, United Arab Emirates

Michael Mamish Senior Director,
MENA Nationalization Leader
EY, Saudi Arabia

11

Solving unemployment for GCC nationals: a sectoral approach

The Kingdom needs to create three
million job opportunities by 2015,
and six million jobs by 2030, to
handle the surge of youths looking
for employment.

12


F

or a number of years, GCC
governments have attempted to
facilitate national workers’ entry
into the domestic labor market
and substitute for expatriates,
with mixed results. An oil-driven
development model has provided rapid
economic growth and diversification into
a variety of sectors; however, citizens
of the GCC continue to face significant
underemployment.
Population growth rates in all six
GCC states are at 3% or more, with large
numbers of expatriates — in some states,
such as the UAE and Qatar, outnumbering
locals — creating a disproportionately
young population across the GCC. This
projected demographic growth will add new
national entrants into the labor market for
years to come. Increasing private sector
engagement in creating job opportunities
for nationals is crucial.
In Saudi Arabia, the largest of the GCC
countries by population and GNP, 400,000
Saudis, on average, reach working age
every year. The Kingdom needs to create
three million job opportunities by 2015,
and six million jobs by 2030, to handle the
surge of youths looking for employment.
The public sector is already over-staffed
and, given its inability to stimulate real
non-oil output directly, it will be the private
sector that plays a pivotal role in creating
more jobs for nationals.
Unaddressed, unemployment could
reach 40% for youths aged between 20
and 24, and higher for women. Creating
appropriate job opportunities for nationals,
and reducing current unemployment, is a
critical focus of GCC governments. Another

key aim of the region’s labor nationalization
includes reducing dependence on expatriate
workers and capturing and reinvesting
capital that would otherwise flow overseas
in the form of remittances and increased
self-enabled economic competitiveness.

A survey of efforts and
initiatives: overview of the
different programs undertaken
by GCC governments
GCC governments have been pushing
on multiple fronts to address the
problem. Those efforts range from longterm strategic policies, to short-term
desired outcomes.
One example of long-term strategic
outcomes from GCC governments, was to
increase spend on education, vocational
training, workforce engagement,
employment information dissemination
and job search support, to better equip
the national workforce with private sector

The programs
that the GCC has
implemented have
been generic in nature
and have not targeted
specific sectors.

job requirements. Enforcing quotas for
nationals in the workforce, specifying
certain jobs for nationals only, and
tightening work visa permits are some
short-term solutions engaged. Other
mid-term measures include fees for hiring
expatriate labor. Short- and mid-term
measures, if not implemented carefully,
may lead to labor market distortion, forcing
private sector companies to hire nationals
instead of cheaper, more productive
expatriates, which may reduce their
competitiveness and force them to consider
relocation and outsourcing.
This combination of incentives to
increase national employment and
regulate the labor market for the private
sector has created mixed feelings with
employers, where some believe the
governments’ policies are inconsiderate
to their competitiveness and ability to
profitably grow while dealing with those
measures. Many of these employers have
lobbied successfully with the political elite,
and gained stay measures in a number of
sectors for long periods of time.
A key rationale used in this lobbying
is the gradual replacement of expatriates
with nationals as a prudent economic
strategy, particularly because of the
region’s demographics, but it will not be
successful if it focuses on job substitution at
the expense of job creation. Neither will it
be successful if it results in making private
sector companies less competitive, and
deters foreign direct investment.
The Kingdom of Saudi Arabia (KSA)
is one GCC country that implemented a
number of market-based strategies across
the spectrum, such as:

►► Nitakat: a program assessing the
nationalization performance of
enterprises (i.e., the percentage of
Saudis in the enterprise in comparison
with the total number of employees
within the organization). The better the
organization’s classification, the easier
it is for it to act in the labor market.
►► Hafez: the first GCC unemployment
program, where unemployed Saudi
nationals are provided a monthly
benefit while looking for employment.
►► Takat: an employment match-making
process using a number of virtual and
non-virtual media to facilitate job seeker
meetings with private sector employers.
►► Reserving specific job categories
for Saudis such as security, HR and
administrative. Unemployment among
women received special attention, and
all retail sales positions for feminine
products are now restricted to
Saudi females.

13


Figure 1. Sectoral analysis V-model
Sectorstrategic
policy
direction

Evolve
sectorstrategic
policy

Gate 0

Develop recommendations and
case for change

Gate 4

Post implementation review

Me
asu
re a
nd
mo
nito
r

Sector
analysis

Analyze current state and
future state options

ne
deﬁ
nd
ya
ntif
Ide

Commission sector analysis

Potential focus for
sector’s labor supply
and demand

Gate 1

Commission business case development
Undertake detailed assessment of
labor supply and demand

Business case
and new model

Measure and monitor success

Sustain and
monitor
Embed change

Gate 3

Transition to “business as usual”

Build the capability and prepare impacted bodies
and stakeholders

Develop detailed business case

Develop detailed hypothesis model

Undertake detailed design (policy, process,
people, systems)

Conﬁrm new model with stakeholders and
develop an implementation model

Undertake high-level design (policy, process, people,
performance, systems)

Key governance stage gates

Implement

Gate 2

Commission implementation project

Accountability: Ministry of Labor

(and transfer of governance accountability)

Accountability: implementation owners (other Ministry)

Source: EY.

The MoL recognized that, without bespoke
solutions, current methods to drive more nationals
into AHW would not be sufficient to meet the
sector’s requirements and increased demands.

14


►► Subsidization of training and initial
employment for Saudi workers through
the Human Resources Development
Fund (HRDF) by providing financial
support for training and education to
trainers, trainees and employers to
match private sector requirements,
both on-the-job training and in
preparation for entering the job
market. These subsidies include

Creating appropriate
job opportunities for
nationals and reducing
current unemployment
is a critical focus of
GCC governments.
wages for Saudis for their initial
employment period.
►► Funding the King Abdullah Foreign
Scholarship Program providing support
to over 150,000 young Saudis to
complete their higher education
outside the Kingdom and bring back
employable knowledge at par with
educated expatriates.
►► Eliminating the gap between the output
of the local educational systems and the
requirements of the market.
Although these initiatives had measurable
success in Saudi Arabia and other GCC
countries, the need for additional sectorspecific efforts is evident. This is because
the sectors receiving generous government
funding are important drivers of economic
growth, however, those sectors create
low-skill jobs that GCC nationals are not
attracted to.

Sectoral analysis model
EY developed a sectoral analysis V-model
to design sector-specific solutions to
complement the existing broad initiatives.

This proved most useful in bringing
differentiated solutions to certain sectors
where there are specific requirements not
met by broad solutions. Examples of such
sectors are health care, tourism and the
small and medium-size enterprises. Figure 1
shows the sectoral analysis V-model.
The sectoral analysis V-model consists
of two main sets of activities. The model is
initiated on the left hand side proceeding
through a number of gates to verify the
requirements of the targeted sector and
build a fact-based business case for change
to implement a new model to meet the
specific sector’s requirements. Most of
these activities usually are sponsored by
labor regulators, mainly the Ministry of
Labor (MoL). As the case for change is
formulated, the implementation efforts
move to the right side of the V-model,
where sectoral stakeholders and other
partners would own the accountability
under the sponsorship of labor regulators.
The sector facts-based analysis is
founded on gathering data, including the
sector’s available labor supply and demand
information. A key aspect of the data
collection is learning from the sector’s
stakeholders, through interviews and
surveys, a true sense of the current state
of the employment picture, its needs and
any gaps that might exist from current
unemployment initiatives. The interviews
and surveys aim to highlight a specific
sector’s priorities and initiatives requiring
particular talent-management attention.
The gathered knowledge is used to
develop a sector-specific employment
maturity framework for assessing “asis” and “to-be.” The implementation of

this maturity model yields a “long list”
of sector-specific opportunities. Options
analysis of global benchmarks and the
developed priorities will offer a “short
list” of strategic initiatives that will bring a
focus on the issues that the sector would
benefit from the most. Impact assessment
of the initiatives and their implementation
approach feeds into the case for change
for labor market management for the
sector. Socializing the short list with the
private sector stakeholders is important
to verify the appropriateness of sectorspecific initiatives and to gain support for
the additional efforts complementing the
existing initiatives.
Refer to the case study highlighted in
this article to see how the V-model works
in practice.

15


V-model
success in
Saudi Arabia
Large-scale unemployment
solutions should be coupled
with sectoral solutions
addressing specific issues
The GCC countries have been proactively
working on the unemployment problems
for their nationals for a number of years,
but all the indicators suggest that the
situation will become ever more urgent. The

16

programs that the GCC has implemented
have been generic in nature and have not
targeted specific sectors. We believe these
initiatives need to be complemented by a
sector approach that identifies the current
issues within each sector, so that a bespoke
strategic solution can be developed. 


W

e successfully used the
V-model in a project that
focused on the health
care sector, working in
conjunction with the
MoL in KSA. KSA is
currently facing a problem in the quality and
number of Saudi nationals going into the
Allied Health care Workers (AHW), and it is
not meeting the requirements and demands
of the sector. The demands are driven by a
number of factors: increased demographics,
demographic trends including higher
pediatric and geriatric needs, disease
trends such as increased cardiovascular and
hypertension, increased health care service
delivery and patient safety standards,
better labor densities of AHW to population
and other health care professionals, such as
physicians and nurses. The MoL recognized
that, without bespoke solutions, current
methods to drive more nationals into AHW
would not be sufficient to meet the sector’s
requirements and increased demands.

V-model sectoral analysis
of AHW
Desk-based research, stakeholder
engagement through interviews, surveys
and global leading practices (GLP)
research were among the initial stages
of the analysis, forming the base for a
report into the nationalization issues in
the AHW sector. Bolstering this research
was the development of an issues list with
the cooperation of stakeholders, which
was segmented into four major areas;

K-12 education, post secondary school
training, pre-employment and employment.
Identified issues included weakness in math
and science education, lack of unbiased
counseling, entry into training not being
hurdled and AHW training being the
course of last recourse. The training was
not meeting defined standards, language
of instruction was considered difficult to
most students, lack of balance between
theory and practice, lack of alignment
between employers, trainers and curricula.
Weak follow-up commitments after
training, lack of orientation, and weak
expectations management after starting
employment. Separately the list of issues
included opportunities to improve certain
employment aspects such as career
pathing, rewards and recognition, better
coordination of demand and supply.
This list was validated with stakeholders
before work could begin on developing a
business case addressing these issues. A
list of opportunities to drive nationalization
was developed, again in cooperation with
stakeholders and a short list of 15 initiatives
and opportunities was finalized.

V-model business case
development for AHW
Additional interviews and data collection
was carried out to establish the project
governance and stakeholder targeting.
Outline requirements for initiatives
were confirmed, and a vision and target
operating model (TOM) developed. A
detailed current state assessment was

undertaken to compare against the TOM,
and an action plan drawn up to address
any gaps.
From this action plan, a detailed
business case containing options
appraisal, cost-benefit analysis, key risks
and implementation timescales was
developed. The business case included:
►► Improving AHW labor density to 8.7
per demographic growth and labor
densities against other health care
professionals
►► Increased health care standards
and reach
►► Drivers such as demographics,
diseases trends and geographic
distribution
Once the business case was formed, an
implementation and deployment strategy
and approach was confirmed. The design
for the implementation plan for a new
model for AHW labor supply was to
include all stakeholders in an accelerated
design event, where participants would
collaborate to agree on the final features
of the new model, and then agree on
specific actionable items with ownership
and timeline commitments. 

1. comparative assessment of labor market nationalization
A
policies in the GCC, S. Hertog, Gerlach Press, 2012.
2. merging strains in GCC labor markets, U. Fasano and R.
E
Goyal, IMF, 2004.
3. re the GCC’s labor nationalization policies working? E.
A
Rutledge, Gulf Research Center, 2005.
4. audi Arabia’s youth and the Kingdom’s future, C. Murphy,
S
Woodrow Wilson International Center for Scholars, 2011.
5. n Saudi Arabia: its people, past, religion, fault lines — and
O
future, K. E. House, Knopf, 2012.

17

Victory from
strategy: are you
evolving ahead of
the competition?
EY´s Strategy experts share insights and
lessons learned from their strategy review
projects, one of many elements of EY
Strategy’s service portfolio.

18


Authors
Robert Jung Manager
Strategy
EY, Germany
Jule Parulewski Consultant
Strategy
EY, Germany

19

Victory from strategy: are you evolving ahead of the competition?

An effective strategy
is hard to develop,
but its result should
be straightforward,
easy to adhere to
and understandable
by everyone.

A

ccording to Sun Tzu, author
of the seminal sixth-century
Chinese military treatise The
Art of War, “Tactics without
strategy is the noise before
defeat.” In today’s evermore
competitive business environment,
companies lacking a coherent strategy are
doomed to lose in their own battleground —
the market.
But what is strategy, and why has it
become so important in the business world?
The word has military origins. It is derived
from the Greek word stratēgia, meaning
“the art of the general.” Used today in
different contexts, strategy has various
definitions. Canadian management guru
Henry Mintzberg defines it as a pattern in
a stream of decisions, where all of these
decisions are targeted toward a common
goal. For a business, this goal might be to
create or sustain a long-term competitive
advantage; in other words, to win in
the market.
EY understands the growing importance
of strategy. Thus, it established a dedicated
global Strategy practice to support its
clients on their journeys when optimizing,
growing or innovating their business.

Stick to the basics
Even the most minimal strategy approach
needs three basic elements in order to
be effective: situation diagnosis, guiding
principles and a set of coherent actions.
“Situation Diagnosis” means analyzing
the current situation and environment of
the company, and developing scenarios
about how the future is most likely
to materialize.

20


Subsequently, “guiding principles”
determine the direction an organization
could develop in these scenarios, without
going into the detail behind the direction
itself. Lastly, a set of “coherent actions”
assures the coordinated use of resources,
activities and decisions to enable the
desired future state.

Ask around
The process of forming a strategy is
triggered by the company’s leadership
team, but delivering input for diagnosis
requires the deep understanding of the
firm’s employees and operations.
Input from all levels of the organization
helps to inform and enhance the
decisions made at the top, and it starts
the process of building support for the
strategy execution among employees and
responsible managers.
Furthermore, it develops the
commitment and understanding of all
employees who will be held responsible
for delivering the results required by the
strategy later on.

Make a long story short
A common mistake companies make when
setting their strategy, is developing one that
is too complex or inconsistent.
Many companies either have no strategy,
or one that is not connected with existing
operations or the external environment —
one whose meaning is lost in its complexity
or built in an isolated vacuum. An effective
strategy is hard to develop, but its result
should be straightforward, easy to adhere
to and understandable by everyone.

Defining a strategy
is a continuous,
flexible process
that must adapt to
changing internal and
external conditions.

Don’t fool yourself
Setting objectives or plans and calling them
a strategy is another common mistake.
“Becoming the market leader” is not a
strategy — it’s an objective or vision. It only
becomes a strategy if it is connected with
the elements of situation diagnosis, guiding
principles and a set of coherent actions
supporting it. This is when strategies
become realities.

Stay flexible
In today’s highly dynamic economies,
business models are becoming short-lived.
Defining a strategy is a continuous, flexible
process that must adapt to changing
internal and external conditions. Whenever
the core assumptions about the current and
future developments in the environment
change, the strategy needs to be reviewed
and adapted, if required. As a rule of
thumb, every company should review its
strategy at least once a year — the more
volatile the environment the more often you
should review and refresh your strategy.

Winning in the market
Sun Tzu also wrote: “All men can see these
tactics whereby I conquer, but what none
can see is the strategy out of which victory
is evolved.” When the future arrives, and
you find yourself in a stronger position
in the market, your competitors might
wonder how you got there. But those
responsible for setting and pursuing your
strategy — including the employees who
helped to inform and deliver it — will be left
in no doubt. 

21


Case study
How EY´s Strategy team
supported a market
leader in reviewing
its strategy and
staying ahead of the
competition

T

o help shed some light on the
theory, here’s an example
of how EY’s Strategy team
worked with a client to review
its strategy and recommend
improvements.
In previous years, the client — a market
leader within the Swiss automotive
leasing market — has drawn on a stable
return on equity and fulfilled all sales and
performance targets.
External market developments, such
as evolving customer requirements or
increased pressure from the competition,
forced the client to develop a strategy
to react to these threats. Members of

the company’s top management team
developed ideas for meeting their expected
future challenges.
With the aim of securing further
progress and growth, the management
team asked EY to review, challenge
and refresh its existing strategy and
recommend improvements.

Project approach
The EY team initially conducted a
complete as-is analysis of the client’s
current situation, its strategic plans,
operating model, service offering and ideas
for innovation.

Figure 1. Strategy review report

Busines
culture ch s
eck

Cons
data o olida
ver ted
vie
w

Strategy
review
report

st
Co tion
iza

di Dat
ty a
ch
ec k

im
opt

Report on the current
state and validity of
internally developed cost
optimization approach

tions
nda
me
om
ec

Report on existing data and current
state of business planning

tegrity
ta in
Da check

Report on the current state
and validity of internally
developed enhancements
to company culture

R

Advise on enhancements to existing
internal planning and strategy

ch
e

ck

Growth
strategy check

Report on the level of
data integrity with
appropriate adjustments
wherever possible

Report on the
validity of data and
its underlying
assumptions

li
va

Report on the current state and
validity of internally developed
growth strategy

22


In order to get a holistic picture
of the company, EY gathered data
through extensive document analysis,
as well as from more than 30 interviews
with employees from all divisions and
hierarchy levels.
It was extremely important to ensure
employee support from all levels of
the organization, and so the client’s
leadership team held an official kickoff event communicating the project’s
importance to the company’s future success
and positioning.

This event served as a demonstration
of the senior team’s full commitment, and
made it clear to all employees that change
was on the way — and that ongoing success
would require everyone in the company
to go the extra mile. “The management’s
clear commitment to involve and receive
honest feedback from all employees was
crucial to obtain the necessary information
needed from the very beginning” says Jule
Parulewski from EY’s Strategy practice.

Actions taken and
results delivered
Once the project started, the first phase
was to screen, consolidate and analyze
all data collected and draw the right
conclusions from it. In parallel, the
team developed initial hypotheses for
improvement paths on the basis of the data
analysis, and began to search for additional
information to test, challenge and evaluate
these hypotheses.

Figure 2. Output from scenario analysis
Impact of interest margin on scenarios

Impact of ﬂeet size on scenarios

Scenario 1
24.9%

25.0%

25.0%

Scenario 1
20.9%

20.0%

20.0%

Baseline
20.9%

15.0%

15.0%

Baseline
15.3%

10.0%

5.0%

0.0%
2008
–5.0%

2012

2013

2014

2015

2016

2017

Scenario 2
–2.5%

Economic return (%)

Economic return (%)

10.0%

Scenario 2
6.1%

5.0%

0.0%
2008
–5.0%

2012

2013

2014

2015

2016

2017

Scenario 3
–1.8%

Scenario 3
–0.0%

–9.9%

–0.0%

Scenario 4
–11.4%

–15.0%

–15.0%

–20.0%

Scenario 4
–18.9%

–20.0%

Source: EY.

23


The value delivered by the EY
Strategy team helped me and my
management team further enhance
our company’s positioning.
I am very thankful to the EY Strategy
team for its uncompromising
dedication and exceptional hard work.
Managing Director

Figure 3. Structure of business model analysis with example questions
Key
resources

What key resources do our
value propositions require?
Which key resources are we
acquiring from partners?



Key
activities



Customer
relationships








What type of relationship
does each of our customer
segments expect us to
establish and maintain with
them?
How are they integrated with
the rest of our business
model?
How costly are they?



What key activities do our
value propositions require?
How do our distribution
channels affect customer
relationships?



Value
propositions



Key
partners





Customer
segments



What value do we deliver to
the customer?
Which one of our customer’s
problems are we helping to
solve?
What bundles of products
and services are we offering
to each customer segment?

Who are our key suppliers?
Which key activities do
partners perform?
Who are our key partners?

Revenue
streams







For whom are we
creating value?
Who are our most
important customers?

Channels




Cost
structure









Through which channels
do our customer segments
want to be reached?
How are our channels
integrated?
Which ones are most
cost-efﬁcient?
Which ones work best?

What are the most
important costs inherent in
our business model?
Which key resources are
most expensive?
Which key activities are
most expensive?

How much does each
revenue stream contribute to
overall revenues?
What value are customers
really willing to pay for?
How are they currently
paying?

Source: EY.

To account for possible future
developments of the Swiss automotive
leasing market, the EY Strategy team
developed and tested multiple scenarios
using a specially developed proprietary
financial model to assess the impact of each
scenario on the client’s overall strategy and
business model.
Results of the situation analysis and

possible improvements to the client’s
business model, value proposition or
customer portfolio were evaluated
against employee’s current level of skill
and experience, in order to assess the
realization chances of each improvement.
Additionally, the team reviewed the
client’s internal organization and processes
for their cost-saving potential.

24


A benchmark for comparison with
competitors enabled the EY team to
support its enhancements with facts
and figures.
At the end of the project, EY
summarized all of this information and
helped the client to rate and prioritize
its existing initiatives. The EY team
recommended a set of coherent actions

The value-driven
project approach of
EY’s Strategy team
helped us to focus our
resources on the main
drivers of success.
The holistic project
design ensured our
employees’ support.
Finance Director

Figure 4. Recommended coherent actions
Phase
3: 201
5–17
Growth

Phase
2: 201
4–15
Service

Process
quick wins

Su
pp
or
tin
ga
cti
viti
es

s
ces
Pro sign
de
ick
t qu
Cos wins

t
Cos

company a better understanding of key
challenges on the horizon. The company
also now has much deeper insight into its
own strengths and weaknesses and can,
therefore, take these into consideration
when dealing with future challenges.
As a result, the company is enabled
to address its potential for improved
economic success and is aware of its
internal and external development areas.
It has also been equipped with a clear
road map together with a set of coherent
actions that will support the continuing
fulfillment of economic targets and
profitability objectives.

“This project, again, demonstrated
that a strategy is different from a vision or
mission. It is more than goals, targets and
objectives,” says Robert Jung, Manager
at EY’s Strategy practice. “A strategy is
the result of extensive research, analysis,
planning and hard choices. It is a carefully
developed, problem-focused action plan
aimed at solving a critical challenge. If
done properly, it provides everyone in the
organization with guidance on what to
aim for, the reason behind it and how to
get there.” 
ac
tiv
itie
s

th
ow
Gr

which, in combination, allows for the
client to adjust its strategy and reach its
objectives. EY provided a strategic road
map with readily implementable quick wins
as well as medium- and long-term actions.
EY submitted a final report
summarizing the results and documenting
recommendations. It included an in-depth
analysis and evaluation of the current
growth strategy, process improvement
plans and an assessment of internal
innovation ideas. The report was further
enriched with enhancement options for
each area.
The project´s extensive analysis has
empowered the client by giving the

Cul
ture

s
ces ion
Pro entat
m
u
doc

Su
pp
or
tin
g

Source: M. Baghai, S. Coley and D. White, The
Alchemy of Growth, Basic Books, 1999.

E
ﬂex mploy
ibil ee
izat
ion

Pe
ma rfor
na ma
ge nc Pilo
me e
t
nt tab “one
le”
Imple
me
CPM nt
C
qui ultura
ck w l
ins

M
ac erge
qu rs
(M isiti and
A on
) s

t
lou
Rol cepts
con

ot
Pil epts
nc
p co
elo
Devicated l
dedalytica
an skills

t
ep on
nc ati
t
Co ent
cep
Conrvice ion segm
se ntat
me
seg

h
wt
Gro

de Dev
m p dic elo
an ro at p
a je e
sk gem ct d
ills e
nt

opt Cost
imi
zat
ion

Phase
1: 201
3–14
Culture

S
M creen
A t ing
arg
ets

2017

25

Feeling the
pressure:
managing supply
chain risk in
Southeast Asia
The Southeast Asian pharmaceuticals
industry is taking center stage in the region,
with predictions that the market will grow
to US$3.9b by 2016.1 This rapid growth is
gaining attention from both governments
and patients, and pharmaceutical companies
must gear their production and distribution
infrastructure if it is going to withstand this
growth and pressure. The majority of this
increasing pressure is being felt by the health
care supply chain, which in turn, is increasing
risk that companies must address.

1. ccording to PR Newswire (US) as seen on The Jakarta Post
A
20 August 2013.

26


Authors
Philip Chu Partner
Advisory, Supply Chain
EY, Singapore
Sing Hwee Neo Partner
Advisory, Risk
EY, Singapore

27

Feeling the pressure: managing supply chain risk in Southeast Asia

In larger countries,
such as China and
India, currently, subdistributors, most of
which are local players,
handle 30% of the main
distributors’ sales
revenue. However,
the principals don’t
have any visibility
or transparency on
sub-distributors’
compliance.
Survey respondent

A

variety of internal and
external forces are driving
the rise of supply chain
risks. Macro trends, such
as increasing globalization
and global connectivity, are
rapidly changing markets and demands.
Varying customer expectations and product
life cycles, along with increasing quality and
compliance issues, give rise to complexities
in the pharmaceutical supply chain across
clinical research, sourcing, manufacturing,
distribution and sales. Pharmaceutical
companies are expanding their portfolios
and improving their operational efficiency

28


to cater to increasing demand for high
quality and affordable products delivered on
time with excellent customer service. While
increased use of outsourcing is meant to
improve efficiency — allowing businesses to
focus on their core competencies — it has
also made operations more complex and
exposed them to greater third-party risk.
Extended value chain risks associated
with upstream and downstream operational
activities, product development,
manufacturing and distribution also must be
considered. Furthermore, by reducing slack
in the network through lean manufacturing,
centralization, just-in-time inventory and

capacity rationalization, companies have
not only reduced the margin for error but
also introduced new kinds of supply chain
risk. Supply chain centralization also poses
a big risk for the organization to align
policies and standardize procedures across
regions and countries. Additionally, the
rising internet sales of drugs have brought
in higher risk of counterfeiting drugs.
These complexities pose a myriad
of risks to business sales performance,
brand equity and reputation — ultimately
impacting product quality and patients’
safety. For pharmaceutical industry leaders,
this environment raises some pressing
questions: how can companies understand
where the most important risks in their
supply chain are? How much risk should
they tolerate? How can they reduce their
exposure to unacceptable risk today, and
prevent their occurrence in the future?
These questions are not only restricted to
Southeast Asia — they are problems that
must be addressed by pharmaceutical
companies worldwide.

Distribution in the
pharmaceutical supply chain
While all large pharmaceutical multinational
companies (MNCs) have sophisticated
supply chain management processes and
deem upstream risks critical, few recognize
distribution risk. This is despite the
extraordinary potential costs arising from
its ignorance. In the current pharmaceutical
market, distributors play a critical role in
the value chain as most of them not only
purchase products from the principal for
on-sale, but also manage the marketing,

sales and distribution to customers locally.
Some of them also manage the after-sales
support and customer relationship.
Additionally, as distributors manage
product portfolios for multiple principals,
fair treatment of all brands without bias
poses a significant risk to the principal’s
brand equity, revenues and reputation.
Distributors may lend greater focus to
certain brands during the sales process. The
principal must recognize these risks and
develop a mechanism to safeguard itself
against them.
Furthermore, greater complexity in
front-office administration is leading to
increased focus in monitoring contracts,
rebates and chargebacks. There is also a
need for systemization to obtain visibility
on distributor compliance, risk reduction
and counterfeits. Newer models for health
care delivery and reverse logistics are
being explored. There is greater emphasis
on the use of electronic health records,
e-prescribing, mobile health applications
and remote monitoring.
The industry’s current supply chain
model will not be able to meet these
challenges forever, requiring companies in
the sector to develop new capabilities and
new ways of working together.

All distributors claim
that they have the best
reach. The difficulty
for us is to ascertain
those claims. Despite
having sophisticated
market intelligence, we
still need an exhaustive
on-the-ground check
to validate distributor
coverage.
Survey respondent

An executive perspective
We interviewed a number of senior
executives from pharmaceutical companies
across the supply chain and distributor
management functions. They highlighted
four main risks that must be considered
when looking at the supply chain in
emerging Southeast Asian markets, such as
Vietnam and Indonesia.

29

Feeling the pressure: managing supply chain risk in Southeast Asia

1. Product liability

Although distributors handle the principal’s
products across local markets, the
accountability of the product rests with
the principal. This means it is they who are
susceptible to market and reputational risk
due to quality issues, such as contamination
during distribution, physical damage,
counterfeiting or mislabeling of products,
cargo theft due to inadequate security
measures, and diversion of products from
the intended authorized market to another.

that are present at the sub-regional
level. Processing errors and negative
chargebacks cannot be ignored either.
There is a risk that the sub-distributor may
resell a returned product and improperly
request an additional chargeback, or
claim a chargeback for a product that was
shipped to a non-contracted customer.
Such risks do not only impact the principal’s
brand but also its relationship with the
main distributor. How can sub-distributor
compliance and risk be managed?

2. Financial stability

4. Distributor reach and coverage

This relates to the financial health and
bankruptcy risk of the distributors. As the
principal’s products are registered under
the name of the distributor, its revenues are
earned only when the actual downstream
sales transaction occurs. Thus, there is
mutual dependency between the principal
and distributor. In the event of bankruptcy
or adverse global economic conditions,
the principal’s cash flow is impacted if the
distributor is unable to sell. In addition, it
is difficult for the principal to engage with
another distributor and sell to them within
a short turnaround time. Distributors’
financial health thus needs periodic
assessment through timely audits of
financial statements, past transactions and
overall business analysis.

Distributors today reach out to several
thousands of pharmacies, hospitals and
health care institutions. The risk here is how
this reach can be validated. Distributors
carry a plethora of brands and product
portfolios for multiple principals. The
question to be addressed is whether the
principal’s products are actually reaching
the end customers fairly, consistently and in
an unadulterated manner. If neglected, this
area could result in unfilled demand from
the end consumer, thus impacting revenues
and profits. There needs to be a program
and research to validate a thorough check
on the distributor’s claims based on the
market and competitive intelligence.

3. Compliance

To mitigate these risks, businesses need
to have an effective and holistic risk
management program, encompassing
not just the company’s risk management
team but all the functional arms including
sales, marketing, purchasing, operations
and finance. The program should provide
greater clarity on distributor transactions,

30


Main distributors in a country may not
have full coverage, especially in larger
countries, and thus engage sub-distributors
to support them locally. Often, the principal
has established practices and programs to
validate and assess the business of the main
distributor but ignoring the sub-distributors

Remediating the risk

Distribution in
Indonesia is a challenge,
due to the highly
regulated distributor
environment. Improper
handling of the products
poses a big risk to
product liability for
the principals.
Survey respondent

Distributors collect
money on behalf of
principals. If they are
not financially stable
to carry out the sales,
they will burn up the
principal’s cash flows.
Survey respondent

competitive health and capabilities, the subdistributor mapping and improved visibility
across the value chain.
Coordinated supply chain and
distribution management efforts, by
contrast, can provide a clearer and
more comprehensive understanding of
the strengths and weaknesses. Simply
recognizing the value of distributor risk
management is not enough. Unknown and
unforeseeable risks will always be with
us, and not even the best risk assessment
approach can identify all of them. Even so,
greater insight into the way they might play
out can provide a more comprehensive
picture of an industry’s competitive
dynamics and help shape a better
corporate strategy.
There are three key attributes to help
companies build a resilient supply chain
for distributor management: information
sharing, control and collaboration.
Information sharing across the
organization, to check for adherence to
compliance and applicable standards by
distributors, should be used as common risk
assessment practice. The ability to monitor
supply chain events and patterns as they
happen, allows companies to address
problems proactively. Data analytics is one
of the critical enablers. Control is essential:
having robust policies, monitoring, and
control mechanisms to help ensure the
proper procedures and processes are
actually followed. Collaboration is also key;
having the ability to work effectively with
distributors through symbiotic, trust-based
relationships in order to avoid disruptions
and achieve common goals. Currently,

the consignment model is widely used for
distributor agreements.
A service-oriented model can also
be explored in more mature markets.
Controls need to be established through a
comprehensive audit and due diligence of
distributor sales, transactions and margins.
Risk from third-party distributors poses
a significant challenge to pharmaceutical
companies. A systematic approach to
managing those risks can lower costs and
help pharmaceutical companies present a
coherent approach to all key stakeholders,
including regulators.

Conclusion
Distribution risk opportunities do much
more than improve the bottom line. By
embracing the challenges of supply chain
leadership and distribution excellence,
pharmaceutical companies have the
opportunity to further the most important
missions of the health care industry:
providing safe, affordable access to
products that can enhance, or even save,
the lives of people across the world. 

31

Section title

Culture: the
elusive path to
business success
Revitalizing talent has a lot less to do
with changing people, but a lot more to
do with the culture that the organization,
the management team and the people
themselves create and contribute to.

32


Authors
Seshni Samuel EMEIA Talent Leader
EY, South Africa
Joya Appadu Senior Manager
Organizational Development
EY, South Africa

33

Culture: the elusive path to business success

We wanted to create
an environment
where our people
felt supported
and empowered in
delivering on our
strategic objectives.
Ajen Sita, EY Africa CEO

I

magine the ultimate success story: a
business, an organizational strategy that
is guaranteed to win in the market, and
then of course, the right people who
make it all happen. Like most things,
this is more easily said than done. What
keeps the typical HR practitioner up at
night is: how do we ensure we have the
right people to successfully deliver on the
business strategy?

34


But, according to Sumantra Ghoshal,
late Professor from the London Business
School, that is the wrong question to
ask. Rather, he claims: revitalizing talent
has a lot less to do with changing people,
but a lot more to do with the context —
or the culture — that the organization,
the management team and the people
themselves create and contribute to.

“Let me try to describe ‘context’ in the
best way I experience it,” says Ghoshal.
“I come from Calcutta, India. Calcutta
is a wonderful town in spring, autumn
and winter … but in the summer, well,
the temperature is 40 degrees, and the
humidity is 99%.” Imagine the heat, the
humidity, the noise, the dirt. “It sucks up all
your energy, drains your brain and exhausts
your imagination,” he says. Ghoshal then
takes us to springtime in the forest in
Fontainebleau, near INSEAD, a business
school, where he was a professor at the
time. “The smell of the trees, the crispness
in the air, the flowers, the grass underfoot …
how one’s heart lifts up, how the energy
and creativity bubble away!”
The issue is not about changing people.
“In Fontainebleau in spring, I have a lot
of energy,” he says. “In Calcutta in the
summer, I am a bit tired. And yet I’m the
same person.” The issue is beyond the
abstractions of strategy, or organization,
or processes. “Most companies, especially
large companies, have created downtown
Calcutta in the summer, inside themselves,”
says Ghoshal. At the end of the day, the
question Ghoshal poses is, how do we
create Fontainebleau inside people? How
do we create a culture and an environment
that brings out the best in people?

Creating an organizational
culture to underpin
organizational strategy
So what is culture? Ghoshal describes
culture as the “smell of a place.” Strategy,
defined by top management, then flows
down to the rest of the organization. What
does the strategy “smell” like, when it

comes down to the front line manager, and
how does the “smell” then affect the front
line manager’s behaviors?
Although abstract, the phenomena of
culture are concrete and very powerful —
and very difficult to change. Another pundit
of culture, Edgar H. Schein, in his book
Organizational Culture and Leadership,1
categorizes culture into four elements:
structural stability, depth, breadth and
patterning. “Structural stability” is the
notion that culture is the foundation of
group identity. It holds the group together
and defines the group even as members
come and go. “Depth” is the concept that
culture is so deep that group members may
be unconscious of it. It is simply the way
you do things and needs no explanation.
“Breadth” is the effect of culture on
everything about an organization, touching
every function and activity. Lastly,
“patterning” is the notion that culture is
what makes the group’s behaviors, values
and rituals coherent.
“Taking on a cultural transformation is
no small feat,” says Shirley Zinn, graduate
from Harvard University, Faculty at Duke
Corporate Education and Extraordinary
Professor at University of Pretoria. “Culture
goes beyond capturing the minds of
employees, but captures their values, their
beliefs, their hearts. It is ultimately what
drives behavior. And that behavior needs to
support the strategic objectives of the firm,
in order to result in business success.”
Zinn adds, “Executive buy-in is
absolutely essential.” After all, if executives
of the firm feel the need to foster an
empowering culture — that, in itself, speaks
to the culture of the firm.

Per Schein’s research, guiding
an organization through cultural
transformation also requires “unlearning”
as well as learning. “It is not enough to
define what behaviors are required to
achieve the strategy,” says Zinn. “The
behaviors that need to be unlearned,
and cannot be tolerated, also need to
be defined.”

Putting theory into practice
In August 2006, EY Africa set about uniting
its offices by integrating all processes,
legal entities and systems. You can rightly
call this undertaking ambitious: there
are 33 separate country units across
EY Africa, each with their own cultures,
languages and operations. The need to
create an organizational culture to support
the company’s strategic objectives was
quickly apparent.
“Our purpose at EY is to build a better
working world for our people, our clients
and our communities,” says Ajen Sita,
EY Africa CEO. “Our ambition is to be
the most distinctive professional services
firm in Africa. We wanted to create
an environment where our people felt
supported and empowered in delivering on
our strategic objectives.”
And so began the search for a unique
organizational culture that defined
and united these different offices.
Understanding what needed to change was
the first step for EY Africa’s management.

1. . H. Schein, Organizational Culture and Leadership, 1985.
E

35


Sustaining a culture
and embedding it
within the organization
is as important as
defining it.

Based on the Bluprints concept,2 all 5,400
employees in the continent were asked
the same question: what should we be
doing more of, and less of, to become the
professional services firm that builds a
better working world across Africa for their
people, clients and communities? Adds Sita,
“As the executive, we wanted to know what
our people wanted — from the partners of
the firm, to the managers and down to each
and every employee.”
With this approach, it is the people of
EY Africa who defined what culture they
were willing to embrace in order to meet
their company’s strategic objectives. Also,
true to Schein’s research, this approach
addressed not only behaviors that needed
to be learned, but also those that needed
to be unlearned — all the while creating
commitment from the people from the start
of the process.
Responses were provided electronically
via an online survey, which drew more than
11,000 replies from 84% of the workforce.
Those responses were then divided into
top-line themes (behaviors that employees
wanted to see more of) and bottom-line
themes (behaviors that employees wanted
to see less of). The employees then voted
and narrowed the list down to the 10 top
and 10 bottom themes that they thought
deserved the most attention.
EY Africa then took the process a step
further. We asked every employee: for
each top-line and bottom-line theme, what

visual icon would you associate it to? “True
to our purpose of uniting our employees
beyond barriers such as language, it was
important for us to express our culture in
the universal language of art,” says Seshni
Samuel, EMEIA Talent Leader. “The use of
iconography was instrumental in reinforcing
culture by using a right brain language
to create association.” More than 1,300
creative ideas were submitted — after

Image 1. Visual icon, modeled from clay, to show teaming and integration

2. www.blu-prints.com.

36

which the executives had the formidable
task of narrowing down each behavior to
its most appropriate visual icon. Refer to
Image 1 to see a photograph of the visual
icon, modeled from clay, created to show
teaming and integration.


The result: EY Africa’s formula as an
organization, developed by its people across
the continent, that defines the culture that
is deemed important to its people. Refer to
Image 2 to see a photograph of the formula
brought to life in the EY Johannesburg
office, where all the icons, modeled from

clay, are on display. We called this journey
“Our EY,” in recognition of a shared desired
organizational culture that belongs to all
those who created it.
“Our EY reinforces EY Africa’s purpose
and creates an EY Africa identity, giving
employees a unique EY culture and sense

of belonging, which transcends their
countries, languages and cultural barriers,”
says Samuel. “The innovative approach of
cocreating a culture as a firm, and then
translating it into a visual formula, not only
defines our culture into concrete behaviors,
but it also engages our people.”

Image 2. EY Africa’s formula on display in a Johannesberg art gallery

37


Strengthen global,
empower local
Some people consider Africa to be one
country or region — yet it is home to
more than 2,000 languages and cultures.
Embedding the culture and making it
relevant to each employee — across 33
countries — was the next battle.
The solution: the executive team called
on local partners in each country to discuss
the cultural formula by organizing “pod”
sessions that involved, at most, 20 people
at a time. That’s correct — that would be
more than 250 pod sessions, across 33
countries in Africa. During those sessions,
local leadership presented the Our EY
formula directly to their teams, so that

issues uncovered and questions probed
remained relevant to each local office.
“What teaming and integration means
in Lagos could be very different from its
meaning in Walvis Bay,” says Samuel. “We
wanted the local leaders to introduce these
behaviors, in a small intimate safe setting,
so that all people could internalize it in
the way that made most sense to them, in
their context.”
Sustaining a culture, and embedding
it within the organization, is as important
as defining it. “Language is a huge part
of culture,” says Samuel. “To embed the
behaviors in the organizational culture, we
need to use it in our daily communication.”
As such, internal communications, more

Image 3. Our EY coins

The innovative
approach of cocreating
a culture as a firm,
and then translating it
into a visual formula,
not only defines our
culture into concrete
behaviors, but it also
engages our people.
Seshni Samuel, Talent Leader,
EY EMEIA

38


often than not, carry the emblem of the
relevant Our EY visual icon, depending
on the context of the message. The
Johannesburg Spring Day event features
a Masterchef challenge, where teams
involved lose points for “accepting
mediocrity” (a bottom-line behavior) if
their stalls are untidy after completing a
cooking challenge.
Every six months, all employees across
Africa participate in a survey to rate how
well their colleagues are living up to their
desired culture. As part of the survey, the
following question is asked: what are the
top- and bottom-line behaviors that most
attention should be given to in the next six
months? Results are sliced and diced into

Tips for a successful
organizational cultural
journey
►► Understand the business needs —
what works for one business may
not work for another. Know what
you are trying to achieve and why it
is critical for success
►► Appreciate the importance of
executive commitment — ongoing
executive and partner support and
involvement
►► Create an empowering platform —
allowing everyone to contribute and
giving them a voice
business or country units to give meaningful
feedback to management. Meetings are
held every six months to discuss these
results and microformulae, which then drive
locally relevant interventions.
As part of its plan to establish an Africawide culture, EY launched the “make a
difference” program to recognize people
who demonstrate the Our EY behaviors.
Special silver-coated coins that say,
“Thank you for living Our EY and making a
difference,” are awarded to employees to
thank them for their efforts (see Image 3,
which is a photograph of the coins). The
benefit of receiving the coin is that the
recipient can then pass it on to other
colleagues throughout Africa who have
shown a similar commitment to living the
Our EY behaviors. Each coin is encircled by
a compass, to signify the business moving
in the right direction whenever someone
recognizes a colleague. This scheme helps

connect employees in different business
units and countries with one another, and
encourages recipients to pay tribute to
colleagues who demonstrate best practice.
“Africa’s social systems, beliefs, and
cultures are as diverse as its peoples and
as disparate as its climates,” Samuel says.
“While Our EY gave us the opportunity and
platform to unite our people across the
continent, the success of this initiative lies
in its versatility to still be impactful in each
country, even as each harnesses hundreds
of different societies with their own laws
and languages. Our EY is EY Africa’s
culture that helps bring out the best of
our people.” 

►► Demonstrate innovation and
creativity — capturing the
imagination and spirit of the
organization
►► Implement meaningful
initiatives — delivering messages
that are relevant to the local context
►► Encourage sustainability —
embedding the culture in existing
processes and systems

39

Who are your
organization’s
problem solvers?
The impact of an effective problem solver
within an organization can be significant.
In an environment where operational
excellence is a necessity, companies that
know who their problem solvers are and are
proactively nurturing this talent within the
organization, will have the advantage over
their competitors.

40


Authors
Uwe Michael Mueller Performance
Improvement Leader
Europe, Middle East, India and Africa (EMEIA)
EY, Germany

Nelson Taapken People and
Organization Leader
Germany, Switzerland and Austria (GSA)
EY, Germany

41

Who are your organization’s problem solvers?

Many organizations instinctively know when they
have a natural problem solver but struggle to define
what inspires such confidence, making it impossible
to develop the COOs of tomorrow.

W

ho are your
organization’s chief
problem solvers? Most
businesses have such
individuals: they are the
small group of people
to whom the company automatically turns
when a challenge is to be confronted or an
opportunity is to be grasped. Their status
may not necessarily be overtly recognized,
but people across the business — from the
CEO downward — instinctively know who
they are.
If your organization doesn’t have such a
group — or you can’t name them — there is
a good chance that it isn’t operating to its
full potential. These are the go-to people
for challenges of every description — from,
say, scrutinizing the minutiae of a supply
chain problem to delivering a strategic
transformation of the entire business.
Without them, these challenges are never
fully met.

42


This is especially relevant in today’s
difficult operating environment, which
some leaders have taken to describing
as a “VUCA” world: volatile, uncertain,
complex and ambiguous. To cope with that,
organizations are being forced to ensure
that their operational performance is as
good as it can be. They need to hardwire
agility into their day-to-day work, in
order to respond to a constantly shifting
marketplace. And they need to work hard to
create a culture that fosters and supports
operational excellence.
To do so, organizations are creating a
formal job title for individuals who can help
deliver on these goals. Two decades ago,
relatively few companies employed chief
operating officers (COOs), but today the
role is far more common. These roles are
often taken by the most senior problem
solvers within the business. The kind of
person on whom CEOs depend to drive
operational excellence. And the sort of

Anyone who hopes to
have a transformative
effect on the
organization must
have the leadership
skills required to
enthuse and motivate
those they work with.

leaders that earn the respect of colleagues
and subordinates because of their
consistency in delivering day in and day out.
Still, in the end, the job title is unimportant.
Whether you call them COOs, Operations
Directors or Presidents, these individuals
are invaluable to successful organizations.
How, then, do companies ensure they
have someone who is capable of making
sure that thousands of moving parts work
together in the most effective way possible?
And how do they guarantee a flow of these
talented problem solvers for the future?

The core characteristics of
future problem solvers
The answer is to think more carefully about
what makes these individuals who they
are — and how these characteristics can be
engineered and encouraged. For although
many organizations instinctively know when
they have a natural problem solver, who
is trusted and relied upon by everyone,
they often struggle to define what it is that
inspires such confidence. Unless they are
able to do so, it will be impossible to develop
the COOs of tomorrow.
In fact, EY’s research suggests the
attributes these leaders display are more
complicated than is often thought.1 Broadly
speaking, they fall into two groups: a set of
core capabilities that a future operational
leader must develop, plus a further set of
less tangible qualities that are just as crucial
for the most effective problem solvers.

1. or more, see: Aiming for the top: a guide for aspiring COOs
F
and their organizations, EY, 2013.

43


It is the core capabilities that many
organizations will look to first, both as they
seek to find problem solvers for the here
and now, and to ensure their most talented
individuals can step up in the future. The
typical capabilities that are considered are
wide ranging, not least because this reflects
the demands associated with creating a
high-performing business:
►► Change management. An ability to
manage transformation is crucial.
Successful change agents are able to
lead different groups of people, bringing
them together at the right moments
and breaking down the barriers that act
as a drag — not least people’s resistance
to change.

►► Compliance. Businesses
increasingly operate in a controlled
environment — and not only in highly
regulated industries such as financial
services. It is the COO, or their
equivalent, who must ensure these
controls are in place and enforced —
and that they do not unduly hinder the
business’s ability to perform.

►► Strategy. The best problem solvers
understand how to set objectives, map
resources and monitor progress. They
turn the company’s strategic vision
into workable reality. To meet that
challenge, they’ll need to join the dots
between the business’s day-to-day
operational issues and the changing
environment of the industry in which
they operate.

►► Performance. In a volatile and
uncertain economic environment,
all organizations must do more with
less. Identifying and delivering those
efficiency gains are crucial objectives
for most operational leaders.

►► Structure. Organizations need an
operating model that spans people,
process and technology in order to
turn vision into reality. The quality
of that model — its efficiency and
effectiveness — will determine whether
the business succeeds or fails in
realizing its vision.

►► Insight. It will be difficult for problem
solvers to be truly effective unless
they have a granular understanding of
the operational issues in the industry

Those organizations that have already hired an
effective problem solver understand the impact
that these individuals make. Those that haven’t risk
being left behind.

44


in which they operate. That typically
requires extensive experience in the
sector, as well as the ability to adapt
quickly to emerging challenges.
►► Global grasp. Multinational
organizations operate in many markets,
coping with different local practices,
cultures and regulatory frameworks.
Problem solvers must bridge those
differences with structures that
deliver the necessary freedoms for
local managers to operate effectively,
while also conforming to the
organization’s strategic vision and its
implementation model.

Spotting the “X” factors
These core capabilities are common to
nearly any business, making them the
foundational elements for anyone planning
to become the organization’s future
problem solver. But it is a less obvious set of
qualities that set out future high performers

from the rest, and help organizations
identify which candidates to focus on. These
are attributes that might be described
as “X” factors. Accordingly, many are
intangible in nature. However, what is most
encouraging is that nearly all of these can
be nurtured and developed within the most
promising candidates.
The first attribute is simply about their
depth and breadth of experience. The most
effective operational executives will often
have worked in a variety of the business’s
functions during their career, developing
crucial insights into what is required in
commercial roles, as well as operations
and functions such as HR or marketing.
They may also have spent time in different
geographies or at subsidiary businesses.
Organizations can ensure they have such
individuals by developing programs and
schemes that enable individuals identified
as future leaders to rotate through the
business. This process may begin with
graduate trainee programs and lead right
through to executive management training
designed for senior staff.
A second attribute is international
perspective. In a multinational organization,

an individual whose experience has
all been in a single country may find it
difficult to function across borders and
cultures. The knowledge gleaned from
international postings gives future leaders
a bank of ideas about leading practices
on which they can later draw — from
different operating models to innovative
technologies. Ensuring future leaders get
exposure to the international operations of
the business should therefore be a priority
in executive career development and
succession planning.
A third relates to leadership skills.
Problem solvers can’t do it all by
themselves. Anyone who hopes to have a
transformative effect on the organization
must have the leadership skills required
to enthuse and motivate those they work
with — even where those people aren’t
direct reports. Organizations should not
make the mistake of thinking leaders are
all born with these skills. It is possible to
help talented individuals become effective
leaders, by providing them with the
opportunity to work with those who already
display such skills. Specialist training and
coaching can also make a huge difference.

45


The most effective
problem solvers
know their Plan B
even before Plan A
has come unstuck,
and have creative
solutions even to
unexpected problems.

46


Flexibility is next. The rapidity of change
is a pressing theme for multinational
organizations — their leaders must be
prepared to constantly adapt to the
evolving environment in which the business
has to operate. The most effective problem
solvers know their Plan B even before Plan
A has come unstuck, and have creative
solutions even to unexpected problems.
It is difficult to teach people how to be
flexible. But adaptability can be acquired
with experience. By exposing future leaders
to different challenges in different places,
organizations build their ability to learn
quickly and to operate with greater agility.
An often overlooked attribute is courage.
New challenges are unnerving, but a
willingness to move out of the comfort
zone is a crucial attribute to have. This is
how individuals learn new skills, broaden
their experience and become the leaders
to whom the business looks for solutions.
Courage is about being prepared to be the
one who volunteers for the tough challenge,
or the one who is able to concede
mistakes or failures where colleagues are
running scared. It is important to identify
individuals who display such courage and
to build upon it — offering them moves
to new functions or geographies, for
example, or putting them in charge of
underperforming divisions.
Another element that is easy to forget
is sociability, although it is often the most
obvious one to discern. All organizations,
in the end, are people businesses.
No individual will be able to take the
organization by the scruff of its neck unless

they are skilled networkers, capable of
building strong relationships throughout
the business.
Not only must they know who to call to
make things happen, they need to be able
to navigate the political issues that are a
feature of all organizations. They’ll often
lack the direct authority to implement
change, so they’ll need strong powers of
persuasion and motivation. Some of these
skills can be taught, but self-awareness and
a willingness to submit to the assessments
of others, through 360-degree appraisals,
for example, are necessary for those
individuals aiming to improve their
emotional intelligence.

Building a talent pipeline
Any company seeking to ensure its longterm performance needs to work hard to
develop a solid talent pipeline of future
organizational “fixers” that hold these
foundational skills — and also the related
“X” factors that help them truly stand out.
They may not necessarily become COOs,
but the attributes above are strongly
desirable for any company seeking to cope
in a VUCA world.
In the short term, it may be necessary to
look for external candidates for the role, but
many of the attributes identified as wanted
imply that internal appointments are better.
For organizations unable to hire internally
today, it is even more important to develop
a robust framework for developing such
individuals for the future. By mapping out
existing talent, and framing that against
likely future organizational needs, it can

then be possible to design effective talent
development programs to produce future
problem solvers.
Ultimately, these are investments that
may not pay off for many years. But they
are worth making if companies plan to
deliver operational excellence over the
longer term. Those organizations that
have already hired an effective problem
solver understand the impact that these
individuals make. Those that haven’t risk
being left behind. 

For further information about
EY’s COO program, please visit
ey.com/future-coo.

47

Internet startups: the essential
role of the
finance function
There is much to focus on when establishing
an internet start-up, such as finding an
investor who shares the belief in your
vision, designing prototypes and building
a business plan — all this activity can mean
the essential role of the finance function
is often forgotten. Overlooking this crucial
part of a fledgling company can cause real,
and frequently dire, repercussions as the
business grows.

48


Authors
Ricardo Steuer Manager
Advisory Services
EY, Germany
Sven Westeppe Consultant
Advisory Services
EY, Germany

49

Internet start-ups: the essential role of the finance function

As the start-up
grows, investors
demand due diligence
and transparency
of operations and
security, introducing
complex processes
that often require
a large investment
of resources.

T

he term “start-up” is usually
associated directly with
internet businesses, such
as social networks or online
brokerage services (see
Figure 1). However, there are
many variations such as corporate, small
businesses or lifestyle business start-ups
that often begin as offline business models.
Whatever the type of start-up, they all have
a common challenge: to secure and manage
finance. This article concentrates on
internet start-ups due to their broad public
awareness, taking into account the fact they
show a large variety of different business
models in terms of size and complexity.

Finance function helps build
investor confidence
When an internet start-up kicks off, having
secured funding during the first phase
and raised capital through an investor to
accelerate the business idea, things often
move forward very quickly. Although a
finance function might not be one of the
core business building blocks of the young
enterprise in its initial stages, it will become
increasingly important as the start-up
grows and has to manage payments, handle
receivables or plan budgets. As the small
start-up struggles with the fundamentals,
such as establishing its legal entity and
tracking payroll or tax-related activities,
outsourcing to an external tax accountant
may be a good initial solution. This enables
the founders to concentrate on the growth
of their business idea, rather than spending
resources on back-office activities that
could be provided by an external party.

Figure 1. Types of start-ups
Common appearance of online or internet start-ups

Scalable
These start-ups
are born to
become big, as
founders and
investors believe
that their idea
will change the
world. They hire
the best and
brightest, and
focus on creating
equity in order to
go public in the
future.
Example:
Google, Skype
Source: EY.

50


Buyable
Crowdfunded or
backed by angel
investors, these
start-ups build
web or mobile
applications and
seek to be
acquired by a
larger
corporation.

Example:
Instagram

Social
These type of
start-ups can be
networks or
organizations
that operate with
the goal of
making the world
a better place.
Sometimes
operate as
not-for-proﬁt
organizations.

Example:
Jumo

Corporate
Large, mature
corporations
that understand
the need to
innovate from
inside and invent
new business
models to stay
ahead.

Example:
car sharing

Small
companies
Overwhelming
number of small
businesses, born
out of the
founder’s desire
to run their own
business.

Example:
hairdresser,
carpenter

Lifestyle
Lifestyle startups evolve from a
desire by the
founder to live
the life they love
and pursue their
passion.

Example:
surf teacher

delivery model — needs to be implemented,
at the beginning, to avoid complications as
the business grows.

The start-up’s life cycle
In the traditional life cycle of a start-up
enterprise, a young business must go
through three stages before it reaches
market expansion and maturity: seed,
start-up and growth phase (see Figure 2).
In the initial seed phase, founders establish
their business plan, design the beta version
of the internet platform or app and begin
fund-raising with potential investors. With
the first cash flows from investors, the

Figure 2. The impact of a clear finance strategy on internet start-ups

(illustrative example)
Seed

Start-up
Outsourced

Translate strategy into
daily operations and
synchronize staffing

1

Profit and
transparency
gap

2

Evolve finance strategy
Flexible and
modular finance
function supports
profitable growth

►► Unharmonized finance processes
(especially accounting)

Revenue
US$50m

Revenue
US$500m

Elastic finance function
Revenue
US$50m

Revenue
US$500m

Time

►► Missing transparency
To tackle and cope with these challenges,
a clear finance strategy — including service

Static finance function

In-house
Fully fledged finance
organization led to economies
of cost and cannibalism of
profitability

FTE and revenue

►► Organizational challenges during
growth and expansion phase

Expansion

Sourcing trend

►► Decoupled finance activities from
business case

►► Ad hoc and unstructured ramp-up of
finance staff in later stages

Growth

Finance cost

►► Lack of a strong foundation of finance
knowledge from which the business
can grow

►► Missing general accounting and
controlling procedures

start-up can roll out sales mechanisms and
begin to place its product or service on
the market. Typically in this stage, capital
resources are scarce, which forces the
team to concentrate their resources on
activities such as marketing, IT production
and development. At the beginning of
this phase, one member of the founding
team, typically with a business studies
background, assumes the responsibility for
finance, accounting and other back-office
activities. However, shortly after go-live,
the scope of back-office and especially of
financial and accounting activities becomes
more complex. Given the fact that capital

Finance cost

On the other hand, there are multiple
finance aspects feeding into the business
case, many of which are fundamental to
the fund-raising process and attracting
investors’ interest. A central task of the
finance function is, therefore, the steering
of the start-up through the calculation,
monitoring and controlling of its business
case. For this reason, the finance function
and its management of the business case
are of particular importance for investors,
who are interested to see how their
investments are performing.
This ambivalence between the need
for a finance function due to legal setup
requirements, the lack of focus on finance
and back-office activities early on, and the
interests of the investors in the business
case, represents a stumbling block for many
start-ups, leading to frequent challenges:
►► Poorly defined finance strategy

Finance function FTC

Revenue curve

Source: EY.

51

EY Performance Journal - Volume 5, Issue 4

EY Performance Journal - Volume 5, Issue 4

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