Wind Tunneling Business Strategy

 

Name Wind Tunneling Business Strategy
Modelers Kevin Boettcher
Client/Participant Vertex, Inc.
Client Type Corporation

 

The Issue You Tackled As an established US-based tax technology provider, Vertex was faced with opportunities and investment choices regarding market expansion and development of a next generation tax technology platform. Historically, the company’s business model as an independent software vendor included a go to market approach through a dedicated sales force only. In contemplating strategy direction for the company, however, a key consideration was that of restructuring the go to market approach to incorporate a significant use of third parties as sales channels, not only for sales but for implementation services and support. To help frame this and related investment choices, the company had undertaken a standard scenarios analysis, whereby the extremes of two tax related dimensions were used to posit four scenarios as context within which to judge the viability of a given business strategy, specifically one related to the use of partners as a channel for Vertex offerings.

There were two general challenges encountered as the strategic direction to take was debated. One was that of conceptualizing and understanding the operational realities and business viability of restructuring the company’s go to market approach (a largely endogenous consideration). The second was to conceptualize how the organization would fare in the event any one of the several scenarios posited should materialize (a response to exogenous context). Imagining a trajectory through time with so many variables was also an overriding challenge for the couple dozen business leaders who were charged with forming a consensus on strategy for the company.

What You Actually Did

To address the challenge on projecting endogenous behavior, the Strategy Dynamics discipline of System Dynamics was used to construct a model of the germane business operations, i.e. the Strategic Architecture in Strategy Dynamics terms. In particular, in scope for relevance were four different tax technology offerings and their deployment in four possible distinct market segments. Operations behavior was subject to investment resources distributed across the development of the respective offerings and to go to market sales and marketing activities aimed at the several market segments. Five years of historical performance data were used to calibrate the model to the present point in time. From that point forward, the possibility of using third parties as a channel according to a candidate strategy was incorporated.

To address the challenge of appreciating how the organization would fare in the face of a given scenario, with or without the use of channels, the tax futures scenarios were cast as exogenous influences on the Strategic Architecture. To do this, an analysis was done on the narratives of each scenario to lift out factors that collectively characterized them. A different configuration of values for these factors was used to distinguish one scenario from another. Moreover, the factors themselves were chosen to be compatible with inputs, influences, and other features of the Strategic Architecture, such that the two could be linked to study exogenous impacts on endogenous behavior, and thereby weigh out strategy alternatives. Notably, standard scenario analysis usually takes a longer view, often 20 years or so. The analysis undertaken here used a five year trajectory toward the ultimate twenty year outcomes posited by the four tax futures scenarios. Thus the analysis testbed constructed was one that traced five years of future behavior and outcomes, anchored in the previous five years of corporate performance.

The Results Overall, as a model the Strategic Architecture and its placement in the scenarios context achieved the objective of helping Vertex business leaders manage the complexity of considering strategy alternatives. In particular, operational elements essential to the consideration were highlighted in the modeling process. Moreover, the distillation of each scenario’s general narrative into a fundamental set of dynamic influences was instructive as well.

With confidence in the model’s representation, experiments were undertaken to examine alternative “channel strategies,” i.e. different assignments of offerings and markets to third parties. As an outcome of this analysis, there were certain assignments that served the company better than others, including ones in which the use of third parties performed uniformly better in the face of all of the scenarios modeled. For a company that had previously not relied at all on third parties, this outcome was influential in motivating and providing initial guidance for business development activities that implement a revised go to market approach that uses third parties.

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