Management Consulting Insights – #25 “Social Skills for 21st Century Students in Education”



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Management Consulting Insights – #24 “Integrity is Everything”


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Management Consulting Insights – #23 “Greatness with a Great Team”

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Management Consulting Insights: #22 “Niche is King but You Must Identify your Niche”

Source:  Posted on December 14, 2015Posted in Entrepreneurship

With the new year a couple of weeks away, entrepreneurs and business owners are evaluating their accomplishments in 2015, and setting new goals for 2016.
If I ask you what your goals are for the coming year, your answer will definitely include a growth strategy. Growth is great; growth means progress. However, if your growth goals include expansion into new markets and introduction of new products and services, you might actually be making a mistake.
Before you get up in arms, I am not the Grinch come early trying to kill your enthusiasm for your future. Instead, I am here to tell you that when it comes to business, less is definitely more.
Believe it or not, consumers prefer brands that offer specific and distinct products and services. So offering a new line of generic products will probably hinder the growth you are aiming for.
But don’t worry; I don’t identify problems without coming up with a solution. That’s why below we will look atwhy niche marketing is important for entrepreneurs and how to find a niche that you can succeed in.

busy mall

SECTION #1- What is a niche? And more importantly what is niche marketing?

Let’s start by clearing up the most pressing question; what is a niche?
Merriam-Webster defines a niche as “the situation in which a business’s products or services can succeed by being sold to a particular kind or group of people.”
And the Business Dictionary defines niche marketing as “Concentrating all marketing efforts on a small but specific and well-defined segment of the population. Niches do not ‘exist’ but are ‘created’ by identifying needs, wants, and requirements that are being addressed poorly or not at all by other firms, and developing and delivering goods or services to satisfy them. As a strategy, niche marketing is aimed at being a big fish in a small pond instead of being a small fish in a big pond.”

crowded pond

Here is some super personal stuff about me

When I started this blog, I wrote about everything. One week, I’d be talking about social media, the next week I’d be focusing on the technical parts of running a blog, and the next I’d have Infographics.
If you think I’m exaggerating, just check out my posts from May to around October. You might actually think I’m suffering from hyperactivity.

creative mess
While I had people visiting the blog and enjoying my content, the percentage of returning visitors was low. I honestly believe that most people were not ready to deal with an unfocused blog. Luckily for all my readers, I took a step back and decided to concentrate on one major area ‘entrepreneurship’.
So yeah; I’m now giving advice to budding/stalled entrepreneurs, and I plan to keep my focus here from now on.
I’m happy to say that this change in direction has given me clarity and peace of mind, and has allowed me to focus my attention on building a specific audience. No more promoting my content to every single man, woman, child, and pit bull terrier.
I also think that my content is much better than it was before; though this might just be my ego talking!
Anyways, that’s as personal as we are going to get today.

So why do you need a niche?

Many entrepreneurs want to market their product or service to everyone. After all, if you have the next big app, shouldn’t all 7 billion people on this earth here about it?
Absolutely not!
Not everyone will want a piece of what you have to offer, so what’s the point of talking to uninterested people?When you try and market to everyone, you will end up selling to absolutely no one. Furthermore, when you see that ‘everyone’ does not want your product or service, you will start to dilute what you have to offer in order to please everyone.
All of this is quite obvious; you are probably saying ‘duh Davina, what idiot tries to market to everyone.’ Well, chances are that you (yes you) have fallen into this trap at one point or another.
There’s this common misconception among entrepreneurs that if you only sell a specific product or service, you will miss out on tons of customers. Furthermore, specializing is riskier than generalizing.
But here’s the thing, when we make a decision to sell to everyone because we are too scared to sell to just a few people, we end up wasting resources, branding ourselves as generic, neglecting efficiency, losing out to competition, and failing.

general shoe market

Ask yourself this; if you had to invest a new pair of shoes for going to the office, would you go to a shoe store that sells women’s shoes, men’s shoes, kid’s shoes, and sports shoes, or would you head to a store that only sells professional shoes?

niche shoe shop
When you want to grow your business, you don’t do so by selling new services and new products to new markets, you grow your business by mastering the one product and one service that you have in that one market. Expansion can come once your brand is established and mature.
If you want to stand out and succeed in a world full of failing businesses, you need to narrow down your focus and kick ass in one area. And don’t be tricked into believing that niche businesses have restricted growth opportunities!

Niche marketing carries with it several benefits, including:

  1. Reduced competition
  2. Improved products or services
  3. Increased chances of success
  4. Decreased spending on resources and marketing
  5. Improved customer service
  6. Increased retail price

SECTION #2- The power of the niche brand

In the section above I poured my heart out and told you about my experience with switching from a general focus to a niche focus. But wait a minute, this is currently a small blog, will the niche focus still apply when I’m selling it for a million bucks?
Hell yeah!!!
The most powerful brands on earth are niche brands. From luxury cars, to golf clubs, to cooking appliances, to electronics; the brands that excel are the ones that are not trying to be a consortium.

So let’s take a look at the one brand we all love; Apple. When Steve Jobs co-founded this company with Wozniak in 1976, their focus was on personal computers. This was before my time, but I know that the Apple II and Apple Macintosh were huge hits.
However, in 1985 Jobs was kicked out of Apple (watch the movie or better yet read his biography for more insight on the power struggle that preceded this). Between 1985 and 1997, Apple turned from a profitable company to a company that was treading water. When Jobs came back in ‘97, he noticed that Apple’s focus had shifted from personal computers, to a whole host of products and services.
So in true Jobs fashion, he stopped Apple’s foray into PDAs (Apple Newton), internet suites (Cyberdog), and compound documents (OpenDoc) to name a few. Jobs shifted Apple’s focus back to PCs, and invested time into making Apple PCs the most appealing and technologically advanced PCs on the market.
And the result? Well, sales went right through the roof. Only after Apple had dominated the PC market did they introduce the iPhone(s), iPod(s), iTunes software, iTunes store, and other Apple products and services.

apple products
And it’s not just Apple. It’s Tiffany catering to upper-class jewelry clients, Starbucks catering to coffee lovers, Target catering to shoppers on a budget, and M-PESA catering to individuals without bank accounts.
Niche businesses are winning! 
And if you need an example of a brand that went off the rails, look no further than General Motors. They had tens of subsidiaries making every car under the sun a few years ago, no wonder they filed for bankruptcy in 2009. Hopefully they can remain focused now that they have a second shot at success!

SECTION #3- Don’t be a jack of all trades and a master of none

While some people seem to find their niche in a seamless manner, most of us struggle to find that one thing that we can succeed at. That’s why below I’ve provided tips on finding your niche.

1. Identify your most valuable skill set

Whenever I read/watch an interview with a successful entrepreneur, they always mention their strengths, and then explain how those strengths played a big role in growing their business.
We are all blessed with skills, and those skills are what we need to exploit in order to achieve our goals as entrepreneurs. You need to build your enterprise on your most valuable skills. So how exactly does this work?

sand sculpting skills
STEP 1: Take note of your skills (writing articles, charming people into following your lead, hitting notes that Mariah Carey once did, telling jokes and stories, playing an instrument, solving problems)
STEP 2: Take a note of all your unique skills as these can help differentiate you from potential competitors. You want to give your customers something that no one else can.
STEP 3: You will probably come up with a list of things you are good at, so you need to order your skills based on your passion. The skills that make you the happiest should be at the very top.

P.S. Being great at something and enjoying something are two different things. You do not want to focus on a niche that your heart is not into.

2. Research and find your primary business stream

Now that you’ve identified the skills that you are passionate about sharing with others, your first instinct might be to make yourself known immediately. But you need to cool your heels cowboy. While passion is great, you cannot let it push planning, analysis, and research out of the way.
You need to move forward with a clear mind.

books and research
STEP 1: Find out if your skills solve a problem for your target customers. While you may be skilled in calming cats down, do people really need this skill? Will they pay good money for it?
The only way to definitively answer this question is to do your market research. When doing research you will segment your market based on demographics (age, gender, income, race) or psychographics (beliefs, interests, ideas).
STEP 2: Once you determine that your skill is desired by a certain segment of the market, you need to narrow down your focus so that you have a specific ideal customer.

For example, if your skill is in retail and your passion is in fashion, don’t just stop and say that you want to sell clothes to people on a budget.
Go further and say that you want to sell second-hand clothes to women who want casual outfits. Yes, this is very specific, but you will make a bigger impact in a smaller niche.

flea market
STEP 3: Go out and talk to your potential customers. Listen to what they have to say about the product or service that you want to offer them. They might tell you straight up that it sucks, or they might say that it caters to their needs perfectly.
Testing and regular feedback are crucial to the success of your ideas.
STEP 4: Pay close attention to the events taking place in the industry that you want to enter. Read and watch news regarding technology, innovations, expansions, cut backs, government regulations, industry leaders, local trends, national trends, and even international trends.
Keeping up to date with news will help you spot opportunities that you can turn into a valuable niche for your business. You can also use this news to shift your focus away from actions that will fail, and towards actions that will succeed.


Don’t get frustrated when the process of following industry news, conducting research, talking to customers, making adjustments to your product or service, and testing again, takes you months. Entrepreneurship requires a lot of patience on your part.

3. Turn your crazy idea into a venture

Once you have followed the steps above, you need to take action. It is at this point that you will need to totally step out of your comfort zone. You will need to put fear on the back burner, and take the leap. This risky step requires a lot of courage; however, you will be more confident when you know you’ve done thorough research and testing.

Make your dream a reality!!

4. Don’t remain stagnant

If you want to fail in business, all you need to do is remain exactly the same when everything around you is changing. Change is hard, but it necessary.

time for change
Some people believe that niche businesses are a bad idea because niche markets can discontinue. And there’s some truth in this argument; if you were in the niche of selling walk-mans a few years back, you now have no market.
But here’s the thing, as an entrepreneur you should be flexible enough to evolve with your niche. That’s why we mentioned following industry news and getting regular feedback.
If the business owners selling walkmans were attentive, they would have seen that the industry was moving towards digital musical players. Therefore their next move would be to carve out a niche for themselves in the growing digital musical player industry.
Catering to a niche market does not give you an excuse to resist change. Adapt to big and small changes alike, and improve your product, service, and bottom line. Don’t just think of what your niche market requires in the short-term, figure out what they will need in the long-term, and then make plans to provide it to them.
Your aim should be to cultivate loyal customers, not to constantly look for new customers.
And remember, the species that did not evolve eventually became extinct.

5. Time for you to expand

The whole point of this article was to show you why narrowing down your focus will help improve your chances of success. Once you have dominated your niche like Apple, Amazon, Coca-Cola, M-PESA, or Walmart, then you can start thinking of expanding into new products, services, and markets.
And how do you know whether you are dominating your niche? Simple; you will witness a regular flow of income.
Back to my point. Once you have solid footing in your niche, you can branch out without fear of spreading yourself too thin. But only once you have solid footing!

branching out

Final Verdict

Narrowing down your focus and identifying your niche will ensure that the business model you create will leave competitors in the dust. If you’re just starting your business venture, use the tips above to identify your niche market, and then create a marketing strategy that is centered on your niche brand.
On the other hand, if you are struggling with your current venture, take a step back and see if your products and services are a reflection of your skills and passion. If they aren’t, then it’s time for you to say goodbye. I know it’s hard, but it’s necessary for you to go back to the drawing board, and follow the steps outlined above to identify a niche market that you can dominate.
I know that I don’t always follow my own advice. There are several things in my professional life that I’m pursuing which do not fuel my passion. I am a work in progress, and so are you.
However, I vow to find my niche, and you should too.

If you found this helpful, share it with your friends, family, and colleagues. Also drop me a comment and tell me about any skills that you want to turn into a successful business. And don’t forget to subscribe; I promise I won’t spam you.

It was good talking to you today, and I’ll see you back next Monday!

P.S. It’s okay to tell your customers that you don’t offer a certain product or service, let someone else do it.

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Management Consulting Insights: #21 “Insights Into D.C. Charter Schools Test & Performances”

Picture of a Mountain

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Source: Washington Post
Students Osagie Atkinson, left, and Mitchell Shapiro, both 15-year-old sophomores at Washington Latin Public Charter School in Northwest Washington, go over a math problem in the school library between classes in October. The school has a mission of including diverse families, but it has served a lower share of low-income families over time as its performance and reputation have climbed. (Allison Shelley/For The Washington Post)
It was still dark at 7 a.m., when a yellow bus pulled up in a strip-mall parking lot outside a ­Rent-A-Center in Southeast Washington. A dozen teenagers climbed on board for a 10-mile ride to one of the city’s highest-performing public schools.

Three decades after cities across the country dismantled mandatory busing programs designed to desegregate public schools, Washington Latin Public Charter School dispatches buses across the city to neighborhoods with public housing and others with million-dollar homes. By 8 a.m., the students, dressed in polos and khakis, converge in a refurbished brick school, where the sign in the hallway offers a Latin welcome: “Salvete.”

Charter schools, which enroll students through a citywide lottery, have the potential to create schools that are far more diverse than traditional neighborhood schools, which, by virtue of their attendance boundaries, sort families by race and class.

Despite the promise of becoming social mixing grounds, the District’s charter schools are slightly more racially segregated than the city’s traditional public schools.

Seventy-six percent of the city’s public charter schools served exclusively, or almost exclusively, Latino or African American students in the 2014-2015 school year, compared with about 63 percent of the city’s traditional schools, according to enrollment data from the Office of the State Superintendent of Education.

Most charters — and the philanthropists who support them — have focused on serving students with the greatest needs in neighborhoods of concentrated poverty. Washington Latin represents a smaller, but growing, number of charter schools with a broader mission to serve children from all parts of the city.

“We see charter schools as an opportunity to bring kids together from different backgrounds and give low-income students what may be the best chance at academic success,” said Halley Potter, a fellow at the Century Foundation who helped found the National Coalition of Diverse Charter Schools, a new network that includes Washington Latin and a few other District schools.
Students listen to teacher Carl Lyon (not pictured) during a sophomore advisory period at Washington Latin Public Charter School in Northwest Washington. (Allison Shelley/For The Washington Post)

Dakota Campfield, 11, a sixth-grader, waits on the bus just before 7 a.m. in a parking lot in the Anacostia neighborhood of the District. (Allison Shelley/For The Washington Post)
Research during the past ­half-century has shown that integration can be an effective tool for school reform. Low-income students tend to do better in socioeconomically varied schools, where there are higher levels of parent engagement and advocacy and where a majority of students are college-bound. Studies also show that more experienced and effective teachers tend to be concentrated in more affluent and racially diverse schools.

But when charter schools took root in the 1990s, the U.S. Supreme Court was dismantling mandatory desegregation orders, and federal efforts to break down barriers by race and class were transitioning to an era of school accountability based on student results. Many charter schools opened in urban centers that had been abandoned by white and middle-class residents.
By 2010, a national study by the Civil Rights Project at UCLA found that 70 percent of black charter school students attended “intensely segregated” schools, where at least 90 percent of students are black or Latino, twice the rate in traditional public schools. The report called charter schools a political success and a “civil rights failure.”

[Will the Obama administration now focus on desegregating schools?]

Some charter schools, such as KIPP DC, have been successful working in racially isolated schools in poor neighborhoods, developing specialized teaching strategies and support for students who come to school years behind. A recent analysis of standardized test performance and student academic growth by the D.C. Public Charter School Board shows that the city’s charter students performed better overall in more diverse schools, but there were some exceptions: African American students’ growth in reading actually declined as the percentage of white students increased. Scott Pearson, executive director of the D.C. Public Charter School Board, said the report shows diverse and non-diverse charter schools can be successful.

Many parents and advocates see more holistic benefits to integrated schools, including broader exposure and better preparation for college life and beyond.
Kenneth Wright drops his son off to take the bus to Washington Latin from Anacostia in the mornings. “As my son gets older, the world will become more diverse for him,” he said. “The earlier he can experience that, the better he can adjust and develop the skills to navigate that type of environment.”

Median income has grown exponentially in many D.C. neighborhoods in the past decade, and the portion of white children ages 3 through 17 enrolled in schools has grown from 14 percent to 18 percent since 2000, census data show.

But the public schools remain largely segregated. African American students comprised 67 percent of students in traditional schools and 76 percent of those in charter schools last year. White students, who made up 12 percent of traditional school students and 5 percent of those in charter schools, were concentrated in a relatively small number of schools: at 10 traditional schools and two charter schools, more than half of students were white.
By a measure of socioeconomic diversity, charter and traditional schools served about the same share of students who are considered “at risk,” a designation that includes those from families that receive welfare or food stamps, who are in foster care or are homeless, or who are performing at least a year behind in high school.

But those students were spread more evenly across charter schools. The portion of at-risk students was less than 10 percent at about 15 traditional schools in affluent neighborhoods and greater than 75 percent at more than two dozen schools, mostly in poor neighborhoods east of the Anacostia River. Among charter schools, just four schools had at-risk populations below 10 percent and three had at-risk populations above 75 percent.

[D.C. charter schools serve fewer at-risk students than nearby neighborhood schools]

Charter schools that serve the greatest mix of students tend to be in central parts of the city, in proximity to gentrified neighborhoods such as Columbia Heights and Brookland. They are in high demand, with an influx of higher-income families who are looking for alternatives to lower-performing, segregated neighborhood schools.
Washington Latin first opened in a church near National Cathedral, making it the only charter school in the affluent neighborhoods west of Rock Creek Park.

The school’s mission is to make a challenging classical education accessible to students from all areas of the city.

Nearly 10 years later, the school is located several miles east in a former traditional public school in Petworth. Aided by busing, it has one of the most geographically diverse student bodies in the city, with students traveling an average of 4.7 miles to the middle school and 3.3 miles to the upper school. It’s also racially mixed. The combined enrollment for its middle and upper campuses is 46 percent black, 39 percent white, 10 percent Hispanic and 4 percent Asian.

[D.C. student commutes to charters vary; some go more than five miles]

The school takes a philosophical approach to what it means to be diverse. Socratic seminars, in which students are expected to participate and raise questions, encourage a diversity of ideas. And through the study of classical philosophers such as Aristotle and Plato, students grapple with universal questions, such as “How do I decide what I believe is true?” and “How can I become a good person?”
“One of the most satisfying things is teaching this class and realizing that these questions matter to every kid,” said Bill Clausen, chair of the Humanities Department.

Teachers and coaches also facilitate conversations about the very real differences students experience based on race and class. In one class about the history of Washington, D.C., students sometimes talk about their own lives when they look at data that shows how the average annual family income in Upper Northwest is about $200,000 higher than in Southeast.
Randy Yearby Jr., left, 17, a senior, and Robbie Pearson, 15, a sophomore, wait for the bus just before 7 a.m. in a parking lot in Anacostia. (Allison Shelley/For The Washington Post)

College banners hang in the classroom of teacher Chrys Latham, as she leads a senior advisory period at Washington Latin Public Charter School. (Allison Shelley/For The Washington Post)
Martha Cutts, head of school, said diversity, including socioeconomic diversity, is an “essential characteristic” of Washington Latin, but she said it has become more difficult to meet diversity goals.

A citywide enrollment lottery can open the door to integration, but it’s a rough tool to control for it, experts say. Choice systems tend to benefit people with the most information, often parents with higher education and higher incomes.

As Washington Latin’s academic reputation has grown, so has interest, particularly among wealthier families. Last year, there were 1,600 applications for 119 available seats (including 46 seats offered to siblings of current students).

Washington Latin’s middle school has one of the lowest at-risk populations of any school in the city, with just 4 percent of students eligible, and it’s one of two charter schools with white enrollment above 50 percent.

Cutts said she would like to see a lottery preference for children from low-income families, similar to preferences used in some other cities.

Brooklyn Prospect Charter School in New York, a diverse school with a long wait list, maintains economic diversity by aggressively targeting recruitment and also by setting aside a specific number of seats in the lottery for students who live in poverty.

“It takes constant and thoughtful stewardship, planning, and tactics,” said Daniel Kikuji Rubenstein, co-founder and executive director of the school.

This year, Washington Latin added the new bus line to Anacostia to encourage more students from that part of the city.
Randy Yearby Jr., 17, rides that new bus. He said he went to an all-black school in Prince George’s County before he moved to the District and enrolled in Latin. He recalled going to a “popsicle social” before the first day of school and walking up to a group of kids.

One was white, another Asian, a third was a girl from Palestine. They started talking about their childhoods. “I left that conversation feeling like I had traveled across the world,” he said.


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Management Consulting Insights: #20 “Restarts vs New Starts Schools – Graphs”


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Management Consulting: #19 “The Importance of Computer Science for poor students in STEM Programs”

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“What Students And Teachers Really Think About Computer Science In Schools The good, the bad and the disappointing”

Teachers who work at the poorest schools are more likely to think that computer science is vital to their students’ futures, but are less likely to think their school boards agree, a new survey released Tuesday reveals.

The survey was conducted by Gallup on behalf of Google, and looks at perceptions of computer science for different groups, including students, parents, educators and school district administrators. It follows an earlier survey released in August, which looked at access to computer science courses and found that lower-income students have fewer opportunities to study the subject. However, this latest survey shows that low-income students’ lack of access is not due to apathy on the part of their educators.

Twenty-one percent of teachers who work at schools where more than half of the student body qualifies for free or reduced-price lunch said they thought access to computer science is more important to a student’s future success than other elective courses, like music or art. Only 10 percent of teachers who work at schools where 25 percent or fewer students qualified for free or reduced-price lunch said the same thing.

Sixty-three percent of teachers at the schools with the poorest students said they think most students should be required to take a computer science course. Fifty-one percent of teachers at schools with more affluent students said the same.

Still, teachers from schools with more affluent students were 13 percent more likely to say that their “school board believes computer science education is important to offer in our schools” than their counterparts at schools with more low-income students.

Brandon Busteed, executive director of education and workforce development at Gallup, called the findings a “huge call to action.”

“There are huge discrepancies between the will and the way,” Busteed told The Huffington Post. “There appears to be more will in these poorer schools but less access.”

He continued, “What seems to be missing here are school boards. There is such little conversation about this at a school board level … If I were to say, ‘What’s the one place I would want this data and research to land,’ it would be with members of school boards. They have to look at this and realize their constituents want this in schools.”

The study also looked at students’ perceptions of computer scientists. Unfortunately, their ideas of who is “good” at computer science reflected the field’s lack of gender and racial diversity. Males reported being more confident than females that they could learn computer science if they wanted to. Students and parents both reported that the people they see on film and television participating in computer science are typically white and wear glasses.

“Unfortunately, perceptions of who computer science is for and who is portrayed in computer science is really narrow,” said Sepi Hejazi Moghadam, head of research and development for K-12 and pre-university education at Google. “In your popular culture, media, television, etc., that narrow perception tends to be that of [a] white male and someone who is wearing glasses.” 

“Even though across demographics they value computer science, the important piece is students often don’t see computer science as for them, and it’s further reflected in who is confident to learn computer science,” said Moghadam. 

A majority of employees at Google are white and male. Part of the reason the company commissioned the survey was to learn how to increase diversity in computer science fields, Moghadam said. He also noted the company’s other efforts in this realm, including Google’s Computer Science Education in Media program, which works with television executives to feature more female characters in science, technology, engineering and mathematics-related roles. 

“We know there are many students — especially girls, black and Latino students and students from lower-income families — who aren’t participating in computer science pathways equally,” said Moghadam. “In light of these trends, we decided we need a deeper understanding of these early stages, of the pipeline, to inform our own efforts around access and exposure to computer science.”

Management Consulting Insights: #15 “Closing the Gap U.S. Education with World Partners”

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Source: BCG


From pre-kindergarten through graduate school, the education system in the United States faces tough competition from the rest of the world, a new study found.

The study made public Tuesday by the Paris-based Organization for Economic Cooperation and Development (OECD) shows other nations are catching up and in many cases have surpassed the United States at many levels, from pre-kindergarten enrollment to the percentage of adults with advanced degrees.

OECD’s annual “Education at a Glance” report finds, for instance, that 41% of 3-year-olds in the U.S. are enrolled in pre-kindergarten. Among all OECD countries, the average is 72%.

For 4-year-olds in the United State, the number rises to 66%, but still falls below the OECD average of 88%.

Andreas Schleicher, the OECD’s deputy director for education and skills, said the gap in pre-school enrollment — as well as other factors — isn’t necessarily because things have gotten worse in the U.S.. “There has just been enormous progress” elsewhere in the world, he said.

The report analyzes the education systems of the 34 OECD member countries, which include most industrialized nations, such as the United States, Canada, Australia, Turkey, Chile Israel, Japan, and most European nations, as well as non-member countries: Argentina, Brazil, China, Colombia, Costa Rica, India, Indonesia, Latvia, Lithuania, Russia, Saudi Arabia and South Africa.

On average, OECD nations invest about 0.6% of GDP in pre-primary education. Countries such as Norway, Iceland and Finland invest about 1% of GDP in pre-K, while in the USA, it’s closer to 0.4%, “at the lower end of the spectrum,” Schleicher said.

When it comes to class sizes in K-12 education, the United States has larger than average classes in primary grades, but below average in middle school and high school classes. But even that upper-grade advantage, long touted by education advocates, doesn’t necessarily give U.S. schools an edge, Schleicher said. In the U.S., he said, teachers may enjoy smaller classes, but they get fewer opportunities to collaborate professionally and observe one another at work.

By contrast, in closely watched Finland, 30% of instructional time is spent outside the classroom setting. “So there’s a lot of space and time that teachers have to do other things than teach,” he said. “You don’t see that in the United States.”

Most countries that have large classes “use the resources that creates, actually, to give teachers opportunities to do other things than teach,” Schleicher said.

And as Congress debates overhauling a federal law that could help change the K-12 testing and accountability system, the new OECD statistics present an unexpected finding: globally speaking, the United States doesn’t necessarily give more tests to its students, dispelling what Schleicher called a “popular belief” that the U.S. is “the country with a lot of heavy testing.”

That’s actually not borne out by the data, he said. “There are other countries where the stakes for students are certainly a lot larger and where kids get tested a lot more frequently.”

On the other end of the system, the United States, which once ranked second worldwide behind Israel in the percentage of adults with a college degree of some sort, now sits just above the OECD average.

“It’s sort of a middle position, basically very similar to many other countries,” Schleicher said, “not because it’s the worst, but because so many countries have made very heavy investments in equipping more people with university degrees or other types of tertiary education.”

In places like the United Kingdom, expanded grant funding for higher education means that “anybody who wants to and is qualified to go to a university … can now do that,” he said. “That’s clearly not what we see in the United States. You clearly have strong support for students in the United States, but at the end of the day, people have to pay that back. That poses a barrier for many people.”

On the bright side, he said, the U.S. labor market rewards advanced degrees like few others. “If you have great skills, that’s the country to turn those into a better job and a better life.”


Management Consulting Insights: #9 – A better way to understand internal rate of return

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A better way to understand internal rate of return

Investments can have the same internal rate of return for different reasons. A breakdown of this metric in private equity shows why it matters.

November 2015 | by Marc Goedhart, Cindy Levy, and Paul Morgan

Executives, analysts, and investors often rely on internal-rate-of-return (IRR) calculations as one measure of a project’s yield. Private-equity firms and oil and gas companies, among others, commonly use it as a shorthand benchmark to compare the relative attractiveness of diverse investments. Projects with the highest IRRs are considered the most attractive and are given a higher priority.

But not all IRRs are created equal. They’re a complex mix of components that can affect both a project’s value and its comparability to other projects. In addition to the portion of the metric that reflects momentum in the markets or the strength of the economy, other factors—including a project’s strategic positioning, its business performance, and its level of debt and leverage—also contribute to its IRR. As a result, multiple projects can have the same IRRs for very different reasons. Disaggregating what actually propels them can help managers better assess a project’s genuine value in light of its risk as well as its returns—and shape more realistic expectations among investors.

Since the headline performance of private equity, for example, is typically measured by the IRR of different funds, it’s instructive to examine those funds’ performance. What sometimes escapes scrutiny is how much of their performance is due to each of the factors that contribute to IRR above a baseline of what a business would generate without any improvements—including business performance and strategic repositioning but also debt and leveraging. Armed with those insights, investors are better able to compare funds more meaningfully than by merely looking at the bottom line.

Insights from disaggregating the IRR

Although IRR is the single most important performance benchmark for private-equity investments, disaggregating it and examining the factors above can provide an additional level of insight into the sources of performance. This can give investors in private-equity funds a deeper understanding when making general-partner investment decisions.

Baseline return. Part of an investment’s IRR comes from the cash flow that the business was expected to generate without any improvements after acquisition. To ensure accurate allocation of the other drivers of IRR, it is necessary to calculate and report the contribution from this baseline of cash flows.

Consider a hypothetical investment in a business acquired at an equity value of $55 and divested two years later at a value of $100 (Exhibit 1). The business’s operating cash flow in the year before acquisition was $10. At unchanged performance, the investment’s cash return in year two, compounded at the unlevered IRR, would have been $23.30. In other words, the return from buying and holding the investment without further changes contributed ten percentage points of the 58 percent IRR. Strong performance on this measure could be an indicator of skill in acquiring companies at attractive terms.

Exhibit 1

Improvements to business performance. The best private-equity managers create value by rigorously improving business performance: growing the business, improving its margins, and/or increasing its capital efficiency.1

In the hypothetical investment, revenue growth and margin improvement generated additional earnings in years one and two, amounting to a compounded cash-flow return of $3.30. In addition, earnings improvement in year two translated into a capital gain of $20, bringing the cash return for business-performance improvements to $23.30 and its IRR contribution to ten percentage points. This is an important measure of a private-equity firm’s capacity to not only choose attractive investments but also add to their value during the ownership period.

Strategic repositioning. Repositioning an investment strategically also offers an important source of value creation for private-equity managers. Increasing the opportunities for future growth and returns through, for example, investments in innovation, new-product launches, and market entries can be a powerful boost to the value of a business.

Consider, for example, the impact of the change in the ratio of enterprise value (EV) to earnings before interest, taxes, depreciation, and amortization (EBITDA) for our hypothetical investment. The business was acquired at an EV/EBITDA multiple of 10 and divested at a multiple of 12.5—which generated a cash return of $30. This translates into 13 percentage points of the project’s 58 percent IRR. This measure could indicate a firm’s ability to transform a portfolio company’s strategy to capture future growth and return opportunities.

Effect of leverage. Private-equity investments typically rely on high amounts of debt funding—much higher than for otherwise comparable public companies. Understanding what part of an investment’s IRR is driven by leverage is important as an element of assessing risk-adjusted returns.

In our hypothetical example, the acquisition was partly funded with debt—and debt also increased over the next two years. In that time frame, earnings increased by 20 percent and the company’s EV-to-EBITDA ratio rose by more than two percentage points. The IRR of the acquisition, derived from the investment’s cash flows, would be 58 percent.

How much does the company’s debt affect its IRR? Adding back the cash flows for debt financing and interest payments allows us to estimate the company’s cash flows as if the business had been acquired with equity and no debt. That results in an unlevered IRR of 33 percent—which means leverage from debt financing contributed 25 percentage points, about half of the investment’s total levered IRR. Whether these returns represent value creation for investors on a risk-adjusted basis is questionable, since leverage also adds risk.

The disaggregation shown in Exhibit 1 can be expanded to include additional subcomponents of performance or to accommodate more complex funding and transaction structures.2 Managers may, for example, find it useful to further disaggregate business performance to break out the effects of operating-cash-flow changes from revenue growth, margin expansion, and improvements in capital efficiency. They could also separate the effects of sector-wide changes in valuation from the portion of IRR attributed to strategic repositioning. Moreover, if our hypothetical investment had involved mergers, acquisitions, or large capital investments, further disaggregation could separate the cash flows related to those activities from the cash flows due to business-performance improvements—as well as strategic repositioning.

Comparing projects beyond the bottom line

The example above illustrates the basic principles of disaggregating IRR, which ideally should be done before any comparison of different investments. Consider, for example, two investments by a large private-equity fund, both of them businesses with more than €100 million in annual revenues (Exhibit 2). Each had generated healthy bottom-line returns for investors of 20 percent or more on an annualized basis. But the sources of the returns and the extent to which these represent true value creation differed widely between the businesses.

Exhibit 2

The investment in a retail-chain company had generated a towering 71 percent IRR, with more than three-quarters the result of a very aggressive debt structure—which also carried higher risk. On an unlevered basis and excluding sector and baseline contributions, the risk-adjusted return to investors was a much lower but still impressive 21 percent. By improving margins and the capital efficiency of the individual retail locations, management had contributed around 5 percent a year to IRR from business performance. A successful strategic transformation of the company formed the biggest source of management contributions to IRR. Utilizing the company’s real estate and infrastructure, management was able to launch additional customer services with more stable margins, which translated to a higher-valuation multiple on exit and drove 17 percent annual IRR.

In contrast, the equipment-rental business turned out to be one where management made more of a difference when it came to business performance and strategic transformation, which, when combined, contributed 32 percent to the business’s IRR. Most of this was due to higher growth and improved margins in its core industrial-equipment segments, combined with significant divestments of its consumer-rental business. Unfortunately, nearly 14 percentage points of the overall IRR was wiped out as the credit crisis reduced opportunities across the sector for future growth and profitability. With leverage adding ten percentage points, the IRR for investors ended up at 34 percent.

Understanding the true sources of IRR provides insight not only into the evaluation of individual investments but also into collections of investments, such as within a single private-equity fund or within an investment portfolio of many different private-equity funds. Such an analysis revealed that one fund, for example, was most successful in transforming acquired businesses through rigorous divestment of noncore activities and resetting strategic priorities (Exhibit 3). As with many private-equity funds, leverage was the second-most-important driver of investor returns. From a fund-investor point of view, a high level of dependence on financial leverage for results raises questions, such as whether a firm’s performance will be robust across economic scenarios—or whether it has a track record of successful interventions when high leverage becomes problematic for its portfolio companies. By contrast, reliance on business improvements is inherently more likely to be robust across scenarios.

Exhibit 3

Investors can conduct a similar analysis to identify which funds in their portfolios contribute the most to their returns and why. For example, separating leverage components reveals which funds boost their IRR by aggressive debt funding and are therefore more exposed to changes in underlying business results. Understanding where broader sector revaluations have driven IRR can help investors understand which funds rely on sector bets rather than improvements in business performance or strategy. Investors can also assess how well a general partner’s stated strategy matches its results. A firm touting its ability to add value from operational improvements should get substantial portions of its IRR from managerial changes and strategic repositioning, while a firm more focused on its financial-engineering skills might be expected to benefit more from the leverage effect.3

IRR calculations can be useful when fully understood. Disaggregating the effect of IRR’s various components can help managers and investors alike more accurately assess past results and contribute to future investment decisions.

About the authors

Marc Goedhart is a senior expert in McKinsey’s Amsterdam office;Cindy Levy is a director in the London office, where Paul Morganis a senior expert.

Management Consulting Insights: #8 Pricing Strategies

Pricing Strategies 11042015

Sources BCG

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