Category: Strategy

Those who have worked with me have undoubtedly heard me say that “a business plan is good for only the first 10 minutes.” The reason is that once execution starts, business leaders learn new things that cause them to consider deviating from the original plan. The reason for planning is not necessarily only to attain an outcome, but to launch a process. Formulating a plan establishes a framework to assimilate new information, which then might lead us to alter the plan.

 

Recently, a brief posting on Harvard Business Review’s HBR Weekly Hotlist (“Building a Flexible Business Plan,” April 4) addressed this very issue. The posting stated that in planning, business leaders need to take parallel paths of both doing and thinking: not blindly executing the plan and not ignoring facts on the ground. The posting raised the following key points:

 

1. Think big, start small, scale fast: Determine how big the business can realistically be, but don’t assume that it will get there quickly. Invest in a limited way until you see indications that the business has legs, and then have a plan to aggressively scale up.
2. Have a framework that includes these four elements: people, a business idea, a business model and a market. Understand the key tradeoffs between these four elements, and keep considering how tradeoffs are working. In my experience, people trump everything else. Attempting to implement good business ideas without good people to execute them is a recipe for disaster. Good people with the right business skills and experience, even if they are executing a mediocre idea, are a better bet than the reverse.
3. Keep the plan iterative: Continue to think and rethink the plan as execution commences. Adopt flexible thinking that will enable the organization to adapt and pivot at the appropriate time.

 

Obviously, there is not a checklist or formula for a foolproof business plan. However, starting with leaders who are good at perceiving and acting on opportunities and challenges during the execution phase is a key factor in developing a successful business.

Growing sales and profit can push companies to the brink   In working with clients across a range of growth scenarios, I have found that successfully growing businesses experience unintended consequences of success. It’s a good challenge to face, of course, but it can, and should, be predicted and managed.   Strong and profitable sales growth is obviously desirable, but besides the operational challenges related to fulfillment, managing cash becomes even more important. Accountants will tell you to track two key ratios that can easily be calculated, as follows:

Ratio	What it says	How to Calculate
Quick Ratio	Are there available funds to cover short-term obligations?	Cash + Receivables Current Liabilities (Should be 1:1) or higher
Operating Cash Flow Ratio	The amount of cash being generated compared to amount of cash being required to lay out	Cash flow from Operations Current Liabilities (Should be more than 1:1)

 

While these ratios provide a valuable partial picture, they only reflect history and are not adequate to project future cash positions. That is simply because not every business decision about future financial obligations is captured in accounting systems. A growing company can be making abundant profit (on an accrual basis), but quickly run out of money to cover bills. This could occur because a company decides that it needs to increase future expenses by hiring another person or have plans for increasing inventory; neither decision of this type is reflected in these ratios.

 

What to do? Use a budget! That is, consider how individual actions, which will affect cash but are not yet captured in accounting processes, will affect cash flow forecasts. The process will require updating predictions based on the reality that occurs. While using a realistic budget is not foolproof, it helps reduce the risk of unpleasant surprises related to cash.

Importantly, if forecasts push a company’s cash flow to the edge, either secure cash to meet the predicted needs or, if one cannot get cash under reasonable terms, slow down and even stop trying to grow so aggressively. Growth can create a very tenuous cash-flow situation that can undermine the viability of the entire business. Of course, you should manage A/R and A/P to tip cash in your favor, but after that, especially in rapid growth environments where cash lags behind sales, you may need to slow down so that cash needs do not exceed the ability to generate short-term cash.

I went through this exact situation with a client who insisted on continuing to grow at all costs. And the company did grow – all the way to bankruptcy.

 

I spend a lot of time studying new business ideas, then figuring out how to apply that knowledge to my clients in the middle market. Recently, I came across an interesting debate online about approaches to strategy shifts where the rapid rate of changes in markets and technology suggest “strategy resets” Here is my assessment.

The days are long gone when companies could leisurely plan and slowly execute. Established companies in industries with low barriers to entry, with nimble competitors able to pivot as opportunities emerge, reap the benefits of rapid swings in market share. This experience has encouraged some companies to modify their approach to adjusting strategy, given the volatility and vulnerability of their market position.

Traditional strategy has been bungled by slow-moving, overly processed activities (environmental scans, SWOT analyses, customer analyses, competitor analyses, financial modeling, and so on) that lead to a well-researched and well-written plan that may have only limited bearing on how companies actually behave and perform. Especially because the process is slow, and some argue slower than the rate of change (technology cycles have already outpaced planning cycles), a newer approach known as “adaptive strategy” has been suggested as the new mantra.

The argument for adaptive strategy goes like this: Market volatility, uncertainty, complexity, and ambiguity (together known as VUCA) are much greater now than previously. As a result, the traditional pace of strategic planning is inadequate to get answers and execute − and by then, another short planning cycle is needed. The implications of an adaptive strategy relate to the need for planners to be less oriented toward managing a stable situation and far more oriented toward leapfrogging competition with a disruptive strategy. Think about it: Since 1960, a company’s average stay in the S&P 500 has fallen from 60 years to less than 20 years.

I don’t buy the argument that one can move from adaptation to adaptation and enjoy sustained success. I agree with those who argue that serial adaptation is really an overreaction to managers who are faced with unsettling, rapid change and don’t feel like any inputs into formulating a strategic plan are stable enough to count on. There’s nothing new here: Strategy formulation has always required making hard choices in an uncertain context, and managers tend to seize on some pretext (VUCA included) to avoid making choices and taking responsibility for their choices. Sure, you can adapt, even repeatedly, but the point is that you first have to make a strategic choice that you can then adapt. The temptation regarding adaptive strategies could lead one to never make that initial strategic choice.

Strategy is not developed using a simple recipe, a fill-in-the-blank process. It is not simply using a standard set of tools (as mentioned above) or broad, conceptual, future-oriented, big-picture views. Strategy is iterative. The reality is that strategy is about all of those things, but an adequate strategy cannot be formulated with analysis or big-picture views alone. One has to tie the logic together. One simple approach is to develop a set of answers to some linked questions that cascade logically from first to last:

1. What are our broad aspirations for our organization and the concrete goals against which we can measure our progress?
2. Across the potential field available, where will we choose to play and not play? In which markets and segments?
3. In our chosen place to play (market-offering combination), how will we choose to win against the competitors there?
4. What capabilities are necessary to build and maintain to win in our chosen strategy?
5. What management systems are necessary to operate to build and maintain the key capabilities?

In my consulting practice, I use these five questions to generate broad strategic alternatives. I then use a modified BSC (Balanced Scorecard) method to help companies formulate, communicate, and measure the results of their strategy, as well as develop tactical plans. The strategy and plan can be completed in a very short time, if management is aggressive.

Want help to take on strategy formulation on? Call me: (410) 598- 0719.

[Some content for this article was taken from a Harvard Business Review blog, contributed by Greg Satell (DigitalTonto.com) on June 25, 2014, and Roger Martin, the author of Playing to Win: How Strategy Really Works.]

 

Companies can research and develop strategies that, in theory, would dominate a market, but not every company can execute a most-desired strategy, such as companies limited by how they are structured and how they function. For example, a company with many layers for securing approval to take action cannot generally move quickly, but also rarely makes a critical “process fumble.” By contrast, small entrepreneurial companies can change direction on a dime, but are subject to shortcutting processes that could hurt them down the road.

I like to use a very powerful analogy: In the northeast United States, the late summer and fall trigger activity in nature that enables different species of animals to deal with the lack of available food in the winter, each using a strategy unique to its structure and function:

1. Birds fly south, where food is plentiful.
2. Bears eat in excess and store large amounts of calories in their bodies, then hibernate in the winter to consume stored calories very slowly.
3. Squirrels store calorie-dense nuts in the ground and access them as required.

 

These are structure-enabling and structure-limiting relationships. Bears and squirrels cannot make it to the south, like birds do, since they cannot fly. Squirrels and birds cannot store calories in their bodies, like bears can — and even if they could, they cannot reduce their metabolism rate and hibernate. Bears and birds cannot store food as squirrels do because they do not have the same incredible memory capabilities that squirrels have in relocating hidden food.

There is a lesson here: Just because there is an “ideal” or a “desirable” strategy does not mean that you can pull it off. A company is limited by how it is structured and how it functions today. You may ask dejectedly: Am I doomed to be stuck in a less desirable strategic position? The answer is decidedly “no,” because a business is not really restricted from changing its structure or function.

However, you cannot necessarily get there quickly without a concerted effort. The first step is to honestly assess existing structures and functions. Then, determining the key changes and the sequence of changes to implement requires a realistic sense of how change will be led and then reacted to by staff. Change is hard, and even harder to execute from within. If you need help with strategic business transformation activity, give me a call: 410.598.0719.

 

When instituting a new process or upgrading an existing one, first identify “best practices,” that is: the gold standard for performing that practice. Best practices are a way to borrow processes from others who have learned from multiple iterations and have instituted a practice that yields positive results. But companies that attempt to institute best practices blindly tend not to be satisfied because they did not achieve the results reported by others. Two primary hazards exist for those instituting best practices:

1. Failure to adapt. What works well in one company will not necessarily work well in another, unless the process is customized for the company’s culture, environment and people. Tailoring without diluting the core of the best practice is usually required.
2. Failure to adopt. A borrowed process will only work with the commitment of leadership and those responsible for executing it. Be sure that you have support from all key constituencies before and during implementation.

On the one hand, companies attempt to focus on becoming leaner, more efficient and concentrate on their core business. On the other hand, growth opportunities may demand that companies go well out of their core business comfort zones to reach distant markets, employ new technologies and adopt a wider range of skills.

Growth involves some risk, such as adding staff and investing in marketing, systems and capital/non-capital expenses. To alleviate some of that inherent risk associated with organic growth, companies might consider forming alliances with other companies that already have some of what is required for growth. Forming an alliance could provide many advantages of growth, but would not demand as great of a direct investment in time, resources and skill as it would to organically grow the business from within.

An alliance is an agreement between companies to collaborate by leveraging each other’s resources. The table below illustrates two dimensions against which all alliances can be described: ownership and commitment. To best understand the table, trace rows and columns from left to right and then from bottom to top. For example, along the bottom row from left to right, the relationship of one company to another goes from a simple purchase order, to joint marketing and advertising, to a purchase order with up-front funding. The row above that demonstrates a greater commitment than the lower row, and a higher level of engagement as you move from left (Multi-year purchase agreement) to right (R&D program partnerships). There is also a large variety of strategic alliances, which encompass many types of teaming too extensive to discuss here.

 

In looking at the table, a company may realize that it already has an asset or experience to share in an alliance. Or, it might notice a deficiency needing to be ameliorated, possibly through an alliance. Of course, specific circumstances might suggest particular arrangements. In my experience, companies often are guilty of not looking objectively at themselves. This tends to lead to two opposite issues: Companies overestimate the value of something that they possess, and thereby try to drive too hard a bargain in an alliance; or companies fail to even notice something which they possess but take for granted, which could have tremendous value to another company.

 

Reasons to form an alliance might include:

 

• Distant-market access: The Company does not have access to geographic markets.
• Market-segment access: The company does not have a presence in a desired market segment and cannot build access fast enough to leverage its strengths.
• Changing distribution channels: Destabilizing conditions are forcing a new look at delivery options.
• Management skills: The Company’s core competency is under pressure by formidable competitors.
• Value-added barriers to competition: The Company wants to strengthen its value-added skills and raise the level of competitive intensity within the industry.
• Risk sharing: The Company does not want to take on all of the risk in developing products or markets.
• Funding constraints: The investment burden is straining scarce resources.
• Technology base: Industry is requiring rapidly developing technology.
• Barriers to acquisition: Opportunities are limited because of size, geography, or ownership’s reluctance to cede control.

 

Except for joint ventures and acquisitions, two allied companies generally remain independent, while agreeing on increased commitments and dependencies. To be sure, alliances present significant challenges: boundaries need to be defined, people with unfamiliar skills need to be combined functionally, and communication across the alliance needs to be established.  This is all within the context of clearly communicating the value creation of the alliance.

Many companies are unfamiliar with the skills and approaches needed to form alliances, but an alliance may hold the key to growth that would be unachievable alone – and this holds true for both companies involved. I have worked to engineer a wide range of alliances of the types described in the table, but two absolute, inviolable requirements for success are: 1) clear communication about expectations and responsibilities, and 2) trust, because it is never possible to anticipate everything. This may be an unfamiliar, uncomfortable path to growth for some companies – but it might be the best and sustainable path to growth.

(Information for this article was derived from Smart Alliances by Harbison and Pekar, 1998 and Alliance Advantage by Doz and Hamel, 1998)