Businesses often have trouble sustaining growth, even in favorable economic conditions. The modern business landscape is constantly changing: the information highway remains overloaded; technology continues to develop at high speed; channel layout changes unexpectedly; and new competitors spring into action every day. And if growing a business wasn’t challenging enough, business leaders now face another uphill battle as we face one of the toughest economic environments of our generation.
In today’s complex business environment, strategic thinking is essential to maintaining a long-term competitive position. Corporations recognize this need and invest extensive resources in strategic planning efforts. However, small and medium-sized companies often do not engage in strategy development activities. As a result, subtle changes in the competitive landscape go unnoticed, and once a new technology, process, or change in cost structure enters the market, the incumbent’s competitive advantages are gone. In response, the corporation goes into reactive mode and ends up catching up instead of proactively seizing new opportunities.
The shortage of strategic planning in smaller companies is often attributed to a lack of time and understanding. Company owners and executives tend to become engrossed with the day-to-day operations of the business and focus on immediate tasks rather than long-term goals. Some business owners may recognize the importance of strategic planning, but simply lack a clear understanding of the process. While there are vast libraries on the subject of strategic planning, many authors focus on the concerns of large corporations and focus on issues that do not apply to smaller organizations.
Strategic planning shouldn’t be complicated. In its simplest form, a strategic plan is a clear vision of a company’s long-term position based on the added value it provides to customers and shareholders. Strategic plans require knowledge of fundamental industry changes and how customers and competitors are expected to respond to those changes. Flexibility is an inherent characteristic of strategic plans, which must be easily adaptable to the current market. The evaluation of strategic options is based on the identification of the options that are most capable of providing value to all interested parties and align with the vision and core competencies of the organization.
So where to start? First, become aware of the major changes affecting your industry and start aligning those changes with your organization’s core competencies. Your answers to the following three questions can help develop your starting point.
1. What business are we in?
The answer to this question is not always the most obvious. It is not necessarily linked to the product or service your company offers. For example, insurance companies have long recognized that they are in the business of selling security and collateral. Small retailers like 7-Eleven stores understand that they are in the business of selling convenience. Whole Foods realized that it was in the business of social responsibility and identified a large consumer base that would respond to this message. As a result, the market chain has been rewarded with higher margins than are commonly seen at a traditional grocery store. Companies that understand what business they are in are more adept at identifying niches, following trends, and responding to market demand. This flexibility makes them more successful in formulating sustainable business models.
2. What changes are happening in our industry?
New technologies can change the competitive landscape overnight. Furthermore, competitors can emerge from the most unexpected places. Today, candy bar companies compete with digital music providers for teens’ discretionary income. Be sure to maintain a constant dialogue with your customers, suppliers, and industry experts. Schedule quarterly meetings with your sales staff to find out what they’re hearing in the marketplace.
3. How can we continue to earn money?
Recognizing your organization’s core competencies is critical to building strategic flexibility. The best way to preserve your competitive advantage is to continually innovate. Update your technologies, improve your internal processes or develop more efficient distribution channels. Core competencies can be repackaged, simplified, regrouped, and reconfigured to appeal to a changing market. Tech companies have a firm grasp of this concept. New electronic gadgets are introduced to the market and are quickly followed by advanced models. These products, in turn, are being replaced by simpler, less expensive models that appeal to a large consumer base. Fast food chain McDonald’s built an entire marketing campaign around the Happy Meal, a shining example of a product bundling strategy at work.
By answering the three questions above, your organization can begin to think more strategically. Regardless of size, all businesses should engage in strategic planning activities. In the new economy, knowledge has overtaken raw materials as the essential business resource. Strategy development and execution are crucial to long-term business success. Don’t be surprised by your competition. Catching up has never put a business in a good position.
Markets don’t crash overnight, though executives may feel a loss is quick and unexpected. Markets slowly deteriorate over time, leaving a trail of clues along the way. Most of the time, these clues go unnoticed. Typically, the cause of a company’s failure was the inability to identify impending changes in the business environment and adjust corporate strategy accordingly. One of the contributing factors to a lack of business acumen is an executive’s false belief in continuity. Companies are firmly convinced of their own perpetuity and wrap themselves in a mistaken sense of security and invincibility. This is especially true in the case of generation companies or legacy organizations. Where once a business model could be counted on to provide a successful foundation for at least a decade, today’s businesses may need to revamp in as little as a year or two. Creative destruction is constantly reshaping our business landscape. As a result, companies cannot expect to operate from a position of assured continuity.
financial considerations
Strategy without financial analysis is incomplete and subject to failure. Continued growth under any economic conditions requires a solid financial plan. CEOs often find themselves in a left-brain/right-brain quandary: how do visionary optimism mix with cost-conscious pessimism? Executives often adopt strategies without considering the financial implications. Ineffective strategic plans lack a comprehensive ROI analysis. Smaller companies are particularly at risk, as they may lack a qualified CFO. Controllers with only basic accounting procedures lack the advanced analytical skills required for a detailed financial examination of a strategic plan.
Industries are not created or destroyed equally. Some companies are better positioned for economic uncertainty. Executives who strive to become increasingly strategic in financial decision making and engage in close monitoring of the company’s financial condition have an advantage over their competitors. Financial surveillance includes assessment of the company’s fundamental economic position through analysis of the industry, customer profitability, financial performance, cost structure, capital availability, debt leverage, and retained earnings.
The balance sheet will reveal your debt leverage and the strength of your borrowing power. Retained earnings looks at the past performance of your business model and your management team. If retained earnings reveal negative growth in the past, the business model’s ability to take a further hit will be questionable at best.
Income and costs must be carefully monitored. A loss of revenue can be attributed to a general reduction in demand or a loss of market share due to a competitor’s introduction of a new product. From an operational standpoint, the cost of bringing the product to market may increase or it may be necessary to invest in new technology or human capital. If the additional costs cannot be passed on to the consumer, pricing power reduces margins and ultimately reduces net profit.
Cost structures outline your profit margin and your company’s ability to absorb overhead costs. Higher margins allow for greater cost flexibility. Also, a reduction in overhead may be easier than reducing production costs, particularly if inflation is a competitive factor.
In the case of a company with a less favorable financial position, innovation may be the only solution. Since negative growth and declining retained earnings affect the balance sheet and reduce a company’s ability to raise debt or equity investments, your company may need to form a strategic alliance or joint venture to allow reorganization without a substantial reinvestment of funds. So how do you ensure that your company’s desire for high-quality products and superior customer service is transferred throughout society? Incorporate best practices and monitor processes as you would if they were operating directly under your sole supervision. Meet with each partner to share their goal of creating a smooth existence and work together to adopt common procedures, forms, and processes across the organization. Your partners will likely be more than happy to support the goal, as doing so is in their best interest. If conformation proves impossible, look elsewhere. There is always another company willing and able to take your place.
The following outline provides a brief summary of the key points to help you develop your business plan:
-Keep an eye on future trends and be prepared to change your strategy
-Use technology to reduce costs and drive efficiency
-Strategic alliances (if well formed) can provide a competitive advantage
-Keep a close eye on your financial position
-Profit margins are not guaranteed: competitors can change everything.
What is the end result? Regardless of economic conditions, their industry, business model, or financial position, company executives must have a growth strategy that includes measures of financial performance.
©2017 Accelerated Growth Consortium bda Business In a Nutshell