Companies 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 great speed; channel layout changes unexpectedly; and new competitors get in on the 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 are often not involved 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 advantage disappears. In response, the corporation goes into reactive mode and ends up playing catch-up instead of proactively seizing new opportunities.
The dearth of strategic planning in smaller companies is often attributed to a lack of time and understanding. Company owners and executives tend to become absorbed 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 topic 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 options that are most capable of providing value to all stakeholders 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 begin to align 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 that your company offers. For example, insurance companies have long recognized that they are in the business of selling security and collateral. Small retail stores 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 in a traditional grocery store. Companies that understand what business they are in are better able to identify niches, follow trends and respond 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. Also, 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 learn what they’re hearing in the marketplace.
3. How can we keep making 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 marketplace. Technology companies have a firm understanding of this concept. New electronic gadgets are introduced in the market and are quickly followed by advanced models. These products, in turn, are replaced by simpler, less expensive models that appeal to a large consumer base. Fast food chain McDonalds created 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 companies 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 are not destroyed overnight, although executives may feel that 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 the coming 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 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 themselves 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 dilemma: how do you mix visionary optimism with cost-conscious pessimism? Executives often adopt strategies that do not consider 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 making financial decisions and engage in close monitoring of the company’s financial condition have an advantage over their competitors. Financial oversight includes evaluating the company’s fundamental economic position through industry analysis, 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 an additional 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 the introduction of a new product by a competitor. 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 lowers 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 costs 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. Because 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 for 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 your goal of creating a seamless 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 shaping proves impossible, look elsewhere. There is always another company willing and able to take your place.
The following outline provides a brief summary of 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, your industry, business model, or financial position, company executives must have a growth strategy that includes financial performance measures.
©2017 Accelerated Growth Consortium bda Business In a Nutshell