Businesses often struggle to sustain growth even in favorable economic conditions. The modern business landscape is constantly changing: the information superhighway remains charged; technology advances at warp speed; Distribution channels change unexpectedly; and new competitors come into play every day. And as 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. Businesses recognize this need and invest copious resources in strategic planning efforts. However, small and medium-sized companies often fail to engage in strategy development activities. As a result, minor changes in the competitive landscape go unnoticed, and as soon as a new technology, process, or change in cost structure enters the market, the competitive advantages of the incumbent disappear. In response, the company shifts into a reactive mode and ends up catching up instead of proactively pursuing new opportunities.
The lack of strategic planning in smaller companies is often attributed to a lack of time and understanding. Business owners and executives tend to become immersed in the day-to-day operations of the business and focus on immediate tasks rather than long-term goals. While some business owners recognize the importance of strategic planning, they simply don’t have a clear understanding of the process. While vast libraries exist on the subject of strategic planning, many authors focus on the concerns of large corporations and address issues not applicable 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 value it offers to customers and shareholders. Strategic plans require understanding of fundamental changes in the industry and how customers and competitors should respond to those changes. Flexibility is an inherent feature of strategic plans, which should be easily adaptable to the current market. The evaluation of strategic options is based on identifying decisions that are most likely to create value for all stakeholders and align with the organization’s vision and core competencies.
So where to start? First, understand the key changes impacting your industry and begin to align those changes with your organization’s core competencies. Your answers to the following three questions can help you develop your starting point.
1. What business are we in?
The answer to this question is not always the most obvious. It’s not necessarily tied to the product or service your business offers. For example, insurance companies have long recognized that they are in the business of selling collateral and insurance. Small retail businesses like 7-Eleven stores understand that they are in the business of selling convenience. Whole Foods recognized that it is a socially responsible business and identified a large consumer base that would respond to this message. As a result, the market chain was rewarded with higher margins than is usual in a traditional grocery store. Companies that understand what business they are in are better 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 taking place in our industry?
New technologies can change the competitive landscape overnight. In addition, competitors can appear in the most unexpected places. Today, candy bar companies are competing with digital music providers for teenagers’ discretionary income. Maintain constant dialogue with your customers, suppliers and industry experts. Schedule quarterly meetings with your sales reps to hear what they’re hearing in the market.
3. How can we keep making money?
Recognizing your organization’s core competencies is critical to building strategic agility. The best way to maintain your competitive edge is through continuous innovation. Update your technologies, refine your internal processes or develop more efficient sales channels. Core competencies can be repackaged, pared down, repackaged and reconfigured to be attractive in a changing marketplace. Technology companies have a firm understanding of this concept. New electronic devices are launched, which are quickly followed by advanced models. These products, in turn, are being superseded by slimmed-down, cheaper models that appeal to a large consumer base. Fast food chain McDonalds built an entire marketing campaign around the Happy Meal, a shining example of a product bundling strategy that worked.
By answering the three questions above, your business can start thinking more strategically. Regardless of size, all companies must engage in strategic planning activities. In the New Economy, knowledge has trumped commodities as an essential business resource. The development and implementation of strategies is crucial for long-term business success. Don’t let your competition overwhelm you. Catching up has never put a company in a good position.
Markets are not destroyed overnight, although executives may feel that a loss will come quickly and unexpectedly. Markets slowly deteriorate over time, leaving a trail of clues along the way. Most of the time, these clues go unnoticed. Traditionally, the root cause of a company’s failure has been an inability to anticipate emerging changes in the business environment and adjust corporate strategy accordingly. One of the factors that contribute to the lack of business acumen is an executive’s false belief in continuity. Companies firmly believe in their own permanence and wrap themselves in a false sense of security and invincibility. This applies in particular to multigenerational companies or legacy organizations. Where once a business model could serve as a successful foundation for at least a decade, companies today may need to transform themselves in just 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.
A strategy without financial analysis is incomplete and may fail. Continued growth in any economic condition requires a strong financial plan. CEOs often find themselves in a right-brain/left-brain dilemma – how do you mix visionary optimism with cost-conscious pessimism? Executives often employ strategies that don’t consider the financial implications. Ineffective strategic plans are without a comprehensive ROI analysis. Smaller companies are particularly at risk as they may lack a qualified CFO. Controllers with only basic accounting practices lack the advanced analytical skills required for accurate financial review of a strategic plan.
Industries are not created or destroyed equally. Some companies are better positioned for economic uncertainty. Executives who strive to be increasingly strategic in their financial decisions and closely monitor the company’s financial condition have an advantage over their competitors. Financial vigilance includes evaluating the company’s fundamental economic position through analysis of the industry, customer profitability, financial performance, cost structure, availability of capital, debt and retained earnings.
The balance sheet shows your indebtedness and the strength of your borrowing power. Retained Earnings examines the past performance of your business model and management team. If retained earnings show past negative growth, the business model’s ability to take an additional hit is questionable at best.
Income and expenses should be carefully monitored. A loss in sales can be attributed to an overall drop in demand or lost market share due to the introduction of a new product by a competitor. Operationally, the cost of bringing the product to market may increase or it may be necessary to invest in new technology or human capital. If additional costs cannot be passed on to the consumer, pricing power squeezes margins and net profit is ultimately reduced.
Cost structures describe your profit margin and your company’s ability to absorb overhead. Higher margins allow greater cost flexibility. Additionally, reducing overhead costs can be easier than reducing production costs, especially when inflation is a competing 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 receive debt or equity investments, your company may need to form a strategic alliance or joint venture to enable a reorganization without a significant reinvestment of funds. So how do you ensure that your company’s desire for high product quality and excellent customer service carries over into the entire partnership? Integrate best practices and monitor processes as if they were running directly under your sole supervision. Meet with each partner to share your goal of creating a seamless existence and work together to establish common procedures, forms, and processes across the organization. Your partners will likely happily support the goal as it is in their best interest. If a conformation proves impossible, look elsewhere. There is always another company willing and able to take their place.
The following overview provides a brief summary of key insights to help you develop your business plan:
– Watch out for future trends and be ready to change your strategy
– Use technology to reduce costs and increase efficiency
-Strategic alliances (when well formed) can provide a competitive advantage
– Keep an eye on your financial situation
-Profit margins are not guaranteed – Competitors are subject to change.
What is the bottom line? Regardless of economic conditions, your industry, your business model, or your financial position, corporate leaders should pursue a growth strategy that includes financial key performance indicators.
©2017 Accelerated Growth Consortium bda Business Simply put