Author: Geoff Hudson-Searle

Strategic planning is critical to business success, it is not just about the revenue model and P&L.

Different from classic business planning, the strategic variety involves vision, mission and outside-of-the-box thinking. Strategic planning describes where you want your company to go, not necessarily how you are going to get there. However, like all other “travel plans,” without knowing where you want to go, creating details on how to arrive are meaningless. Strategic planning defines the “where” that your company is heading.

Delivering a strategic plan is one of the most important things any organisation, regardless of size can undertake.  A well-formulated and executed strategy establishes the foundations against which the organisation can create, monitor and measure their success. And yet many people find strategy and its purpose difficult to articulate.

Why is strategy important?

Strategy is fundamental to the success and sustainability of any organisation for the following reasons:

1. Understanding your company and industry

Strategy allows organisations to develop a clearer understanding of their own organisation and what is required for them to succeed. It helps organisations understand their core capabilities, identify and address weaknesses and mitigate risks. It can help organisations better design themselves so that they are focusing on the right things that are the most likely to deliver the best performance, productivity and profit both now and in the future.

2. Growing in a changing world

Understanding what is taking place within the external environment is important to preparing a strategy that will ensure long-term profit and growth. Understanding changes that are taking place in your industry, or with your market place is important.

Because if you don’t adapt you die. Even successful businesses need to realize that what made them successful today is not what will make them successful tomorrow. With the rate of change becoming faster every year, it’s increasingly important that we understand what trends are going to impact on our business and our industry, and how we’re going to respond to them.

Whether political, social or technological, we need to what changes are going to affect our businesses. And we need to know how our organisation can respond to them. It enables us to find opportunities for growth and sustained profitability and it can help us identify and respond to changes that could make us extinct.

It is important that you understand what can affect you and your business both short term and long term.

3. Creating a vision and direction for the whole organisation

All organisations and their staff need to understand their purpose, their destination and the course they are taking to get there. A company without a strategy is akin to sending your staff into the desert and leaving them to follow mirages in search of water. Without a destination and focus in mind your staff will wander aimlessly from one activity to the other never knowing what to focus on or how to prioritise.

Providing an organisation with a common purpose, goals and a set of actions to reach the goal ensures that everyone is working for the same outcome (your organisations success) and that time and resources are being allocated to the same goals and objectives. Simply it streamlines your business and ensures every pound and minute you spend on the business is in the direction of your sustained success.

While strategy is can be difficult for many organisations to commence, its benefits are far-reaching and many. From creating new business opportunities, to streamlining the operations and engaging staff, a well-formulated strategy will enable increased growth, productivity and profit both now and into the future

Why the P&L is important?

For a long time, the answer has been “more.” Ever since Frederick W. Taylor did time studies of steelworkers with a stopwatch in 1900, the measurement of business activity – called “Greater Taylorism” by Walter Keichel in his business history “The Lords of Strategy” – has grown ever more central to management. One result of this drive to quantify and analyse has been that senior executives often create numerous profit centers, or isolated groupings of both revenues and expenses nested within large businesses.

The two benefits are obvious. First, profit centers allow these executives to make better decisions. In organisations whose various revenue and cost accounts are not linked, poor economic performance can be hidden by positive results elsewhere, and decision-making is clouded. Second, profit centers help make accountability clear. By giving managers direct profit and loss responsibility, companies can incentivise activity that measurably contributes to the bottom line.

Finally, for a coherent strategy to work, then, the organisation executing it must be measured as a whole, rather than as parts. In other words, if a company is to have a single strategy, it must be driven by a single P&L.

I was recently in attendance at a Non-Executive Directors panel and evening, discussing the big debate over IQ vs. EQ, whilst I enjoyed hearing the collaborative panel, I really enjoyed the final summary around the facts from a Chief Business Analyst at a ranked Business School, the facts are and without a showdown of a doubt business has lacked in leadership, the statistics speak for themselves, but why?

I completed a TV interview a few years ago where I spoke on The Emotional Wake of Transformation. People in leadership love the title but can they really deliver the skills? If this is the case, what is the cost to the business without the right leadership?

Einstein, Plato, and Da Vinci are some notable personalities known to have an IQ of over 160. Evidently, they are truly geniuses in their respective fields. But does having a high IQ guarantee a one-way journey to success?

IQ

Intelligence quotient (IQ) is an evaluation of a person’s technical intelligence and logical reasoning. If you take an IQ test, you will be presented with questions to assess the following competence:

• spatial ability, a person’s capacity to visualise space and shapes
• mathematical ability, how a person uses logic in solving problems
• language ability, the recognition of meaning from incomplete sentences and jumbled letters
• memory ability, how a person recalls information

EQ

Emotional intelligence (EQ) is the measure of a person’s capacity to be aware of his own feelings and the feelings of others. Daniel Goleman, author of the book Emotional Intelligence (2005), indicated the different facets of emotional intelligence. It revolves among the following:

• self-awareness, the ability to understand one’s emotions
• self-management, the ability to have control over emotions
• social-awareness, how a person develops relationships
• relationship management, how a person treats others with compassion

Take an example  a company middle manager with a high emotional intelligence quotient (EQ). As such, he is more than capable to recognise his emotions and those of others around him; his communication style is intuitive, motivational, and engaging; and he naturally uses empathy, as well as creative and emotive language – such as “I feel” and “I wish” – in his emails and office pep talks to make a connection with his staff.

His company director,  meanwhile, employs a direct, no-frills communication method. She requires “only the facts” and thrives on logic, and her preferred head-over-heart method of communication is sparse and to the point. Hers is a high IQ (intelligence quotient) functioning approach, which tends toward the cognitive, intellectual, analytical, and rational.

Two different people, two varying communications, contrasting styles. And this is where a difficulty can arise in business because while both are shooting at the same goal, they might as well be playing for different teams. As a result, the directors can suffer an awkward breakdown in communications, simply because they are not operating on each other’s wavelengths. Worse, their clash of cultures could have an impact on their working relationship.

Of course, a controversial IQ/EQ friction is not simply restricted to the office because it can also be an issue in the wider business world, for example when an EQ-driven director meets  IQ-driven customers, prospective clients, or peers and fails to make a connection with them. It may even be a contributing factor in his company not winning a lucrative contract. Either way, be it an internal or external IQ/EQ conflict, it has the potential to hamper good business, or turn good business bad.

Demonstrating the right balance is fundamental for the success of a business, that means putting the right processes into place that accelerate a balance of IQ and EQ, the future of every business is dependent upon it!

The below list is different for every individual candidate, but these tips are a good place to start:

1. Seek opportunities to demonstrate that you can add value within the business by getting actively involved in a diverse range of projects. It’s important to be able to show your achievements beyond delivering accurate and timely work.
2. Get as much practice as you can attending meetings or contributing to team initiatives. Many directors/ professionals see themselves as introverts and don’t want to ‘put themselves out there.’ In reality introverts are often excellent communicators because they are good listeners – the most important attribute for empathising well with others.
3. Bolster the skills that are holding you back. Instead of adding another technical degree or certification to your resume, think about developing the soft skills that will boost your EQ.
4. Go beyond the numbers to think about the impact your work has on different aspects of the business and the people who do those jobs. What insights can you give the sales team to help them sell more or make more profitable sales? If you think and communicate from a broader commercial perspective, you’ll soon get the attention of management.

We have been discussing the positives and considerations of organic growth vs acquisition, this is a very topical subject especially with a buoyant M&A appetite, buy and build company structures are ever increasing and within fragmented sectors.

So how do you turn a small business into a big one? Or, grow an already significant company into market dominance? For business owners and executives, these are the critical questions that demand sound planning, consistently astute decisions and successful execution.

The approaches to growing businesses are as numerous and diverse as the range of businesses themselves. While small companies tend to favour an internally focused organic approach and large companies usually favour growth by acquisition, both avenues are open to companies of any size. The key is formulating an appropriate strategy, and assembling a strong business case based on the strategy.

Build or Buy?

Either “build or buy” can be effective, but each present risks and trade-offs that must be carefully considered and skill fully addressed if success is to be achieved. Whether the growth strategy is introspectively organic or includes such inorganic approaches as mergers, acquisitions, joint ventures, or organic-inorganic hybrids, care must be taken in planning and execution to ensure the end result creates real value and positions the business for future opportunities.

Growth From Within

Businesses that pursue organic growth – growth from within – learn that such growth requires time and nurturing, as expanding must be done prudently, at each point biting off only what the business can chew, and allowing each move to digest before expanding further. The risks of organic growth lie in expansion that outpaces the ability to effectively manage, stretches resources too thin, strains capital, or diverts focus from the business’ core mission. Businesses that grow organically can control their rate of growth and normally face less cultural and integration challenges than those that choose an inorganic strategy.

Inorganic Growth-Accelerated Approach

With inorganic growth, via mergers, acquisitions, and joint ventures, market share and assets are immediately larger, new skills and knowledge become available, and access to capital and new markets may be easier.

If you have decided to purchase an existing business instead of starting from scratch and you’ve done some initial research to find out more about the business you’re thinking of buying. What now? If the business still looks promising after your preliminary analysis, your next step is to have your acquisition team (your accountant, solicitor and banker) should start examining the business’s potential returns and its asking price. Whatever method you use to determine the fair market price of the business, your assessment of the business’s value should take into account such issues as the business’s financial health, earnings history, growth potential, and intangible assets (for example, brand name and market position).

To get an idea of the company’s anticipated returns and future financial needs, ask the business owner and/or accountant to show you projected financial statements for the business. Balance sheets, income statements, cash flow statements, footnotes and tax returns for the past three years are all key indicators of a business’s health. These documents will help you do some financial analyses that will spotlight any underlying problems and also provide a closer look at a wide range of less tangible information.

Among other issues, you should focus on the following:

Excessive or insufficient inventory.

If the business is based on a product rather than a service, take careful stock of its inventory. First-time business buyers are often seduced by inventory, but it can be a trap. Excessive inventory may be obsolete or may soon become so; it also costs money to store and insure. Excess inventory can also mean there are a lot of dissatisfied customers who are experiencing lags between their orders and final delivery or are returning items they aren’t happy with.

The lowest level of inventory the business can carry.

Determine this, then have the seller agree to reduce stock to that level by the date you take over the company. Also add a clause to the purchase agreement specifying that you’re buying only the inventory that’s current and saleable.

Accounts receivable.

Uncollected receivables stunt a business’s growth and could require unanticipated bank loans. Look carefully at indicators such as accounts receivable turnover, credit policies, cash collection schedules and the aging of receivables.

Net income.

Use a series of net income ratios to gain a better look at a business’s bottom line. For instance, the ratio of gross profit to net sales can be used to determine whether the company’s profit margin is in line with that of similar businesses. Likewise, the ratio of net income to net worth, when considered together with projected increases in interest costs, total purchase price and similar factors, can show whether you would earn a reasonable return. Finally, the ratio of net income to total assets is a strong indicator of whether the company is getting a favorable rate of return on assets. Your accountant can help you assess all these ratios. As they do so, be sure to determine whether the profit figures have been disclosed before or after taxes and the amount of returns the current owner is getting from the business. Also assess how much of the expenses would stay the same, increase, or decrease under your management.

Working capital.

Working capital is defined as current assets less current liabilities. Without sufficient working capital, a business can’t stay afloat—so one key computation is the ratio of net sales to net working capital. This measures how efficiently the working capital is being used to achieve business objectives.

Sales activity.

Sales figures may appear rosier than they really are. When studying the rate of growth in sales and earnings, read between the lines to tell if the growth rate is due to increased sales volume or higher prices. Also examine the overall marketplace. If the market seems to be mature, sales may be static—and that might be why the seller’s trying to unload the company.

Fixed assets.

If your analysis suggests the business has invested too much money in fixed assets, such as the plant property and equipment, make sure you know why. Unused equipment could indicate that demand is declining or that the business owner miscalculated manufacturing requirements.

Operating environment.

Take time to understand the business’s operating environment and corporate culture. If the business depends on overseas clients or suppliers, for example, examine the short- and long-term political environment of the countries involved. Look at the business in light of consumer or economic trends; for example, if you’re considering a store that sells products based on a fad like Crocs, will that client base still be intact five or 10 years later? Or if the company relies on just a few major clients, can you be sure they’ll stay with you after the deal is closed?

Final word; you may be tempted to acquire a competitor to take it off the market or gain access to its products and revenue. In most cases it will be risky. If you are not familiar with the process, bring in an adviser to help. Due diligence is tricky. Valuations are even harder. Discount the current revenue stream in your valuation. It will likely go down.

On the other hand, you may be able to increase the size of your business by 50 percent or more overnight. It could be a good long-term strategy, as the business consolidates.