Archive for January, 2011

Strategy and Planning – How Business Owners Think

Thursday, January 27th, 2011

1. A Great Question.

The other day I was talking to a friend who is Chair of a TEC group. He told me about the owner of a successful business he’d met recently. The guy insisted that there was no value to be had in paying anyone to help with strategy or business planning.

Knowing what we do, my friend asked me how we dealt with this attitude. A couple of days later I saw a great article in the current edition of Inc. magazine called “How Great Entrepreneurs Think”.  Had I seen it before talking to him it would have helped me do a better job of answering his question than I was able to do.

2. How Successful Business Owners Think.

The article is about a very credible piece of research carried out with a group of entrepreneurs who had:
• At least 15 years’ experience.
• Started multiple companies.
• Successful businesses and failures.
• Taken at least one company public.

It was the brain child of Saras Sarasvathy and was supervised by Herbert Simon who won a Nobel Prize for his research on decision making. Participants were asked to imagine that they were the founders of a start-up that had developed a computer game.

When experienced entrepreneurs start a company they use effectual reasoning. This means that instead of setting out with concrete goals, they use their personal strengths and the resources at hand to develop goals as they go along.

Brilliant improvisers, entrepreneurs are impatient with extensive planning. They just want to get started. Instead of traditional market research they believe they’ll learn what the obstacles are, which questions have to be answered and which prices are acceptable by going out and trying to make some sales.

And it’s not only market research they reject. At start-up, these entrepreneurs don’t believe in prediction of any kind because they don’t believe the future is predictable – and if it is they don’t want to be in that space.

3. How Successful Executives Think.

Sarasvathy wanted something to compare the entrepreneurs’ approach to. So the same experiment was repeated with a group of highly successful corporate executives.

Executives use causal thinking which is typified by setting a goal and then diligently looking for the best ways to achieve it. This means, for example, that they will want to carry out structured research before launching.

4. The Important Point.

But the important point is that the study determined that successful entrepreneurs did adopt more formal planning practices as time went on. In fact, their ability to do so – to become causal as well as effectual thinkers – helped them grow with their companies.

And that’s the answer to my friend’s question. Some business owners adapt as their companies grow, others don’t. Hopefully the ones who do never substitute one way of thinking for the other but rather use them to complement each other.

Those who adapt also know what they don’t know. And, provided there’s clearly perceived value and a proven solution, those entrepreneurs will hire people with the knowledge, skills and experience that they don’t have.

And that’s how people like strategy consultants make a living.

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Why Strategy Is Still Worth A Business Owner’s Time

Sunday, January 23rd, 2011

1. Is strategic planning still worth doing?

A couple of months ago I asked our LinkedIn Group the question “Is the strategic planning process as we know it still relevant?” That was because I’d seen articles and blogs arguing that strategic planning;
• Uses tools which are no longer relevant or
• Is no longer worthwhile because everything changes so quickly now.

2. What do the big names think – and is that important?

So a question in the recent McKinsey Quarterly caught my eye. Asked “What’s the new thing in strategy?” the answer was “there’s always new stuff out there, and most of it’s not very good…… it’s probably better to be thorough about what we know is true.”

McKinsey is a thought leader on the topic of strategy. So the answer kicks the point about the tools no longer being relevant into touch doesn’t it?

Then last week I found an article containing 5 video clips from a presentation given by Jonathon Goodman of the Monitor Group – another authority on strategy. The title is “Why Strategy Matters, And Now More Than Ever”. And that, by itself, disposes of the question of whether strategic planning is no longer worthwhile.

You can argue that McKinsey and Monitor work with large corporations so what they say offers no benefit to smaller, privately owned companies.

But I disagree; after all we founded ProfitPATH to adapt the tools used by corporations for owner managed businesses. If what McKinsey and Monitor say about strategy makes sense, then it makes sense for everyone.

The difference between corporations and owner managed businesses lies in how to apply what they’re saying.

3. Three things for business owners to think about.

I’ve picked 3 quotes from Goodman’s presentation. Each one makes an important point that’s easy to overlook or ignore.

“Strategy is the filter to distinguish distractions from opportunities.” Monitor views strategy as the outcome of making an integrated set of choices about, for example the company’s goals; its target markets; how it will win (its value proposition, sources of competitive advantage etc.);and its capabilities.

For a strategy to be successful each choice must reinforce the others so that all of the pieces of the strategy are aligned. The strategy drives resource allocation and is the thing that connects all parts of the organization.

It makes sense to compare any new initiative which arises to the strategy. If the initiative supports the strategy, it really is an opportunity. If it doesn’t, it is simply a resource wasting distraction.

But how often do we miss applying this critical test as our eyes glaze over with excitement about the profits the new initiative can generate?

(ProfitPATH will shortly introduce a new service to help clients focus on opportunities and avoid distractions.)

“It is useful to produce different versions of the future and ask – what would it take to win?” Business owners can use trends which might emerge or events that could shock any aspect of the environment to create 2 or 3 different versions of the future.

Goodman suggests asking 3 questions about each version. Will our current strategy be effective? If not, what will it take to win? What is the difference between what it will take to win then and what it takes to win today?

“Being flexible is not a strategy.” Monitor argues that the changes in the business environment make developing a coherent strategy more important than ever.

Companies that have one can determine the areas in which they can be flexible e.g. by knowing where to seed opportunities for new products and markets and by building flexibility into capabilities so that they can be deployed in different ways.

But despite the emphasis being heaped on the need for flexibility it cannot, by itself, form the basis of a strategy.

4. Wrapping it up.

Strategy and strategic planning will always be critical to long term success and increasing the value of a company. The big guys can’t be right all of the time – after all who is? But their experience and resources have to be worth something.

3 Ways To Test Your Strategy

Tuesday, January 18th, 2011

An article I read recently showcases 10 tests of a strategy that apply some of the best thinking that’s been done on the topic.  It was published in the McKinsey Quarterly and is called “Have You Tested Your Strategy Recently”. You have to register to read the full article but it’s worth it.

I want to focus on 3 of the tests which I think are particularly valid for business owners.

The first one asks the question – does your strategy put you ahead of trends? That new trends develop in any market is a fact. The issue is the length of time it takes for them to become apparent. A major technological breakthrough or a significant change in, e.g. the economy/demand or regulations/legislation can drive a rapid transition.

But most trends develop so slowly that business owners only react when their profits are affected. At that point it may be too late to respond effectively (think about the travel agents who ignored the rise of online competitors). The cost of missing a trend can be heavy, but seeing it early can pay off.

So how do you spot new trends? Keep an eye on customers who have been quick to adopt new products in the past. What are they doing? Think about the impact the new trends would have on your financial position – and the decisions you would make if you were certain they would happen. How do the results of those decisions compare with your current priorities?

The second test looks at how well your strategy deals with uncertainty. A challenge for business owners is to know which choices to make now, given that the outcomes will take place in a future they can’t control. The authors suggest breaking uncertainty into 4 levels.

The first gives a reasonably clear view of the future with a range of outcomes tight enough to support a firm decision. At level two, there are a number of identifiable outcomes for which a company should prepare. The possible outcomes in the third level aren’t specific but fall into a range resembling a probability distribution. And level four features total ambiguity, where even the distribution of outcomes is unknown.

Most companies assume they are facing either levels one or four while they are usually dealing with level two or three. The authors suggest quickly ruling out impossible outcomes and then looking for those which are either mutually supportive or which are unlikely because they undermine one another. A tool like scenario analysis can be applied – by the owner, management team or consultants like us – to the remainder.

The third test, asks if the strategy balances commitment and flexibility. Commitment and flexibility are opposites – if you’re very committed to a course of action you may have very little flexibility.

Making the best trade-off between them requires understanding that, of all of the decisions a business owner has to make, only strategic decisions result in commitment – through hard-to-reverse investments in long-lasting, company-specific assets.

But in this world of uncertainty, strategy is not only about where and how to compete, it’s also about when. Committing too early reduces flexibility, leaving it too late can allow competitors to gain advantage.

A market beating strategy will do 3 things. Take big bets, or make commitments aimed at gaining significant long-term competitive advantage; make no-regrets moves, which will pay off whatever happens; and maintain options, that involve relatively low costs now but which can be turned into a higher level of commitment as changing conditions warrant.

Why did I choose these 3 tests? Because they are, I think, the most relevant right now as a result of the fall-out from the financial crisis and recession and the hardest for business owners to deal with. (Although I was tempted by Test #8 – Is your strategy contaminated by bias?)

If you would like someone to talk the tests over with, drop me an e-mail or give me a call. I’d be happy to spend half an hour chewing them over with you

Focus On The Drivers And Get The Best Price!

Tuesday, January 11th, 2011

Last month I talked about increasing the value of a company being an output of executing a strategy/ running a company, well. (See Selling Price of Your Company – Goal or Output?)

This week I had the opportunity to speak to a group of accountants, lawyers and financial planners about how business owners view their companies as an asset for retirement. As it turned out, I couldn’t do the talk because I was sick (hopefully they’ll invite me back).

But here are some of the points I was going to cover.

In our experience getting entrepreneurs to focus on building value in their companies can be difficult. Many assume that they’ll only have to think about selling 6 or 9 months before they retire – ignoring several reasons why a sale may occur well before then.

For example, someone from a larger competitor could walk in one day and make the owner an offer. We see this in industries which are consolidating or when our client has intellectual property, or some other asset, the larger competitor considers to be strategic.

It’s also not unknown for one principal in a partnership to trigger a shotgun clause either in an effort to buy out the others or because he/she is ready to move on.

So, as service providers – consultants, accountants, lawyers, financial planners – it falls on us to make our clients aware of these potential surprises.

It’s purely an observation on our part but younger entrepreneurs appear more focused on the price for which they can ultimately sell their companies. As are those owners who have attracted angel or other investors.

The former want to fund another, more relaxed lifestyle and have a relatively short time frame before cashing out. The latter realize that a liquidity event is a certainty at some point in the not too distant future.

The value of most companies – including those purchased for so called strategic reasons – is a function of the size and continuity of the future stream of operating income they will generate.

To get the best price for the company the seller has to demonstrate, particularly during due diligence, that;

  • The drivers of great operating profits are in place and that
  • They will continue to produce those profits after the current owner rides off into the sunset either immediately or after a transition period. 

I talked in my earlier post about those drivers falling into 2 categories – the ones the owner can control and the ones he/she can’t.

Many service providers know from training, experience or both what those drivers are. And they share them with their clients, particularly if the accountant, lawyer or other professional believes there’s room for improvement.

But that advice/input may not be taken.

Why? There are 3 reasons.

First, the service provider may not be able to tell their client/the owner how to put the drivers in place. Second, if the owner knew how to put them in place he/she would have done so already. And third, there may not be enough time to get all of them fully implemented.

There is a solution for the first two. Consultants with the relevant knowledge and experience will work with owner to put the missing links in place. We’re certainly not the only firm who can do this but, if you want to know how it would be done, give me a call and I’ll be happy to give you some examples.

But the solution to the third lies solely in the hands of the owners – including younger entrepreneurs (investors tend to take care of their own). It can take as much as 2 or 3 years to prepare/optimize a company for sale. But it needn’t. The things that will bring the best price are the same things that will optimize operating profits this year and next year. 

If they aren’t in place now why wouldn’t they be put in place – now?

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