Posts Tagged ‘budgeting’

Strategy, Motherhood, The Dog and Its Tail

Tuesday, November 4th, 2014

Do you remember that old expression “The tail’s wagging the dog”?The tail's wagging the dog or, the process is more important than the result

It was used to describe situations in which, for example, a process for doing something takes on more importance than the result it produces.

Why did I think of that now?

Simply, for many companies, this is the time of year in which they begin their strategic or business planning.

This process is often viewed as unproductive, frustrating, even pointless or a waste of time. So it may not be welcomed with enthusiasm.

Why is that?

After 13 years of working with business owners and their teams, I have a few ideas:

1.  Strategy development is a difficult, creative, iterative activity. But in many organizations the ‘planning’ process has to be completed in a predetermined period of time, in the same month or quarter, every year. That’s the tail wagging the dog.

2.  We use terms like strategic planning, business planning, and even budgeting, interchangeably as if they all refer to the same thing. They don’t.

  • Strategy development involves making well thought out choices about the future.
  • Business planning is about the activities that have to be completed in the next 12 months to execute the strategy.
  • Budgeting is estimating the financial outcomes of the activities in the annual business plan.

3.  If we’re not clear about what we’re setting out to do, everyone will expect a different outcome and no one will end up getting the result they wanted.

4.  Worse, the results we do get may not be useful. By trying to do more than one thing at a time, we end up doing none of them well. The result is a breathtaking series of ‘motherhood’ statements that are neither a strategy nor focused action plans.

5.  We begin the process with a budget, the financial targets the owner wants to achieve, and make the ‘strategy’ fit those. That, to use another metaphor, is putting the cart before the horse.

6.  Even if the results are useful, we don’t follow up. We are so busy dealing with day-to-day challenges there is simply no time. In reality, we lack discipline – not time.

Is it surprising that many business owners, executives, managers and employees are cynical about ‘planning’?

 

If you enjoyed this post you’ll also enjoy Strategy and Planning – How Business Owners Think

Click here and automatically receive our latest blog posts.

 

Jim Stewart is the founding Partner at ProfitPATH. He has been working with business owners for over 16 years to increase profits and improve the value of their companies. LinkedIn

Share

6 Thoughts For Your Planning/Budgeting Process

Tuesday, August 21st, 2012

Can you believe that it’s almost the end of August?

I’ve hardly noticed the summer slipping past – perhaps I dozed more than I intended because of the heat!

It’ll be Labour Day in 2 weeks.

Then kids will be back in school which, for many business owners and executives, will mean that vacations are over for another year and it’s back to work. If your company has a calendar fiscal year, 2012 will be beginning to take shape.

The results from the first two quarters should be firmed up. Orders already in-house and the sales pipeline will provide an indication of whether you will make, or beat, your top line targets or whether there will be a shortfall. Year to date margins and expenses will give you a feel for what, if anything, has to be done to protect bottom line profit.

And, of course, annual planning and budgeting for 2013 will begin soon – if it hasn’t already started.

So here are some thoughts (I’d hesitate to call them pearls of anything, let alone wisdom) from posts I’ve written at around this time of year in the past.

1. To make as accurate a guess as possible about what the future holds you’re going to have to make assumptions. On what information will you base them? Something you read – or are you going to get out and talk to your customers and suppliers about what is happening in their world and what that will mean for you?  (See Don’t Let The Summer Heat Cause A Winter Chill)

2. When so much of what is going on around you seems out of control, it’s easy to stop focusing on the things that are under your control – i.e. whether or not you actually execute your plan. Badly done or completely neglected by many companies, execution is what turns plans into results. (From 6 Tips for Getting Better Results Next Year)

3. In this age of fast, unrelenting change it makes sense to forecast several different scenarios, build assumptions on thorough, comprehensive research (formal and informal) and think through contingency plans. (See It’s THAT Time of Year Again)

4. A sample of responses to a survey sent to our database showed that many companies who said they would miss their targets also said they had completed a structured planning process before the start of the fiscal year. That raises some questions. (See them at Give Yourself A Chance in 2011)

5. The owner must be the champion of the planning process. If, for example, the accounting department are perceived to be driving the process it will be seen as only a number crunching exercise, to be completed as quickly as possible. (See More Heat Less Chill)

6. Think you’re going to miss those top and bottom line targets I mentioned earlier? Then consider changing or modifying your strategy and business planning process. Why? Because if you use the same tools, in the same way, and expect a different outcome you may be in for a surprise. (See Don’t Fool Yourself……… )

Let me know what you think.

And good luck with your planning/budgeting meetings.

Click here to automatically receive our latest blog posts.

3 Things That Shape A Good Strategy

Wednesday, September 14th, 2011

It’s the time of year when many business owners and their teams are doing their business planning for 2012.

So in my last 2 posts we talked about the 4 hallmarks of bad strategy and the 2 reasons why there is so much bad strategy.1 

Now I want to focus on the underlying structure of a good strategy and Rumelt’s views on the 3 components of that.

1. Understanding the nature of the challenge

I may be making a “blinding statement of the obvious” when I say that it’s not possible to develop a strategy which will be successful, unless you understand the challenge.

But I’m also probably correct in saying that no strategy – even the ones that later proved unsuccessful – has been approved without the key players believing they did understand the challenge.

Typically the situations which create problems or challenges for companies are complex. A good “diagnosis”, to use Rumelt’s term, simplifies the complexity by identifying those aspects of the situation that are the critical ones. This makes failing to face the real problem impossible (see the first post in this series).

I think that really understanding the challenge requires business owners to:
• Refuse to replace thorough analysis with positive (or wishful) thinking.
• Commit time and resources to a completing that thorough analysis.
• Combine the product of trained analytical skills with their intuition.
• Remain objective in the face of other (opposing) ideas.

2. An integrated approach for dealing with the critical issues

Rumelt describes this as a guiding policy for overcoming the critical issues.

I believe that in order to develop this integrated approach, choices have to be made about which goals to pursue. This helps avoid one of the causes of bad strategy.

And immediately a company embarks on this route they take a giant step away from the template style of planning that Rumelt criticizes so much.

The approach we’ve used successfully for some years now requires conscious thought being given to the implications of the strategy for all functions in the company – not only marketing and sales but also operations, finance, HR and systems.

Our approach raises, and answers, questions like how will we finance growth; what skills and experience will we have to develop or hire to take us to the next level?

3. Coordinated actions that translate the integrated approach into results

Rumelt provides an interesting example of coordinated actions. He talks about Nvidia’s strategy for capturing leadership of the 3-D graphics chip industry.

The CEO realized that releasing a new, better chip in much less time than their competitors was the key to success. That became the company’s guiding principle.

The coordinated actions were – forming 3 development teams working on overlapping schedules; investing in infrastructure to prevent delays in fabricating chips and developing drivers; and regaining control of the development of drivers.

It’s easy to see how these 3 actions supported Nvidia’s guiding policy/integrated approach.

The strategy worked brilliantly for 10 years. But, as we know, no strategy, however brilliant, will remain unchallenged forever.

4. Wrapping up

Three apparently simple things underpin a good strategy. But, as I’ve said before, strategy is like all of those other things in life that seem simple but yet are not. Did I tell you about my golf swing……..

1 The posts summarised an article written by Richard Rumelt, published in the McKinsey Quarterly and based on his recent book “Good Strategy/Bad Strategy: The Difference and Why It Matters”

2 Things That Cause Bad Strategy

Wednesday, September 7th, 2011

Its business planning or budgeting time for many business owners and so in last week’s post I talked about the 4 hallmarks of bad strategy.

They’re featured in an article which was adapted by Richard Rumelt from his new book “Good Strategy/Bad Strategy: The Difference and Why It Matters”. The article appeared in the McKinsey Quarterly

I promised that, for those pressed for time I’d continue summarizing the article in this post and talk about why there is so much bad strategy.

1. Unwillingness or inability to choose

Rumelt argues that a good strategy requires focus. And focus means that business owners have to choose amongst business goals.

Do you remember Digital Equipment Corporation (DEC)? They led the mini-computer industry in the 60’s and 70’s but by the end of the 80’s they were losing ground quickly. There were doubts if the company could survive without making far-reaching changes to their strategy.

Three alternatives were considered – business as usual, become a solutions provider or focus on designing better technology. The CEO wanted consensus on the new strategy but the executive team was divided and unable to reach one.

The result was a compromise, “DEC is committed to providing high-quality products and services and being a leader in data processing.” Like most compromises, it contained a little bit of everything and focused on nothing.

DEC continued losing ground and the CEO was replaced in the early 90’s. His successor focused on technology, but by then it was too late. The losses could only be stopped for a while and the company was acquired by Compaq in the late 90’s.

Failure to choose results in weak strategy and weak strategy results in failure.

2. Confusing “positive thinking” and strategy

Motivational speakers – and their books and web sites – have given rise to the notion that charismatic leaders and positive thinking can achieve the impossible. In concept it’s done by developing a vision and inspiring people to follow it, while empowering them to accomplish it.

The concept was reduced to something of a formula and distilled into a template for strategic planning. But not everyone can be a charismatic leader. Nor can success be achieved simply by applying a formula and completing templates.

A vision has to be more than a statement that the company will be the best, or the leading, or the best known.

The mission has to be filled with more than high-sounding, politically correct statements about the purpose of the business.

And a company’s values can’t be noncontroversial platitudes about integrity, respect and excellence.

Rumelt’s point is that, if the vision, mission and values turn out that way then the strategy is going to be nothing more than aspirations, goals or statements of the obvious presented as decisive insights.

Lack of substance makes a very weak foundation on which to build a future.

3. So what does work?

I’ll save Rumelt’s views on the underlying structure of good strategy for my next post.

Bad Strategy – How To Spot It

Tuesday, August 30th, 2011

Many business owners are in the middle of their business planning or budgeting process for 2012.

So, for those pressed for time, I’ll summarize a timely article by Richard Rumelt, adapted from his new book “Good Strategy/Bad Strategy: The Difference and Why It Matters”, and published in the McKinsey Quarterly.

Here are Rumelt’s 4 hallmarks of bad strategy.

1.    Failure To Face The Problem

A strategy, according to Rumelt, is a response to a challenge. But if the challenge isn’t defined, it’s impossible to assess the quality of the strategy. And if you can’t do that you can’t reject it as bad or improve on it.

For example in 1979 International Harvester produced a Strategic Plan which was thorough and rich in detail. The overall direction was to increase share in each of their served markets while reducing costs.

Unfortunately the Plan didn’t address Harvester’s main problem – its inefficient work organization. This stemmed from grossly inefficient production facilities and the worst labour relations in US industry.

This problem could not be fixed by driving people to increase market share or by investing in new equipment. Harvester survived for a couple of years but began to collapse after a disastrous 6 month strike. The rest, as they say, is history.

2.    Mistaking Goals For Strategy

Rumelt describes a CEO who had a plan to grow revenues 20% a year with profit margins of 20% or more.When asked how this aggressive plan would be achieved, the CEO replied “With the drive to succeed – by picking stretch goals and pushing until we get there”.

The CEO then quoted Jack Welch who said “We have found that by reaching for what appears to be the impossible, we often actually do the impossible.” But he had forgotten that Welch also said “If you don’t have a competitive advantage, don’t compete.”

Rumelt argues that a company needs a unique internal strength or an opportunity created by a change in the industry for this type of growth. Stretch goals and motivation alone are not enough.

He illustrates the inadequacy of this “push until we get there” type of thinking, by referring to the great pushes in the 1914-18 war. The troops who were slaughtered didn’t suffer from a lack of motivation – they suffered from a lack of competent, strategic leadership.

3.    Bad Strategic Objectives

This can take the form of a long list of things to do – often labeled strategies or objectives. These lists result from planning sessions in which the focus is on doing a wide variety of things, not a few, key things.

Rumelt refers to the planning committee for a small city whose strategic plan contained 47 strategies and 178 action items. Action item number 122 was “create a strategic plan.”

Another type of weak strategic objective is one that is “blue sky”. It’s typically a restatement of the desired state of affairs or the challenge- and skips over the fact that no one knows how to get there.

Good strategy works by focusing energy and resources on a very few, pivotal objectives and builds a bridge between the critical challenge and action. Thus, the objectives a good strategy sets stand a good chance of being accomplished.

4.    Fluff

The final hallmark of bad strategy is a restatement of the obvious, combined with a generous sprinkling of buzzwords. Rumelt’s example is a retail bank which said “Our fundamental strategy is one of customer-centric intermediation.”

An intermediate is a company that accepts deposits and then lends the money – in other words, a bank. The buzz phrase “customer centric” could mean that they compete by offering better terms and service. But their policies didn’t reveal any distinction between it and other banks.

So “customer-centric intermediation” is pure fluff. Eliminate it and the bank’s fundamental strategy is being a bank.

5.    My final words

In my next post I’ll finish summarizing the article and talk about why there is so much bad strategy.

Don’t Let The Summer Heat Cause A Winter Chill

Thursday, July 21st, 2011

It’s almost the end of July, it’s hot and it’s vacation season. The heat saps your energy and getting ready for; switching off during; and scrambling to catch up after vacations takes most of your attention.

Together they make it easy for business owners to lose sight of fact that it’s the end of the second quarter and planning, budgeting, whatever you call it, for 2012 will be starting soon.

So what, you ask? Here’s what – your annual business planning/ budgeting/ whatever you call it process is the engine that drives your growth. If you don’t approach it with that in mind you’re setting yourself up to underachieve in 2012.

Based on mistakes we’ve seen made repeatedly in 10 years of strategy consulting there are several things you need to think about now. Here are a couple to get you started……

1. Don’t postpone the second quarter/mid-year review. Hold it ASAP.

Quarterly reviews are a reality check. What’s really happening in the industry, to our customers and with our competitors? How does that compare to our assumptions and how has it affected our forecasts? What can we do to leverage this reality in the next 2 quarters?

How many of the programs we planned have we actually put in place? Are they yielding the results we wanted? What has worked well that can be we build on? Which programs are behind time and how do we adjust for that?

The answers to these questions and others like them, asked in the quarterly review, will allow you to put form around what the situation will be at year end and give you a jumping off point for forecasting sales and bottom line in 2012 and beyond.

If you haven’t been doing quarterly reviews, or have let them slip, this is the time to start or re-start them.

Don’t let vacations be an excuse for postponing them.

2. Waiting until the week before the annual business planning session to start thinking about next year isn’t nearly good enough.

You’re going to make as accurate a guess about what the future holds as possible. To do that you’re going to have to make assumptions which will underpin your financial forecasts, priorities and action plans.

On what information will you base the assumptions? Something you read in an economic outlook from a bank or industry association or in articles about your industry or competitors on the web?

Or are you going to get out and talk to your customers and suppliers about what is happening in their world and what that will mean for you? Why not put a simple but systematic process in place to ask the same, key questions from several sources?

But that will take time; it can’t be done in the week or two before the planning session. Who is going to see whom and ask them what has to be decided soon – using output from the second quarter review. And the meetings will have to be arranged – and everyone has a full, busy schedule.

If information is power – or at least confers power – why settle for anything less than the best information available? Decide what you need and how to get it now – then start collecting the information soon.

3. Quick tip.

Dealing with the summer heat and vacations, doing the things that are urgent, can take the focus off preparation for the thing – the annual business planning process – that is important. If that happens and business catches a chill next year, it will not be this summer’s heat that’s to blame.

More in future posts, but today is the hottest day so far this year – so I’m off to get a Frappuccino. Staying cool is hard work!

Post History