The Importance of Strategy
A Successful Business Must at Least:
Superior Performance can only be Measured Against Realistic Goals
Absolute performance standards are unrealistic; corporate goals are situational and change over time. Goals should be the trade-off between profit growth and risk. Top management should establish realistic goals and hold themselves and their subordinates accountable for achieving the objectives. Incentives should be set for achievement of corporate andindividual goals.
Establishing realistic corporate goals, both short and long term, is the creative act of leadership not just management. Understanding the demands, power and sanctions of each corporate responsibility center or constituency is essential to understanding and establishing realistic goals. Balance of power will change over time, but the ultimate aim is to define goals and performance which prevent dominance by any one constituency. Most difficult trade-offs are between the growth and sales goals and the profit and cash flow goals. Shareholders profit and valuation goals always conflicts with employees security and rewards
Five Analyses that are Necessary to Achieve Clear Strategic Direction
1) Product Line Analysis
Indentifies the strength and weakness of each product line in the corporate portfolio. Expands or eliminates number of product lines based upon the financial analysis of the product lines against the profit center in which they are sold. In particular sources of cash and profit can be established as well as investment needs specified. Greatly assists in eliminating unprofitable and low performing product lines and expending high potential product lines. Increases cash flow by reducing unnecessary or redundant inventory levels. For maximum benefits include product line analysis and budgeting directly on profit and loss statements for each profit center.
2) Profit Center Analysis
Determines whether inter-dependencies between separate businesses within the corporation create value and competitive advantage or whether each business should be evaluated and analyzed on its own merit; however to know if the former is true then the latter must be conducted no matter how time consuming. Correctly placing the sales, costs, and expense data into the appropriate profit center is critical. Poor performing businesses should not be maintained for "overall strength" without strong evidence of their profit center relatedness value. This analysis should be conducted by each corporate location. Sometimes one profit center business at one location creates value though at another location the same business is underperforming.
3) Growth and Revenue Stream Analysis
Indentifies how resources can be used to exploit profitable growth in appropriate businesses. Proper analysis prevents misdirected growth investments, acquisitions and unlocks cash traps in excess inventory, wasted sales generation efforts, and unproductive management time. Revenue must be analyzed by each product line within a business to understand its relationship to the overall business. A matrix of high sales and high margin, must be compared to high sales and low margin, low sales and high margin, and finally low sales and low margin.
Management must establish a proper relationship between all quadrants of the matrix except for low sales and low margin, eliminating the latter. Breakeven costing provides the proper analysis tool to determine how each product line within each business fits within the matrix.
4) Expense Line Item Analysis
Probes deep into indirect and overhead expenses; as no stone should be left over-tuned. Indirect expenses and overhead is the collective root of all evil in business. Do all three above analyses correctly and forget to manage indirect expenses and overhead then all is lost. Hidden beneath the typical accounting profit and loss statement, actual expense line items by dollars per activity reveal the ability of management to manage. Expense line items must be separated between each corporate business and profit center and all cost centers, such as accounting and administration, warehouse and traffic, all manufacturing units, etc. It is the percentage ratio that determines whether an expense line item is too high. Don't depend on industry standard ratios for guidance as they are calculated upon averages. Each companyis different and one corporation's profit center labor to sales ratio may be worthless compared to another corporation's same profit center labor to sales ratio.
5) Organization Analysis
Means the organizational structure must be consistent with strategy and a clear component of the owners and leaders vision. The organizational structure must also embrace the profit and cost centers as independent divisions managed by individual division heads. The financial profit and loss statements should mirror the organizational chart to provide exact accountability for all decisions made within a particular division.
Corporate activities fall into three patterns or "philosophies." 1) Corporate Strategic Direction: Involves top executives defining and monitoring corporate and business strategies. Most appropriate for highly inter-related strategies between business or profit center activities. 2) Corporate Strategic Coordination: Involves corporate executives in influencing strategy and monitoring financial Results. An intermediate form of management necessary for very large corporations. 3) Corporate Financial Control: Decentralizes control to profit center businesses and relies on financial controls to manage. Most appropriate for a diversified corporation and strategy.
Boundaries define the focus of business profit center and cost center leadership. Boundaries and groupings of profit and cost centers can be a powerful implementation lever. Superior performance can be traced to boundaries based upon profit and cost center organizational structure. New boundaries should be created when current profit and cost centers managers cannot focus on achieving the benefits of the function due to the diversity of the new business unit. Such as the introduction of a Information Technology (IT) Department within the Administration Division. In this situation the scope and complexities of IT far exceed the capabilities of Administration leadership. Integration devices can be used during the interim to balance choices made on boundaries and corporate business interface.
In labor intensive businesses self-interested lateral cooperation by departments is preferable to integration by corporate hierarchy. Strategy directed companies require more integration devices than financially controlled companies. Lateral integration devices include cross-training between departments and personnel transfers. Vertical integration devices include strategic planning and control systems, intermediate levels of organization and functional authority.
Business Strategy Identifies how Competitive Advantage will be Achieved
Anticipation and knowledge of customer needs, economic viability, and competitive conditions are critical to achieving competitive advantage. Strategy must be rooted is customer needs and expectations. Customers drive most businesses not production processes or even low cost production. Understanding the needs and wants of customers is then the starting point for developing a successful business strategy. Many businesses fail because management is solely focused on their internal operations, distribution systems, technology and computer advances, human resources, and short-term profitability. Further, application of the five above strategic analyses are rarely conducted and implemented. Thus the internal foundations of clear strategic planning are not obtainable.
Therefore, instead having clear strategic insight, capital is wasted on improving unnecessary internal systems. Meanwhile the customer is slowly adapting to the new technologies offered by the competition, or customer's tastes are changing, or economic conditions are changing which is resulting in changes in customer buying habits, or all of the above. If strategic analyses and planning is not embraced as a critical function, businesses that fail behind usually resort to reducing operating costs and internally restructuring operations, employing new financing opportunities, spinning off unprofitable divisions, selling assets, or as a last resort selling the business itself.
However, offerings to satisfy customer needs must be economically viable. Low cost and differentiation are not mutually exclusive. Many products are low cost and high quality. A purely cost-based strategy is rarely an effective means of satisfying customer needs unless an industry consolidation is the ultimate business strategy. And this strategy also must understand customer needs and advancements in technology—Blockbuster Video and Barnes and Noble Books comes to mind. Therefore, cost/price, though important, is only one of the many attributes sought by customers. Economic viability requires a thorough understanding of major points of revenue, cost and margin contribution leverage. Competitive conditions – past, present and future – will impact achievement of competitive advantage and superior performance. Sustaining an economic offering (products to customers) requires understanding the forces of change in competitive conditions. Current competition, product substitutes, the economy in general, new entrants and technology must be mapped to determine influences on sustaining competitive advantage.
In short, competitive advantage is achieved when strategic analysis and planning is hard-wired into the corporate culture. The value added functions driving competitive advantage must be known, managed and protected. This is business strategy.
A Successful Business Must at Least:
- Meet customer needs
- Be profitable
- Be better than competitors
- Be difficult to duplicate
- Be able to accept and implement change
- Treat customers and employees ethically
Superior Performance can only be Measured Against Realistic Goals
Absolute performance standards are unrealistic; corporate goals are situational and change over time. Goals should be the trade-off between profit growth and risk. Top management should establish realistic goals and hold themselves and their subordinates accountable for achieving the objectives. Incentives should be set for achievement of corporate andindividual goals.
Establishing realistic corporate goals, both short and long term, is the creative act of leadership not just management. Understanding the demands, power and sanctions of each corporate responsibility center or constituency is essential to understanding and establishing realistic goals. Balance of power will change over time, but the ultimate aim is to define goals and performance which prevent dominance by any one constituency. Most difficult trade-offs are between the growth and sales goals and the profit and cash flow goals. Shareholders profit and valuation goals always conflicts with employees security and rewards
Five Analyses that are Necessary to Achieve Clear Strategic Direction
1) Product Line Analysis
Indentifies the strength and weakness of each product line in the corporate portfolio. Expands or eliminates number of product lines based upon the financial analysis of the product lines against the profit center in which they are sold. In particular sources of cash and profit can be established as well as investment needs specified. Greatly assists in eliminating unprofitable and low performing product lines and expending high potential product lines. Increases cash flow by reducing unnecessary or redundant inventory levels. For maximum benefits include product line analysis and budgeting directly on profit and loss statements for each profit center.
2) Profit Center Analysis
Determines whether inter-dependencies between separate businesses within the corporation create value and competitive advantage or whether each business should be evaluated and analyzed on its own merit; however to know if the former is true then the latter must be conducted no matter how time consuming. Correctly placing the sales, costs, and expense data into the appropriate profit center is critical. Poor performing businesses should not be maintained for "overall strength" without strong evidence of their profit center relatedness value. This analysis should be conducted by each corporate location. Sometimes one profit center business at one location creates value though at another location the same business is underperforming.
3) Growth and Revenue Stream Analysis
Indentifies how resources can be used to exploit profitable growth in appropriate businesses. Proper analysis prevents misdirected growth investments, acquisitions and unlocks cash traps in excess inventory, wasted sales generation efforts, and unproductive management time. Revenue must be analyzed by each product line within a business to understand its relationship to the overall business. A matrix of high sales and high margin, must be compared to high sales and low margin, low sales and high margin, and finally low sales and low margin.
Management must establish a proper relationship between all quadrants of the matrix except for low sales and low margin, eliminating the latter. Breakeven costing provides the proper analysis tool to determine how each product line within each business fits within the matrix.
4) Expense Line Item Analysis
Probes deep into indirect and overhead expenses; as no stone should be left over-tuned. Indirect expenses and overhead is the collective root of all evil in business. Do all three above analyses correctly and forget to manage indirect expenses and overhead then all is lost. Hidden beneath the typical accounting profit and loss statement, actual expense line items by dollars per activity reveal the ability of management to manage. Expense line items must be separated between each corporate business and profit center and all cost centers, such as accounting and administration, warehouse and traffic, all manufacturing units, etc. It is the percentage ratio that determines whether an expense line item is too high. Don't depend on industry standard ratios for guidance as they are calculated upon averages. Each companyis different and one corporation's profit center labor to sales ratio may be worthless compared to another corporation's same profit center labor to sales ratio.
5) Organization Analysis
Means the organizational structure must be consistent with strategy and a clear component of the owners and leaders vision. The organizational structure must also embrace the profit and cost centers as independent divisions managed by individual division heads. The financial profit and loss statements should mirror the organizational chart to provide exact accountability for all decisions made within a particular division.
Corporate activities fall into three patterns or "philosophies." 1) Corporate Strategic Direction: Involves top executives defining and monitoring corporate and business strategies. Most appropriate for highly inter-related strategies between business or profit center activities. 2) Corporate Strategic Coordination: Involves corporate executives in influencing strategy and monitoring financial Results. An intermediate form of management necessary for very large corporations. 3) Corporate Financial Control: Decentralizes control to profit center businesses and relies on financial controls to manage. Most appropriate for a diversified corporation and strategy.
Boundaries define the focus of business profit center and cost center leadership. Boundaries and groupings of profit and cost centers can be a powerful implementation lever. Superior performance can be traced to boundaries based upon profit and cost center organizational structure. New boundaries should be created when current profit and cost centers managers cannot focus on achieving the benefits of the function due to the diversity of the new business unit. Such as the introduction of a Information Technology (IT) Department within the Administration Division. In this situation the scope and complexities of IT far exceed the capabilities of Administration leadership. Integration devices can be used during the interim to balance choices made on boundaries and corporate business interface.
In labor intensive businesses self-interested lateral cooperation by departments is preferable to integration by corporate hierarchy. Strategy directed companies require more integration devices than financially controlled companies. Lateral integration devices include cross-training between departments and personnel transfers. Vertical integration devices include strategic planning and control systems, intermediate levels of organization and functional authority.
Business Strategy Identifies how Competitive Advantage will be Achieved
Anticipation and knowledge of customer needs, economic viability, and competitive conditions are critical to achieving competitive advantage. Strategy must be rooted is customer needs and expectations. Customers drive most businesses not production processes or even low cost production. Understanding the needs and wants of customers is then the starting point for developing a successful business strategy. Many businesses fail because management is solely focused on their internal operations, distribution systems, technology and computer advances, human resources, and short-term profitability. Further, application of the five above strategic analyses are rarely conducted and implemented. Thus the internal foundations of clear strategic planning are not obtainable.
Therefore, instead having clear strategic insight, capital is wasted on improving unnecessary internal systems. Meanwhile the customer is slowly adapting to the new technologies offered by the competition, or customer's tastes are changing, or economic conditions are changing which is resulting in changes in customer buying habits, or all of the above. If strategic analyses and planning is not embraced as a critical function, businesses that fail behind usually resort to reducing operating costs and internally restructuring operations, employing new financing opportunities, spinning off unprofitable divisions, selling assets, or as a last resort selling the business itself.
However, offerings to satisfy customer needs must be economically viable. Low cost and differentiation are not mutually exclusive. Many products are low cost and high quality. A purely cost-based strategy is rarely an effective means of satisfying customer needs unless an industry consolidation is the ultimate business strategy. And this strategy also must understand customer needs and advancements in technology—Blockbuster Video and Barnes and Noble Books comes to mind. Therefore, cost/price, though important, is only one of the many attributes sought by customers. Economic viability requires a thorough understanding of major points of revenue, cost and margin contribution leverage. Competitive conditions – past, present and future – will impact achievement of competitive advantage and superior performance. Sustaining an economic offering (products to customers) requires understanding the forces of change in competitive conditions. Current competition, product substitutes, the economy in general, new entrants and technology must be mapped to determine influences on sustaining competitive advantage.
In short, competitive advantage is achieved when strategic analysis and planning is hard-wired into the corporate culture. The value added functions driving competitive advantage must be known, managed and protected. This is business strategy.