January 8, 2020
In our hypercompetitive world, where long-standing competitive advantages can be wiped out in a matter of months by plucky, well-funded upstarts, corporate strategy is no longer optional. Professional capital is finding companies at embryonic stages of development, and we all know that capital radically changes a marketplace and the behavior of its participants.
Why should we care about strategy when dealing with the here and now can prove daunting? A well-formed strategic plan should result in enhanced competitive resolve by tapping into new and exciting opportunities that help a company stand the test of time, such as finding new markets, defending hard-won territories, extending one’s brand, bolting on an acquisition, or reenergizing the balance sheet.
Developing an effective strategy is not an exclusive exercise. The first step in any planning process is to gather input from all corners of an enterprise. The team must have these elements:
What should the team’s first step be? Although it seems like an odd place to start, one of the most useful outcomes of planning is to understand and inventory organizational weaknesses. Do you have a dearth of needed talent? Are there distribution or product issues? Is the company financially compromised?
Document steps to overcome all perceived weaknesses so that you’ll have the foundational strength for the job ahead. You’ll need to bolster corporate capabilities to produce desired outcomes. And, honestly, capital can be bargained for in the context of material strategic changes.
A useful strategic plan must contain both top-down and bottom-up considerations. From a macro perspective, survey your industry and gauge the same competitive resolve of the companies you try to outsell and outservice every day. Catalog regulatory and expected market disruptions so that you can calibrate your thinking. This aspect of planning should produce a matrix.
Has your industry moved away from your company so that, in essence, you have subordinated your business to competitors? You should also know exactly where you can be forceful in your position and accelerate your growth. A few considerations:
All strategic initiatives place capital stress on a company. Even if your plan calls for the disposition of a money-losing operation, you’ll have to stress-test this action against your capital structure. Given your debt covenants, can you simply close a money-losing operation, or can an asset be sold without input and approval from your capital providers?
It’s time to take your plan to the laboratory for a slight detour. The group must prioritize and assign value to each recommended strategy. Each desired activity has a price tag (and one cannot forget the working capital involved). For example, you may desire to enter a new market through organic growth. A careful review of the required investment must be modeled first on its own with the expected uptick in revenue and earnings and then consolidated to see if this “fits” within the current capital and operating structure.
A member of the strategy team should be acutely aware of overall capital capacity and related restrictions. Often this involves stress-testing the change in the financial model against current debt covenants or return hurdles. Know the “flow through” of your plan before you present it to your C-suite. A high-return scenario may encourage capital talks with external sources, so do not be discouraged if you can’t “fit” exciting initiatives within the current balance sheet.
At this point, you have lots of great ideas scattered about. How do you pull it all together into a coherent and compelling story? It’s time to connect your top-down and bottom-up strategy. What opportunities have you uncovered in your industry, and what can you do to take advantage of these pockets? Do your ideas speak to these opportunities?
The team must develop a consensus on how to prioritize and decide on a clear number one, two, and three. All ideas must be filtered in the lab for stress and assumed returns, as well as required capital and resources, including human and IT. There will be disagreements, but a robust debate on how to finalize and prioritize your overall strategic plan will deepen the team’s commitment to such recommendations. Thinking contextually will preempt the CFO’s first question: How do we pay for all this?
While there is no magic way to conduct strategic planning, a company must recognize that strategy is as relevant as the next sale. An ability to see around the next corner will be critical to your competitiveness well into the future.