Turnaround in business. Part 5

 

Do We Really Have A Strategy? “When the Strategy Is that We Have No Strategy”

We have learnt about strategies that work, but what about the common mistakes crafting our company strategy. If we do not know the common errors crafting strategy, we cannot avoid them. So let’s go to analyze different misapprehensions that could make us believe that we have a strategy, when our “pretended strategy” is not working at all:

Confusing Strategic Intent with Strategy

Some CEOs misinterpret Hamel & Prahalad when they suggest “to rewrite their industry rules and create new competitive space.” Therefore, those CEOs use a more internal environment focus to formulate strategy. They “forget” to perform a deep analysis of competition and the coherence of our strategy related to our competitors position, movements and strengths. So, they focus on the goals that they would like to achieve, disregarding the environment/competitors’ analysis. This is a dangerous misinterpretation of strategic intent, because the firm could plan expenses for unrealistic higher revenue and profit growth. Moreover, unrealistic goals are very dangerous because use to undermine staff morale and bonuses/incentives.

Ignoring the strategic boundaries

Many firms decide a Customer Intimacy/CRM strategy or Product Leadership/Innovation strategy in order to try to run away from product commoditization. Notwithstanding, that those differentiation strategies have an important boundary, I mean the price and promotion of the products use to constraint those strategies. So, customer flexibility can be a source of competitive advantage just at affordable prices. Moreover, Product Innovation could improve the quality, but quality perception has limits and the price that customers are willing to pay for an innovation too (e.g. How much is willing to pay for a car buyer in order to reduce the petrol consumption just 0.1 liter?) Other important risk of Product Innovation is being too much focused on the product, and forget that products are bought by customers (e.g. assuming that all the customer would like to have a Mercedes Benz or other good brand could push that firm to lose customer focus).  We have to mention that there are products with less price elasticity than others (e.g. luxury products.) On the other hand, we have Operational Excellence/Infrastructure Management strategy as a low cost strategy, its boundaries are the minimum product features and the right placement requested by customers. Finally, heavy overheads can lead to failure almost any strategy. So, overheads must be monitored, and especially in the low cost strategy.

Strategic Boundaries

Not having a good value proposition

If we ask companies with a weak strategy for their value proposition, we are likely going to receive ambiguous answers like: “we are a customer centric firm”, “we have a global presence”, and so on. So, the next question would be:  Why are customers going to buy our products rather than competitor products or even substitutes?

Not having a solid business. Does our business generate recurrent and stable profits? Are we able to replicate our business success in other markets and/or products?

While we have companies like ZARA/Inditex that they are able to replicate success in almost every market and product line, we have organizations that they do not even understand their success in a few markets. So, they are not able to take advantage of growing sales and profits much faster than the fixed costs. Furthermore, because their business success is “unpredictable,” they do not use to take full advantage of financial leverage too. So, the strategic paths of those firms is selling the firm or growing by acquisitions, because they cannot replicate success. We should be aware that in solid and replicable business success like ZARA/Inditex make sense vertical integration, and outsourcing potential benefits are limited by the real synergies of that working business model.

Confusing Competitive Advantage with Strategy

People who enjoyed some success in the past use to assume that there was a good strategy in place. Sometimes, that success comes from a First Mover Competitive Advantage just selling first in a specific geography. Therefore, when they tried to replicate their success in another market with strong competition (after a few years), they realize that they cannot replicate the past success. First Mover Competitive Advantage use to be sustainable when we create a product innovation, buyer switching costs, or we achieve a critical volume that offers us Economies of Scale. Thus, we should monitor that we are not losing market share or reducing our margins’ year by year, because that could be a signal that we are losing our old competitive advantage of being first selling in one specific market. In that case, we did not generate sustainability in the First Mover Competitive Advantage for the lack of strategy.

Believing that strategy is just the definition activity rather than definition and execution activities

Our strategy formulation process shows where we want to go, but do we show clearly HOW TO get there? A poor strategic execution shows a huge gap between our strategic objectives and our feasible achievements. Those firms use to impose unachievable objectives with the expectation to revamp the firm, but they cannot materialize the growth without defining HOW TO. Again, that dynamite staff morale, and best staff will probably leave the company.

Forgetting the third strategic level

When the strategy formulation starts with the Corporate Strategy and end with the Business Units Strategy. So, the Functional Strategy is not developed at all. Therefore, most of the business policies are not developed neither.

More focus on support activities than customers and strategy

Sometimes when we read a companies’ annual report, we can find that the main subjects are important, but just support activities like Corporate Governance, or Health and Safety matters. In those cases, it is difficult to locate strategy or new customers’ acquisition subjects. Thus, we should wonder us a couple of questions: Are we leaving at a difficult time with lack of ideas? Or do we have companies managed for people with difficulties in bringing and materializing new ideas?

Building a management team too much homogenous 

It is much easier to bring up ideas, building management teams based on diversity. Nevertheless, we can find many companies that the concept of globalization is just entering new markets and move the sales responsibility locally. So, in those firms, many of the management positions are just for people located or coming from the global headquarter, with the same nationality, with the experience in the same industry, and even with the same degree (engineers for example). When this is the situation, it is difficult to bring up new ideas and create a “killer strategy.”

Wrong people in the wrong position

We can meet with the board of some organizations; people with a good background, many years of experience in one specific industry, good communication skills, and with the same nationality of the firm. However, are those the Key Success Factors (KSFs) to develop a leading strategy? Probably NOT, the KSFs are likely creative and strategic thinking, and these are not very common competences. Another important question is: do we have good managers to execute our strategy? In order to identify good managers I would suggest the following: good managers have a good staff around them, and they have the competence to identify quickly brilliant people. Unfortunately, that capability is not as common as must be. In those cases, we will have average teams, performing mediocre strategies.

Lack self-confident and visionary people

It seen amazing, but we can find top management more worried with action than inaction issues. Finally, we have managers that rather than bringing and supporting new growth and improvement initiatives, they are focused again just on Corporate Governance, Health and Safety, and avoiding or delaying investments.

Short term and very low risk focus

If the focus is the short term ROI and low risk, we are not thinking strategically that means the long term planning. So, we are rejecting many opportunities to build “new” competitive advantages and create a growing path for the firm. We must mention that those firms do not use to feel comfortable planning HOW TO execute strategies. They use to fail putting resources in place to avoid so much as possible the investment and risk associated with it. The result of a strategy not supported with the right resources is the frustration of the team and a false strategy start.

Be global and unable to act locally

There are subsidiaries that copy the huge elephantiasis global organizational chart at the local level. Indeed, they do not know how to adapt the global strategy at local level. Furthermore, it is quite common that headquarter staff request at local level resources to implement their global initiatives that not always fit with the local priorities.

Strategy is a matter of “just top management”

There are companies assuming that all the top management has the strategic thinking competence. Thus, the strategy process is limited according to hierarchy position. We can find good operational people with limited strategic thinking, participating in the strategy process. On the other hand, we have “young” staff with good strategic thinking skill that they do not participate, because their position in the organization inhibits them. Moreover, in those firms the strategy communication process uses to be an issue. They use to forget that strategy execution must arrive to the lowest level of the organization. The communication process, the message, and the objectives should be different for each level. Nevertheless, every employee in the company must be informed about the strategy and its evolution in order to allow the strategy to transform the whole organization. We should be aware that some companies do not communicate their strategy because they are afraid to be copied by competitors. That just actually shows the misunderstanding of strategy execution power and copying execution complexity.

Turnaround a business which “strategy is that they do not have strategy” is complicated. A business that does not have a clear direction and execution of strategy cannot guarantee a profitable future. Therefore, we should be aware of strategy crafting pitfalls in order to make the necessary adjustment into our strategy to build a business able to generate sustainable and replicable profits.

The Lost Link to Make Strategy Work: Sales & Operations Planning (S&OP)

A strategic plan without a strong strategy execution is just a “dream.” We are living in a very turbulent business environment, in which crafting the right strategy is a key activity in the company growth and profitable journey. However, crafting the right strategy doesn’t guarantee the strategy will work. It is well known that many of the strategies that fail are as a result of poor strategy execution. Many organizations have strategic plans and annual business plans (budgets) in place. Nevertheless, the experience said that annual budgets are not enough to success on strategy execution. Thus, let see how we can accelerate and improve the strategy execution using the Sales & Operations Planning (S&OP) – Note: Be aware that some people rename this tool as Integrated Business Planning.

Why the Sales & Operations Planning (S&OP)?

1. The reality says that in companies that don’t have a S&OP process in place, the two core functions of the firm Demand and Supply use to run their own and different plans. The misalignment of the Demand and Supply functions increase the total cost structure of the firm (higher inventory costs, lower productivity, emergency cost raising, etc.), reduce the service level to end customers (stockout, delays, etc.) and last but not least, deteriorate the competitive position of the firm. But the situation uses to be even worse in medium and large firms because the Demand function uses to be divided up to three departments (product/brand, marketing, and sales). The same it’s happening with the Supply function that uses to be divided up to three departments (purchasing, production, and logistics). So, one of the main deliverables of a S&OP is having one version of the truth, I mean one unified plan in which all the main areas of the company are fully aligned. This is so important because any issue at the planning level will amplify the problems at the tactical and operational levels.
   
2. Nowadays, we have a high customer expectations which are difficult to match. The monthly S&OP process is building a more agile and responsive organization which can optimize the use of inventory and other resources, and improve customer service at the same time.
3. Companies with internal plans misaligned use to spend much time and energy fighting internally (marketing vs. sales or demand vs. supply) and blaming each other. Another deliverable of a S&OP is to minimize the internal frictions, and secure the firm energy to increase market share and work internally to improve the company.
4. Likely the root cause of firms underperforming or “satisfactory” underperforming (doing just fine) use to be a lack of coordination between the Demand owners and the Supply owners. Communication between those areas used to be poor with many unplanned events that cost a lot of money to the company, and damage the quality of the products and services. Again, the S&OP process is solving that issue establishing a few planned and coordinated meetings every month with the right people involved.
5. Another characteristic of firms underperforming is that they are struggling with the present. Their processes are not well optimized, so those firms are more focused on solving the issues of the short-term (3 to 4 months) rather than planning the future. However, the lack of planning and visibility after 3 to 4 months doesn’t allow the firm to proactively anticipate future market trends or company constraints. Organizations that are struggling with the present should solve their short-term issues, but in parallel they should invest in developing a S&OP process that will reduce the chaotic and costly unplanned events.
6. It is well accepted that nowadays efficient and market-driven companies are supported for cross functional processes. However, cross functional processes are not working just because there is a quality document that shows the link between different areas. To really make cross functional processes work, organizations need to build high performance cross functional teams that take business decisions rather than functional ones. One of the foundations of S&OP is the creation of those cross functional teams (Demand team, Supply team, Pre-S&OP team, and the Executive team) with regular meetings and change management techniques in place to work as one team with one unified plan. Those high performance teams should have the following goals: planning, performance measurement, accountability, continuous improvement, and bottom-up feedback.
7. Last but not least, firms with a poor strategy execution used to fail to achieve their goal of defining the company direction. A poor strategy execution creates confusion and lack of truth in the Leadership team. Nevertheless, the S&OP will strongly support the strategy execution. First, the S&OP process starts with the input of the Strategic Business Plan which guarantee the integration between both plans. Second, the S&OP is a link between the long-term Strategic Plan and the short-term Budget/Annual-Plan because the S&OP is a monthly operational and financial rolling plan between 18 and 36 months. Third, the S&OP is a tactical plan that additionally to the financial figures shows operational and actionable units of measure to take important execution decisions in the areas of resources, production, inventory, and product/service distribution. Forth, the S&OP plan incorporated performance measures and learning lessons from KPIs with actions plans for continuous improvement the operational and financial performance of the firm in a monthly basis.

What is Sales & Operations Planning (S&OP)?

The S&OP is a tool that was created in the 70s with the purpose of operations planning mainly for manufacturing environments. Since then, the planning tool has expanded its scope to other departments and other industries. But, let see what is the S&OP definition from the APICS Dictionary 15th edition:

“Sales and operations planning – A process to develop tactical plans that provide management the ability to strategically direct its businesses to achieve competitive advantage on a continuous basis by integrating customer-focused marketing plans for new and existing products with the management of the supply chain. Then process brings together all the plans for the business (sales, marketing, development, manufacturing, sourcing, and financial) into one integrated set of plans. It is performed at least once a month and is reviewed by management at an aggregate (product family) level. The process must reconcile all supply, demand, and new products plans at both the detail and aggregate levels and tie to the business plan. It is the definitive statement of the company’s plans for the near to intermediate terms, covering a horizon sufficient to plan for resources and to support the annual business planning process. Executed properly, the sales and operation planning process links the business strategic plan with its execution and reviews performance management for continuous improvements.”

What are the barriers to take the decision of having an S&OP?

I would say that a S&OP is a must have business tool. Although there are some barriers to take the decision to implement it.

1. “This is a supply chain tool.” Yes, you are right, it is a supply chain AND strategic tool. S&OP is mainly a supply chain tool that involves almost all the areas of the company (including finance and human resources). Nowadays, among other things, the higher market competition and lower margins are pushing firms to improve the operational performance (I mean supply chain) to achieve the desired financial performance.
2. “This is a planning tool for manufacturing companies.” It is true that the supply complexity of production environments means that S&OP adds even more value for those firms. Nonetheless, all the companies must manage their demand, and supply of products and/or services to satisfy that demand. So, for instance, let think in a small business consulting firm, that company needs to manage its demand (marketing plan, sales plan, etc.) and its supply (capacity planning and resource planning – consulting hours capacity and how many consultants). So, the tool is useful for not production environment too.
3. “I already have my MRP (Material Requirement Planning) for planning.” Good! Having a MRP in place means that you have a process and a system to assist you with the Supply short-term (3-4 months) plan. However, the focus of S&OP is not just Supply but also Demand. Additionally, the planning horizon is very different because S&OP horizon uses to be between 18 and 36 months. So, MRP is a complementary tool rather than a substitute one.
4. “I already do almost the same with the traditional Budget (Annual Plan).” The budget is an excellent and necessary business tool, but it isn’t an alternative tool rather than a complementary one. In fact, the S&OP is an Integrated Business Planning tool that integrates finance with operations. Although in S&OP operational figures are translated to money, the format is not a P&L format. Furthermore, the planning horizons of both tools are different.
5. “This is a tool for large organizations.” Large organizations take an important advantage of this tool to reduce their complexity and improve their planning process. But be aware that many companies are running their S&OP process in just an Excel spreadsheet. So, the main investing is mainly in one full time person with the capability to run this process. In fact, there are some consultants that recommend initiating the S&OP process in an Excel spreadsheet, and just move to a specific software when the process is clearly defined and stabilized.
6. “This is another fashion business tool.” This tool is in the market for more than 40 years. It is a tool highly demanded it, and software firms like SAP or Oracle has invested importantly to develop S&OP solutions for their customers. Moreover, there are successful consulting firms as Oliver Wight that improve companies’ performance just implemented S&OP projects (they rename the tool as Integrated Business Planning – IBP).

Implementing a S&OP process is clearly reducing the gap between strategy formulation and execution. Even if your business is small or not too complex, you will accelerate the performance of the business.

Annual Budget: Are You Using Budget As a Real Strategic Execution Tool?

Nowadays, most firms have annual budget processes in place. Nevertheless, there are no many of them using a budget process that is fully align with the company strategic execution process. Even many large firms use budgets just as a “merely” finance tool. We have to stress that budget should be an essential tool for turnaround a firm, but in this case budget must be used as a strategic execution tool that really approach, integrate and align all the areas of the company. Let’s review what make a budget a very powerful strategic execution tool.

Annual budget should be an extension of the company strategy

Before presenting the specific company/unit/department budget, a strategy summary (just a few slides)  of the company/unit/department should be present. This is the way to guarantee that the budget (short-term planning) is aligned with the strategy (medium and long-term planning). The strategy summary should respond briefly to the following questions regarding growth:

• What is the company positioning compare with competitors?
• What are our differentiators (strategic sweet spots)?
• What is our cost and/or differentiation (competitive advantage)?
• What is the firm strategy (according to the value disciplines, or the core business type framework, etc.)?
• What are our target customer segments (scope)?
• Where is the company expected to be in 2 years, 5 years, and 10 years (vision)?

Budget is not just related with Sales

Unfortunately, there are some top managers that focus budget “just” mainly on sales. They hyper simplify business success just in sales growth. But sustainable and replicable growth required of other functions as solid operations, proper finance structure, etc. Organizations that focus “just” on sales successfully used “to leave a lot of money on the table” because they do not optimize operations. Overestimated operations should affect the capability of the firm to achieve sustainable growth. I mean the growth of the firm is just support for the good performing of the sales, but operations and cost structure are not optimized. Therefore, if sales growth stop or drop the impact in the organization will be huge.

We must have a detailed list of the annual strategic initiatives for each firm/business-unit/department

Budget is not just figures. The figures must be related to coherent initiatives that show the cause and effect relationships between short-term strategy execution and budget. Just if we get in detail at the initiative level and aligning all the company main areas, we can improve strategic execution skills. Moreover, annual budget it is a good moment to: review KPIs; define what the KPIs target  for the following year should be; and what resources we need from budget to guarantee success achievements.

Cash flow budget should not be define just for the finance area

There are companies that assume cash flow is mainly an issue for the finance department. However, cash flow is a top strategic decision in which all the areas should participate in the planning process rather than leaving finance to decide what could produce short-term misalignment decisions. The most important cash flow decisions are:

Customers days of payment

It is important to align Sales and Finance in this subject because extending the days of sales outstanding (DSO) is equal to additional customers’ discounts. Furthermore, Sales should define if it is more important extending DSO, or reducing DSO to be able to reduce the days payable outstanding (DPO) what should help us to improve our costs structure to support or sales close process and/or sales profitability.

Supplier days of payment

From the financial point of view, we should extend as much these payments. We must be aware than from the operational and strategic point of view, we could be interested to reduce suppliers days of payment to achieve the following objectives: better cost structure because suppliers will be willing to offer better rates to customers that offer better payment conditions; better services because supplier are willing to prioritize good customers (customers that pay in a shorter period and without delays); better finance conditions because the balance is more solid and banks have less risk; and better days of sales outstanding (DSO) because reducing days payable outstanding (DPO) will push us to improve the DSO.

Inventory days

If Sales, Supply Chain and Finance are not properly aligned about inventory we can face issues like the following: Sales promises services that the firm cannot accomplish for the lack of cash flow, Supply Chain import products according to Sales, and Finance is not prepared to pay importation taxes. The company has to pay for penalties (warehousing costs, etc.) for the delay on taxes’ payments. So the cost structure is suffering, and the brand name is damaged.

Budget alignment example

People and structure must be reviewed

In many companies the people review process leading for Human Resources is not 100% connected with the budget process. Probably because there are still companies that in their understanding budget process is a “pure financial” process rather than a strategic one. Indeed, budget process used to be run between mid-September and late-November, although the people evaluation process used to be run from February to March because the main focus is bonus calculation. So the suggestion is making people review at the same time that the budget process, although final bonus calculation can be calculated next year from February to March. At the same time of the budget process the firm should answer at least the following strategic questions related with people and structure:

• How fast is salaries growing compare with profit growth?
• Do we have the correct productivity?
• Do we have the right balance between direct and indirect staff?
• Should we change our current structure (centralized vs. decentralized, and vertical vs. horizontal)?
• How is each member of the team performing?
• What is the provision for bonuses?
• What is the provision for firing under performers?
• What is the provision for headhunters?
• What is the budget for training?
• What are the MBOs?

Aligning MBOs (Management By Objectives) and bonus program with budget

There are firms that start the new  fiscal year and after several months people do not still know what their corporations expect from them. I mean MBOs are not still defined. Even it is worse that people did not participate in the alignment process between budget and MBOs what could create an unmotivated effect in the MBOs because employees can think that MBOs are unfair. On the other hand, we have companies that limit the amount of money that people can obtain via bonus, and they do not use accelerators in the bonus system to motivate high performance behaviors. Those bonus systems that limit the speed of growth could have a “short-term finance justification” but they are strategically unacceptable because it reduces the attractiveness of the firms for top performers, limit employees satisfaction, and reduced the company growth rate.

Monthly and quarterly business and budget review

Well-managed firms used to monthly review the budget and prepare the new forecast for the current fiscal year twice or three times per year. However, many organizations forget to communicate budget and strategy status to the whole company in regular basis (quarterly). If information remain just at the top of the company, we cannot expect the mobilization of the entire company to achieve the budget. So there are firms that pursuing finance confidentiality too much, they reduce the firm speed to get or exceed the budget.

Budget must reflect 100% the most likely scenario

Companies that are in the stock market realize the importance of using the most likely scenario for budgeting. But many firms fall upon temptation to push management to overestimated budget thinking that difficult objectives motivate to work harder and make happier the shareholders. Nevertheless, overestimated budget is a very dangerous decision. Overestimated budget can bring the following problems in the short-term: Main concerning in the shareholders for the gap between actual and budget figures; stressing the team; problems to pay for bonus to high performers because objectives were unrealistic; better employees leaving the company because they are not willing to work in those conditions and they have other better workplaces outside; create cost structure problems because operations make investments to support unrealistic sales volumes; create important cash flow problems because we are using an optimistic scenario.

Making the correct strategic questions about budget

Manager used to ask questions which push people to improve the budget. Common wisdom teach us that budget as objectives should be SMART (Specific, Measurable, Attainable, Relevant, and Timed). But there are leaders who believe that attainable means approximately 10% of probability because they think that this is achievable (there is a probability of 10%) and those “incentive” people to work harder. The reality is for low performers we cannot expect too much, and for high performers they are already working hard. So the result of this approach just used to demotivated high performers. Probably the right strategic questions regarding budget should be to verify the coherency of budget rather than raising objectives too much. For instance in Sales some coherent questions could be:

• What is the average time for closing sales?
• What is the minimum pipeline probability used to incorporate sales pipeline opportunities in the budget?
• What are the additional resources to justify the proposed growth?
• What is the assumption of productivity of new resources in the initial stages (for instance new reps used not to be productive in the initial months)?
• What are the initiatives that support the proposed growth?

Annual budget is an opportunity to learn and questioning our cost structure

There are still organizations that prepare budgets just making the extrapolation of the previous year. Nevertheless, budget is a great opportunity to study the previous year and suggest improvements’ initiatives like travel savings, reducing the number of facilities, etc. There are companies that wait to run under budget to implement improvement initiatives rather than doing proactively.

Questioning company strategy

Sometimes we used to assume that budget must be aligned with strategy, but what about if we have an unrealistic strategy. If there is a misalignment between budget and strategy execution, it is time to discuss if the issue is the budget or it is the strategy.

As we can review, there are many opportunities to improve the   budget process and our strategy execution. Materializing those opportunities can make an important difference in the company performance and turnaround process.

Quick Financial Firms Analysis: Extended DuPont Model

In 1920 DuPont created DuPont Model. Almost one century after DuPont started using this analysis, it still remains a quick and useful tool for analyzing firm’s financial situation and improvements’ status.

The heart of the model is the ROE (Return On Equity) = Profitability x Efficiency x Financial leverage. In this Extended DuPont Model we have added the following features:

1. The model has been extended to add essential information to analyze some of the main risks for the survival of the firm (liquidity and indebtedness). Thus, we have added the following ratios: the current ratio (liquidity), current liabilities to debt (debts quality), borrowing cost and self-financing.
2. We have added some financial tendency information (present and last year information) of a few main variables: Sales, Net income, Assets and Debts.

Adapted from Oriol Amat: Extended DuPont Model

Extended DuPont Model contributions

1. It shows information about the main traditional economic value indicators: Net income, Cash flow, ROA, and ROE.
2. The model is based on ratios that can be easily and quickly created extracting the information from the income statement and balance sheet (annual report).
3. Those ratios summarize the financial situation of the company and allow us to compare easily our performance with other subsidiaries and even with our competitors or best in class firms in our industry.
4. It is a “simple” and quick tool that provides a better understanding of the main accounting variables and how they are related. There are other tools like EVA (Economic Added Value) that approach the value creation issue but they are more complex to implement.
5. It brings some important growth conclusions:

Growth model

• High turnover
• High margins
• High turnover and margins
• No growth model at all

Growth status

• Healthy and balanced growth of all model ratios
• So fast growth (indebtedness and ROA problems)
• Run away to the front (just sales are growing, so this growth without profitability is unhealthy and will likely continue deteriorating the indebtedness ratios)
• Sales issue, but the other ratios are not underperforming “yet.”
• Weak growth (sales and ROE problems)
• Excess of structure (the structure is too big and all the ratios are underperforming)