Monetary Wisdom - March 2008

By Charlie Ragland

Most companies are looking to increase sales and improve profitability but many don’t know the best course of action to take. Many companies have a conceptual strategy but have failed to establish a specific course of action. Business strategy is a key. Business owners need to know who their customers are, what their competitive advantage is, why customers buy from them, how they plan to grow, how they measure success, and how good they are at making changes when external forces change.

Most companies can’t succinctly define their competitive advantage and are not sure how to create one. Many have lost sight of the changing needs of their customers or new competitive alternatives. These companies believe that they just need more sales. But increasing sales is not always the secret to improving financial performance. Financial performance is the result of many interlinked decisions with anticipated and unanticipated cause and effect. 

The most successful companies invest in a planning process that establishes a business direction and focuses on specific strategies and actions that will improve performance. The strategic plan or business plan will serve as their road map to guide the performance of their business. 

“Tomorrow always arrives. It is always different. And even the mightiest company is in trouble if it has not worked on the future. Being surprised by what happens is a risk that even the largest and richest company cannot afford, and even the smallest business need not run.” Peter Drucker

A common business planning approach is to focus on six key areas: vision/mission, internal analysis, external analysis, strategic options, execution, and measurement/evaluation.

Vision/Mission—The vision and mission statement work together in setting the direction for the business. The vision focuses on the future direction of the business and answers the question, What do I want my business to become? The mission statement defines the business today. 

You should develop a compelling mission statement that appeals to your employees’ sense of purpose and accomplishment. Your employees need to believe that they can accomplish their personal goals through their work in your organization. They must believe in the future. The harder they work, the more successful and secure their future will be.

While many executives establish the direction of their business during executive retreats, successful entrepreneurs involve as many people as possible. Having your team understand and embrace the direction of the business will enhance your success rate and financial performance. Everyone needs to understand their individual role and how it impacts the financial performance of the business.

“If you’re not faster than your competitor, you’re in a tenuous position, and if you’re only half as fast, you’re terminal.” George Salk

Internal Analysis—The internal analysis is the process for looking deep inside your organization and determining how you compare to the competition. Define your core strengths and weaknesses. Here are some areas to consider:
• Examine your key functional areas—management, marketing, finance/accounting, warehousing/logistics, sales, and information systems.
• Determine your strengths—e.g., product line, customer service, experienced employees, financial strengths.
• Identify your significant weaknesses—e.g., training, computer systems, customer interface, Web presence, financial structure, sales. 
• Highlight your strengths. 
• Take action to improve your weaknesses. 
• Determine the highest return on your internal investments. 

“Nothing focuses the mind better than the constant sight of a competitor who wants to wipe you off the map.” Wayne Calloway

External Analysis—The external analysis evaluates opportunities that can benefit your business and threats that should be avoided. How are you positioned to address the external market? What are the trends that may impact your business? The key is to be faster than your competition in identifying and responding to changes in the external market.

External forces that can impact your business are grouped into five broad categories.
• Economic forces—interest rates, credit availability, consumer spending, inflation rate, unemployment trends.
• Social, cultural, demographic, and environmental forces —trends that shape the way we live, work, produce, and consume. They include consumer education, the aging population, the increasing influence of minorities, and the environment. 
• Political, governmental, and legal forces—changes in local, state, and federal laws, regulatory agencies, and special interest groups. They include government regulations, mandatory recycling, tax law, and import/export regulations.
• Technological forces—the Internet is changing the way business is conducted in terms of shorter product life cycles, new forms of distribution, and changing traditional geographical markets.
• Competitive forces—new competitors, increased competitive rivalry among existing firms, and the strength of the buyers. These can impact your relative competitive position. 

Industry performance will vary and the importance of individual trends will change over time, but the collective analysis of the business market will increase your understanding of opportunities for growth and potential threats that can have a negative impact on your business. 

“The idea is to concentrate our strength against our competitor’s relative weakness.” Bruce Henderson

Strategic Options—Once the internal and external analyses are complete, a number of different actions and opportunities will present themselves. Evaluate each option against a list of consistent criteria in order to rank the relative attractiveness of each course of action. 

The goal is to strengthen core competencies, improve weaknesses, minimize threats, and take advantage of growth opportunities. Always evaluate your strategic options based on how well the strategy matches your firm’s skills, resources, and capabilities.

“The leader’s role is to make sure that the business managers have the skills, resources, and capabilities necessary to execute the company’s business strategy.” Larry Bossidy

Execution—Without a good execution plan, all strategies are equal. In developing a plan for improving the performance of your business, the challenges of execution are often overlooked. Does your firm have the skills, resources, and capabilities to execute the plan? 

Key steps in the execution process include the following.
• Align, motivate, and execute.
• Team execution on a daily basis.
• Ensure everyone in the organization understands the business direction and how their specific role is important to the strategy’s success and the future success of the business.

Measurement and evaluation—Measure your performance and strive to make adjustments. Develop a balanced scorecard, display it visibly in the organization, and track your performance to goal so everyone can see the progress on a periodic basis.

The balanced scorecard approach highlights four or five key measurement criteria that significantly impact business performance. Everyone in the organization understands each criteria and how their individual responsibilities impact the attainment of the goal.

Common scorecard criteria include sales, inventory levels, cash flow, and income. Business performance (the business scorecard) is a measure of the effectiveness of how you implemented or failed to implement your plan.

Developing a focused business strategy will move your firm closer to meeting your business goals.  

Copyright 2008 Floor Focus 

Related Topics:Armstrong Flooring, Interface