Strategic planning is clarifying the overall purpose and desired results of an organization, and how those results will be achieved.
If your CFO spent the last several weeks pushing out year end financials and calculating so many numbers that they have all become “insignificant ratios”, pause for a moment to make sure that all of the executives in your company know one MAGIC number that will guide their decisions in 2015.
As many readers of this blog know, my tagline is Achieving Accelerated Growth with Sustained Profitability®. And you may also recall that the secret lies in reversing that phrase. It is essential for the leaders of any enterprise to know what truly drives their profitability. Like quality assurance versus quality control, it’s not just about examining the end result (net profit). It’s about using key indicators much earlier in the process that create and predict the end result.
Let’s use two companies within the same industry as an example. One time share enterprise has a magic number of “2.5″. That number results from a formula that involves the factors that drive their success and profitability. Debt/Equity divided by (Occupancy plus Customer Satisfaction). They closely monitor these indicators and pick up or slow down capital investment based on their magic number.
Say their Debt/Equity ratio has been running at 4.0. Whether that is considered aggressive or conservative depends on the economic season. In their case, if their capacity has been running .90 and their customer satisfaction rating has been holding strong at .95, they would be comfortable speeding up their investment in property acquisition and improvements. 4.0/1.85 = 2.16 which is well below their MAGIC NUMBER of 2.5.
A competitor with a more aggressive land approach utilizes the same components but has concluded that 4.0 is their MAGIC NUMBER. The addition of occupancy and customer satisfaction can’t exceed 2.0, so there is always a firm 8/1 cap on their debt/equity ratio. The CFO is happy about that, by the way. This company tends to focus much more on acquiring assets and less on customer service and occupancy, but when the sum of those two numbers slides below 1.5 they can only afford a 6/1 debt/equity ratio. You can probably imagine the fascinating discussions they have when that happens.
Use of a tailored MAGIC NUMBER captures strategy in a tangible way, involves multiple departments, applies short term results, guides decisions and helps to create a more resilient longer term result for the entire enterprise.
What drives your profitability? What components could comprise a MAGIC NUMBER for you in 2015?
Alright…I admit…I am probably too close to this topic.
Those of you who have known me for a long time know that (although it sounds corny to some people) my personal mission has long been to be “a positive force for economic development.” Think about all of the time and money you and other parents have (and continue to) invest in your children! Once it was clear that I was never going to become a MOM, I decided to invest an equivalent amount of time, money, and effort in economic development to help generate jobs, improve policies, encourage continued growth of existing businesses, support innovation, etc.
Over the summer, I found myself wondering if all of the effort that I and so many other people have put into economic development is working. The economy still has dramatic swings and is incredibly vulnerable. Disincentives to growth of existing businesses stubbornly persist. Jobs seem to bleed through borders like water. Yes…strengthening the economy is difficult but what’s the alternative?
Personally, I am grateful for what I have learned through my 35 years as an economic development advocate. When I hosted a weekly talk show to shine a light on what it takes to keep growing midsized companies, I got to interview and meet 300 of THE most amazing, bright, ambitious people. Serving on chamber of commerce boards, I have been fascinated by the complex blend of diplomacy and influence executed by many corporate CEOs. There are more steps in that dance than in a number choreographed by Napoleon and Tabatha. Most of us must resist the urge to solve problems in our own companies. We provide vision and lead strategy but must depend on our great employees to prevent and solve problems. Sometimes, executives find participating in broader problem solving initiatives is a refreshing change of pace. Plus, Governors seem to appreciate when business leaders find ways to solve problems.
When you have presented alternative approaches to legislators as often as I have, you can’t help but notice that their time is thinly distributed across hundreds (if not thousands) of issues and is often dominated by fundraising and campaigning. Important people are often grateful for the provision of constructive suggestions instead of being subject to yet another diatribe of complaints. Providing expert testimony at a public hearing is very scary the first few times you do it, but having survived that experience, you are better prepared to face media scrutiny as the CEO of a significant business.
Trying to PUSH THE ECONOMIC ROCK UPHILL is not a one person task. I value being part of the collective village of the business community that keeps trying. And frankly, the effort has consistently influenced our employees to also think about issues that are larger than just themselves.
If your business grew by 5% last year, should this year’s goal be 6%? If your segment of an industry has been shrinking by 8% each of the last 3 years, should you scrap your growth goals and only focus on cost cutting? Or are a series of sub goals related to increased productivity, product improvements, and targeted marketing campaigns behind your growth goal?
Our best results have been achieved when clients have embraced transformative goals.
It is much more rewarding to intentionally create a company that is designed to be profitable than arbitrarily incrementally reactively grow into an awkward less profitable size.
When you truly know what drives the profitability of your business, you know to look for more of that. For example, operational excellence can drive profitability. One service oriented business may have operational excellence when it has a 1/2/6 ratio of account executives/project managers/ associates. That company’s growth goals could be based on maintaining that ratio. The question becomes how do we create a company that attracts gross revenue that fuels 6 account executives, 12 project managers and 36 associates? Operational excellence for a distributor might be realized through a 1/6 ratio of hubs to branches or always hitting a specific return on total assets (ROTA).
One of the many responsibilities of an accounting department is to track key ratios. The best CFOs know how to identify and recommend a few critical key ratios that are closely related to what drives profitability for the specific company. And their choice go much deeper than simple gross profit.
The attributes of the sales people can simultaneously be the optimizing and limiting factor when profitability is driven by consultative selling. The sales department may track average order size, closing rate, gross profit, orders per month, orders per sales professional, etc. They may even track the time from lead to close (buying cycle). I’ve seen powerful transformative growth goals result when the VP Sales and CFO confer and create combined ratios (magic number) like Average Order Size X Closing Rate/Length of Buying Cycle. Maybe the optimum Order X Rate/Cycle value is achieved through a specific combination of experienced and new sales people. Maybe the value of their “magic number” goes up when each sales professional has a book of 50 targets instead of 200.
Do you really know the most critical numbers behind what drives your profitability? Could you generate a transformative goal based on a “magic number” created only for your business?
Remember it? Directed by Robert Redford, the movie was based on Steven Pressfield’s 1995 book with the same name. The actors include luminaries Jack Lemmon, Will Smith, Charlize Theron and Matt Damon. This was Lemmon’s final movie which makes it even more important to many people.
In 1931 (during the depths of the Great Depression), the City of Savannah, GA sponsors an exhibition golf tournament with great golfers Bobby Jones, Walter Hagan and the town’s golf prodigy and hero, Rannulph Junuh.
As he caddies, wise Bagger Vance (played by Will Smith) provides sage advice to help Junuh recapture his “authentic swing.” They talked very little about the fairway, sand traps or greens. They talked about post-traumatic stress, the meaning of life, guilt, regret, a broken heart, giving up, accepting responsibility and hiding. You know…light conversation (lol).
As many golfers of today can tell you, finding one’s authentic swing in golf is not just a matter of repetition. Golf is a mental game as much as it is a physical one. When a golfer’s muscles are tight from being angry at work, his/her slice or hook returns on the golf course. When a golfer’s optimism or confidence is compromised, the short game on the green becomes another nightmare. An executive’s capacity to make great strategic decisions is another version of one’s authentic swing.
Presidents of privately held mid-sized companies often don’t have time to play golf or have another similar outlet that offers feedback on whether the president is still centered. It is impossible to maintain your authentic swing when you aren’t centered. Often the all-important feedback comes in the form of poor business results. The president’s loss of his/her authentic swing is taken out on the business.
Sometimes executives just keep showing up when he/she knows he/she is “just not right with the world”. Continuing to show up is important, but just going through the motions can solidify bad decisions (a hook or a slice). Finding what keeps you centered is worth the effort. An executive coach could be your Bagger Vance.
In your life, perhaps you could depend on your brother for corny jokes or your best friend to be there in a pinch. I knew that my father could clearly explain confusing mathematics concepts like asymptotic lines. In my family, we learned to play to win and play by the rules. No cheating was an absolute rule. I could count on that.
These days, playing by the rules can seem to others as being naïve.
To win some online games, players must find ways around the rules and obvious premises. In many movies, shrewd detectives find ways to surface evidence no matter what it takes. Search warrants are often portrayed as a nuisance. For a while, the public seemed to be accepting drug enhanced performance of top athletes. Corporations can beat out the competition by tying one another up in court fighting over patent and trademark infringement. Pirates of intellectual property (IP) win. Even if the court case doesn’t go their way, they can afford to pay the fine because they have sold so many products in the meantime…at a higher net profit because they didn’t have to invest in expensive R&D. This presents a huge challenge to organizations like the International Trade Council (ITC).
Gamification is now being touted as the primary way corporations can engage their millennial generation workforce. What was the highest score last month on the major game being played? How can you beat your highest score? On the surface that sounds exciting, competitive and motivating. But what are the rules, and do the rules matter?
I’ve seen more and more trusted vendors become frustrated by the gamification mentality over the past few years. If their customers expect that you must “beat your highest score” over and over again, how much is enough? Those customers are never satisfied. It can also be demotivating to millennial employees. They initially like the game, but they tend to withdraw if they don’t continue to get praise and appreciation or if it feels like the expectations keep going up and up and up with too little reward. We all know young adults who have opted out of the careers for which they earned higher education degrees. Instead of being a math teacher, one of my nephews has chosen to work at McDonalds.
If your company is considering gamification as a strategic direction…corporate culture, be prepared to look at the concepts of rules, beating your previous high score and the pros and cons of ever-increasing expectations. What will customers be able to count on from you if/when it becomes a game?
No matter what industry you are in, advances in technology influence what your growth strategies should be.
Maybe you don’t view your company as directly related to technology. Perhaps you sell things like paper products, over the counter medications, or canned or bottled foods. The reality is, each year’s flu season drives increased sales for Kleenex tissues, Charmin’ toilet paper, Chap Stick lip balm, TheraFlu, Halls cough drops, Vicks Vapo Rub, Canada Dry ginger ale, Joy Mangano’s cotton and bamboo blend blankets, Hallmark get well cards, and Campbells chicken noodle soup. The flu even impacts which items are purchased from the Home Shopping Network.
If your company is involved with these and similar products, you may not be happy to learn about progress being made by Dr. Rider and his team at MIT, but you do need to know about it. An article by Scott Tarone in the September 2013 issue of TECHLIFESCINEWS shares information about DRACO, which is a double stranded RNA activated caspase oligomerizer that has been successful against 15 different viral infections including the H1N1 flu virus!
If customers tend to purchase and use your products when they are feeling well, you need to know about DRACO too. You might decide to establish higher market penetration goals.
If you don’t think that something like DRACO is relevant, maybe a better question is whether someone from your team should attend the annual CES event. Their advertisement in the Sept 2013 issue of WIRED magazine accurately describes the event as “It’s a Lab. A Social Phenomenon. A Marketplace and a Look into the Future.” This global stage for innovation will be in Las Vegas, Nevada from January 7-10 in 2014.
What your team members read is also important. If your business is influenced by techno gadgets, maybe someone in your company should be reading Liszewski’s Gizmodo blog.
Think about it. The formulation of growth strategy includes rethinking: your company’s positioning, products/services, customers & market, competition, and business model. We all need to be informed about technological advances before making these big decisions. Who is leading and coordinating the research effort for your organization?
The cover of the 09-09-13 issue of BLOOMBERG BUSINESSWEEK proclaimed HOLY SHIP … for good reason. Drake Bennett’s article shares that Maersk Corp. has recently ordered 10 of the new Triple-E cargo ships that can haul 18,000 TEU (standard shipping containers). That is huge! It wasn’t very long ago when carrying 6,000 TEU was remarkable. One Triple-E ship is as long as the Empire State Building is high and can carry 182 million IPADs or 111 million pairs of shoes from Shanghai to Rotterdam. That 25 day trip involves 530,000 gallons of fuel. When you visit Shanghai Harbor, you cannot help but notice the three Triple-E hulls on DSME’s floating docks. At this point, a new Triple-E is entering service every 6-7 weeks.
Although a portion of the readers of my weekly blogs are in ship building, import/export, and/or transportation, I realize that not all of you are. So why should you care that Maersk ordered 10 Triple-E cargo ships?
Maersk is the world’s biggest shipper in part because its leaders apparently know how to read the rise and fall of the economy and spot windows of opportunity. The shipping industry is very cyclical. They started planning to GO HUGE 4 years ago. The 500+ page contract to order 10 Triple-Es (with an option to buy 10 more) was signed in February 2011. It takes a year to build, test, and deliver one Triple-E, so the ships are now launching during the 3rd and 4th quarters of 2013. If competitors try to copy Maersk, their timing would be way off.
This is yet another example of true wealth that can be traced back to actions taken during recessions and periods of uncertainty. 2008-2010 were some of the most stressful years for most companies. Maersk was busy getting ready to buy/fill/launch 10 HUGE Triple-Es. By the way, Maersk did not exercise its option to buy 10 more, but isn’t it impressive that they created the opportunity for themselves?
Although we are not anywhere near the scale of Maersk, we do benefit from the fact that 3 of our 5 related businesses grow more rapidly during periods of uncertainty and/or recessions. That didn’t just happen. The concept of establishing a suite of related businesses (and 2 unrelated companies) was the result of deliberate research, analysis, and negotiations. Fortunately, none of our contracts were/are 500+ pages, like Maersk’s.
What is your executive team doing to read the cycles of the global (macro) economy? your industry’s economy? your company’s micro-economy?
What risk will you be taking to turn the waves of the economic ocean into success?
How many times have you convened with other leaders to do strategic planning and the session starts with the traditional SWOT analysis (strengths, weaknesses, opportunities, threats)? OK, the approach helps board members and executives hear one another, get caught up, and slowly start to think about something other than day to day implementation. But if your organization has been approaching strategic planning this way every year, it’s time for a change! Kill it. Smash it like an ugly bug.
The SWOT approach exercises the parts of our brains that consider incremental change and linear progression. If your last strategic plan includes several “improvement goals” you know exactly what I mean.
Strategy # 1: Let’s improve customer satisfaction or customer retention or net promoter scores by 5%
Strategy # 2: Let’s improve capacity utilization, productivity or efficiency by 3%
Folks, those aren’t even strategies. They are execution targets for sure but we could substitute “do more with less” on everyone’s strategic plan and skip SWOT analysis and the retreat all together. WHY and HOW should you improve these things? What is the strategic logic behind the goals?
Do you remember a few years ago when the Cadillac division of General Motors came up with the CATERA and the cute advertisements said “LEASE A CATERA” “WHO’S LISA CATERA?” What a fiasco that was. In my opinion, that was a blatant example of inside out, incremental, linear thinking. They wanted to save money. They wanted to have a smaller Cadillac. They had access to cheap OPALs. The result was a charade. An OPAL is still an OPAL even if you call it a Cadillac.
Strategy is more about “outside in” thinking than “from what we already know.” Strategy starts with insights about the outside and is about what you don’t already know.
Research about societal trends, buying patterns, new technologies, generational differences, power and influence, etc. is a more powerful way to get into strategic planning than SWOT.
That kind of research can be unsettling for folks who focus on implementation most of the time, but frankly…that’s the difference between executives and managers. This probably reminds you of Peter Drucker’s famous view of leaders doing right things and mangers doing things right.
And stop calling it a planning session. It’s enough to get important people together to do some strategic thinking. How about strategic working (or thinking) session?
Instead of SWOT, could your strategy session with a review of high level trend research. Where is the market headed? What are the challenges/problems people and organizations in the market experience? What do they want (even if it doesn’t exist today) better, faster, and cheaper? Which of today’s problems and complaints could/would/should be resolved in that time? What will their world look like 5 years from now? Take some time envisioning the future…your customer’s desired future.
That step of becoming fully immersed in the improved lives of who you serve raises the bar on your own thinking and helps you temporarily stop thinking only in terms of what your organization is capable of doing today. What role should your organization play in the improved lives of people in your market(s)? What would you be providing to have earned loyalty and rave reviews?
This process leads many organizations to let go of “forecasting” … accepting incremental improvement of what is done today. Back casting from the vision of a better future outside typically leads executives to embrace much more aggressive changes inside. How else would you see that you might need to actually improve efficiency 12%?
“Forty Under Forty” awards have been around for a long time to shine a light on “future leaders.” These days it feels like we need “Thirty Under Thirty” or “Twenty Under Twenty” awards instead.
The National Speakers Association recognizes the trend. One of the keynote speakers at this year’s NSA convention was 17 year old Philipp Riederle. When Riederle was 13 years old, he hacked into his iPhone® to see how it worked and started a blog…which is now read by over 1 million subscribers. These days, large corporations pay Riederle good money to teach them how to reach teen aged and young adult buyers.
NSA has committed to stay ahead of its members and keep embracing new technologies and trends. That’s good because it is important for our professional societies to do what is needed to be as relevant as possible. NSA’s apps provide value. On line education keeps improving. And conventions are colorful, lively, multi-media events.
There’s a relatively new special interest group within NSA for young members (generations X and Y and millennials). A core group of these members sit together with their heads down as they busily thumb their smart phones during main stage presentations. They text ideas, tweet what comes to mind, and friend one another.
What would happen to your product development or marketing if it had to be relevant to millennials today? By the time some companies figure that out, the millennials will be older and folks can meet one another half way. Maybe not.