Management / Strategy Consulting
Strategic considerations and its development has become fairly limited in business. While a full framework is presented from coursework so that a strategist might know what information is necessary for a full strategic evaluation, it is almost never used. I would venture that few have the full set of skills and experiences to present a valuation of possible implementations of a strategy and thus a cost-benefit for evaluation anyway. There was a time when understanding why certain tools for modeling were developed and knowing what the strengths and weaknesses for these financial modeling tools are in different circumstances.
Understanding the IRR assumes that any cashflows earned in a period must be reinvested at the IRR rate in order to maintain that return for the life of a project or investment, else your return decreases. Understanding that the NPV has more flexibility in the projection of cashflows, both positive and negative and that risk can be represented in either the discount rate or the cash flows. Understanding that there is a sound reasoning to using a DCF model due to the considerations of alternative investments, risk to return ratios for classes of investments and the Law of One Price in financial theory. We could go further into needing statistical distributions to work out expectations or even other performance metrics and how the wrong metrics influence poor decisions, but that is not the exact topic I want to cover here.
“Strategy” has become one-sided only concerned with the entity that is seeking a consultant, at best a stale plan to generate more sales or to implement a technology that will surely save on cost, and at worst, a way for the more prominent consultants to have another billing cycle at the expense of the company.
Strategy is not one sided, it is at the very least, considering two competing sides as a strategy must consist of, again, the very least an action and consideration of a reaction. If you are in a monopolistic market set up, then you don’t have a strategy, you are simply attempting to optimize and anyone with basic knowledge of operations and costs could understand this need without needing any knowledge of strategic planning.
Strategy is unavoidably influenced by the framework of both your internal and external factors that include your competitors’ reactions to your implementation of your strategy. You may not see this as clearly in the mega-conglomerates, but if you are a small business competing in a regional market, you deal with it daily.
Strategic Planning: The sequence of interrelated procedures for determining an entity’s long-term goals, aligning with the Mission Statement, and identifying the best approaches for achieving those goals.
Management strategies impact all areas of operations, directly or indirectly, and then through quantitative representation, make their mark on the financials, but any strategic development should begin with the same framework and hopefully support derived from data analytics. As I like to say, you don’t need to reinvent the wheel, but you need the correct tire for the conditions.
Let’s list some of the framework:
Close Up On PESTLE
The real differences in any strategy will rest with the depth of skillsets and abilities of the consultant and quite frankly most are lacking in the understanding of managerial accounting methods and corresponding financial valuation techniques that enable the creation of useful cost-benefit models for decision analysis.
Since all strategy presented requires investment of capital and will impact the financial structure of the company, these investments must be evaluated by some capital investment hurdle rate and the metrics for success of the plan established.
Many strategies only provide guidelines for operating activities but do not determine the activities to be undertaken. Those that do suggest activities are more often than not “technology” centered or “marketing” centered strategies. I would like to remark on these strategies
I prefer to present reality for the range of possibilities that could be; as perceived, you may think of this as optimistic to pessimistic, but as a business stakeholder you should only think of the possibilities as scenarios.
Your questions should always be :
“Can operations continue through the range of scenarios?”
“ What adjustments must be addressed to prepare for the range of scenarios given the probabilities assigned to the scenarios?”
Quick Take on Technology
It has been the belief for some time that tech, tech, tech will save the day. I have seen the implementation or attempted implementation in every area of operations, Orders, AR, AP, Scheduling, Communications, Tasking, Reporting, etc etc… I will simply say this piece …
If the technology does not reduce time on a task or process and therefore reduce costs, the technology SHOULD NOT be implemented. I have seen too often the introduction of “technology” that either duplicates technology already available on another platform used by an organization or a technology that does not reduce time on a process, but in fact INCREASES the time on a task or process.
It is common to have departments decide they want a unique application because they were used to its layout or various options offered, but even a basic business course on pricing and options will tell you that packaging together all necessary applications is more expensive that finding a single application that meets your needs, CRM, ERP, ERM, Accounting, HR, Payroll systems etc. It seems to be the current trend to see “start-ups” in the tech industry only create applications that are essentially communications and video platforms. It is as if these options are not already available on a myriad of platforms that are used by corporate entities, but it is these applications that are often the “tech” that is being introduced. It is also common to see little to no evaluation on the cost-benefits ratios of any of these applications to justify the expense.
The most financially irresponsible circumstance I have heard of to date is one that involved a “Big Four” firm (there is such a history of integrity within these firms) and a billing/collections system for government payments on services provided within the healthcare industry. The system was supposed to increase efficiency and accuracy of collections, due primarily to the method of assigning services to each patient through coding used by government approval systems. It was hoped that there would be fewer returns for inaccurate or wrongly coded services. Mind you, there were only about 5% of total billings that were of issue and totaled under $1million annually.
The system was pushed by the “Big Four” as they could install, train and then mentor for many months and millions of dollars in billing. For some reason the CFO believed that the 5% of collections that were returned were going to be worth the $16million dollar price tag. But that wasn’t all. The staff that was running at 5% returned rate had to be increased by TWO AND A HALF TIMES to use the new “tech” system and still wasn’t able to get the improvement promised. Hey… but the “Big Four” got their billing. Needless to say, four years later, the entire department is now outsourced because the company couldn’t afford the fiasco that was put upon them and accepted with seemingly no cost-benefit analysis.
The moral of the story … Value and Evaluate.
Quick Take on Marketing
In the same vein, marketing strategy.
I will pose a question to you.
When you search for the answer to a question on a search engine, how often do you go past the first page?
I would venture a guess that it may be 1% of the time.
I would pose another question.
How many brands do you follow on various social media sties?
Natural follow-ups.
How many are brands from which you have made purchases?
How often do you click on their posts?
How many brands do you follow only because they post entertaining vids and not for products?
Now consider, how many scrolling pages upon pages of posts are on your feed intermixed friends, family, celebrity, sport personalities, and then brands.
Ponder these questions when someone starts talking to you about “SEO” and the thousands and thousands of competitor businesses that are all being told the same thing as a marketing “strategy.
Marketing is a multi-pronged strategy that should involve much, much more than social media or even the website, but this is where numerous businesses stop.
Marketing is what I call the “Rabbit Hole”. You need to make potential customers aware of your existence, but the key is in finding WHO those customers are through data else you are dumping money into an effort that may yield little fruit.
If you are asked WHO your target customers are, you should be able to lay out socioeconomic defining data and which data is most prevalent across all customers. If you answer, ‘everyone’, then you are not getting the most out of your advertising spend.
That said, even in rough economic times, defining data could be a saving grace to a fully fleshed out marketing strategy involving marketing, media selection, promos and distribution channels. The real questions are, what data to collect, how to collect it and how best to analyze the patterns within it. To simply stop at ad data like clicks or views is not going to be beneficial without reference to closing.
The only stories that I care to relate when it comes to marketing is that claimed ‘creatives’ are a dime a dozen. You need a ‘creative’ that understands data and behavior and you may benefit from expanding your understanding of the general marketing medium as the way to market as commercials are less and less impactful no matter if they are on TV, radio, or a podcast.
Back to our Internal and External considerations for Strategy
Strategies presented without a full understanding of the internal and external factors relevant to a company, competitors, industry and economy is no strategy at all. Certainly, you can make adjustments to operations and efficiencies, but what do you do when the rest of the competitors do the same? A primary element of an industry analysis is that of competitor reaction.
Strategy is never singularly sided, otherwise, what would be the need for a strategy. At the very least a developed strategy always involves an action and a reaction. The best strategies plan out several actions, anticipating reactions, or even forcing reactions, think of games like Chess and Go or the study of game theory.
Too often have I seen strategies implemented from only an internal view that should have also taken a look at external factors in order to offer up a complete evaluation. While it is difficult to anticipate all reactions from competitors, some should be obvious, and others can be tracked over time. Most reactions will be directly related to available resources or the economic environment. If you pay close attention, a competitor’s reaction may tell you a lot about their situation.
Track reactions to your Promos and Pricing and their Promos and Pricing.
Track the direction that competitors are taking product lines, options, designs.
Track joint ventures, it gives directional clues that they believe they can move product lines.
Track media channels they are tracking your media channels and perhaps your ads.
Pieced together you will be able to begin to formulate an outline of their strategy, markets they may enter, how they may attempt to take your market share and perhaps even further insight into how their operations are running and their capital position. It may be worthwhile to keep track of your top three to five competitors.
Strategic Outlining and Development
You will find the intertwining of the Internal and External aspects of strategic planning are unavoidable from start-up to maturity.
Mission and Vision Statements layout your long-term framework and guide your short-term planning for your company.
What is your company’s purpose?
How do you want your company to be viewed?
These statements will be heavily influenced by the industry and current competitors in the industry.
Where can you fit?
Where can you provide value for the customer?
The answer to this will be shaped through your 5 Forces analysis and Market Structure.
How does the industry shape up for profitability?
What type of structure? A Monopolistic Competitive Market structure?
How easy is it to enter the market? Resources?
Are companies price takers or price setters?
What products are offered?
You will find your competitive edge to deliver your value proposition through your Core competencies, R&D, innovation, technology, supply chains, etc. And discover how your competitor delivers through their core competencies.
At this stage a refining takes place as you will decide how to edge into the market utilizing your strengths and taking advantage of discovered opportunities. To stay in the market and continue to improve, being aware of the needs for improvement, the weaknesses and the arising threats from external forces, the PESTLE analysis, will be necessary.
Can you pair your core competencies with the
Competing on Cost,
Quality,
Speed,
Flexibility.
(Only the most generalized “strategies” are presented using the framework above)
o Cost Leadership – Low Cost
o Cost Leadership- Value
o Differentiation
o Focus – Low Cost
o Focus – Value
Cost Leadership
Low-cost provider for given level of volume
Sell at industry average, but optimization allows higher profit
Sell at below industry average and gain market share Significant Capital to invest in production and logistics
High Skill manufacturing
High Skill R&D
Effective, Efficient distribution channels
Differentiation
Product or Service of unique features offering customers value
Perception of value or difference amongst competitors
Premium Price for value or uniqueness
Features
Functionality
Durability
Service Support
High Skilled Marketing Research
High Skilled Sales Personnel
Brand Reputation
Focus
Niche market segment
Quick Response Approach
First to Market Innovation
Highly Skilled Market Research
Tailored Product for Customer Value
High degree Customer Satisfaction
Finally, your internal and external frameworks choices will determine your usage of resources (which may actually be one of your advantages) and bring you to the Value Drivers, metrics and the areas of management to conduct the operations from which you will deliver your value proposition.
These frameworks truly shape your company, your products, the delivery and your investment in furthering your Mission. The frameworks shape your strategy … or quite frankly, should shape your strategy.
Most strategies actually begin from the Value Drivers or areas of management, Operations, Marketing, Finance, Performance, without consideration of where these aspects had sprouted. These strategies are short-sighted and attempt a quick fix to a driver to improve a metric. While metrics derived from these areas offer an indicator, a need, for change and hence strategies, these metrics are actually sourced from the depth of the frameworks.
As an example … Pricing Strength.
What is the Market Structure?
Where does the Industry sit for Buyer Power and Supplier Power?
What are your Core Competencies?
How do you define your product delivery, cost, quality, speed, flexibility?
Your framework defines how much influence you have over drivers and what options you may have to improve drivers.
It may be best to view the metrics from your drivers and aspects of operations as simply the quantitative representation of past strategies and decisions allowable within the framework of market, industry and company resources.
The fact is that frameworks have brought the company to its current point and these frameworks, represented quantitatively by the value metrics, will be the key to develop strategies to improve your drivers and metrics. Both the Internal and External influences must be considered.