Season 4. Season Review - Jeremy Gray

Jeremy Gray – Show 13 Season 4. Season Review
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In the first part of the season we discussed strategic planning. The art of strategic planning I use the word art rather than science as there are no hard and fast rules on how to write a strategic plan.

Strategy is about making choices. Strategy is about focusing on the plans that will provide the best return using the assets available to you. You may have several exciting opportunities open to you so you need to make a choice.

A strategic plan helps you narrow down your choices to those most likely to succeed with the resources we have to hand or can access.
What is a strategic plan? You can find many definitions for a strategic plan on the internet but in its essence a strategic plan describes why your company exists and how it will succeed. It's that simple, why are we in business and how will we grow our company?
 
Mission and vision statements can help align your employees with your company goals.

As an example Let’s look at Tesla, a company much in the news today.
Mission statement: To create the most compelling car company of the 21st century by driving the world’s transition to electric vehicles.
Vision statement: To accelerate the world’s transition to sustainable energy.

Note the clever use of the word accelerate in the vision statement with its association with cars and moving forward. The vision statement also allows Tesla to move beyond cars to power storage solutions.

The focus on sustainable solutions using electric cars and sustainable energy will resonate with many people across the globe. It is this vision of the future that has made Elon Musk, the founder of Tesla among other futuristic businesses such as SpaceX one of the richest people in the world.

Who should be involved in strategic planning

Starting with you as the CEO or business owner. Your involvement and leadership in the strategic planning process is critical. This cannot be delegated and probably you would not want to delegate it even if you could. If you do not have the passion to develop a strategic plan then I would suggest strategic planning is not for your company. Focus your and your employees efforts elsewhere.

However if you believe that strategic planning is right for your company then you have a difficult balancing act to achieve. You must provide guidance on where you see your company going but you must not become the loudest voice in the room. A key part of the strategic planning process is to gather as many ideas, thoughts and opinions on the opportunities that are available for growth. No one person can see every pathway forward for your company. And I repeat that Strategy is about choices and you want to get every possible choice on the table and then choose the most appropriate route for your company. And recall discarded choices should be documented and kept available for reference as they may become the better option if business circumstances change.

So as CEO you must be the leader of the planning team and allow open conversation among the team.

Why should you take the time and allocate precious resources to developing your business. The traditional what is in it for me? Well if nothing else the strategic planning process forces you and your team step away from the day to day activities to look at the broader picture. To remind yourself why you started your business in the first place and possibly reconsider whether this is still the right direction for your business.

More Specific Benefits include:

A clear understanding by all your team of why you exist and where you are going and why? The why is important. If the why is not explained the strategy may be unclear to your employees. I worked for many years in the corporate environment and the why behind an action was often not explained. Some senior managers may take the view that employees do not need to know the why, they just need to implement the plan. Really?? As an employee I do not need to know why an action is to be taken? Without understanding why I might implement the action incorrectly and not achieve the desired objective.

Another reason for strategic planning is that it gives you an opportunity to revisit past decisions and see if there are any flaws in the logic or reasoning behind those decisions. We human beings are subject to cognitive biases, I looked up the definition of cognitive basis on the internet but I did not think they added much to the explanation. Put simply we as human beings make decisions based on our past experiences, what we read and what others are telling us. As a result there are biases in how we make decisions. Learn how to avoid these biases in your team.

A method to reduce the impact of biases and groupthink is to appoint a member of the team as a devil’s advocate. That is someone who presents counter arguments to the proposed strategy. Pointing out alternatives, flaws in the thinking behind the idea under discussion.

Use the strategic planning process to validate the reasoning behind past and current business decisions.

Take the time to gather as much information about the external environment  as you can so decisions can be based on facts rather than assumptions. Get a solid understanding of the market you operate in. Growth Rates, the strengths and weaknesses of your competition, latest developments in technology that might threaten or provide opportunities, upcoming potential government regulations.

Once you have decided on the strategies that are optimal for your company break them down into actions that will lead to achieving the objectives you have set for your company. Review progress against these actions. My recommendation is either quarterly or semi-annually. By doing this you will keep your business moving forward towards the company you want to become.

Another important benefit of strategic planning is it gives you the ability to understand what resources are required and when they will be required to meet your long goals. This is a step that is often missed in strategic planning and in my opinion is a leading reason that companies fail to implement their strategic plans successfully.

Next we looked at why strategic plans fail. Why do strategic plans fail?  Do a Google search what percent of strategic plans fail and you will find a range of percentages, 67% or two thirds seems to be the most often quoted figure. Whatever the correct number is you can be sure that more strat plans fail than succeed. By reviewing the most common causes of failure you will be able to improve your chances of success.

A Harvard Business Review article in 2017 had the headline Many Strategies Fail because they are not really strategies. There are many useful insights in the article so I will include a link in my show notes should you want to read more. The Harvard Business Review is pretty generous, allowing you to read a number of their past articles each month.

The HBR article cites “One major reason for the lack of action is that “new strategies” are often not strategies at all. A real strategy involves a clear set of choices that define what the firm is going to do and what it’s not going to do.”

Document your choices including the why behind the choice. Record the strategies that you rejected, that is the options you did not choose and again why you rejected that choice. If you follow this advice you will have documented a clear set of choices and rejected choices and thus should be able to avoid this reason for failure.

Another cause of failure is that many so-called strategies are in fact goals. “We want to be the number one or number two in all the markets in which we operate” is one of those. It does not tell you what you are going to do; all it does is tell you what you hope the outcome will be.  I am sure you have will have heard the expression that hope is not a strategy.

Lack of follow up: The strategic plan is prepared, reviewed, agreed and documented and then, and then nothing happens. There are multiple reasons why this may occur. Maybe no one is accountable to ensure the plan is implemented. You may hear a statement like everyone is responsible for implementing the strategic plan. But in reality when everyone is responsible no one is responsible. ensure a senior manager or a team are held accountable for execution. I have recommended quarterly or semi-annual reviews to monitor progress. You might want to announce the strategic plan to all employees and commit to providing regular updates on how things are going. There is nothing like public reporting to motivate progress.

Use backward planning to avoid failure of execution. Let’s say your strategic plan calls for you to enter a new market in two years time. Consider everything that must be in place, ready to go, fully functional in the quarter before launch. Items such as production capacity, marketing programs, employees in place, inventory and working capital available, if its an overseas market the business structure etc etc.  You can consider this as your to do list. All the tasks that must be completed to achieve success. Then move backwards quarter by quarter until you reach the present day. This allows you to develop a quarterly action plan that if followed and executed will ensure your strategic objective launches on time.
 
After Strategic Planning we looked at Mergers and Acquisitions. We looked at high profile failures, these are available in the show notes for season 5. Next we talked about deal structure.

There are two common ways to acquire a company, you can buy the shares or you can buy the assets. What are the advantages and disadvantages of each method?

A share deal is generally less complex. You take ownership of the company, its assets and liabilities, all its contracts for example all employee contracts remain in place, there are no contracts that need to be assigned to the new owners. To suppliers and customers the acquisition is more transparent, not a lot changes from their perspective they are still dealing with the same people, paying into the same bank accounts etc.

In an asset deal in contrast as the name implies you buy the assets including the customer lists but every contract has to be assigned to the new owners. Every employee has to sign a new employment contract, every customer under contract has to agree to transfer the sales contract to the new owner, any assets owned or used under a leasing contract also need to be changed, yes even down to the photocopier lease.

If an asset deal is so much more complicated why would any buyer consider an asset deal. The reason lies in my earlier description of a share deal by buying the shares you take ownership of all the assets and all the liabilities. All the liabilities, you will be liable for all outstanding claims, all future claims any legal penalties etc against the company from the day it started.

I have done both share and asset deals and the decision on which is better is based on what is referred to as  the length of the tail. This is not the length of the tail on the site dog but how long will it take for any liabilities to become apparent. You should also factor in the potential cost of any liabilities.

Chasing the right target is essential. The target company must be one that can be integrated into your organization. This means it must be of a manageable size, closely aligned with what you and your company does today and a cultural fit.

Size really means not taking on more than you can digest. Some experts suggest no more than 50% of your business size but I have seen larger percentages succeed.

Having a target that operates in a similar business segment obviously increases the chances of success. You understand the industry, the channels, the competitors – you know the business.

Cultural fit is more difficult to assess but meet the owner or key managers to understand their philosophy of doing business.  If they focus on low cost and minimal service and your company has a high value added culture, this is not going to work. That is obviously an extreme example but to take the time to understand how they do business and whether it matches your company style. And this is the time to do a little external background research, hire a professional company to make enquiries about the target's reputation within the industry. Do they act ethically? How is the owner or the key managers perceived?

How do you value the company?

3 common methods for valuing ongoing businesses are:

Comparable company analysis (also called “trading multiples” or “peer group analysis” or “equity comps” or “public market multiples”) is a relative valuation method in which you compare the current value of a business to other similar businesses by looking at trading multiples like P/E, EV/EBITDA, or other ratios. Multiples of EBITDA are the most common valuation method.

Precedent transactions analysis is another form of relative valuation where you compare the company in question to other businesses that have recently been sold or acquired in the same industry. These transaction values include the take-over premium included in the price for which they were acquired.

Discounted Cash Flow (DCF) analysis is an intrinsic value approach where an analyst forecasts the business’ free cash flow into the future and discounts it back to today at the firm’s Weighted Average Cost of Capital (WACC).

If multiple valuation methods are used they can be plotted on a simple chart – sometimes called a football field chart.

Initial offer to seller to be in the form of a non-binding letter of intent. This should include Scope of the acquisition and terms. Conditions of offer these are usually a) Subject to Due Diligence b) Operates in a normal manner.  C) Guarantees, Reps Warranties Normal closing adjustments etc and d) Subject to financing Normally you would want an Exclusivity agreement, a non shop agreement, usually around six months.

Integration is key  Successful acquisitions require a focus on integration from the very start

Why are you making the acquisition?

Technology -  could be cultural issues? What is the objective of the owners of the company

Channel – What are the challenges of merging channels? How will you ensure that the opportunity is maximized

Synergies – Revenue – are the sales cultures similar? Cost – often results in employees losing their jobs? How will employees react? Existing employees have inside track. But are they best for the long term?

Synergies how will they be achieved? Have a clear plan – you are paying for them so they must be achieved.

Forming an integration team. Start about 12 weeks before the expected close.

Integration manager – need a clear leader. As owner you need to remain close to the deal.

Involve everyone you can think of – over communication is better than under communication.

Objective is ensure that each function is fully informed about the deal, they have their questions answered and each person understands what their role will be in the integration process

Hold regular meetings – weekly will probably work. Minutes and action items circulated and reviewed at the start of each meeting.
Use a checklist to ensure every item is covered – a typical check list has 150 to 200 items on it.

Timeline helps make the manageable. Typically 6 months – 3 months prior to closing to 3 month after closing. Things will get very busy during the closing process – ensure you have the resources.

Identify key employees in the target company. If it is an asset deal they will need to sign a new employee contract. Make this a precedent to closing.

Initial objective post closing – keep the company running: Employees get paid. Customers know how to place orders, Suppliers continue to provide materials and services

This must be your focus – avoid distractions. Do not rush the integration process. Safety must be a priority.
 
After M&A we moved onto Financial Planning and Analysis.

As your business grows the more complex it becomes and the harder it is to understand what is driving your business performance, good or bad. But this understanding is vital to moving your business forward and this is where FP&A comes in.

A good FP&A function is a profit center not a cost center. Many CFOs are surprised when I make this statement. Traditionally Finance has been seen as a cost center but FP&A should add value to your business. If not why hire an FP&A person or team? You would not hire a sales person unless they were bringing more value than you are paying them, or a manufacturing operative. FP&A is not legally required, you do need a finance team to keep the books, ensure taxes are paid etc. But FP&A is optional.

The challenge in many companies is that FP&A delivers little more than a budget that quickly grows stale.  That is unacceptable.

The best-performing organizations use FP&A to drive business outcomes, not just to budget spending or forecast sales and expenses.

They do more than predict desirable results; they develop rigorous, well-conceived plans to deliver those results.

One of the keys to that is linking operational and financial planning. To use a simple example, a best practice FP&A company will recognize the relationship between productivity and cost of goods sold (COGS). If the company establishes a target of increasing earnings by a specific dollar amount, it will assess the required productivity gain necessary to reduce COGS and increase profitability.
This underscores that financial projections aren’t divorced from operational planning. In fact, it’s just the opposite: Financial projections are seen as worthless without an operational plan to achieve them.

In modern thinking FP&A now sits between the financial leader and the operations leader. The CFO and COO in lager organizations. FP&A should support the entire organization. Helping sales in pricing strategies, R&D in goal setting and the management team in decision making.

A sign of success is when no manager will hold a decision making meeting without a member of the FP&A present.

What level of accuracy is acceptable? It may be surprising but in the field of forecasting there is a model called the naïve forecast. At its simplest the naïve forecast assumes that tomorrow is going to be very much like today. That the status quo will continue and nothing much will change. This might seem simplistic or naïve but over the short term it may be an acceptable forecasting technique. If the industry you operate in is relatively stable and change comes slowly the naïve forecast may be all that is required. It is a case of effort over reward, or cost versus benefit. Will a more detailed model deliver a forecast that enables an much better decision and thus outcome?

The level of accuracy required depends on circumstances. In supermarkets the demand forecast accuracy for short shelf life products needs to be more accurate than demand forecast accuracy for products with a longer shelf life. If a can of baked beans sits on a shelf for a couple of weeks there is little harm done much beyond using a  little bit more working capital than needed. If a head of lettuce sits in the chiller for a couple of days it is either going to have to be thrown away or marked down significantly to get it sold.

Keep Budgeting and Forecasting Flexible

Rigid forecasts and budgets aren't very useful. Things change as the time progresses, and you need to be able to factor in those changes and how they will affect your business. Continuing to base decisions on the best guesses made months prior can lead to faulty and costly decisions. Keep in mind the inertia basis we have talked about in the past. In addition, holding employees to metrics based on out-of-date information is counterproductive and frustrating. Building flexibility into your budgeting and forecasting will allow for more accuracy and better results in your business.

Why use a model as an aid to solving business problems? As an action orientated entrepreneur there is a temptation to jump to a solution when presented with a problem. Unfortunately, this often leads to short solutions that soon breaks down or creates other unforeseen problems within the organization. In today’s show we will explore how the use of problem-solving models can lead to robust solutions that fix the issue for the long term without disrupting other parts of your business.
 
Key Issues - Owner Perspective:
By adopting and encouraging the use of problem-solving methodologies you will provide a framework for your managers to make better decisions. Managers are often limited in their ability to make good decisions as they may not have a full understanding of the business. How often has a manager presented to you a flawed solution to a problem? You have had to ask them, have you thought of this or that? Only to see that they quickly recognize they have missed something important.  By using a structured approach, you can avoid some of the consequences of poor decisions.
 
You can contact me via:
Jeremy@business-in-asia.org

Or schedule time via Calendly:
https://calendly.com/3-continents-consulting

My websites include:
https://business-in-asia.org/
https://thedentistscfo.com/

My LinkedIn URL
https://www.linkedin.com/in/jeremy-gray1

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