In my last post, I wrote about why operating and strategic planning is important to businesses. Today's post discusses what a good strategic and operating plan looks like. It is not a short blog post. I found that all the other articles or blogs written on this topic tended to be very high-level and highlight "what" needs included in a strategic plan, but not "why" it should be included or "how" the area should be done and relate to the other areas. This blog attempts to give you a clear picture of how to creat an effective strategic plan that will drive business results and provides some great examples to make it relevant for business owners (#strategicplanning #operatingplanning #drivebusinessresults)
First, a story. When I was a young twenty-something, I had just graduated from college and had accepted a job at General Electric's financial management program, which was a 2-year rotational finance program aimed at exposing junior finance employees to various aspects of finance in the company and developing their skillsets for more senior responsibility. Although I'd been hired by the locomotive division, then out of Erie, PA, my first assignment was based out of GE's global headquarters in Fairfield, CT. At the time, each of the divisions would pick from their top "FMP's" (what we programees were called) and loan us out for one 6-month rotation to assignments at corporate. It was viewed as a special reward of sorts since you would undoubtedly get exposed to the real top-dogs that were based there. Yes, it was my first rotation, but I'd worked for my hiring division for 2 summers leading successful projects and was something of a known quantity. As a result, I believe my managers assumed I would not do anything to embarrass them! So lucky I was.
In one of my first weeks there, I learned that the corporate FMP's were allowed to sit-in the weekly Financial Planning & Analysis (FP&A) sessions held by GE's FP&A leader and his staff. For perspective, this guy was something of a legend. He was in his mid to late 60's and the right-hand man to the CFO. The definition of FP&A is the "budgeting, forecasting and analytical processes that support an organization's financial health and strategy." Indeed he did own all of this but in layman's terms, his team's job was to consolidate and understand the constant streams of financial information coming in from 12 different divisions, then figure out based on all the risks and opportunities those divisions faced, what the impact to the company might be in the next quarter and year, how the company might strategically pivot based on that information to maximize shareholder value, and help our CFO and head of investor relations communicate to the street. We were talking about over $125 Billion dollars of revenues in 2001 and unbelievable complexity. Add to that the then-recent scandals and failures of Enron and WorldCom, meant incredible scrutiny on corporations and investor demand for more and more information. This is the guy whose job got tougheras a result. He was the man for the job though, having done it for 10 years already and been a trusted advisor to Jack Welch for the last 20 years of his CEO leadership to the company. That was his job. Our job, as FMP's, was to go be flies on the wall and soak in as much as possible...Like young Luke Skywalker(s) meeting Yoda.
During these FP&A sessions he calmly reviewed information from his team, asked questions, directed follow-ups and usually ended up telling a story or two from his vast experience. Like children listening to the sage, village-elder...we did soak it up. There is only one story I remember to this day and it had a lasting impact on me as a future finance leader. I'll recant it here as I remember it, qualifying that this story is a memory from 20 years ago so some of the details may be off a bit, but the moral of the story is what is important.
GE being one of the biggest companies in the world and famous in the 80's and 90's for its ability to consistently hit targets, it was not a surprise when very senior government budget offices invited our FP&A leader for a visit to talk about GE's FP&A process. And so he went, the meeting starting with welcomes and all the usual pleasantries, the government personnel indicating they were hoping to glean learnings that could be applied to our government. Getting down to brass tax, our leader said something to the effect of, "GE starts with goals. We want to be #1 or #2 in a specific market; we want to develop a specific technology; we want to expand to a new global market etc. The government has goals too. For example, you probably want to improve roads and bridges in a certain area of the country, develop better education here, and so on." It was at this early point in the discussion that the government personnel stopped the GE leader and said something to the effect of, "Ahhh, you see I think this may be where we're different. You see we usually start with a budget number and THEN figure out how we're going to spend it." The meeting continued from there but with very little effect. You see, it's critical to allocate resources and plan around goals. If resources are allocated without goals in mind, resources are wasted. The destination (see last blog) is the key to outlining a map that will get you there.
With that, the strategic plan is where all this starts. This is the place where you state the goals and outline the strategy to get there. Every business should have one and it doesn't need to be overly complex, but it should have six fundamental areas.
Mission and Vision Statements
A mission statement summarizes a company's purpose, focus, and objectives. This statement tells everyone "What" you do and "How" you do it. A vision statement states the aspirational goals of a company and describes how they desire their company to impact their community or world around them. This statement is more inspirational and should serve as a guide to which internal decisions should align. This statement tells everyone "why" you do what you do. A lot of companies have one statement that encompasses both these goals. All companies, big and small, should really have one for a couple of reasons. Internally you want to rally your resources around a single purpose and idea and externally this helps you differentiate your company from others and build a brand image consistent with your company purpose.
Example from Nike:
Mission Statement: Create groundbreaking sports innovations, make our products sustainably, build a creative and diverse global team, and make a positive impact in communities where we live and work.
Vision Statement: Bring inspiration and innovation to every athlete in the world.
The mission and vision of Focused Finance Solutions (my mission and vision) is:
Mission Statement: With unyielding integrity and superior technical skills provide outstanding financial guidance to my clients for the betterment of our companies, employees, communities and families.
Vision Statement: Make work a challenging, rewarding and fun place to play.
Core Values
Core values are the beliefs and behaviors that will enable your company to achieve your mission and vision. One of the most frustrating things to managers and owners of small businesses is actually managing employees when behaviors need improved or corrected. They don't communicate the way managers want them to, they can't commit to or they miss deadlines, their work is sloppy and the manager is always correcting errors, etc. A manager will tell me about a situation in which a specific employee behaved inappropriately in a meeting or with a client. Yet when I ask if he/she gave the employee feedback, the answer is almost always "no"! Giving feedback is also one of the most challenging things for managers to do. The manager doesn't know how to give the feedback, or he/she has never done it before so he/she thinks it would be odd now, or the manager believes the behavior is part of the employee's "personality" and therefore unchangeable or doesn't want the employee to be upset. Unfortunately, if you don't start training employees on how you want them to behave, they will never change their behavior. In turn, managers then end up taking on aspects of employee jobs that frustrate them instead of developing the employee to perform in the appropriate manner. And it’s not just to management’s benefit that you develop your employees' behavior. It’s for the employee! Most employees want to know how they are performing and how they can do better. Providing feedback shows that you recognize their efforts and are interested in developing their performance. Thinking about, documenting and communicating your core values is a way for you to unapologetically start this process in your company. You want all your employees to model your core values, so they should be communicated and used as the basis for launching your employee performance assessment process (a topic for a different blog).
Core values can and probably should change over time. As a long time employee of GE, I watched the company review and change its values over time. When I started with GE, one long-held value was that employees should "Demonstrate...the "4-E's" of GE leadership: the personal Energy to welcome and deal with the speed of change...the ability to create an atmosphere that Energizes others...the Edge to make difficult decisions...and the ability to consistently Execute". These behaviors were focused on operating and executing with gusto. The company was growing in size and complexity and it needed energetic people who could get "it" done. Over time though the company changed its desired values to focus more on the need for innovation. The former behavioral traits were updated to new ones like "imagination, courage, inclusiveness, and expertise". This enabled the company to have more cultural sensitivity and tap employee talents and markets internationally. I'm pretty sure they are different now as well. The point is, your core values, when communicated and integrated into employee performance assessments should help propel your company towards your mission and vision.
Macro and Micro Business Assessment
You need to be able to assess where your business and its products and/or services sit in relation to forces that could change that position in the world, for both good and bad. Doing this not only demonstrates to any external parties (like bankers or investors from whom you may be seeking capital) that you have thought through this but should also drive the key points (goals) of the company's long-term agenda, which in turn, should be aimed at ensuring competitive position and advantage. This in turn should drive short term operating plans and goals. There are two models used for this assessment: one more prevalently discussed online and one I like better because I find it is more robust.
The model more prevalently discussed is the SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats). The one I like better is what I call the Porters 5 "Plus" Analysis. Truly the Porters 5 "Plus" can be put into the SWOT format, but I think seeing all the factors listed helps you think through areas that you may miss in a SWOT analysis. The "Porters 5" model (excluding the "Plus") is an assessment of how your business is positioned in relation to these 5 micro forces:
1. Competitive position: What is the number and diversity of competitors? What is the industry concentration and growth rate? Are their quality differences among competitors? Describe brand or customer loyalty. What are the switching costs to customers? What are the barriers to exit?
2. Bargaining power of suppliers: What is the number and size of suppliers? What is your ability to substitute/change suppliers?
3. Bargaining power of customers: What is the number and size of customers (orders)? What is the customer industry growth rate? How price sensitive are your customers? What is the customer's ability to substitute? Are there switching costs?
4. Threat of new entrants: What are the barriers to entry (capital requirements, government policies, cumulative experience, access to distribution channels)? Are their economies of scale and have your reached them (how long does it take)? Are customers so brand loyal that new entrants have an added disadvantage?
5. Threat of substitutes: What are the number of substitute products available? What is the buyer's propensity to substitute? What is the relative price performance of substitutes? What is the perceived level of product differentiation among substitute products? Are there switching costs?
If, for example, your analysis shows you have a customer that buys 80% of your output and your product is poorly differentiated from other substitutes, you might have 2 goals for the near future: develop new customers/markets and develop products that can decrease your threat of substitution. To accomplish the first goal, a specific action plan may be to hire more sales folks or build a new channel to market through distributors. To accomplish the second goal a specific action plan may be exploring specific product inputs that make your product life longer than the competition. Those actions, in turn, have associated costs and returns on investment which should be modeled in both long-term and short-term financial projections.
The "Plus" of the Porters 5 "Plus" is an assessment of macro-environmental factors and how they impact your business. These can be just as important to your business survival and competitiveness as the micro factors. There are 6:
1. Economic conditions/sensitivity: Do you sell a product that people tend not to buy in poor economic times? What is the economic outlook and how does that impact your projections?
2. Political factors: Think "Facebook". Do you sell to governments and municipalities? Is your political party a factor?
3. Legal/Regulatory factors: What are the regulations being discussed that could impact your business? e.g. a new minimum wage? changing healthcare costs? etc.
4. Environmental factors: Do you make a product that requires EPA or OSHA oversite? Are the costs to comply with those regulations increasing/decreasing?
5. Technological factors: How has technology changed your product/service space over time? Are there industry advancements underway? Is your company developing them or is someone else? Just think "Kodak".
6. Sociocultural factors: Do you have brink and mortar stores, but your target market is a teenager who increasingly shops online?
The above are just examples but can also aid you in your long- and short-term planning. As an example, if you manufacture yachts and there is reason to believe the economy will hit a downturn in the next 2 years you might hold off on plans to spend $20MM on a new operating facility or on new operating equipment. From this assessment, you should not only have several goals outlined but you may also develop specific flags/news feeds that you want to keep in your line of sight which tell you if you've hit a point where you should green-light or red-light a project or resource allocation.
Value proposition and Competitive Advantage
I am not a marketing or product expert, however as the "finance guy" I can tell you that understanding and intentionally working your product and/or service value proposition is critical to maintaining and/or building a competitive advantage over the long term. It is also a key to directly impact your bottom line in the short-term. Think of your products/services as a three-legged stool. Products are differentiated against 3 main attributes (the stool's legs): quality, price and time (is it going to be available when it is needed). If you have superior quality, lower price, and can deliver any quantity in its needed timeframe, then you have a very strong stool versus your competitors and probably an easy time drawing customers and growing sales. If you have lower quality than competition but a lower price and comparable delivery your stool may be a little wobbly but still a sound sitting devise. You have competitors that beat you out when quality is their main buying focus, but you win with those customers that are price sensitive buyers. If though, your competition comes up with a way to lower price and maintain quality, your stool will fall apart. Your company should have a firm understanding of how your product/service compares to the competition (and its substitutes) with respect to the series of product attributes most important to the customer (quality) and with respect to price and time. The analysis should show that price makes sense with respect to quality and time assessments. If it doesn't you either have a problem that needs to be fixed or an opportunity you should capitalize on.
Example 1: Your quality analysis shows that your product underperforms competition in several categories. Your price analysis shows that you are 5% above the competition on "an apples to apples" basis. Your time analysis shows that you and your competitors have roughly the same delivery capabilities. You have a Price/Quality problem. If you can't improve and demonstrate that improvement in quality to your target customer and your customer switching costs are low, it will not take long for your customer to go elsewhere. You need to fix your price until you can get your value proposition in line. A decision to drop price is horrible but it's better than getting nothing when your customer walks away. This is why a value proposition needs looked at often vs what's going on in your competitors' camps.
Example 2: Your quality analysis shows that your product out-performs competition in several categories. Your price analysis shows that you are 5% under the competition on "an apples to apples" basis. Your time analysis shows that you and your competitors have roughly the same delivery capabilities. You have a Price/Quality opportunity. Absent any other reasons, you should justifiably raise your price. Yeah! This positive impact goes directly to the bottom line.
Now let's talk about the "apples". "Apples to apples" comparisons of products are sometimes challenging to translate into financial terms, but if they show your product provides clear better value to the customer vs. competition it can be the most effective tool for your sales. Also, in some situations, they can provide you a negotiating tool to move a customer to a "yes" vs an alternative product purchase.
Example: In a prior corporate life, I held financial responsibility for a business that was trying to sell a product which from a price perspective was maybe 20% higher than the competitive product under our target customer's evaluation. However, over time we were able to show that our product would result in much lower maintenance costs. The financial value proposition showed that our product was, hands-down, the way to go. Unfortunately, this by itself still wasn't enough for the customer to say yes. Why? This customer had a capital budget and year-end cashflow constraint that prevented them from saying "Yes" to the higher priced product. The customer's management was more interested in their short-term cash-flow which would be impacted by the cost of the upfront product purchase, than with the savings they would feel in their maintenance budget over time. To close the deal, we decided to offer a partial extension of payment terms. The two keys enabling us to do this were that 1) the customer did not represent a credit risk and 2) the margin on the product was enough to keep us, as the seller, in a cash-flow positive position until the extended payment was received. The customer agreed to pay 2/3rds of the price prior to delivery. By extending the final 1/3rd payment, we were able to solve their cash-flow timing issue and align the final 1/3rd payment to the next year when they would feel the first maintenance savings. In doing this we beat the competition in both long-term and short-term value propositions. This is where the value proposition and finance can directly drive sales in the short term.
Long term and Short-term goals
By now, you should see how all the prior items discussed should be shaping your specific long-term and short-term goals. People say that long-term goals should be those items you want to achieve in a 3-5-year timeframe. In my experience, plans change drastically from year to year based on what actually happens, so a 5-year plan can be pie-in-the-sky. I recommend a 3-year plan, but investors/banks may ask for longer, so do what you need and makes sense. All your long-term goals should 1) align to your mission/vision, 2) make sense given your current micro/macro business assessment and to where you want to move your position in that assessment, and 3) align to your current and aspiring value proposition. Your short-term goals (1-year) should be a subset of those long-term goals and reflect intentional steps (investments, reductions) you are taking on that long-term journey. It is important that the short-term objectives be what people call SMART goals: Specific, Measurable, Achievable, Realistic, and Time-bound to that year. Action plans should be set around each short-term goal that reflects this and which can be translated into Financials.
Financials
I find it makes most sense to develop your short-term financial plan first. You can usually see with more detail and clarity the costs/returns associated with initial actions you are above to take vs those that are further out on the time horizon. It makes sense to model those in the short-term making your best higher-level assumptions for the long-term plan after doing so. The short-term plan is what I call the "Operating Plan". This should be done on a monthly basis so you can compare your results and assess performance periodically, making adjusting decisions as you drive your business through-out the year. The amount of detail will depend on your goals. If you have a long-term goal to be #1 in a new country in year 3, but you have yet to make a sale in that country. This year's goals may include initial orders of $10,000 per month starting in September, with first shipments and sales rolling out in December. To generate the orders by September, you may need to hire an area sales manager in March (Cost from the month of assumed hire). Separately, if you anticipate a downturn in sales due to outside economic forces you may budget sales and gross margin down 10% ask all your administrative budget owners to cut costs by 10%, telling them they need to show you the plan to achieve it. Whatever the level of detail, your operating plan should have clear assumptions or details so results can be understood and acted upon.
What exactly should your financials include? Answer: an income statement, cash flow statement, and balance sheet and usually orders and backlog.
After completing the 1-year operating plan, you should roll forward the following 2-4-year financials on an annual basis, adjusting using higher-level assumptions to reflect the impact of your goals and/or other assumptions in those years.
Having done the above, you now have a set of financials that should be reviewed in total ("the financial roll-up") to see if they make sense. You have baked all your goals into the plan, but does the financial roll-up show you don't have the cash to do everything you want in year 1 or year 2? Does the plan show you need to ask for capital, but doing so would place your business under too much strain? Here is where you need to rack and stack your goals and investments and/or challenge cost areas where you think necessary. I am a fan of comparing investments in 4 main categories. 1) Must Do: Strategic or customer committed. These are those projects/investments that if you do-not-do, will have a severe detrimental business impact. You must do them to stay competitive or meet a compliance, legal or contractual obligation. 2) Carryover Projects: These are investments that were started in prior years and require investment this year in order to bring them to completion. It should not be a foregone conclusion that these monies will be spent, so project owners should show you where these projects are with respect to original investment assumptions on cost and anticipated IRR and payback years. They should also be reviewed with respect to your strategic plan to see if they still align with the business's strategy and objectives. Assuming they do, they will be part of your planned budget. If they are no longer relevant or no longer meet your payback expectations, they should be shelved, and those monies freed up for more impactful projects. (As an aside, if the later happens, some serious post-mortem of what went wrong should be happening. You just wasted money, and someone messed up somewhere. You do not want this repeating itself). Assuming categories 1 and 2 out of the way, you likely have a remaining budget number to allocate on the "new stuff". Every other investment should then be categorized based on their strategic and/or financial return in order of importance. This should get you to your last two categories...3) Should do and 4) Nice to have. Once this is completed, the short-term and long-term budgets should be tweaked for the changes and the financial roll-up reviewed for any final modifications. Having finalized your plan, the strategic plan should be communicated to employees in the company and relevant leaders should understand their operating plan targets for orders, sales, investment and costs.
Voila! This is how a good strategic plan is done and how it translates into a solid operating plan you can use to manage your business throughout the year. With a few tweaks, this is also a ready-made investor or bank-package you can provide in your quest for capital or loan assistance. The interesting part of this should be to note that the "Financials" section is not that complicated. Financials can be tackled if the rest of the strategic plan has been thought through. And those parts are usually the parts business owners and/or leaders have in their heads...it’s all there... just sometimes not organized, communicated or put down on paper. Unfortunately, things not put down or communicated tend to have a way of not getting done. Of note, one thing I hear from outside professionals (Bankers mostly) is that they receive bank packages, but they don't seem to be well thought out or they have financials that don't seem to marry the strategy. These things can't be divorced...the later must come from the former. It may seem tedious, but remember this is all fun, healthy stuff for companies to go through. It provides your organization clarity and a path with which to achieve its mission and vision. Plus, once you go through it once, it becomes easier the next time. You can make improvements to the process and explore new areas that will keep your company competitive and able to handle the challenges that arise throughout its future.