How Exciting!  It’s “Annual Plan” time!… Not!!

Many organizations spend considerable time putting together the annual plan.  Once completed, they breathe a sigh of relief and relegate the planning documents to the shelf, to await next year’s planning revival meeting.  Most organizations also use some type of key performance measurements.  But, most likely, other than the sales department, very few of the metrics focus on business growth.  Then management wonders why people working inside the walls have so little customer focus!

Imagine Thousands of Spontaneous Employee Actions… 
…In Concert, and Aligned With Your Strategic
Goals

Jim Collins, in Good To Great, describes a flywheel metaphor for thousands of autonomous employee pushes on the strategic flywheel of the business.  That kind of unanimous movement has to start with a clearly-understood, compelling business strategy.  To be effective — guiding the whole organization in a productive direction — your strategic planning efforts should include the following capabilities:

·   Does your team have a clear vision of your best opportunities? Or is your organization somewhat out of alignment, because people perceive key opportunities differently?

·   Has your company timed your capacity investments for optimum ROI so you are putting capital to work just-in-time (not too early or not too late)?  Or have you made investments only to find later that the timing of them was wrong, or you under- or over-invested in the wrong things?

·   Do you “Own” your customer relationships, so achievement of the strategic plan is supported by
dependable execution?  Or do your customers and suppliers own you?

·   Have you taken the guess-work out of strategic planning with fact-based decision-making based on clear cause-and-effect market dynamics?  (Yes, the laws of supply and demand play a role in practical strategy.)  Or do you have a planning shelf document?

If you tend to relate to the latter part of the statements outlined above please read on.

Making the Transition to the One-Page Model

Lets look at a simple but effective way to create a one-page Strategic Growth Model with meaningful information to help drive, or at least guide business growth.  Our last couple articles for Rainmakers focused on key performance indicators (KPIs).  So we will not belabor that topic here.  Nor will we dwell on specific business strategies or market research, both of which are well documented in planning literature.

Click here for Why You Should Care Article

Click Here for KPI’s and Continual Improvement Article

The strategic planning process usually begins with a series of questions about the business situation. 

·   Which market niches offer the best potential returns for our core competencies and invested assets?

·   Should we invest money (plant, equipment, human resources or other) in our business today? 

·   What impact will that have on the marketplace where we play? 

·   What is the best timing for specific strategic investments?

That last question can be crucial, but often goes unanswered as the planning team has usually spent a lot of energy researching current and historical market data, so they’re uncomfortable forecasting future market shifts without a dependable “crystal ball.”  That’s typical of internal management groups that spend most of their time analyzing “hard data” from operations. 

Occasionally, an entrepreneurial spirit in the group may say something like “Wait a minute.  I’ve heard rumors that competitors DEF and XYZ are gearing up to serve this niche too.  If all that capacity hits at the same time, and early in the market demand ramp-up, we could be selling the product at a loss for quite a while unless somebody drops out.”  Others might take that as negative, not supporting the team’s plan, even though it’s a legitimate concern about the future market dynamics.  It’s about the timing of the investment, not about the basic market opportunity.  Unfortunately, most such discussions go unresolved because there is no convenient tool at hand to sort the issues in the future view. 

The Strategic Growth Model (SGM) addresses the planning problem described above.  It creates a one-page, time-based view of the key relationships between the…

·   total niche market demand for your products or services,

·   “net” competitive capacity available from your industry, and

·   your own company’s capacity. 

The one-page SGM shows the factors driving niche market profitability and guides individual company decisions about when to increase or decrease participation in a market niche. 

There are a variety of ways to approach this.  We have outlined an approach below that several organizations have used to increase profitability, grow their business and guide business investments.  It also fits with our views on the importance of meaningful “key performance indicators” and “continual improvement of business performance.”

Market, Competitors and Us — The Causal Relationships

The Strategic Growth Model summarizes the time-variable key factors in a Niche strategy.  You can create your own version of this.  Since it uses current operations data in a conventional financial spreadsheet format as a starting point, the niche extensions and roll-ups can be obvious and easy to interpret during planning discussions. 

Industry Perspective

At an overall industry level your SGM needs to include factors like GNP Expected Growth, Estimated Production Capacity, Overall Estimated Market Demand, Human Resources Capacity, etc.  You might come up with one or two other capacity factors, but keep it simple. 

Example 1: Determining Your Net Capacity

In the case of Human Resources, think back a few years ago, when software developers were at a premium.  The industry demand exceeded the available supply, so if your growth plans needed that type of talent, you might not be able to grow as fast as you hoped.  Surprisingly, in many industries fixed asset production capacity is not a key factor.  Often, based on equipment (molders, headers, etc.) there appears to be more supply than demand, so your competitors may expect that to put downward pressure on pricing.  But, their HR capacity to serve a specific niche may actually be the controlling capacity.  So the companies that correctly support that relationship with adequate levels of quality HR capacity will reap the best margins and market share growth — in spite of what appears to be an unfavorable demand vs. supply relationship based on the simple fixed asset capacities.  That’s the type of strategic relationship to be clarified in the SGM. 

Example 2: Strategic Timing

In the following chart a niche market appears to be growing at a healthy rate, but still within the available capacities, so additional hard assets don’t appear to be justified through FY2.  But the competitor that sees that HR capacity is at 86% in FY3 might decide to invest in more HR capacity for FY3 when higher margins are likely. 

 

                                   

Niche-Specific Supply Capacity:	FY2	FY3
GNP Growth (for reference)	3.0%	3.5%
a. Niche Market Total Demand (Sales $)	$75M	$95M
General Fixed Asset Cap. (Equipment)	$200M	$200M
Proprietary/IP Asset Cap. (Process, patents)	$120M	$120M
Human Res. Cap. (Niche-specific expertise)	$110M	$110M
b. Net Niche-Specific Supply Capacity *	$110M	$110M
Capacity Utilization (a b)	68%	86%

Two points are important in this example:

·   The demand vs. supply relationship (capacity utilization) drives niche market profitability.

·   Capacity comes in different forms, so you have to know which is the current constraint before making additional investments.  Just like on a production line, additional investment in the unconstrained areas would be wasted.

Example 3: Company = Sum of the Niches

You need to develop this model for each industry (marketplace) niche that your company serves.  For example, an automotive supplier might serve Detroit’s Big 3, Japanese US Operations, and perhaps another industry outside of automobiles. So there could be three data models, one for each market niche.  The three views can be added together to get an overall segment or company view as in the illustration above.

Entrepreneur’s View

People do not always know what the ‘real’ market or competitor numbers are.  Government, industry and company data bases are not usually detailed to the level you need for specific market niches.  But you need to start somewhere.  So at the very least, use estimates from your sales people to obtain an "entrepreneur's view" of the market factors that result in either high- or low-profit markets.  Over time, you will find better information to replace the estimates — as long as you keep them in view so day-to-day interactions continue to look for the facts.  However, even estimates help answer key strategy questions like: “Do the Strategic Plan numbers that people talk about make any sense from a holistic perspective?”.  And, “Will the niche market and competitive dynamics expected in FY3 provide margins to justify a capital investment now?”

Company Perspective

Once you develop a SGM for your target market niches, you can begin to work on your company in total.  The same information on capacity needs to be captured for your overall business.  If you are looking at Fixed Assets, Proprietary Assets and Human Resources the overall capacity would be based on the portions of those capacities allocated to the individual niches. 

Example 4: Financial Impact

After the above steps you can begin to compare performance between years.  It would be unrealistic to assume that a company could increase prices or that revenues would rise significantly if an overall industry capacity has actually increased by 10% while total niche demand has increased by 10% or less.  Unless the company has a dynamite plan of action or some grand new technology, it is likely to experience a flat to declining share for this industry niche.

The play-off between the industry and company figures can be used to estimate profit changes and return on invested capital (ROIC) for the company.  As the company looks at the overall industry activity over time it can evaluate a wide range of issues:

·    If over-capacity will hold down returns

·    When a shake-out is likely

·    When investment is most appropriate

·    When you should aggressively pursue market share, etc.

Getting Started

We can assist you, or you can build your own Strategic Growth Model by taking several key steps:

1.  Identify the main capacity components in businesses serving your target market niches.

2.  Research your competition to determine their capacities in the main capacity components.  Remember that this will probably be very crude information the first year.

3.  Research the total demand in each target niche.

4.  Build a spreadsheet to display the market demand versus net industry capacity in future years.  This is where the “entrepreneur’s view” comes into play. 

5.  Add your own company’s capacities to the spreadsheet model.

6.  Identify the “customer loyalty factors” your company must deliver to dominate your chosen niches.  This could be the most important part of the process since it provides the goals your people need to meet to execute the strategy successfully.

7.  Add an industry margin %  line to the model with your interpretation of the margin to be expected in each future year based on the supply/demand ratio in place at that time. 

8.  Integrate the data used for strategy and operations so they present a clear roadmap and diagnostic base for use by everyone in the company, regardless of their role.

9.  Replace the annual strategic planning “event” with an on-going strategic planning “process” that’s seamlessly woven into the day-to-day management routine. 

Step 7 is key to the investment timing questions in a strategic plan.  Your team may not be able to fill the model with concrete data in the first year, but it will help them maintain that holistic entrepreneur’s view of the marketplace and will provide a roadmap for on-going data collection work that can become a part of routine business activities throughout the year.  So next year the numbers will be closer to reality, and need less guesswork to fill the gaps.

Do it!

The Strategic Growth Model concept is relatively simple although it can sound complicated since day-to-day we rarely use supply and demand information in a holistic view of a business.  The supply/demand view is out-of-context with our routine business operating views.  Use the SGM to step back from the “trees” in your day-to-day view, and take a look at the “forest” of each niche you’re operating in.  Identify the forces that will drive the supply/demand market dynamics in the years ahead.  Those are the factors you need to build into your Strategic Growth Model. 

Feel free to contact us through Rainmakers if you would like to learn more about how this methodology can be applied to your business. 

Call Rainmakers at 847/251-3327