Strategic planning means a lot of things to a lot of different people. One problem that exists in corporate America is that the act of strategic planning is undefined and so management teams feel that if they can get to an offsite, sit around a table, work on some budget plans and talk about the next year, then they have done their strategic planning. While all of that may help, true strategic planning comes down to essentially meeting two tests. Further, for small and mid-sized businesses, you can talk a lot about many activities, but there are three main needle-movers that matter more than the rest of the topics combined. In this article, we will explore the three tests and three topics your company should consider in answering before year-end.
Don’t Get Caught Up In The Noise
While there are many topics you could talk about and make decisions on, the reality is that few topics matter. Your rate of growth, for example, is almost a worthless conversation, strategically speaking. You can decide to grow by 2% or by 15%, but the reality is that statistically, growth is really hard to manage and not all that sensitive to your inputs. Your company has a natural cadence, that is already set in motion by your DNA, and that is hard to change. Sure, you can add more marketing, salespeople, production, capital, and products to an area, and it even may help on the margin, but if you move your growth from 5% to 8%, strategically, it is not going to make a difference in the long run.
M&A is another worthless strategic conversation for many companies. M&A should not be an end to itself, but a means to an end. Unless you know your end plan, M&A is, at best, a distraction and, at worst, a value destroyer. You are either already capable of M&A, or you are not, and if you are not already set up for M&A, then talking about it some more will likely not make a difference. It is far better to decide your strategic goal and then figure out if there is an M&A candidate that can get you there.
Don’t get us wrong, items such as growth, capital allocation, M&A what geography you are going to tackle, and thousands of other common questions are important, they just don’t matter STRATEGICALLY. If you grow at 12%, extend into the next state or make that acquisition, the odds are that you are just a larger company with the same strategy. In other words, most topics that companies talk about in their strategic planning sessions, are noise, not signal.
Strategic Decisions Are About Trade-offs
In our opinion, the two questions to keep in the back of your mind that point to potential strategic success are as follows:
- Are you making decisions that require a trade-off of resources? And,
- Do these decisions result in you doing something different than your competition so that they create “alpha,” or excess return above the industry average?
Allocating more capital to beef up your cybersecurity may be important, but that is a budgeting exercise. Now, allocating capital to cybersecurity and deciding not to fund the creating of a new product – that is a strategic decision.
Now there are lots of strategic decisions that management can make that involve trade-offs; however, while these are strategic decisions, they are not STRATEGY.
Strategic Decisions are Not Strategy
Just because decisions are of strategic importance doesn’t mean they result in a strategy. If every one of your competitors is putting more capital into cybersecurity at the expense of coming out with a new deposit product, then that will likely result in you producing a similar return. The goal of “strategy” is to have an above-average or excess return after adjusting for risk.
However, if the bulk of your competitors are beefing up cybersecurity and you cut IT costs to create a new product that results in a 154% risk-adjusted return, well, that is a strategy.
The Three Topics of Signal
While there are millions of strategies, there are only a few, in our estimation, that move the needle. They break down to these three:
Customer Relevancy: Here is the question – If your company were to be acquired or go out of business, who would cry? If no one misses you, well, that is a problem. Friends, family, and investors don’t count. What counts is the fact that you can create a scalable strategy that makes a difference in the lives of some customer segments. The more relevant you can become, the more likely you are to create that alpha in your return. Providing value to the marketplace that can’t be found elsewhere is a true strategy.
Relevancy can be an amazing customer experience, it can be a specialized product, it could be an understanding of a particular customer segment, or it could be a number of other things. Whatever it is, the goal is to create a clear value proposition that is sustainable both at your current company’s size but also at scale.
If you say this isn’t easy for a company, you are right, but it is not easy in any industry, yet leaders such as Southwest Airlines, Lululemon, Topo Chico Water, Oatly, and many others have figured it out. That is why they are leaders.
Operating Leverage: This is the easiest one to accomplish as it is more of an engineering problem than a problem of creativity, such as customer relevancy. Operating leverage, or gaining scale, is just high-quality growth. What many managers don’t appreciate is that not all growth is the same. In fact, some are downright terminal. If you are already inefficient, then growing assets or business lines will just make you a larger, more inefficient company. Consider that the more inefficient your company is, the higher your cost of capital. In other words, many companies are growing themselves right out of business as their growth sows the seeds of their destruction.
The key is to make sure you are producing a return above your cost of capital and/or make sure that your marginal cost structure is decreasing as you grow. If you already have a 20% gross profit margin and it takes more incremental resources to achieve your top line or asset growth levels, well, that is another problem. Make sure whatever growth plans you cook up this year results in more production off a smaller cost base.
Maybe this means leveraging a CRM system, putting more technology in the cloud, finding ways to streamline your processes, reducing the regulatory burden, or reorganizing so your salespeople to get them in front of the customers more often. Whatever the initiative is, the goal is to grow earnings with more efficiency. If you are not doing that, then your efforts around growth could be destroying value and make you a prime candidate to be acquired.
Human Capital: Of all the strategic initiatives, this one is the easiest for managers to understand yet the hardest initiative to make a difference. We all say that people are our most important asset, yet few companies channel enough resources to make a difference. Do you have an efficient and employee-friendly onboarding process, are you recruiting the talent you will need for the future, do your employees have the tools and authority they need to make a difference, are you training to the level of excellence and are you inspiring your people such that they do great work to help you overcome the challenges of relevancy and operating leverage?
If you look at your strategic initiatives and at least 20% don’t revolve around improving your human capital, then likely you are sub-optimizing your resource allocation in this area.
Putting This In Motion
These are not the only tests or topics of importance that can make a difference in your company, but we have found that, as a general rule of thumb, these are the tests and topics that are most likely to move the needle. If you have others, we would love to hear from you. Regardless, the important takeaway here is to make sure you are using your strategic resources wisely, you have the right process, and you are focusing on a select number of initiatives that will make a difference.
The articles presented contain summaries, personal opinions, viewpoints and analyses of the author of the article and not those of Capital Financial Inc. The articles are intended to provide general information on finance, current events, strategy, leadership, risk management, and other related topics and are not intended to be complete or to provide any specific recommendations or advice. Readers should consult their own legal or financial professionals for specific advice on any particular topic.
