Business Strategy Fundamentals
Over the years, I have met and worked with literally hundreds of business owners. At one time or another, many of them have written a business plan. But very few of them have a working business strategy. A business plan and a business strategy are two very different tools. A business plan is normally prepared for a financing partner, either a bank or an investor. The purpose of the plan is to let investors know about the business and its potential for success in order to encourage them to invest in the business.
A business strategy is quite different. Rather than a document for investors, this is a plan for the owner to follow. It begins with an evaluation of the business’ goals. Where does the business owner want the business to be in 5, 10 or 20 years, both in terms of fair market value and cash flow? What are the plans for exiting the business? Will it be sold to an outside party or to key employees, or will it be turned over to the owner’s children?
Next, we have to do a thorough evaluation of the current state of the business. This includes a valuation of the business and an evaluation of the business’ strengths and weaknesses. The more thorough the assessment, the better the potential output, but even a cursory evaluation is helpful.
Most businesses have a tendency to identify strengths and weaknesses away from input from top management. The approach needs to be broader than this to get a true assessment. A broader approach includes interviews with key personnel and surveys of all staff levels. A side benefit of the interviews and surveys is it provides significant insight into the opportunities of the business.
Also included in the evaluation should be benchmarking. Benchmarking identifies areas in which a business is above or below the industry averages. This analysis can immediately identify areas of opportunity.
Now we need to create a strategic plan to increase the business’ weaknesses and to use its strengths to create the desired value and cash flow. The valuation is key to this process. Most businesses never have a valuation done until they are ready to sell or gift the business. This makes no sense. If we want to target a specific value in the future, would not we want to know the current value and the method of valuation that is used in our market? By doing a current valuation, we can develop a plan that will use the principles of value in the valuation to build the value of the business.
Once we have a conceptual strategic plan, we need to determine those tactics that are likely to achieve that plan. “Strategy” is most often defined as an elaborate and systematic plan of action intended to accomplish a specific goal or goals, while the “tactics” are the actionable steps that will carry out the strategy. Having a well thought-out strategy keeps the company focused and on target while implementing and tracking a list of actionable tactics ensures real results.
Tactics are the specific tools you will use to carry out your strategy. Your tactics will need to adjust to the conditions of the market. For example, your strategy may include multiple locations. Your initial tactic may be to acquire other businesses like yours in strategic locations. But you may find that there are not qualified or motivated sellers in your targeted locations. You may have to change tactics and build your own office in your desired location.
With tactics tentatively in place, it’s time to begin implementing your business strategy. This includes building your team, developing your reports, creating your systems and procedures and placing in place internal controls. When building your team, be sure to have clear agreements in place with each team member regarding their roles and responsibilities towards you and your business. Clear communication is essential to implementing a successful business strategy.
Be sure that the reporting is set up to give you the information you need to make sure everything is implemented and running smoothly. Good reporting relieves much of the stress of running a business because you know what is happening and why it is happening.
Good reporting is also part of good internal controls. You must have internal controls in place, not only to prevent fraud and theft, but also to ensure that the work is being done in the way you expect.
Creating workable and efficient systems and procedures allow you to run the business by managing systems rather than managing individuals. With proper systems in place, you can build your business as large as you want while maintaining efficiency and high levels of profitability.