Delivering Profitability: A Consultant’s View

Chapter 02: BUSINESS STRATEGY DRIVES BOTH GROWTH AND PROFITABILITY

by David Wagstaff

Broadly defined strategy both defines and communicates what the business is about, where it is heading and how the business managers plan to achieve their vision.  When done well, it helps guide the teams of people both within the company and those who provide services to the company.  It defines what is of highest importance, what’s not, and ideally provides a high level road map for management’s plans to pursue and to achieve its aspirations.

If you’re an experienced business person with formal business training or working for a larger company you may feel this chapter doesn’t apply to you.  Either its material you already know or it only applies to the top few executives and the board of directors and as a business unit manager you can’t impact the overall company strategy.  While that may be true consider these two points:

  • In larger companies developing business strategy applies not only for the company overall but also for each group within the company. Each team or group needs to understand how they fit into the total picture and vision for the company.
  • If you already are well versed in strategy, use this chapter as a review to consider if there are any opportunities within the components of your overall all strategy which are costing your scarce resources or which are not optimizing your ability to grow and deliver excellent services for customers. As mentioned previously in both large and small companies, I’m often amazed how many challenges start at a fundamental strategic level.  Consider that the expense challenge may not be on how to reduce an expense item such as rental expense but more fundamentally does the business need the space at all?  I have seen huge efforts wasted on optimizing an expense category, when the expense wasn’t even necessary to accomplish the company’s vision.

Business Strategy is Important: A 2007 study of financial institution led by the author of this presentation while he was working with PA Consulting Group, demonstrated two key elements related to strategy: 1) Banks with a formal stated strategy for growth significantly outperformed those who did not. Those with a formal strategy realized 15.4% asset growth over a 5 year period and earned 1.08% on those assets while the banks without a formal written strategy for growth saw growth of 5.4% and return on assets of 0.53%. 2) Those who placed Organic Growth as their top Priority grew at 19.46% and achieved 1.11% return on assets. Total Income also grew faster at 14.31% vs 13.38% for the general population.

While the study above was specific to banks, throughout my 20 years in consulting, I’ve seen businesses across industries perform better when both management and staff are clear about the business objectives and their strategy for obtaining the objectives.  However, while it’s important to have a strategy and communicate it, the road to success in one business is likely to be different that another. One business may focus successfully on having excited engaged customers while the next may focus on the number of products sold per customer.

Strategy is at the core of profitability.  Strategy which is too widely defined can be overly expensive to execute and strategy which is too narrowly defined can cost revenue.  Likewise operating a business inconsistent with its strategy is likewise to either waste resources or miss customer opportunities. For example: If the strategy is to win customers through lowest cost, then the company should seek processes, structures, and methods of delivering services consistent with being the lowest cost provider.  By contrast a company, which defines its strategy as providing the highest quality customer experience, should expect to spend more resources on the quality of its staff, investments in innovation and understanding its customers.

Example: A financial institution’s stated strategy was to target high net worth customer.  However, the banks policy was to limit personal lines of credit (LOC) for all customers including their targeted wealthy client base to $5,000.  This policy had both strategic and cost challenges and had been in place for years.  From an expenses standpoint the cost to approve or decline a $50,000 LOC costs nearly the same as it does a $5,000 LOC.  But the bigger issue was the strategic issues.  The bank targeted affluent to wealth customers such as doctors, attorneys and business owners.  The policy didn’t work for customers as the line amount was too low for wealthy clients who were then forced to find another bank to meet their LOC needs.  It cost the bank revenue, loyalty and customers.

 

So where does one start in developing a strategy that increases growth and profitability?

Start by defining what success looks like to you and your company?  Even before defining the strategy itself, define how will you know if you have a strategy that works for you?

Examples of defining success:

  • We will have a good strategy if we are making a difference for our community, our employees and are returning a fair return to our shareholders.
  • We will have a successful strategy if our strategy enables an above market average return for our shareholders?
  • We will have a successful strategy if our strategy enables our family to continue to operate the business for the benefit of the current generation and the next generation.

So what are the core components of developing business strategy?

  1. The most basic elements of strategy are:
    1. Vision: This is a brief statement ideally no more than 1 sentence, inspiring and depicting what you aspire for the business to be at a future time. While its common to plan in 3 to 5 year time periods, for some businesses or planning its useful to take a shorter or longer term vision.

For example: I was working with a successful small business where the current owners who are now in the 60’s are planning to transfer the business to the next generation, roughly in 5 years.  We started the discussion looking out 20 years to focus long-term beyond the transition.  It was useful to bring everyone to a common vision.

Also as the word vision implies, when developing the vision it’s often helpful to developing it using a simple visual context.  One of the most well-known examples and one that does a great job of the vision was Apple Computer’s many years ago was “An Apple on Every Desk”.  What I like about this one is its very simple, just a few words and yet everyone in the company could see it and understand it. Obviously as times change the vision needs to evolve.  Apple’s new vision is “To make a contribution to the world by making tools for the mind that advance humankind.”

Read more: http://wiki.answers.com/Q/What_is_Apple%27s_vision_statement#ixzz1noVBbN00

  

  1. Mission: The company’s reason for being. It’s focused in the current time period and is more specific on the how.

 

Continuing the Apple example:  “Apple is committed to bringing the best personal computing experience to students, educators, creative professionals and consumers around the world through its innovative hardware, software and Internet offerings.” Footnote: Dr. Diane Hamilton, http://drdianehamilton.wordpress.com/2011/01/13/top-10-company-mission-statements-in-2011/

While vision and mission are typically the cornerstone of a business strategy, the strategy to achieve the desired results takes a broader view of the business.  In addition to determining what the business will be in the future, it’s important to think about the path to get the business to that destination.

A few years ago when helping a business with their strategy, I developed something I called the Strategy Cube to look at several of the key dimensions of the business to be considered in developing strategies and actions which lead to higher profitability.

  1. Target Markets and Market Segments: These define your universe of customers and prospects. If you are in a Business to Business (B2B) company, what industries and size businesses. If you are in a company’s serves consumer consider if the business is serving a specific geographic area, consider the profile of current buyers and the profile of customers who are most profitable for the business.
  2. Business Attributes:
    • Employees and people serving and interacting with customers
    • Training and development both for employees and sometimes even for customers
    • Reward and compensation systems
    • Organization structures
    • Physical locations of operations and office locations to serve customers
  3. Business Development: For small entrepreneurial companies in my experience this is often one of the most challenging elements. Most small business owners know how to provide the product or service for which they set up the business to deliver, but often they lack experience and fail to put together an effective plan on how they will win new business.  Building a better mouse trap does not guarantee business success.  Without effective methods to bring in new customers and have existing customers return, the business will soon fail.
    • Marketing strategies and plans
    • Sales strategy and plan
    • Sale force or sales team strategy
    • Advertising
    • Public relations & media
    • Plan for customer interactions, this can include in stores, offices, at call centers etc.
    • Organic growth vs growth through acquisition
  4. Delivery Strategy: How will your product or service be delivered? Even for existing businesses with the changes in technology its worth revisiting if the existing delivery methods are the most convenient for the customer and most efficient for the business.
    • Physical location
    • Internet & Social Strategies
    • Telephone
    • Hours of operation
    • Electronic vs in-person
  5. Products and Services:
    • Number of products and services
    • Features and functions of products and services
    • Breadth and depth of service offering
    • Product pricing
  6. Measurement Systems and Performance Tracking: “What gets measured gets done.”
    • Management scorecards
    • Management dashboards
    • Employee performance and measurement systems
    • Financial measurement systems including profitability systems and budget tracking systems

Taken together it’s important that each of the components of the company is aligned with the overall strategy and vision.  That is there is no point in saying “our mission is to have happy engaged employees delivering best in class service to customers” and then to not measure if that is happening.  Likewise to have the same mission and then to try to be the lowest cost provider would be inconsistent and would likely lead to failure.  While this may seem obvious, I’ve been to companies where we find huge opportunities by simply aligning one or more of the element to fit with the company’s overall strategy.

When the strategy is well thought out, effectively communicated, with business attributes all aligned to the strategy, it’s a powerful combination which fuels rapidly business growth and profitability.

About ClarityFI

Clarity FI is a financial business management consulting firm offering Strategic and Financial Consulting, Part-time / Time Sharing Chief Financial Officer (CFO) Services, Management Reporting and Bookkeeping. We help organizations understand financial decisions and mine information and data to chart the clearest path to success. We partner with management to optimize customer experience, optimize product pricing, reduce costs, and engage employees and customers to produce tangible, achievable results. The bottom line? We want to help you increase income, save costs, and watch your profits soar.

About the Author

Mr. David Wagstaff has twenty years of leadership, financial management and consulting experience providing business insights, strategic financial analytics, and executive leadership. He is the Managing Principal and Founder of Clarity Fl, focusing on strategic financial management, CFO Services and financial dashboards, analysis and insights. He has experience working with companies that range from large Fortune 100 businesses to entrepreneurial start-ups. Previously, Mr. Wagstaff served as a Managing Consultant, Senior Manager, Enterprise Business Solutions. His corporate responsibilities have been well balanced with successful personal ventures. Mr. Wagstaff earned his MBA from the University of Maryland, Smith School of Business in College Park, MD, with a concentration in Finance, Accounting and New Venture Creation. He earned his BS in Economics and Business Management from Ithaca College in Ithaca, NY. He is an outstanding member in his community as an active member of the social services organization having served on the Board of Directors and Executive Committee of the board at both Time Out Youth and Family Services of Montgomery County. He is also proud to have been a NJ Foster Parent. He currently resides in Collingswood, New Jersey with his Partner. He enjoys hiking in the mountains, the beautiful scenery of nature, swimming, water and snow skiing and sailing.

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