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10-31-2006, 05:40 AM
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#601 (permalink) |
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RS4
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Setting realistic goals
The motivation to found a business is sustained by a need for achievement, selfreliance and personal fulfilment, although one or more negative ‘push’ factors might also be a cause, e.g. redundancy, lack of alternative job opportunities or changes in personal circumstances. But once the initial ‘buzz’ of starting the business is over and the initial goal has been achieved, what is in it for the founders? Psychic and emotional goals (sense of independence, control of your own destiny) can conflict with economic ones, such as growth in income and net worth. For instance, founders often express their motivation (goal) in terms of ‘controlling their own destiny’. Arguably, this is true only in the context of their initial career choice. Once the business is under way, the job of owning and managing it is like any other and soon control of one’s own destiny is subverted to the demands of customers, suppliers, employees and bank managers. The owner-manager will soon feel that outsiders are controlling his or her destiny. What are realistic goals for the founders as the business grows, and why change? Explicit, measurable objectives should be formulated and the first should probably be net profit margin (net profit before tax as a per centage of sales), framed with future growth in mind; growth in net worth might be a secondary objective (set it as a specific percentage uplift on the previous year), with an eye on future external financing needs. Being explicit about goals gives everyone something concrete and achievable to aim for – the founders cannot expect increasing numbers of new employees to buy into their nebulous personal goals and ambitions, even if the original loyal staff, much smaller in number, might be willing to continue to do so, because of their close emotional connection with the founders from day one. Few people will commit to a goal that seeks to build the founders’ egos, or helps define the meaning of life for them! |
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10-31-2006, 05:41 AM
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#602 (permalink) |
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RS4
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Synopsis of the book
In this book we deal with the job of managing business growth successfully.We do not accept that growth (or rapid growth) is a foregone conclusion, even when there has been growth in the recent past. Markets can change rapidly and customers can be fickle. Each situation needs to be examined and the decision to grow or not to grow taken on its merits. Monitoring and assessing business performance and periodically evaluating existing strategy and future strategic options are crucial activities for directors; leading and managing people to implement the chosen strategy effectively and efficiently are crucial activities for managers. The following ten chapters tackle the fundamentals of directing, leading and managing a growing business: setting business strategy and getting performance from people. We begin in Chapter 2 with business strategy, on the grounds that everything else follows the lead question: ‘in which direction should the business be going?’ By ‘direction’ we mean the market segments into which you choose to sell and the mix of products and/or services on offer in the chosen markets. We examine strategic options and techniques for making defensible choices that produce the optimum strategic fit between markets and organizational competences, thus ensuring that managers have every chance of implementing the chosen strategy profitably within planned financing limits. We follow with further market-related issues in Chapter 3, which deals with dayto- day marketing and sales decisions. This involves more than merely advertising and printing brochures.What frameworks are available to ensure that you can meet the needs of your customers effectively and efficiently? How can you communicate effectively with your chosen markets and generate profitable leads? This chapter also deals with the development of a complete marketing function that includes the usual promotional and website roles as well as the increasingly vital ones of gathering market and customer feedback data, competitor research, product development and customer care. Chapter 4 provides a general outline of organizational design and development. Effective and efficient organizational change is at the core of successful business growth – managers need the skills of diagnosing organizational problems accurately to ensure that proposed changes will align structure, people, processes and systems more closely with the existing and emergent needs of customers. Having put in place the right organization to deliver the strategy, in Chapter 5 we discuss the management skills required to get teams of people to perform their tasks effectively and efficiently. Once overall corporate objectives are communicated to team leaders, they in turn can brief their teams clearly, set achievable goals for individuals, monitor progress towards these goals and provide constructive feedback on achievements. These, with an understanding of motivation and demotivation, are the essential skills of managing people at work. Managing people effectively and efficiently requires much more than these essential skills, however. In Chapter 6 we discuss the role of the leader who understands delegation and who can apply the ‘situational leadership’ model to teasing out superior performance, thus distinguishing ordinary teams from excellent ones. Striking the right balance of contributions to team performance through specific team roles (and recruiting for these roles) is one aspect of effective team leadership; another is building and developing the team through performance appraisals. Few growing businesses thrive without the ‘magic’ in their culture that sets them apart from competing organizations. Chapter 7 deals with the beliefs and assumptions held by people about their organization: the way they do things that is different to their competitors. Small, dynamic, growing organizations have a special aura about them – a ‘can do’ culture – that initially sparkles without much explicit burnishing by managers. Yet these special features can go unrecognized and therefore be neglected in the dash for growth, with unintended damage to the human fabric of the organization. Moving from the human side of enterprise to the financial side, Chapter 8 explains profit and loss accounts, balance sheets and cash-flow statements, not from the standpoint of the accountant but rather from that of managers faced with making the right business decisions; every decision has a direct or indirect impact on profitability and cash flow. So managers should understand clearly where and how profits are made and how effectively finance is used in their business. To this end, we analyse the accounts using common financial ratios, applying them to day-to-day as well as strategic decision making. Chapter 9 deals withmanagement information systems and financial controls: the systematic provision of financial, market and operational information for effective decision making, and the controls needed to ensure that financial targets are met. The quality of internal information is usually poor in growing businesses, and none so poor as profitability data on individual customers, market segments, projects and products. The emphasis is on practical information systems needed to monitor and manage the business and on the fixed and working capital controls needed to make efficient use of available long- and short-term finance. Bringing it all together is the theme of Chapter 10, which introduces the essentials of strategic and operational business planning. The pressure to produce business plans with ever-increasing complexity is immense as the business grows, although given the rate of market change, the powerlessness of the small business and the lack of high-level management resources to implement plans, it is understandable that plan nowadays is considered an undesirable four-letter word! Our treatment of the topic is entirely practical: plans can be useful documents, but they must meet certain minimum standards. We provide examples of the different types of business plans in the appendices. Our closing words in Chapter 11 are devoted to the hazards that lie innocuously in the path of the unsuspecting founder-director or key manager. Whether appointing a successor, dealing with nepotism or seeing off the ‘sacred cows’ of business growth, it is important to recognize them as potential obstacles to progress and to confront them head on by examining alternative options and making decisions based on an informed choice. |
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10-31-2006, 05:41 AM
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#604 (permalink) |
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RS4
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Making Sense of Strategy
Strategic issues: Setting the scene Strategy as applied to business is a recent phenomenon. The term ‘strategy’ derives from military science and describes how a general deploys his forces in battle with the objective of achieving victory by defeating the enemy. Business strategy describes how you organize your business (deploy your resources) to compete for the attention of customers in your target markets (achieve your objectives), faced by competitors and other external factors that present threats to your business (defeat the enemy, so to speak). Business strategy addresses the following questions: 1 Customers and markets – which customers (and markets) should you target? 2 Products and/or services – what should you sell to these customers? 3 Organizational resources and competences, such as people, processes, structure and systems – how should you organize your business to get these products/services to your customers? 4 Finance, both working capital and long-term capital – how much money will be needed to make the strategy happen and to achieve corporate objectives? Here are some fundamental propositions about strategy that explain its relevance to managing today’s growing business. 1 The essence of business strategy is to compete profitably by identifying a target market with specific unmet needs (opportunity) and to sell products and/or services in it, exploiting your organizational distinctiveness (strengths) at a price that will return the optimum level of profit, while making continuous improvements to those parts of the business that don’t work well (weaknesses), in the face of competition and other unfavourable external factors (threats). 2 This seems straightforward in a period of slow, steady growth. However, strategy erodes quickly in rapidly changing times because yesterday’s competitive strengths that successfully underpinned past performance cannot be automatically expected to do the same today and tomorrow. Customers, competitors and other exogenous factors will not allow it. New unique or special strengths have to be found and existing ones revamped simultaneously to ensure that profitability is maintained or increased. 3 Business strategy is a total concept embracing every function in the business: customers, products or services, research and development, marketing, production, purchasing, logistics, operations, administration, personnel, information systems and finance. Most of all, it is concerned with the way these functions are brought together to generate profits: the sharper your focus on the needs of your customers and the closer the alignment of your organization with these needs, the higher the rate of profit. 4 Customers have choices: they can buy from you, from a competitor, or, if they prefer, defer their purchase temporarily or even permanently. Competitive action and reaction are always at work, whether implicitly or explicitly. Thus customer behaviour is fundamental to business strategy. It is a moving target, continually changing its shape and composition. And as a result, it is not easily influenced in the short run. 5 Business strategy does not have to be written in a business plan to exist. All businesses have a strategy, even if it is implicit, since they have: • Customers to whom they sell and markets in which they compete. • Products or services that they sell in these markets. • Organizational resources that are deployed to make these sales. • Financial resources that underpin all this activity. So the key questions are: What is your strategy? How well is it working? Are corporate objectives being achieved? Can profitability be raised by refining strategy and focusing resources more effectively on the right customers? Directors of growing small and medium-sized businesses generally admit that they could be more profitable. The only question is: How? |
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10-31-2006, 05:41 AM
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#605 (permalink) |
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RS4
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The Titanic: A salutary lesson in strategy
The story of the Titanic is widely known. The giant passenger liner was considered indestructible, embodying all the latest technologies in marine engineering, and was finished to a luxurious standard. Everything about it was top class: construction, engines, food, music, furnishings, d´ecor, bed linen, service and crew. Nevertheless, on its maiden voyage it hit an iceberg in the North Atlantic and sank with substantial loss of life. The point about this tragic event is that there was more focus on the internal trappings of luxury than on the external strategic picture. In other words, the crew’s attention was focused on arranging the deckchairs, the waiters’ on serving meals and themusicians’ on tuning their violins, when there should have been more attention paid to what was happening off the ship – in the sea, to the elements, to other shipping nearby. In particular, was this the right course? Was this the right ship for this course? If more attention had been focused on threats to the safe passage of the ship (and to the lifeboats, of which there were not enough for all the passengers), the outcome would have been less tragic. This can be used as a metaphor for business performance. There is no point in concerning yourself with tactical matters, e.g. checking brochure copy to improve communication with your market (Titanic equivalent: arranging the deckchairs), when you are threatened by head-to-head competition or defecting customers (Titanic equivalent: steaming into dangerous waters). The captain of the ship should have put strategic considerations before tactical ones. Look out for icebergs before arranging deckchairs or tuning violins! In other words, make sure that you have a long-term outlook (at least two or three years for a normal business) with clear objectives, and that your business is organized to keep in view the principal influences on what happens over this period. Then organize your resources in pursuit of these objectives and make day-to-day adjustments as the situation demands. Or think of business strategy and business tactics as a jigsaw puzzle: the straight pieces at the edge seal the fate of the inside pieces by forming a boundary beyond which the inside pieces cannot stray. It is much easier to assemble a jigsaw by putting the edges in place first, because they dictate the position of the inside pieces. So it is for business. Strategy comes first. Strategy should not be the preserve of only the owners and directors. Everyone constructing a jigsaw should be able to see the edge pieces. In business, everyone in the organization should know and understand the chosen strategy in its broadest terms. This will give meaning to their jobs and place their work goals in context. Communicating strategy to all staff and helping them see their jobs and goals in context is an important source of individual and team motivation, as well as being good management practice. |
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10-31-2006, 05:42 AM
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#606 (permalink) |
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RS4
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Review of current performance
As with any journey, it is vital to know your starting point. Implementing a successful business strategy starts with knowing where your business is at the moment (where profits are made, and why), since a solid platform is needed on which to base future business strategy. This requires a careful review of the business, the objective of which is to establish the rationale for business strategy and identify which areas of the business should be developed (where the focus of attention should be), which should be eliminated or cut back and how development should proceed. The review should be undertaken by the senior team responsible for strategy, including not only owners and directors but also key managers; indeed, anyone who has a view or experience of internal strengths and weaknesses as well as external opportunities and threats. Ideally they should also have some familiarity with financial performance and, above all, should understand the link between distinctiveness and profitability The strategic review should start by answering the question: Where do profits come from? There is clearly no sense in developing those parts of the business where you are either losingmoney or just breaking even. Resources must be focused on the parts demonstrating the highest levels of profit, while taking action on the least profitable parts. For example, the British computer manufacturer Apricot identified its main source of profits late in the day, with unfortunate consequences. You will need to collect, collate and analyse internal sales and cost data to establish clearly where your profits come from. Gross sales data are not sufficient and can even be misleading. The markets and products with the highest sales values could be the least profitable parts of the business, e.g. when pursuing sales revenues at the expense of margins. Having profitability data available on a continuous basis at all levels of the business should provide a powerful platform for decision making. For example, profitability data on different market segments, different product or service lines and different channels for reaching and servicing market segments allow resources to be focused on customers in these segments. This should raise overall margins. The quality of financial reporting, including profitability data for each customer (where appropriate),market segment, product/service, marketing channel, branch, country, etc., can only be as good as the comprehensiveness of your management information system (covered in Chapter 9). The example in Box 2.2 illustrates how detailed profitability data can aid considerably in strategic decision making. |
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10-31-2006, 05:42 AM
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#608 (permalink) |
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RS4
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Analysing competitive forces
The aim of having a winning strategy is to be able to compete effectively to make profits. Analysing the way you compete is therefore an important part of reviewing and setting strategy. Michael Porter,1 the eminent Harvard professor, proposed five competitive forces that could erode profitability, as follows: 1 The actions of existing competitors. Are your existing competitors likely to introduce new products as a direct threat to yours? 2 Substitute products or services. Can your customers replace your products or services easily? 3 New entrants into the industry. Will new competitors be attracted by your success? 4 Bargaining power of customers. How powerful are they? 5 Suppliers’ bargaining power. How powerful are they? To these five, we should add the effects of PEST factors (political, economic, sociological, technological). Your job in reviewing your strategy is to examine each of these factors, both for the present as well as for the immediate future (the next two to three years), identifying direct competitors and coming to a view about the probability of threats from one or more areas. Your strategy should reflect the probable impact of these threats and your business plan should contain actions to counter them. For example, if you have spotted an opportunity in a new market that is currently served by only one or two entrenched suppliers, your approach, either in what you sell or how you sell it, should incorporate specific features to contain the threat from existing suppliers. |
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10-31-2006, 05:43 AM
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#609 (permalink) |
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RS4
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Market segmentation: Defining customer behaviour
Different customers have different needs, each with their associated mix of quality, service and price. For instance, some customers are not interested in comparing prices at all, preferring top quality every time; many shop around to secure the best deals; and others are prepared to pay a premium to get their purchases immediately. It is therefore important to segment the market and record profitability by market segment. The process of identifying customers by the attributes of their buying behaviour is called market segmentation. The idea is to align the business with individual market segments and, where feasible, to operate separate business units or teams serving each segment (see Chapter 4 for examples of organizational alignment with market segments). The example in Box 2.3 illustrates this for an IT systems supplier. |
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10-31-2006, 05:44 AM
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#613 (permalink) |
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RS4
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Customers with identical or similar behaviour should be assigned to the same
segment, on the grounds that finding, communicating with, selling to and servicing them require a standardized approach (and the same or similar direct costs). What is meant by customer behaviour? Since it is so complex a phenomenon – there are psychological, sociological, economic and other reasons for different kinds of behaviour – it is not surprising that it creates difficulties. We tend to look for superficial characteristics that allow us to group customers in a practical way, depending on whether we are selling to business markets or consumer markets. So we normally group customers by one or more of the characteristics The ideal is to be as specific as possible to ensure that all organizational,marketing and operational activities can have focus. For example, a pharmaceutical producer selling to retail chemists through wholesalers could characterize its market as in column A in Box 2.5, whereas retail chemists would target consumer segments as in column B. An alternative method is to take your existing customer base, examine the sales and profitability of each customer, rank them by profitability and finally examine the ranking for patterns or characteristics. You should find out something that you didn’t know before! Further issues of practical day-to-day marketing are discussed in Chapter 3. |
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10-31-2006, 05:44 AM
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#614 (permalink) |
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RS4
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Strategic marketing analysis
Strategic marketing analysis refers to the process of choosing which customers to sell to, rather than the specific marketing methods of attracting their attention. Its general objective is to identify customers who satisfy one or more of the following criteria: 1 Unable to operate without your products/services. 2 Faced with the fewest alternatives. 3 Most predisposed to buy from you. |
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10-31-2006, 05:45 AM
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#617 (permalink) |
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RS4
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A customer satisfying all three conditions would:
1 Need the benefits you had to offer. 2 Be prepared to pay almost any price. 3 Contact you (meaning that your selling costs would be low). So who are your most profitable customers? It is now time to undertake your own strategic analysis by segmenting your existing customer base along the lines suggested above: follow the steps outlined in Box 2.6. Your management information system should produce customer profitability data in sufficient detail, but if not, you should be able to calculate ad hoc profitability data from your files and accounting system. |
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10-31-2006, 05:46 AM
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#618 (permalink) |
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RS4
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Distinctive competence
Customers must have a reason to buy from you. You compete for their attention by endeavouring to make them a ‘distinctive’ offer (thereby differentiating your business from the competition), which ensures that you can charge a price that makes a satisfactory margin. The more distinctive the offer, the less likely are your customers to be able to compare prices on a like-for-like basis (unless, of course, your distinctiveness is based purely on price). Successful growing businesses achieve this distinctiveness by getting really close to their customers and understanding their most idiosyncratic needs, then meeting them as effectively and efficiently as possible. The source of this distinctiveness is one or more special or core competences, which must be actively developed. The origins of distinctiveness lie in the special skills, knowledge and technologies – or competences – that businesses develop over time. The special competences that set the business apart from the competition are grouped together and called distinctive competence. Identifying your distinctive competence is critical to finding a competitive strategy. However, you need evidence, not merely beliefs or assumptions. The way we do this is to ask customers this key question: Why do you buy from us (rather than from our competitors)? On the face of it, this seems an easy question to answer. But it can turn out to have daunting implications and you might feel that it could open a can of worms! In fact, customers generally welcome a discussion along these lines, because it gets to the heart of their trading relationship with you. Nevertheless, customers do not automatically think of their buying decisions in crisp, black-and-white terms. An effective researcher will elicit the right answers and establish one or more of the sources of distinctiveness |
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10-31-2006, 05:46 AM
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#620 (permalink) |
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RS4
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Hygiene factors
Distinctive competence should be distinguished from hygiene factors. These are buying decision criteria that a prospective customer uses to ensure that potential suppliers are good enough to be on the ‘approved’ list, i.e. in the decision-making frame. For example, price is often a hygiene factor rather than a distinctive one. If you are not within the right price range, you do not even get on to the shortlist from which the final buying decision is made (Box 2.8). It is impossible to overstate the importance of gathering objective, up-to-date information on distinctiveness, because distinctiveness lies at the heart of competitiveness, which in turn is what business strategy is all about. So when interviewing customers, bear in mind the practical points |
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10-31-2006, 05:47 AM
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#621 (permalink) |
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RS4
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Defining core competences
Having identified the distinctive and hygiene factors that make up your competitive advantage, you should now determine what core competences give rise to them. A core competence is the combination of skills, knowledge and technologies that you employ in your business that ultimately gives you a competitive edge. The example in Box 2.10 illustrates the difference between distinctive and core competences. It should be straightforward to devise a strategic business development plan around these critical issues. The main focus of development activity formanagement should revolve around the distinctive competences in manufacturing (e.g. flexible technology, short runs, efficient workflow, skilled machine operatives), design (e.g. people’s creative skills, interpreting customer needs, market awareness), resourcing (e.g. capacity, scheduling, training, interpersonal skills) and company values (e.g. recruitment policies, teamworking, skills and knowledge). In this model (Figure 2.1), distinctiveness is supported by the three main core competences, which are key departmental functions in this tile-manufacturing business. By identifying the distinctive and core competences, the task of developing the most important parts of the business has a clear logic to it and limited resources can be focused on those factors that will bring the greatest return. The core competence model can be used effectively to plan ahead.2 To identify the options for taking your business into new areas of opportunity, you should be asking the question: Where else can our distinctive and core competences be deployed? This is illustrated in Figure 2.2. An explanation of this model follows. |
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10-31-2006, 05:47 AM
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#627 (permalink) |
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RS4
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Drive for efficiency and effectiveness (slow growth)
In this quadrant, you should sharpen the focus of existing core competences in existing markets. At times when there are few significant opportunities for growth, competitiveness remains the key to achieving profit objectives. What better way to improve competitiveness than by cleaning up and improving existing operations, including, for example, a drive to raise skill and knowledge levels for the whole organization? The main focus for such activity should be raising customer service standards and adding value at every point in the customer–supplier interface, with the ultimate intention of maintaining or raising profitability. |
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10-31-2006, 05:48 AM
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#637 (permalink) |
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RS4
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Growth by developing new functions and roles
In this quadrant, you should radically improve existing competences and develop new ones to add significant value to existing and new customers in existing markets. Typically, this requires you to add new functions and roles to your existing organization (e.g. introducing a professional marketing function quite separate from sales or a buying department) as well as committing new resources to developing people’s skills and knowledge (e.g. formalizing the personnel function or seeking accreditation to the Investors in People3 standard) and adding new technologies, to exploit perceived growth potential in existing markets. The risk here is that by growing overheads rapidly (which is what is implied in this option), you run the risk of losses in the early stages of growth if productivity, sales and margins do not materialize rapidly. This can be compounded by overambitious business plans and optimistic forecasts of both profit and cash (see Chapter 10 for ways to alleviate this problem). |
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10-31-2006, 05:48 AM
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#649 (permalink) |
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RS4
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Growth by market development
In this quadrant, you should take existing competences into new markets (preferably into contiguous ones to reduce commercial risk – options involving significant commercial risk should be analysed together with the product/market choices discussed below). Clearly, this involves much greater risk than a cleaning-up operation and commensurate returns should be expected. But be careful: the risks of venturing into new markets, sometimes without an effective marketing function, constitute one of the hazards discussed in Chapter 11. |
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