Planning and strategy
This section provides tips and advice for business strategy and planning ahead.
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An introduction to strategic planning | Avoiding traps in strategic planning | Building strategic alliances | Finding your market niche | How to survive when times get tough | Innovate to grow | Make your planning meetings count | No business is an island | Pricing strategies | Six reasons why business plans fail | Six steps to an effective business plan | Small is profitable | Strategies for increasing revenue | The right kind of growth
Here at AVASK, we can provide businesses with advice and support on a wide range of business issues. Here are some tips on strategic planning...
Strategic planning is important and clear goals and objectives are essential for a business to achieve sustained growth and profitability. But for such exercises to be effective you must be ruthless in maintaining focus and achieving measurable results.
Try applying these golden rules to your next strategy session:
Some form of strategic planning is essential for all businesses that want to improve their long-term financial performance. However, it can be difficult to do it effectively, especially without external help and constructive criticism.
For many businesses, 'strategy' is too often:
- an overly simplistic vision, which is not necessarily grounded in tangible, competitive advantage;
- concerned only with general objectives, without spelling out the 'how';
- too broad in scope, and insufficiently broken down by different product or market segments;
- controlled exclusively by too small a number of individuals;
- based upon inaccurate or wishful financial projections;
- focused only on profitability or sales measures, meaning that other important issues, such as exit values on sale of the business are often not factored in.
A new perspective
To avoid these traps, it is useful to take a fresh perspective on the business. You need to look at the wider picture, including such things as the 'PEST factors (political, economic, social and technical); the actions of your competitors, the efficiency of your systems and cost management; and the factors that drive growth in your business.
A good external adviser can often help in achieving this perspective. They can do this not just by coming up with imaginative ideas for growth and strategy, but also by facilitating discussions, by helping you to evaluate options, and by asking you searching questions about your business, which stimulate creative thinking and help you find your own solutions.
Above all, strategic planning must result in practical measures which ultimately benefit your bottom line.
Strategies should be broken down into step-by-step processes, deadlines and responsibilities decided, and project management guidelines put in place so that ideas can be implemented. Measures that will enable you to track success should also be established.
As your accountants, we can help you with much more than just your tax returns. We can assist in many of the areas that will enable your business to achieve long-term financial success. These include such things as preparing cash flow forecasts and business plans, minimising your tax burden and helping you to maximise the opportunities for raising finance.
Going for growth means learning to spot emerging opportunities and taking advantage of them quickly - before your competitors move in.
But expansion requires people, skills, experience, equipment, plant, technology, and above all capital. Gathering all these quickly to take advantage of a fleeting opportunity is often beyond the scope of smaller businesses. By the time they have mustered the necessary resources the opportunity has passed, or a competitor with more clout has beaten them to market.
Sometimes the solution is to seek a strategic alliance or joint venture with another business with which you have appropriate synergy.
The first actions are to determine:
- What the goals and objectives of the venture are
- What resources are needed to accomplish them
- Which of these resources you can provide
- What resources you are looking for a partner to provide
Once you are able to profile the prospective partner, look for candidates among your customers or clients, among your suppliers, and in industry association sources. You can also ask your banker, legal adviser, and of course us to make suggestions.
Draw up a short-list and then research each candidate carefully. Besides checking what resources they can bring into the partnership, look also at such things as their ethics, values, and expectations to see if there is compatibility in these areas.
Check their accounts, history, and reputation. Ask their customers, suppliers, etc what it is like doing business with them.
Once you have found a suitable partner and agreed heads of terms, draw up an agreement that clearly specifies:
- The goals and objectives of the venture
- The time period within which they are to be accomplished
- The criteria for measuring success or failure
- What resources each party will put into the venture
- How profits or losses will be shared
Be sure to protect your interests by agreeing rules for such things as sharing data, poaching staff, disclosing financial information, and protecting assets such as intellectual property.
Above all else, be clear about your exit strategy before you begin.
Generally, only the largest companies can hope to meet the needs of an entire market. For most small to medium-sized businesses, a key factor in business success is finding niches in the market, and exploiting them by offering specialised products or services to specific groups of customers.
Researching the market
Careful study of the market will almost certainly unearth opportunities for products or services that you are well-equipped to provide. The first step is to conduct research into existing companies in your field, with a view to understanding the areas in which your competitors are already well-established. You might use this information to create a table and help you visualise the gaps in the market where you'll meet the least direct competition.
It is important to avoid complacency about exploiting niche markets. Continue to monitor your customers' needs - perhaps with regular questionnaires - and analyse your customers to spot further opportunities for profitable specialisation.
A good database will allow you to analyse your market information and help you spot patterns that you might otherwise overlook. For example, do customers in certain geographic areas consistently purchase expensive, top-end products. If so, you might want to tailor your marketing strategy and concentrate your customer care resources accordingly.
Areas of differentiation
Here are some of the factors to consider:
It is important for all businesses, especially small and medium-sized enterprises, to be properly prepared for difficult times.
You need to plan on two levels: in the short-term, you must ensure that you have the resources and flexibility to manage short-term fluctuations. Now might not be the best time to expand or to hire additional staff. But in the long-term, you need to focus on being in a position of strength when the economy improves again.
This is essential - you can soon run into trouble if you let debts mount up, a problem which is all the more likely in lean times. Make sure you have a clear policy for collecting debts, which customers are aware of, and above all, make sure you enforce it. Pursue outstanding debts by letter and telephone, and threaten legal action if you have to.
If your terms of business allow for adding interest on overdue accounts (they should, and at a good rate), add it. If your terms set credit limits, stick to them and stop supplying as credit limits are reached or bills go unpaid.
Keep your customers loyal
In difficult times it becomes harder to attract new customers. Therefore it is more important than ever to maintain loyalty among your existing ones. Consider ways of developing and rewarding customer loyalty - selected discounts (especially for early payment, or cash with order), regular mailings, loyalty cards and so on.
Beware of cutting prices
If sales begin to taper off, it can be tempting to cut prices. But this can be a mistake. Cutting prices can have the negative long-term effect of cheapening your image in the marketplace. Remember that suppliers might also raise their prices, so try to negotiate a long-term discount with them.
Don't neglect marketing
Don't fall into the trap of cutting back on your marketing budget when cash flow is tight - it is a false economy. In tough times the marketplace becomes more competitive - you may need to market more vigorously, not less. If you do not have a strategic marketing plan, now is the time to draw one up.
Concentrate on your key employees
The wage bill is the largest area of expenditure for most businesses, and often the first target for cutbacks when times are hard. But you should always try to keep your key employees: their strengths will help you through any tough time, and you will need them again when business picks up. You could consider flexible working arrangements, or contracting out under-used staff. Cross-train employees now, so that if you do have to lose people the remaining staff will be able to cover for them.
Planning is vital for the success of your business. You need to plan what changes can be made to strengthen your business against tough times, and how to put those changes into action. But planning is not just about "worst case scenarios" - we can help you plan for your business future with advice on business management, business finances and personal financial planning to help you, your business and your family be financially successful, whatever the future holds.
It is essential to take proper professional advice to pre-empt any problems that may arise in an economic downturn. Contact us today, and we'll help you through the difficult times.
It is often said that the driving force behind continuous improvement in a business is innovation.
Innovation requires three basic skills:
- Sensitivity to the marketplace - being able to read the trends and identify emerging needs
- Inventiveness - the ability to develop a creative response to those needs, either by introducing a new product or service or by adapting existing ones
- Positioning and timing - the art of introducing the new product or service into the marketplace in the right place and at the right time
One of the most significant trends to emerge in the marketplace in recent years is that of increased time pressures combining with greater spending power among the working population. In other words, people are increasingly cash-rich, but time-poor.
Here are some examples of the way the retail sector has adapted to meet these new needs:
- Supplying high-end prepared foods, such as microwave dinners or oven-ready meals, for busy consumers for whom both the convenience and the brand add value. Though targeted at narrower sectors of the market than traditional 'convenience foods' are, these products can command premium prices and so provide higher margins. Examples include Sainsbury's 'Taste the Difference' and Tesco's 'Finest' ranges.
- Taking advantage of convenient locations or existing 'fast trade' to create one-stop shops where busy consumers can avail themselves of a number of fast track services under one roof. Again, the speed and convenience are often combined with top brands to leverage premium prices. A good example is a petrol station selling top-of-the-range grocery items, CDs and so on.
It is not difficult to see how these principles can be applied to other sectors - the key point is to stay in touch with your market and be flexible enough to adapt to its needs.
We are constantly being reminded that planning is the key to business success. 'Failing to plan,' the saying goes, 'is planning to fail.'
So every so often we dutifully gather our key staff in the conference room or hotel suite. We assemble the flip chart, distribute the Post-it notes, and begin the familiar ritual of brainstorming goals and objectives.
At the end of the day we return to our offices with the next three months' goals:
'Become more customer-focused,' 'Improve procedures,' 'Strengthen teamwork' and so on. And of course nothing changes. So how can we make sure that our planning meetings really do have a beneficial effect on the business?
It is very easy to fall into the trap of communicating with each other in a detached 'conference-speak' that virtually ensures any goals or objectives we articulate are too vague to be implemented. The result is, of course, that such exercises gradually lose their credibility and the opportunity to make use of employees' energy to make significant progress is lost.
However, if approached in the right way, it is possible to make planning a meaningful activity that contributes to real improvements in both performance and profitability.
Five-point planning procedure
The overall objective of a planning exercise must be to set measurable goals to be accomplished within a specified period by implementing clearly defined procedures.
Try following this five-point procedure:
- Limit your wish list to two or three projects. Long lists tend to lead to unstructured business rather than measurable progress
- Avoid vague or clichéd objectives. Spell out in plain English precisely what is to be achieved, by whom and by what means
- Establish clear criteria for measuring progress and assign someone to do just that
- Specify how the plan may be modified, if at all, as it is implemented
- Agree a definite time and place to evaluate the final outcome - and be sure to conduct that evaluation
Progress in business does depend upon planning, but only if that planning is practical, measurable and subsequently implemented.
Do you see your business as an island unto itself or as a vital link in a chain? If you want to maximise your profits, it is often necessary to take a wider view...
Whatever the nature of your business, the chances are that you are part of at least one supply chain that delivers products or services to the end customer or client. Looked at in this way, all the other businesses in that chain, from origination through to final delivery, are effectively your trading partners.
Everyone adds value
Each one of you has a vested interest in the performance of all the others because the supply chain is effectively a value chain in which each participant adds value at each stage of the process for which they are responsible. This way of viewing your business points up the interdependence of all the businesses in any chain of which you are a part.
In a nutshell, any value added at any stage in the process is inherited by all the businesses further down the line; and any waste, redundancy, excessive cost, or reduced value is also passed on in a similar way.
Collaborate with your trading partners
A key strategy in maximising profitability, therefore, must be collaborating with other businesses in the chain to reduce waste and increase value at every stage. For example, you might:
- Agree exclusive buying deals - approach a few 'preferred providers' with the offer of an exclusive buying deal, which could guarantee business to a supplier in return for favourable prices.
- Ask your suppliers to help you reduce costs - It is becoming more common to ask suppliers whether there is a cheaper alternative specification that suits your needs. Knowledgeable suppliers can often suggest alternative materials or cheaper processes.
- Talk to suppliers to get leads - your suppliers may already be dealing with your potential customers. You may be able to establish a two-way lead-referral process.
Inevitably, such strategies begin cautiously with confidence building and trust building exercises. These should be designed to help both parties recognise areas of mutual interest and develop understanding of how you impact on each other's cost and value structures. The next stage is to develop strategies to reduce the costs and increase the value you pass on to or inherit from each other.
Breaking down barriers
This process-based model breaks down the traditional boundaries, not only between different stages of the process within your own business, but also between businesses in a shared chain. It enables you to act collectively to reduce costs and increase value so that everyone involved will reap rewards.
One of the most important decisions to be made when launching a product or service is setting the price. Sometimes, this is also one of the most difficult decisions.
Ultimately, you will want to make as much profit as you can from each sale, with prices set at the highest point possible before demand starts to decline. But numerous factors will influence your pricing structure. For a start, you must consider your business objectives: for example, if your aim is just to maximise profits, you may set a higher price than if your objective is to increase market share or grow sales.
Here are some of the issues you need to consider:
Covering your costs
A popular and simple method of pricing a product or service is to calculate the costs of producing it and add a profit margin. For example, if it costs £10 to make a product and you decide on a mark-up of 50%, the sale price will be £15 (and the gross profit will be 33.3%).
However, when using this method, it is important to take into account all costs. Some 'direct' costs will be obvious, such as stock, materials, employee wages, storage, packaging and delivery. But you must also be aware of 'indirect' costs, such as rent, utility bills, insurance and depreciation of equipment. You may need our advice when analysing your total costs.
In addition, using this 'cost-plus-profit' method alone fails to take into account such factors as competition, market trends and the needs of the customer.
Competition and customers
Customers buying standard products available from numerous sources will generally look for the supplier with the lowest prices. This makes it difficult for the small business to compete with large corporations, who can mass-produce and purchase in bulk.
Consequently, many successful small businesses do not even attempt to compete by lowering price, but instead focus on other areas such as perceived quality, customer service or uniqueness of brand. Indeed, if you are marketing your product or service as high-quality or 'luxury', customers will expect to pay more and a cheap price will actually harm sales.
Different approaches to pricing
Sometimes, you might want to set different prices for what is essentially the same product. This may be done in a number of ways, such as:
- By customer group - for example, existing customers might get discount prices on new products; or entertainment venues might charge lower prices for students.
- By time - prices can be varied by season or time. For example, off-peak and on-peak telephone charges, or off-season holiday deals.
- By geographic location - you might be able to charge higher prices for the same product in more affluent areas, or in places where there is less competition.
- By image/form - with different packaging and image, the same product might be sold at different prices to different markets.
As you can see, there are many different issues to consider when setting a price. It always pays keep an eye on your pricing in relation to the competition, and hopefully be one step ahead.
At AVASK we can provide help with writing a business plan, based on our experience of working with businesses across the globe. Here are six reasons why business plans fail – and how to make them succeed…
You may well have prepared a business plan some years ago to present to your bank manager. If you revisit that plan now, you will probably be surprised by how little relationship the position of your business now bears to that predicted in the plan. The reality is that most business plans fail. Here are some of the traps to avoid:
1. A dead document
A business plan that is created for a purpose and then discarded will always become obsolete quickly. Making your business plan a living document is essential if you don't want the whole process to be a failure. Only a regularly reviewed and updated plan can be the spur to look critically at your business on a recurring basis.
Most business plans are over-optimistic, especially as regards predicted sales, often massively overestimating the size of the market. Research your market thoroughly. Too many business plans include a SWOT analysis, but concentrate on the strengths and opportunities and ignore the threats and weaknesses.
3. Ignoring the competition
Business plans commonly assume that the competition will make no competitive response or indeed, will have no new initiatives of their own. Study your competitors and try to second-guess their plans. A living document will take into account their actions.
4. New or old?
Too many business plans depend on doing something new, when what is needed is to find a better way of doing what is being done now.
5. Ignoring risk
What are the risks attached to the plan? Think through these and the costs of failure as well as the rewards of success.
6. Profit or turnover?
If expansion is planned, it should result in increased profits, not just sales. Expansion requires finance, people and other resources. Can you get them?
Remember: a good business plan is as much about the process as the final document. Creating your plan will open your eyes to the realities of your business. Keeping it updated will help you stay on the right track.
For help with developing your plan, contact a member of the AVASK team today.
If you think your business performance can improve and, amidst the meetings, phone calls, e-mails and office crises, you find it difficult to know how to begin, then you will benefit from reviewing your business planning.
Don't confuse business planning with crisis management. The former should prevent the latter. Making time for planning now can reduce the time you spend fighting fires later. Here are six key steps that can lead to an effective plan for your business:
Remember: a good business plan is as much about the process as the final document. Creating your plan will open your eyes to the realities of your business. Keeping it updated will help you stay on the right track. For help with developing your plan, call us.
In a world of large, multinational corporations, it might sometimes seem that smaller businesses cannot effectively compete. But there are also advantages to being small, and good planning and management can help you make the most of your strengths.
Use your advantage in the labour market
In today's world of mergers, downsizing, and outsourcing, working for large companies is losing its appeal for many employees. Not only is job security becoming a thing of the past, job satisfaction is decreasing while workplace stress is increasing.
Conversely, working for small and medium-sized firms is becoming increasingly attractive. Research suggests that employees of SMEs are much more satisfied with their work-life balance, and they find that their roles are more varied and personal than in a large company. With good planning you can use this advantage in the labour market to attract higher calibre employees - and to retain those you already have.
Look to your profits, not your earnings
Smaller businesses also have a key advantage over large companies when it comes to a long-term commitment to innovation.
Often the investment decisions of public companies are driven by the short-term contingencies of the stock market and pressures from major shareholders, which can narrow their options as far as investing in innovation is concerned. SMEs, by contrast, are largely free from these restraints. They can focus on long-term profitability rather than short-term earnings.
Use nimble strategies to stay one step ahead
Conventional wisdom says that the key to success is to increase your share of the market, which implies that businesses that command only a small market share are at a disadvantage.
But this need not be the case. Generally, the larger the share of the market a company commands, the more remote it becomes from its customers. In smaller firms, by contrast, the managers tend to remain closer to their customers. This enables them to read changes in the marketplace sooner and more accurately, and to develop responses more quickly than larger companies are able to.
Small businesses have numerous advantages in the marketplace, but they need to develop the strategies for making the most of them. We can help you improve the dynamics and the profitability of your business.
One of the keys to successful profit improvement and sustained business growth is to develop strategies that increase revenue for your business.
A useful tool in developing such strategies is the product/market matrix:
|Existing products||New products|
The matrix defines four areas where you might consider revenue-increasing strategies.
Although it refers specifically to selling products to customers, it can be applied equally effectively to selling services to clients.
1. Existing products in existing markets:
Highest rate of return
As a general rule, strategies focused in the top left quadrant will require less resources and are more likely to generate the highest rate of return on your efforts, at least in the short term. Here you might consider:
- Increasing the selling price to increase your margins.
- Reducing the selling price to increase sales volume or market share.
- Cross-selling additional products or services to existing customers or clients.
- Persuading customers to increase the size of their order.
- Upgrading, ie. encouraging customers or clients to purchase a more sophisticated version of the product or a higher level of service.
Profit Point: Take care of your existing customers
It costs more to gain a new customer than to keep an old one. Make sure you look after your best customers.
2. New markets for existing products: Extending your market
Possibilities in the lower left quadrant include, for example, extending your market geographically or repositioning an existing product or service to occupy a different market niche.
Profit Point: Target new customers for high profit goods and services
New customers are expensive to acquire, but high profit items make it worth seeking them out. Decide upon the best geographic areas and sectors to start with, otherwise you risk spreading the message too thin.
3. New products for existing markets:
Leveraging increased revenue
The top right quadrant is all about listening to your customers and meeting their needs. Businesses that listen closely to their customers or clients will have no shortage of ideas for leveraging increased revenue from existing markets by introducing new products or services tailored to their needs. Possible strategies here include developing product line extensions and accessories or bundling new products or services with existing ones.
Profit Point: Understand customer demands
Make sure you have mechanisms in place for finding our what your customers think of your service, and what their real needs are. Don't just offer them what you think they want.
4. New products in new markets: Diversification
The bottom right quadrant represents perhaps the most ambitious possibility, and obviously calls for careful research before too many resources are invested in a new venture.
Though there might be dangers for some businesses in departing too early or too far from their core competencies, for others such diversification might provide more stability and a stronger cash flow in a volatile market.
Such growth can be achieved either by additional investment within your existing business structure or through an appropriate merger or acquisition.
Profit Point: Make alliances to move into new markets
Sometimes it can be very effective to arrange joint ventures with businesses that have complimentary assets or skills before venturing outside the sectors that are known to you.
In the pursuit of improved profitability you might be forgiven for thinking that any kind of growth is desirable, but in reality there are two types of growth - healthy growth and unhealthy growth.
You can tell whether your growth is healthy or not by looking at your profit and loss statement or at your balance sheet.
From your profit and loss statement, calculate the percentage growth of sales and the percentage growth of earnings. If sales are growing faster than earnings, this is a sign of unhealthy growth. The bigger the gap, the more unhealthy the growth.
Alternatively, from your balance sheet, calculate the percentage growth of key asset categories - debtors, stock, and fixed assets such as equipment. If the percentage growth of these categories combined exceeds the percentage growth of sales, this is an indicator of unhealthy growth. Again, the bigger the gap, the more unhealthy the growth.
The indicators of healthy long-term growth are:
- The percentage growth in earnings is keeping up with or exceeding the percentage growth in sales.
- The combined percentage increase in the key asset categories is less than the percentage increase in sales.
Growth in sales can look impressive but if it is not matched by a corresponding increase in profitability it can conceal underlying problems such as:
- Inadequate cash flow.
- Unhealthy stock levels.
- Too many debtors
Sooner or later, these problems will surface as dissatisfied customers, demoralised employees, strained systems and controls, and stressed-out owners.
If the root causes are not addressed, what started out simply as a problem of rate of growth can become a question of survival.