COMMENTS ON STRATEGIC PLANNING & BENCHMARKING
by Bill Lynn, Fifth Ward Alderman

Maximizing the value of the firm

In finance it assumed the goal is the firm is to maximize stockholder wealth.  In order to maximize stockholder wealth the firm needs to maximize after tax cash flow. Cash flow takes into account revenues, costs, depreciation and taxes.

For instance in the US depreciation is a tax deductible item but it is considered a non cash item.  This means it reduces your taxable income, but it does not necessarily mean the timing of the payment is the same as the depreciation.  

Example:         Revenue
                        - direct costs
                        - indirectt costs
                        - depreciation
                                =before tax profit
                                        -income tax
                                =after tax profit
                                        +depreciation
                                = cash flow

The value of the firm is then based on the discounted cash flow over the life of the firm.

What strategic planning does is help to increase cash flow and thus the value of the firm.  Thus the firm should concentrate on the aspects of the firm that increase cash flow the most.  Although easily said, it is not always clear what those are. 

Cash flow can be increased by either (1) increasing revenue (2) reducing cost, or (3) reducing taxes through tax planning.

Understanding what the firm does and who you are.

What does your firm do?  This is critical and not always easy.  The firm should develop a mission statement.  This is a concise statement of the major goal of the firm.  For instance in your business, it might be position yourself as the premier plastics manufacturer in a specific segment of the industry serving customers in a cost effective manner.  (This is an example)  I would recommend studying the mission statements of other organizations to obtain an idea of what you consider to be a ‘good statement.’  In doing this you recognize you cannot be ‘all things to all people.’  This is a classic business error, so you must understand that it is better to be very good in some aspect of the business.  You can concentrate on this and become known for that characteristic.  (low cost, high quality, fast production are examples.)

Evaluating your firm

In order to achieve your firm’s goals you must first analyze the current status of the firm.  In order to do this you must evaluate your firm internally and the external environment.

The first issue is to determine what type of environment the firms exists in.  This is often done through what is called a SWOT analysis.  SWOT stands for Strengths, weaknesses, opportunities, and threats.

Strengths
            What are the firm’s major strengths?   Is it in production, sales, distribution, or some other aspect of the business?  In general you want to play to your strengths and capitalize on them.  You also want to determine your major strengths. Firms are not good at everything so they must be very honest about this assessment, because it can point to the direction your firm wants to take.

Weaknesses
            What are your firm’s major weaknesses?  This is sometimes difficult to admit, but it too is critical.  If you have a weakness that impacts other aspects of your business you may either conclude you must improve in this area or develop and alliance with a firm that has a strength in this area.  For instance, Wal-Mart is a very well known company.  They are very good at sales and distribution, but they do not produce their own products.  They concentrate on sales and distribution and seek out companies that are good at producing the products they want.  They then negotiate with those companies to obtain the best prices.  This creates an alliance that makes use of the strengths of both companies, and helps them overcome their weaknesses.

Opportunities
            In considering opportunities the firm must evaluate both current opportunities and future opportunities.  This means they must evaluate what is going on around them in the market.  For instance, in the plastics industry there have been many improvements in the quality and types of plastics.  This broadens the market and allows you to sell your products in areas where they did not previously exist.  For instance some years ago I worked with a plastics firm that wanted to build plastic pallets.  The price was higher than for wooden pallets, but they could be used and sanitized.  This made them ideal in the food business.  The advantage has increased with time.  It was also determined that since plastic did not rust or rot it was ideal in high moisture applications and the company discovered a market in making growing trays for the mushroom industry. 

Again, this can take time and research to discover.

Threats
            There are always threats to business.  These may be from government regulation and taxes, other industries, natural disasters, supply disruptions, and many other things.  For instance in the plastics industry much plastic is made from petroleum. The cost of petroleum is rising and this constitutes a threat.  Environmental regulations can also be a threat.  Other examples might be changes in technology, new products that will replace your product, lower cost producers entering the market, or inability to obtain needed inputs which could include skilled labor.

Establishing a strategy related to your mission

Given this information the firm then needs to establish a strategy.  This means the firm will look at several potential goals and then determine the goals that are the most important to them.  For instance your company may want to expand production to serve another industry or a larger distribution area.  It might want to expand production into another type of plastic.  Assume your company is very good at sales and distribution they might want to create a strategic alliance with a company making a complementary good that you market.  You might want to set as a goal finding new suppliers or cutting cost. 

You should focus on a very limited number of goals that are achievable in a period of time of a few years.  In the US most companies concentrate on establishing long term goals of about five years.  While these goals are five year goals the firm must establish a series of changes and steps to be done at intervals to assure that these will achieved.  Further the actions to be taken must be measurable and should be used as benchmarks to the success of the program.  These benchmarks may be generated either internally or from external sources.  The plan should be audited to make sure progress is being made, and if not why.  The audit should be done at least on an annual basis but it may depend on the timing of the actions taken.  For instance if you are to achieve a certain action within 6 months be sure that is done.  For instance you may decide that you are going to determine what industries are currently using your products and obtain names of all the companies in that industry.  If this is be achieved in 6 months, be sure you at least review the time line to determine whether it has been done or not.    

Benchmarking

It is important that you establish ways to measure your progress and outcomes.  These measure are called benchmarks.  After developing a long term plan you must measure progress along the way.  For instance assume you want to double your sales in five years.  You must set intermediate goals along the way to make sure you are making progress toward the final goal.  You might want to measure progress yearly to make sure you are increasing 20% annually. 

In some cases benchmarks may be comparable to industry averages or some normal mesasures.  This is true in many financial benchmarks such as liquidity ratios (current assets/current liabilities for instance).  If you are establishing a change in a financial ratio over the long term make sure you are making progress toward that goal.

In other cases the benchmarks may be internally generated as discussed with increased sales.

Who should be involved?

It is necessary that everyone in the company support the established goals.  If they don’t they won’t take action to support those goals and that will mean you won’t achieve the goals. 

This means not only should everyone support the goals of the plan each department must develop a plan to support the strategic plan.  For instance if you want to double sales in five years, the personnel department will need to develop a plan to expand your work force.  The production department will need to develop a plan to expand production and probably production facilities.  Purchasing must gear up to buy more inputs and shipping must expand their capacity.

Each department must develop a supporting strategic plan.

Evaluating your progress

You must evaluate progress toward the goals of the plan on at least an annual basis.  Are you achieving those goals and if not why?

If you are not then you must determine if it is an internal problem or something has changed in the external environment.  Once this is determined then you can plan a course of action.  This could be very easy such as providing more resources to one department because they are unable to provide the level of services necessary or it could entail making major changes since the entire external environment has changed.  Where technological change is rapid this may mean major changes in the overall plan.