Center for Management of Emerging Companies

Business-Level Strategy

Growth is a key goal and objective for emerging companies and management must carefully determine the best way to combine the core competencies within a firm’s functional departments to provide the firm with the best opportunity for achieving and sustaining a competitive advantage in its chosen environment.  This report focuses on the process of setting business level-strategy, which includes (1) selecting the domain(s) in which the firm will be competing for scarce resources (e.g., capital, personnel, technology, inputs and customers) and (2) positioning the firm in each chosen domain so that its function-based core competencies are most effectively leveraged to establish a competitive advantage.  The overall goal of business-level strategy is to protect the firm’s position in its current domain and, if possible, enlarge the domain in which the firm can operate with a competitive advantage.

Preparing a Business Plan - Guidelines for Professional Legal Advisors

This month's post is a chapter on Preparing a Business Plan written with AiMinh Nguyen that will appear in an upcoming book for professional legal advisor published by the American Bar Association--Emerging Companies Guide 2d Edition. 

New Book - Organizational Management & Administration

In December of this year, Thomson West will be publishing the first volume of my new publication--Organizational Management & Administration: A Guide for Managers and Professionals.  The publication is intended to be a comprehensive guide to management and administration of organizations, particularly emerging companies, and will draw on many of the issues covered in this Blog.  Please click here to review the Preface for the publication, which provides an overview of the content of the first volume.

Implementing a Law Firm's Strategic Plan

Implementation is, of course, the most critically important part of any strategic planning process.  However, the senior managers of the organization may get so caught up in the details of one or more of the initiatives in the plan that they neglect the need to take time to create an implementation plan and dedicate the necessary resources to make sure the plan is launched effectively and that progress is continuously monitored.  In this report I discuss implementation of a strategic plan for a law firm and some of the specific issues that can arise in that context as the firm pursues new geographic and client markets or the creation of new practice areas.

Strategic Planning for R&D

One of the key functional areas for an emerging company is research and development and it is absolutely essential to align the activities of the R&D group with the overall business and technology strategy of the firm.  This report covers some of the basic elements of a solid R&D strategy including portfolio analysis, budgeting and ongoing evaluation of group performance.  Another issue to consider is when, and how, R&D activities should be outsourced.

Final Pre-Implementation Strategy Review

It is clear that the strategic planning process can be time-consuming and requires a substantial amount of managerial resources.  Once the mission and strategy statements have been completed, and the goals and objectives have been established, the senior managers of the relevant business unit (or the firm as a whole in the case of corporate-level strategies) will obviously be eager to push forward.  Before proceeding, however, it is wise to have an objective, independent group composed of members that have not been involved in the strategy formulation process conduct a final pre-implementation strategy review.  This type of approach, which can also be used for specific “bet-the-company” transactions, introduces a “devil’s advocate” to the process in order to ensure that full consideration is given to the tough questions that need to be recognized and answered before the firm commits its resources to a particular strategy.  While it is not surprising that the strategy developers will often resist this approach, their cooperation and understanding can be solicited by assuring them that the members of the group are not interested in managing their business but rather are looking to gain a better understanding of how decisions have been made and the assumptions that are being used in developing the strategies.  The personal agendas of the reviewers and the strategy developers should not be allowed to interfere with the review process and the focus should remain on determining whether the proposed strategy is the best of all feasible alternatives even if it includes risks and minor defects that can only be recognized and not totally overcome.

The review group should always be led by someone who has no direct stake in the outcome of the review and is not part of the management hierarchy involved with creating and executing the strategy.  In this case of a review of a business unit strategy this means that the group leader should be a senior manager of another business unit.  Corporate-level strategies should be reviewed by groups overseen by an independent member of the board of directors with proven experience in strategy development who understands the overall organization of the company.  Group members should have a knack for being able to pose questions that focus specifically on the assumptions used in developing the proposed strategy since it is important to ensure that a wide range of possible scenarios have been considered.  Group members should also be reminded that it is not their role to come to conclusions and advocate their own answers to the questions that they raise, nor should they seek to develop their own alternative strategies.

The questions posed by the review group will obviously depend on the particular strategy under consideration; however, questions that probably should be asked in almost every instance include the following:

• Is the strategy realistic and is it likely to produce long-term success for the business unit and/or the firm as a whole?

• Is the strategy constructed in a way that it will withstand public scrutiny and reasonably anticipated turbulence in the relevant business environment?

• Have the developers of the strategy taken past experiences and failures into account in assessing the likelihood of future success for the strategy?

• Does it appear that the members of management hierarchy involved with creating and executing the strategy have had access to all relevant information, including dissenting views?

• Has consideration been given to the impact that the strategy will have on existing businesses?

• Have the strategy developers considered all reasonable options before settling on the specific strategy under consideration?

• Do the advocates of the strategy demonstrate sufficient confidence in its likelihood of success and would they be willing to risk their personal resources on the ultimate outcome of the strategy?

The work of the review group should be respected and the managers associated with the development and execution of the particular strategy should be required to prepare some sort of formal response to the review even if it is ultimately decided to move forward with the strategy in essentially the form it was originally presented for review without significant modification to take into account the findings of the review group.

The discussion in this post is based on P.B. Carroll and C. Mui.  “7 Ways to Fail Big” Harvard Business Review, September 2008, 82-91, 86-87, and this material will appear in Fall 2008 in Alan Gutterman’s publication entitled “Business Transactions Solutions” and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.  Alan Gutterman is the Founder/Principal of Gutterman Law & Business (www.alangutterman.com), which publishes the Emerging Companies Blog and the Business Counselor Blog, and a Partner of The General Counsel LLC (www.thegeneralcounsel.net).

Challenges for Strategic Planning in Developing Countries

The introduction of formal strategic planning programs among firms in developing countries has been slow.  The best candidates for planning are those companies that recognize that they are under pressure to improve their performance, either from the government or from their customers and other business partners.  Unfortunately, however, the general economic and political environment in many developing countries has often stymied the ongoing development of strategic planning.  For example, senior managers in government-owned or controlled firms are hardly secure in their position, with changes anticipated whenever a new administration assumes control.  As a result, these managers cannot be blamed if setting long-term goals and objectives, and establishing strategic plans to attain them, is not a high priority in relation to their other day-to-day activities and responsibilities.  Moreover, attempts to implement industrial policy are often marked by frequent restructuring of enterprises, thereby destroying the continuity necessary for the planning process to be accepted and successful.

One fundamental area of concern is ensuring that managers in developing countries obtain the necessary skills and training to enable them to successfully conduct the planning process.  For example, managers must develop the capacity to identify various alternative options and then select those options that are most suitable for the firm and its resources.  This requires training in decision making techniques, including cost-benefit-analysis and computation of risk-adjusted return on investment.  Managers in developing countries must also receive training and experience in planning techniques, including opportunities to actually implement their plans in their organizations.  The later element is often missing in current training programs, which are largely limited to lectures that are not tied to actual planning projects back at the firms of the participants.

Another factor that often influences the planning process in developing countries is that many locally-owned firms lack experience in formal strategic planning.  For example, it has been noted that African enterprises tend to simply produce budgets and forecasts of future revenues and use this information as a basis for requesting the funds thought to be necessary to cover operating expenses.  What is lacking in this approach is any detailed research on environmental factors, market trends, or the activities of competitors.  Also, efforts to introduce strategic planning in developing countries are often hampered by the traditional cultural beliefs that the future is best left to fate and that planning is just futile.  Moreover, the high levels of economic and political instability in developing countries tend to frustrate attempts to create reliable forecasts.  Finally, while large foreign firms in developing countries are used to sophisticated planning systems, often extending out for a number of years in the future, parastatals and locally-owned firms are rarely able to move beyond the most basic planning sequence.

A related problem in this area is the historical tendency among firms in developing countries to rely on outside consultants in whatever planning process that may be used.  Under this scenario, consultants come to the firm, interview the managers, and return with a completed plan for approval.  This approach misses important opportunities for managers to be involved in the planning process and apply knowledge and information they may have collected during training and lectures.  Moreover, if the managers are not intimately involved in the process of creating the plan, it is less likely that the plan will be implemented due to a lack of real emotional commitment to a plan that is largely the work of outsiders.

Successful planning in developing countries will also require some changes in the management style and organizational culture.  Planning is a collaborative exercise and requires that managers must be open to innovation, change, and new ways of doing business and communicating.  Specifically, managers in developing countries must abandon their traditional notions of their relationship with their subordinates and be willing to accept and embrace employee participation and set up a whole set of procedures and practices that support the employee involvement in the planning process.  For example, if the plan includes performance targets, appropriate changes in the incentive and reward systems in the firm may be required.

The content in this post has been adapted from material that will appear in Going Global: A Guide to Building an International Business (Fall 2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

Business Plan Preparation: The Mission Statement

One of the most important and challenging elements of any business plan is the mission statement, which should be a short and concise pronouncement of the purpose for which the company has been organized and the specific targets and objectives of the company’s business activities.  The process of developing the mission statement forces the founders and other members of the senior management team to carefully evaluate the resources of the business, their own personal goals and objectives and the function that the company’s product and services may serve in the marketplace.  The mission statement should not be confused with operational aims such as achieving profitability or accumulating wealth for investors—the statement should educate customers, employees, business partners, regulators and members of the general public about the social function that the company intends to serve (i.e., the value that the company will create in the marketplace).  A statement of purpose creates an identity for the business and also helps guide decisions about key issues such as what products and services to offer and how they should be positioned and marketed.  The mission statement also become a rallying point for the company’s human resources and plays a strong role in how and where the company seeks capital to fund its operations.

The process of creating a mission statement forces companies to address a fundamental question that is often deceptively difficult to answer—just what business is the company engaged in?  While it is typical for companies to define their business by reference to the specific products and services that they offer the better approach is to focus on the value associated with the output of the company’s business activities and the core competencies that the company has developed in order to generate that value.  By taking this approach companies can avoid defining their businesses too narrowly and thus missing out on opportunities for positive that may be created by unforeseen future events such as new technologies and competitors.  For example, the launch of a new company may be based on development and commercialization of a specific device to provide greater protection against theft at the homes and offices of customers.  While the particular product may be sufficient to sustain the company in the short-term, the ultimate survival of the business will likely depend on the continuous development and introduction of a suite of security-related products and services.  In fact, this will be crucial given that competitors may soon duplicate the original device and drive down prices and margins.  In that situation the company must embrace a mission statement that institutionalizes a broader goal of offering value in the form of superior security products and services and acquiring the resources necessary for creating and sustaining the necessary core competencies to developed value-added outputs.

Although the mission statement should be short, often no more than a single sentence, it can take days or months to emerge and once the statement has been drafted there is still more work to do—the founders and other members of the management team must identify the basic philosophical tenants of the firm that will support the mission statement and serve as the foundation for the appropriate corporate culture.  There is obviously a vast array of issues and questions that might be considered when crafting a company’s basic philosophy and organizational culture has become an important sub-discipline within the broader field of organizational studies and theory.  In any case, serious thought needs to be given to fundamental questions such as the level of risk that is appropriate in making decisions about new products, services and business relationships and the best ways for the company to interact with its external environment (e.g., customers, suppliers, competitors and regulators).  The answers will determine how the business operates and the decisions by managers and employees that are considered appropriate.  For example, if the firm philosophy is relative “risk averse” the sales team may shy away from aggressive credit policies for new customers and the product development group will be more likely to select projects that incrementally improve on current offerings as opposed to pursuing ideas that may lead to true innovations but also carry much higher levels of uncertainty.

The content in this post has been adapted from material that will appear in Business Transactions Solutions (Fall 2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

 

 

Revolution or Evolution

Innovation is certainly a noble objective for a start-up company and many entrepreneurs rush to form a new business in order to “change the world” and bring about revolutionary changes in markets and the day-to-day expectations of customers.  A grand vision is certainly important in attracting necessary resources for the business including qualified personnel interested in pursuing innovative projects and capital providers attracted to business concepts with high potential returns on investment; however, entrepreneurs must also be able to take a pragmatic approach to building their companies and accept the fact that their planned revolution will only occur, if ever, through a series of smaller steps taken over an extended period of time.  Even the best new technology takes time to develop and will require patient communications with prospective users to educate them and alleviate any concerns that they might have about switching from their current solutions for the problems that the new technology is seeking to address.  Accordingly, entrepreneurs must have the judgment and courage to create and implement a strategic plan that maintains the long-term vision that formed the basis for launching the company in the first place while breaking the journey down into achievable milestones.

The content in this post has been adapted from material that will appear in Business Transactions Solutions (2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

The Budgeting Process

The budgeting process is an essential element of strategic business planning that involves the development of the goals and objectives of the company; the formulation of specific department and overall organizational budgets; and the reporting and follow-up of budget variances and revisions.  The goals and objectives of the company should, of course, be based on an assessment of the marketplace, the operational activities and strengths of the company, and the long-term business objectives of the stakeholders of the company.  These goals and objectives are needed in order to give direction to the budgeting process.  Operational objectives could include such things as controlling inventory levels and carrying costs and, if so, the budget should include all the indicators necessary to monitor inventory-related performance.

Analysis of variances is absolutely necessary to evaluate the integrity of the budgets as well as overall performance of organizational operations.  By identifying and analyzing material variances, management can determine if the budget needs to be revised and/or other operational decisions are required.  In order for the budgeting process to be most effective it should be done on a continuous basis as opposed to episodically or once a year so that the budget becomes a tool for regular feedback and improvement. 

Fixed budgets are generally used in situations where the sales volume of the company is relatively stable and predictable.  Fixed budgets are based on the estimated or standard unit costs, selling expenses and administrative expenses that correspond to a specific projected volume of sales.  A fixed budget serves as a profit plan--assuming that the estimated costs and expenses are less than the projected sales revenues—and can be used as the basis for cash flow forecasting; however, the utility of a fixed budget depends heavily on the accuracy of the assumptions regarding sales volume.  Accordingly, if the actual sales volume differs substantially from the projections, either due to unforeseen circumstances or faulty assumptions, then a fixed budget will immediately require modification—particularly if sales are depressed and cost cutting is needed in order to avoid substantial losses.

The alternative to a fixed budget is a flexible, or variable, budget.  This type of budget is useful for controlling expenses and evaluating managerial performance.  Development of a flexible budget begins with allocation of expense items to three different categories: fixed, semi-variable and variable.  Each expense item has its own specially developed formula that is used to forecast costs and expenses based on the actual level of sales or production.  Allocation of expense items and development of formulae can be a challenging process since it is often difficult to determine whether an expense is fixed or variable or choose whether the formulae should be based on sales or output.  However, the time and effort invested in creating a flexible budgeting process is generally comparable to that associated with a fixed budget if one factors in inevitable modifications to the original fixed budget in light of actual operational performance.  In fact, flexible budgeting is probably the preferred approach for smaller companies that are growing since there is bound to be unpredictability with respect to sales and output and the inherent flexibility lends itself to the management of change that is so necessary during the earlier stages of the company’s development.