4 thoughts on business strategy

As 2017 starts and the world changes in many ways, including technology, the labor force, globalism, politics and more, we find it helpful to relook at strategy and what's working and what's not. Here are four thoughts on strategy.

1. Strategy and Strategic Analysis Begins Internally, Not Externally; Double Down on What's Working. When a company looks at strategy, its first goal should be to examine its own business. Here, strategy should start with the company examining what is working, where revenues are coming from and where margins are coming from. Then, once this is understood, the next plan in most situations is to protect those revenues and margins. I.e., it is often to double down on those areas that are generating revenues and margins.

People and companies so often think of strategy as looking for the next new thing. We think strategy starts with allocating resources first and foremost to things that are working and generating the cash that drives the business and creates new business. This doesn't mean that you can be solely focused on those things. The things working today will not likely provide cash forever. At the same time, business strategy should start with knowing your own business and focusing 75 to 80 percent of energies on those things that drive your revenues and margins.

As a corollary to knowing your own business, we push to narrow down our focus on the business to those lines or areas that generate acceptable revenues and profits, and then allocate most efforts to those areas. If in a business the core clients are customers from the banking sector or healthcare sector, our bias would start with doubling down on those areas. Similarly, with great niches we are in, or great people we work with, we want to over-allocate efforts to the niches that are working for us and the people on our team who perform well. Thus, 80 percent of time might be spent with one's top 20 to 30 percent of performers. Similarly, 80 percent of time would be spent in niches that drive the great majority of the business. In a similar vein, in most businesses, 20 percent or some minority of customers may generate 80 percent or some significant percentage of the revenues. Again, most efforts would be focused on serving those customers that drive the lion's share of the revenues.

2. Abandon Projects and Areas That are Not Profitable. As a way to make sure you are spending time on the right areas, we are proponents of pruning out those areas that don't drive profits. Pruning out areas and projects clarifies the company's focus and eliminates distractions. It also sends a clear message that resources of the company, people and monetary resources will be spent and devoted to priorities to the company. Thus, the periodic reduction of items that the company is pursuing (reductions of "stock keeping units," the old term for service lines or areas) is critical to improving performance.

3. New Areas; Can You Win? Is it Worth Winning? In reviewing new areas, we start with two core concepts. The first concept, or series of questions, is — Can we win in the area? Is the competition such that we can win in it? Or is the competition so great that, even with great efforts and resource allocation, we would have a difficult time winning?

The second question we look at is — If we win, is it worth winning? For example, a law firm can be the best individual or small group physician law firm in the world. But even if it wins, the business might not pay very well and maybe a difficult business to be in. There are numerous different discussions along these lines to be had in almost any business, i.e., niches that you could win in, but is it worth it if you win?

There are three other issues worth considering regarding building and choosing new areas of business. First is the concept of building first in areas adjacent to your core. There is a great book on this subject called "Profit from the Core: A Return to Growth in Turbulent Times" by Chris Zook and James Allen. Here, they focus on the concept of seeking success first in areas that are close to where you currently succeed. Typically your people understand those areas better, you may have business and operational synergies in those areas, you might already have market recognition in those areas and your customers may follow you in those areas. Thus, there are number of things that drive success in closely aligned areas.

Second, another concept related to strategy and testing areas comes from Jim Collins in one of his books "Great by Choice." He says in testing new areas, don't over-allocate resources. Rather, fire "bullets" versus cannons to understand if there is an opportunity to win in a new area.

Third, a final concept is as follows. When you pursue a new area, it is often easy in most businesses to obtain some small wins in the new area. This is where it is very important to go back to the initial question of, "If we win in this area, is it worth winning?" Gaining a few wins in a new business is often easy because there are usually customers in any segment who are dissatisfied with their current provider. The great challenge is figuring out whether you can deeply win and, if you do so, whether it is worth winning. We encourage people not to take the early wins too seriously — they are sometimes misleading as to the real depth of the ability to win in the area or the value of the winning.

4. Great People are the Whole Thing. We believe, as it has been stated in many different business books and lectures, that at the end of the day a great deal revolves around having great people in place. Looking at strategy — without the concept of how we are going to get there and who is going to lead us to get us there — is a very difficult empty process. Rather, if you have put together a great team, it is often easy to pursue all kinds of different strategies and succeed. In short, strategy should come hand in hand with building a team of great people.

 

 

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