CategoryBusiness Advice Archives — Page 5 of 8 — C. Lynn Northrup, CPA, CPIM
Basics of Strategy
Gaining an understanding of strategy and its objectives is essential not only for business, but in everyday life. I teach this topic to my accounting and finance students and thought it would make a good blog post.
Competitive strategy is really about being different and selecting a different set of activities capable of delivering a unique mix of value to customers. In the process of selecting a different set of activities it boils down to the choices you make to change the rules in your favor so you create a competitive position that eliminates the competition.
Choices to change the rules should include setting the right goals. A sound strategy might be to achieve superior profitability by not becoming too big or growing too fast. It might involve becoming a technology leader. Strategy needs to have continuity and is something that can’t be constantly reinvented. It boils down the basic value you are trying to deliver to customers. It is important to maintain a strategy that is consistent in the face of a multitude of changes.
A good strategy will ensure that its components will drives competitive advantage and sustainability. There should be a simple consistency between each functional activity and the overall strategy. This will occur when activities are reinforcing and there is an optimization of effort. A good competitive strategy will grow out of the entire system of activities.
Essentially there are five steps in developing strategy which are presented as follows:
1. Formulating a strategic vision of the organization’s future business composition and the direction on where the entity is headed.
2. Setting objectives.
3. Crafting a strategy to achieve the desired outcomes.
4. Implementing and executing the selected strategy efficiently and effectively.
5. Evaluating organizational performance and making appropriate corrective adjustments wherever necessary.
These five primary tasks become a continuous loop whereby you are observing, orienting, deciding, and acting on necessary adjustments as needed. In the current economic environment, organizations need to be agile and quick in making these decisions.
Good strategy can involve a variety of approaches. This might include a variety of cost approaches ranging from low cost/low price, differentiation, to a specific market niche. Other approaches include responses to changing market conditions, moves to secure a competitive advantage, geographic market coverage, and vertical integration. In addition strategic approaches include financial approaches, human resources, R. & D., marketing, manufacturing, and collaborative partnerships and alliances. The development of the strategy will certainly consider some of these options.
In addition to various approaches, there are some fundamental components of strategy. Foremost, it will be essential to decide what product or service attributes offer the best chance to win a competitive edge. The next step is to develop the skills, expertise, and competitive capabilities that will set the business apart from rivals. Your choice of strategic components should insulate the business as much as possible from the effects of competition.
Attempt to evaluate your firm or company as to whether it is either conventional or reactive. Another way of looking at the evaluation is to determine whether your firm is distinctive and far-sighted. One way of assessing this is evaluating which issues absorb management’s time and attention. How does management’s point of view regarding the future measure up against the competition? Are you better at improving operational efficiency or at creating new businesses? Is the company’s agenda determined by actions of competitors or is it set based on your own unique vision of the future? Within the organization, what is the balance between anxiety and hope?
Finally, it is essential to assess the quality of your strategic market leadership in terms of the customers being serviced today in contrast to those you expect to service in the future. This same question can be directed to your current competitors and who you expect to compete against in the future. Where are your profits earned today and versus where they will be earned in the future? Effective strategy is dependent on resolving the key questions of what drives your business today in contrast to what will provide the competitive advantage in the future. In too many instances, organizations fail to address these issues and follow the course of plodding from day to day with not real thought of the future.
Creating Client Value
How valuable are CPAs to their clients? What do clients want their CPAs to do for them? These questions have puzzled me and frustrated me for some time. After giving this some thought I reached the conclusion that clients don’t receive value and CPAs don’t provide the value they are capable of delivering.Creating value lies in the pursuit and development of value propositions. Value propositions aren’t defined in the tax code or in generally accepted accounting principles, yet it is the secret to greater profitability which is created by providing needed and necessary services. Clients want more than taxes and accounting from CPAs. They want and need help with their businesses, especially when economic conditions are tough. This means defining customer value in terms of what services CPAs provide and how they do business with their clients. Here is where you can link price together with reliability, dependability, and convenience of the service provided.
Far too many CPAs provide a service, but miss out on providing and building client value. This occurs because they haven’t taken the time to develop the knowledge and understanding as to what clients really need. You need to ask the key questions of clients so you know what they expect of you and how they think you could help them address their challenges and opportunities. This most likely means the ability to provide them with management consulting in strategic and operational areas.
Developing a basket of services which provide value will allow you to value bill. This begins with understanding clients needs and translates into increased profitability for you relative to the hours expended. You now have a choice on what you charge because the client is receiving greater value from the services you provide.
You might end up servicing fewer clients and receiving greater revenue. Providing added value services to clients you truly want to work with ends up being a win/win situation. You can develop some ideas relative to the types of services by reviewing the list of services I offer both to clients and as resources to CPAs.
Employing a value proposition strategy to your practice is an effective way to re-engineer what you are doing by giving clients the services they need and want. Providing added value to clients puts you in the driver’s seat and lets you value bill in contrast to just being paid for the hours you charged to an engagement. It also creates a better overall client experience since it enhances the flow of communication and avoids difficulties and problems which can occur.
You can now start charging the maximum amount that a client is willing to pay which results in greater revenue and a more productive work environment. You will have happier clients since they now perceive they are receiving the value they wanted and are willing to pay for it. Your practice should grow because happy clients talk and this should translate into increased work. This is truly a way of working smarter and not harder.
Defining Your Mission
What is a mission or vision statement? In brief terms, a mission statement is a description of how an organization defines success and where it is headed going down the road. In order to be successful, a mission statement needs to be more than just words or phrases. An effective mission statement needs to be a living document that provides the necessary focus for all levels of the organization.Despite the importance of defining a mission, there have been a lot of failures to create any change in organizational performance or in what people are doing to accomplish results. One of the big problems is that mission statements fail to effectively communicate to employees on where the company is headed. Mission statements also fall short on linking strategic direction with specific goals and objectives at all levels of the organization.
It is critical for organizations to define their future business direction so employees clearly understand where they are going and how they will get there. From this platform, organizations need to develop a definition of success and a process for setting goals and objectives. Together with these steps, it is critical for the entire organization to have clarity on its sources of strength and competitive advantage.
Once organizations get these step right, they need to move forward to clarify “the what, where, and how” of competitive success. This message then needs to be effectively communicated to employees and other people who have a stake in its success. A process of setting goals and objectives at all levels of the organization needs to be complete so everyone is on the same page in order to achieve a successful execution of the mission.
In many instances I think the objective setting process can be simplified. It doesn’t need to be complicated, but there needs to be buy in at all levels and everyone needs to know their role and how they fit into the plan. Defining an effective set of objectives might sound easy, but it is a tough job and is critical to achieving success.
The key to a successful mission or vision statement boils down to the following three steps:
1. Where is our business going?
2. What are our objectives?
3. How will we accomplish our objectives?
After these three questions have been answered, the key to success is to effectively convert the answers into performance objectives for employees at all levels of the organization. Organizations that commit to this process with focus and determination will be the winners.
Getting Virtual Consulting Help
In the current economic environment there are lots of business owners struggling to deal with issues and problems and no idea on where and how to get help. Likewise there are CPAs who are asked by their clients for assistance in areas where they lack the knowledge and experience to provide support. It is a perception that help has to be geographically accessible. The reality in many situations is that there are virtual means of accessing the necessary experience and assistance.Many services, including training, can be provided virtually using the telephone, e-mail, and conferencing tools. I selected the areas of my expertise that could be delivered virtually. It is possible to review strategy and operational situations by using my questionnaires and experience in effective ways. Another situation faced by many companies is that they lack the financial expertise to provide the financial and controllership skills required to survive the current difficult economic environment. Virtual tools are available to share financial information and in many instances an experienced financial manager can provide the needed suggestions that can make the difference between success and failure.
Internal controls represent an area where CPAs need some assistance so they can avoid reinventing the wheel. In many instances I can provide instant answers to questions and provide suggested solutions that could otherwise take hours to solve. Based on working with the COSO internal control framework and assessing audit risk, I can provide direction and advice to practitioners and even help them review their work papers to minimize their risk.
My dealings with family-owned businesses have provided me with firsthand experience in working with succession and planning issues including estate and trust planning tools. It is like having someone working in your CPA practice where you can discuss and review a problem for potential solutions.
Some other areas where virtual assistance is available are cost management, operations and supply chain management. Why struggle with these areas when help is a phone call away. I can also provide assistance with strategic planning and share checklist and questionnaires that will allow you to facilitate development of strategic thinking with your clients. If you are a business looking for assistance, I can provide virtual support and training in these and other specialized areas.
You may not have given thought to using virtual support or training, but it available and utilized all the time. It is a cost effective way to receive the assistance you need. Give me a call to discuss ways that I might be of assistance.
Virtual Consulting Concepts
Why not virtual consulting and business support? Since I have always performed consulting services at client’s sites, this represents an interesting question. In the current economic environment when every dollar counts it occurred to me that I could provide companies with excellent support and advice they might not be able to access in their geographic region. I teach on-line courses for Villanova University in conjunction with Bisk Education where I facilitate live discussion session with students every week. If I could teach on line then why not consult on line?After pondering the topic and the question, the answer seems pretty straight forward. Clients could really benefit from such an approach. In one of my recent live discussion sessions we had an extensive dialogue on the transformation of communication. Virtual communication is what has evolved in today’s world. Since we communicate virtually, then consulting and business advisory support represents a logical approach.
Telephone and e-mail are logical tools that most clients understand. The part which is a mystery to them is realizing that we can conduct an on-line dialog over the internet utilizing voice in addition to sharing of presentations and other analytical tools. It isn’t quite the same as face to face communication, but it works pretty well and is a lot cheaper and more time effective. It is an approach that works well enough to help a large number of clients. Virtual consulting can save time and reduce costs so traveling to client sites is limited only to the bare essentials.
In addition to reducing costs and improving efficiency, this approach saves a lot of wear and tear and allows me to reach out to a greater audience and expand my market reach. I can now help more people access my knowledge and expertise. I think this is a good way to work especially in a tough economic environment.
Economic Crisis
It seems like economic crisis and tough times are all we hear about these days. In a recent publication of Accounting Today an article appeared talking about the need for CPAs to step forth to provide assistance to small businesses. We need to provide guidance but small business people have to make a paradigm shift and realize they need help. They have been used to going without financial assistance for far too long and CPAs have been too focused on tax returns and financial statement preparation. Change needs to happen if businesses are to survive. My web site contains a lot of information both business owners and CPAs can use to survive the recession.CFO and Controllers of larger companies are also in a survival mode. They are laser focused on cash preservation and cost reduction. The key areas of focus include the following:
1. Preserving cash
2. Reducing costs
3. Reducing risk
4. Understanding expenditure patterns
5. Plugging holes in the dike
Over emphasis and indulgence on these factors can lead to overlooking some potential opportunities.
I think small business and larger organizations are missing the boat by placing all the emphasis on cutting back and hunkering down. Risk management should include looking for opportunities in addition to potential risk events that could adversely affect the company. Risk management should include considering opportunities to do a better job of purchasing and improving visibility on spending. Cash conversion efficiency includes managing accounts payable and inventories. These two areas represent a significant source of extra cash. It deserves additional focus and effort that will produce extra cash and liquidity.
Risk management includes effective planning and development of value propositions. Reevaluation of business strategies must be addressed since the old business model has shifted. New product lines and new markets need to be evaluated. More than likely the old rules no longer apply. Survival will depend on creating new visions and new strategies. These strategies then need to be linked to new marketing and sales programs. One of my clients is now spending a significant amount of effort developing new products and markets because the streams of revenue that existed just a few months ago no longer exist.
Operations and strategic planning when combined with sound financial management concepts and methodologies represent exactly how businesses need to deal with the economic crisis. Linked to these concepts are lean accounting and value stream analysis based on the voice of the customer.
I think this back to basics approach is what is required to cope with the challenges we face and represents the road less traveled to build healthy businesses and an economy that will survive the test of time.
Tone at The Top
Management philosophy is synonymous with “tone at the top” and provides direction as to how the organization will manage its financial reporting and articulate its objectives relative to internal control. Management attitude sets the foundation for financial reporting assertions and the application of accounting principles. The philosophy and operating style of management determines how financial reporting objectives and risk mitigation practices are established and executed.
Many smaller companies have entrepreneurial management teams that don’t always understand accounting and internal control processes. Promoting the importance of risk mitigation and appropriate interaction associated with transaction processing requirements is an adjustment for management teams of smaller companies. In many instances, adjustments need to be made so that all journal entries, together with the underlying assumptions and estimates, are properly authorized and supported by sufficient documen¬tation. Management operating style trickles down to employees, so there needs to be clear communication and application of business judgment so that qualified personnel are in place to perform effectively designed controls. It is critical for smaller organizations to ensure that management communicates effectively with employees as well as external parties relative to information linked to financial reporting objectives and the necessity for accurate and fairly presented financial reporting. Management needs to take financial reporting and internal control seriously by setting a “tone from the top” that is understood at all levels of the organization. Management philosophy and operating style needs to be “do as I do” and not just “do as I say.”
Lean Accounting Concepts
Lean accounting is a mystery to most business people and accountants. They have heard of lean manufacturing but not lean accounting. Lean accounting evolved in the manufacturing environment and hasn’t made much progress into lean thinking applications. There are a number of ways lean accounting can be applied in a variety of situations. It is perfect for managing and measuring results in tough economic times.Initially lean accounting got traction because it had the capability of overcoming the problems associated with standard costing. Standard costing is driven by labor efficiency, machine utilization, and absorption of overhead. These standard cost techniques were traditionally used by managers to build excessive inventories and generate positive variances to improve GAAP profitability leading to higher management incentive bonuses.
The economic recession has created a need for lean accounting. However, since most accountants haven’t use lean tools, the application goes unused. Lean accounting deals with tracking throughput or revenue and the associated variable costs required to generate those sales. Understanding that lean contribution from sales directly improves the bottom line is critical. You don’t spend funds unless it is associated with generating revenue. Since lean accounting provides better information for decision-making it has the impact of increasing sales. In a slower economy, companies need tools like value stream costing and similar lean-decision making applications.
Lean accounting financial statements are easier to understand. Since the focus is on the value stream linked to the voice of the customer, lean encourages measurement of drivers that produce value that customers want. Based on lean thinking, we are only incurring costs to produce customer value. We know the cost of the form and features demanded by customer. Costing techniques include target costing and analysis of the life-cycle of products. These approaches utilize continuous improvement techniques focused on improving our profit margins.
Since most managers relate lean accounting to manufacturing, the tendency is to ignore the concepts of lean and lean accounting for non-manufacturing applications. These areas represent the most lucrative opportunities for lean thinking and lean measurement. There are significant opportunities to lean our administrative and other overhead areas of organizations. Service, health care, and other industry sectors are leaving money on the table by not using lean thinking and lean accounting.
There are plenty of ways to apply lean thinking to accounting and financial operations. The use of simplified financial presentation and measurement can represent significant improvement in time savings and better decision-making. One of the concepts I advocate is sales and operational planning linked to rolling forecasts that virtually eliminates the need for annual budgets. This is a process of getting the entire organization to commit to a regular process of monitoring and communicating the most up to date information available and converting it to meaningful and actionable information. Rolling forecasts provide a simplified lean measurement of the organization and where it is going on a timely basis. It becomes a real-time basis decision making tool.
These concepts are discussed and explained in my book, Dynamics of Profit Focused Accounting. A lean front office is no different than a lean shop floor manufacturing operation. It is all about process flow and eliminating the waste from the value stream. The problem lies in the lack of education and inability to shift paradigms to a new lean way of thinking.
Understanding Strategy
My recent post Strategies for Recession implies that everyone understands strategy. The truth is that strategy isn’t well understood and means many things to different people. One of my students in a recent session indicated she had worked on strategy development project for a large unnamed company and the executives didn’t have a clue as to what strategy is and how to utilize it. Hopefully, we’ll shed some light on strategy and how it is crafted.I think competitive strategy is about being different and deliberately making choices relative to activities that will provide a unique value proposition to customers. One contradiction is that operational effectiveness is strategy. This is what every organization should be doing to remain competitive. Strategy is about making tough choices needed to maintain a competitive advantage. These are choices to change the rules so they work in your favor.
Having the right goals is a critical component of having a sound strategy. Setting goals and objectives represent components of effective strategies. Strategy needs to have continuity and isn’t something that can be constantly reinvented. It boils down to the basic value proposition you are trying to deliver to customers.
A good strategy includes simple consistency between all the functional activities and the overall strategy. The strategic fit drives competitive advantage and sustainability and occurs when the activities are reinforcing thus achieving optimization of effort. Competitive strategy grows out of the entire system of activities.
Thompson and Strickland in their book Crafting and Implementing Strategy define five primary tasks:
1. Formulating a strategic vision of the company’s future business composition and the direction where the entity is headed.
2. Setting objectives.
3. Crafting a strategy to achieve the desired outcomes.
4. Implementing and executing the selected strategy efficiently and effectively.
5. Evaluating organizational performance and making appropriate corrective adjustment wherever necessary.
These five primary tasks become a continuous loop whereby you are observing, orienting, deciding, and acting on necessary adjustments as needed. In the current economic environment, organizations need to be agile and quick in making these decisions.
I will provide additional insight on strategy and how to apply it effectively in the future. In the meantime some strategic terminology might be helpful. Here are some definitions that will help to remove some of the mystery.
Strategic Vision is a view of the organization’s future direction and business makeup. The organization’s mission is defining it’s the business purpose and what the business is trying to accomplish on behalf of its customers. Strategic objectives represent the targets management establishes for strengthening the organization’s overall business position and competitive vitality. So strategy represents the actions and approaches that are implemented to satisfy customers and the strategic plan is a statement outlining the mission, performance targets and strategy.
This should provide some clarity and eliminate confusion related to strategy. Hopefully this will help you navigate turbulent waters and craft your strategies for survival.
Strategies for Recession Survival
Don’t Panic
Take a lesson from the pilot of US Airways flight 1549 who was forced to land his Airbus in the Hudson River with all the 155 people on board surviving. I think this is a critical lesson when trying to survive in a recession. This is the time to keep your wits about you and keep a level head.
Develop a Plan and a Budget
In uncertain economic times there is no way of knowing what’s going to happen or how bad things might get. In these situations I tell clients to develop a worst case scenario budget. This budget should be a rolling forecast so you are continually projecting your best estimate of what you think will happen and develop. Be conservative on your estimate of sales and revenue and hold the line on expenses. It is critical to monitor and measure your financial performance in all categories, especially cash flow.
Cost Reduction
Evaluate all opportunities to tighten your level of expenses. I developed a Recession Survival Toolkit that contains extensive information and tips on cost reduction to managing cash flow and obtaining credit. While most businesses are laser focused on controlling payroll, they do this through layoffs. There are multiple ways of containing payroll other than terminating employees. These steps include salary cuts, reduced hours, and vacations without pay to list a few ideas.
Strategic Planning and Thinking
A recession is the time to establishing a strategic plan. I urge clients to create a clear vision of the future realizing there is a lot of uncertainty. It is imperative to be agile and ready to move in different directions with your response to changing conditions. You need to have a number of options so you are not locked in to a narrow strategy. In fact I like clients to have a reasonable range of options because it allows you more flexibility.
Selling and Marketing
I think a number of people fail to think proactively about sales and marketing opportunities during a recession. Managing risk is as much about identifying opportunities as it about looking for things that might produce a negative impact on the company. Companies need to be aggressive with their sales effort because the psychology of recession is taking buyers out of the market. When there are fewer customers it is critical to aggressively pursue maintaining or increasing market share. However, this should not be achieved at the expense of giving up your profit margins. This is when I apply profit focused accounting to match costs with selling price to maximize profit margins. I see too many executives cutting price just to gain volume in contrast to employing all the necessary tools to maintain profitability.
Cash is King
In a recession, cash is king. It is critical to maintain lines of credit and have them available just in case. The key is to maximize your cash conversion efficiency. This concept is focused on turning accounts receivable into cash as quickly as possible and at the same time reducing your investment in inventory. The other component is stretching accounts payable as much as practical without losing discounts or damaging your credit worthiness.
Using BBVTM
Building Business Value is our approach to building value using proven management methods that preserve shareholder value. A recession is exactly the time to stay with proven management techniques and methodologies. One of my suggestions in this regard is to make sure you have the right people on the bus and in the right seats. Good execution of management fundamentals should be the objective. My final thought is to utilize my change management concepts to make sure you don’t get lock into doing things just because of your pre-recession comfort zone.
When all else fails, do as Debbie Reslock suggested in yesterday’s Denver Post. “Bid in the dark and shoot the moon because through it all, I still have faith. With out looking at the cards, I’m betting on all of us.” I am betting on Debbie’s hand, I think she’s got a winner.
