In a series of articles, Shaun Gillanders, freelance Finance Director and Interim Manager, explains the tools available to produce a plan and manage its implementation in order to ensure a business can generate value for its principles. In this, his second article on the subject, he examines the tools available for building a coherent business strategy.
If the future of Scottish Law Firms is to be shaken up with new market entrants then partners and principles need to prepare their businesses to succeed in a different market place. Last week's article focussed on how to measure value so that the owners of the business can be confident that their investment is creating wealth for them. However, deciding on the required financial return does not build a business strategy. The return is the product of implementing a good business strategy well. Here we will look at the tools available to build a business strategy. This is the first step in generating the financial returns that create wealth for its owners.
Many organisations produce a regular strategy and then file it away. Having done 'strategy', the business owners can then get on with the important job of answering client calls. Strategic planning should, however, work out where a business is and where it wants to be and then generate a plan to move the business from A to B. This is done through a five-stage process of diagnosis, options, evaluation breakthrough, planning and implementation.
This involves understanding the current position. Here the organisation gets to look at key strategic issues, opportunities and threats across the corporate portfolio. New avenues for development are considered and the position of the business is then assessed by looking at "value gaps" within the organisation.
Porters Five Forces
For each of the following categories of competitive force, identify where pressure may come from:
- The threat of new entrants to the market place, who could they be and what could they offer that you don't?
- The possibility of substitute products or services that could make yours redundant.
- The power of customers determining what you deliver and how much they will pay.
- The power of suppliers determining what is available for you to base your product or service on and how much you have to pay for it.
- The competition within your industry between existing market players (including yourself).
Through discussion, identify the external forces that will cause your market to grow and those that will cause your market to shrink. Once you have identified what is likely to change the total market size then you may be able to build a strategy that takes advantage of these.
Compare your business performance in the following five key areas against specific competitors. Increase this tool's effectiveness by asking your clients for their opinions. The key areas are; perceived brand strength, product/service performance and value, innovation effectiveness (delivering real results from innovative new services), systems, and skill base. For your business and each specific competitor, score them on a scale of 1 (very weak) to 5 (very strong) for each key area. By comparing the scores for each organisation, you can try to work out what they or you are doing right (or wrong) and what you can change to out-compete them.
Identify the gaps in your performance (financial or otherwise). Once these gaps are found, work out why they are there and what you need to do about it. For example, if you want to increase turnover by 21% per annum for the next five years but your average increase over the last year has been 11% then you need to work out how you can get the extra 10%. By looking at the turnover growth by practice area you could find that 3 of your businesses are growing by 18% whereas the fourth is static. You, therefore, need to do something drastic with the static business and work out how to increase the other by only 3%. This allows you to focus change on specific measures or business areas.
Look at your organisation's strengths and weaknesses, the opportunities and threats facing it. Then work out how to maximise the advantages arising from your strengths, minimise the effects of (or deal with) the weaknesses. Similarly, look at the opportunities available and threats arising and decide what you can do with them.
Compare the performance of business units within your organisation (it could even be applied to partners and their specialisms). Draw up a grid showing market attractiveness against competitive position (see Insert 1). Place each of your business units onto the grid. Obviously, those with strong competitive positions and high market attractiveness are units that need to be developed and encouraged, whereas those with low competitive positions and low market attractiveness need to either be disposed of or their position dramatically moved. For those units in between, you need to work out what you can do to improve performance of the units.
By now you should have a number of strategic options available to the business. For example, you may have one option to close down a department, another to invest in the same department. This part of the process allows you to make an informed choice between multiple competing or non-competing strategic options. To do this, you need to create a Strategic Options Grid. List the options along the top of the grid and list the following criteria, Strategic Attractiveness, Financial Attractiveness, Implementation Difficulty, Uncertainty and Risk, and Acceptability to stakeholders down the side.
|Option 1||Option 2||Option 3|
|Uncertainty and Risk|
|Acceptance to Stakeholders|
For each strategic option, score each criterion from 0 to 3 (zero being lowest and 3 highest). Use the tools discussed to inform your scoring.
For Strategic Attractiveness use the SWOT, Growth drivers, Five forces, Competitor profiling and GE grid analysis. For Financial Attractiveness use the Value and Cost Drivers (see below). For Implementation Difficulty use the Difficulty over Time Curve (below). For Uncertainty and Risk use the Uncertainty/Importance Grid (below). For Stakeholder Acceptability use the Stakeholder Grid (below). The option with the highest score is the best strategic option.
Value and Cost Drivers
Value drivers are any factors, either internal or external, that either directly or indirectly generate a cash inflow. A cost driver is any similar thing that generates a cash outflow. Identify the value and cost drivers within the business and business units to identify where cash comes from and where it goes. Then see how you can maximise the cash generative drivers and minimise the cash depleting ones.
Difficulty over Time Curve
This is a subjective view of how difficult a strategy will be to implement over time. The curve can be plotted for just one constraint within the business strategy (like cash resources) or for the whole implementation. Cash resource is quite easy to objectively generate and compare. For example, one option has the first cash inflow in year 5, the cash resource required can be plotted against time and required cash can be a proxy for difficulty. Running a business with no cash and uncertain future inflows is more challenging than running one that has steady, regular income. This can be used to plot any aspect of the plan.
This is a straight-forward graph plotting Certainty against Importance. An option that generates a certain but unimportant outcome can be compared effectively against one that generates an important but averagely certain outcome. Again, plotting all options on this grid allows you to score the options in the Strategic Options Grid.
Finally, this tool allows you to chart the attitude of stakeholders against the influence that they have on the outcome. This enables you to compare different options in terms of the ease with which they can be implemented but also allows you to identify actions that you could take to increase the success of the strategies (see insert 2). For example, if you believe that your strategy will be received badly by a section of your staff that has a high ability to influence its success then you need to work hard to explain the strategy and get them to accept it or reduce their influence.
Now with multiple and varying strategic options documented and compared objectively, the organisation has to 'bet the farm' on one of them. Any options with zero scores in the Strategic Option Grid should be discounted and if the analysis has been honest and full, the option with the highest score should be the one that you select as the strategic direction for the firm.
This can, however, result in difficult operational decisions. Deciding to pull out of one area of the business that generates significant fees because it doesn't fit the long term strategy is hard, but the clarity and focus that the process above delivers makes the choice available to management clear.
Now that a strategy has been decided upon, it is time to begin planning how it will be implemented. This section comes down to good old-fashioned project management. Work out what needs to be done by whom and when, what relies upon other stages to be completed and where the critical path lies. Get this documented in someway and ensure that the plan is regularly reviewed and that delays or problems are dealt with quickly and efficiently. Project management is an art that can be successfully brought in to ensure that the strategy is delivered on time.
Controls over the strategy should ensure that the strategy is being implemented and that, once implemented, it is proving effective. To monitor and control strategy implementation, it must be broken down into smaller chunks. This can be as basic as project management with milestones and deliverables. Other tools available include "From-To Analysis" and the Balanced Scorecard.
With the current organisation clearly in mind, decide whether it is "not-so-good" (1) or "near excellent" (5) for key sub-compartments of the strategy. These sub-compartments are organisation-specific and depend upon the strategy, but could include organisational structures, behaviours, cost base or client focus. For those that score low, work out how you can shift them further up the scale and closer to 5.
A balanced scorecard uses the key sub-compartments of the strategy and builds medium term plans around these with a review and feedback mechanism. The aim is to look beyond pure financial measures to other control dimensions like customer satisfaction.
Following the above steps and applying the tools described should enable you to develop a business strategy and implement it. If your strategic thinking is good then this strategy, well implemented, will deliver true economic value and create wealth. More importantly, a good strategy will enable your business to thrive in difficult and competitive times and a really good strategy could even redesign the competitive environment in which you and other law firms compete.
Implementing a strategy well comes down to improving your business performance in the required areas. Benchmarking is a way of working out what you need to do to succeed. Find an organisation that does something that your strategy requires you to do well and then copy their results. Next month I'll explain the advantage of benchmarking and how to go about it, as well as how to identify some sources of benchmarking data.
Shaun Gillanders is a Scotland based freelance Finance Director. Following a successful career as an FD of one of Scotland's leading growing private law firms, he has begun advising a wider range of law firms on strategy, financial management and operational development. If you wish to discuss any issues raised by this or any of the other articles in this series then please feel free to email him at [email protected]