Strategic Planning & Propensity of Risk Avoidance

At the Giersch Group, we believe that a systematic approach to strategic planning lays the foundation for good decision making throughout the year.  We encourage the review of the company’s strategic position.  Understanding the strategic position lays the foundation for the company strategy. The company strategy also lays the foundation for the issues covered in topics of Year-End Maximization and next year’s Budget.

In a prior resource, we extensively covered the process on how to build a strategic plan.   This resource will review some aspects of a strategic plan and then consider how risks affect our strategic thinking.

Be Visionary

Strategy is about visioning and turning the vision into executable plans.  At the Giersch Group, we believe that if you cannot vision growth, you cannot achieve growth.  We often find that a struggle with vision can be due to risk aversion that gets translated into a sense of caution.  Therefore, when creating or evaluating a strategic plan, the question must continue to be asked:  “What should the business look like in three to five years?” 

When viewing the weaknesses reported on their last month’s SWOT analysis, business owners have a bias towards a conservative potential for the business in three years.  Add to this caution a general bias toward goals that can be achieved or for easy success, and the answer becomes even more conservative. Better safe than sorry, might be another way to summarize this orientation.

Let’s address the role of a strategy and this kind of conservative approach.  A strategy is a vision with implementable steps.  It is not a commitment of the firm.  Instead, the strategy leads to the budget, which in turn is based upon achievable inputs from the current business activity (to be covered more in the November topic.) 

This propensity to conservative visioning is why we require a second question be asked: “If the business doubles in the next 3 to 5 years, what does the business look like?”   By asking this question, the business owner is forced to be visionary without feeling he/she has to be conservative.  Rather, the question allows the business owner to develop a picture of both the company’s potential growth and the company’s needs to address that potential growth.

Often we have seen a three-percent-growth company answer the first question as “a ten percent increase in revenue with similar profit increases.”  When we then challenge the company to answer what it would look like with double the revenue, the conversation completely changes.  Initially, it is that double is preposterous.  Then we begin exploring what would change in the company if it did double the revenue. Then we explore where that revenue could come from.  We follow that with exploring what it would take to get the revenue.  It is quite amazing how different the answer to the first question becomes after this exploration.  Often the ten percent moves to thirty or fifty percent increase because the potential was there, but the vision was missing.

Utilize Financial Models

Financial models bring the vision to life and lay the groundwork necessary to create an implementable strategy to achieve the vision.  Without a financial model, the vision is merely a shell, a concept without economic meaning or purpose.  Financial models aid in identifying risks in the plan, thereby allowing the business owners to be conservative and visionary at the same time.

We recommend full financial statements be used in the financial modeling process:  balance sheet, income statement, and statement of cash flow.  Each of these components gives insights into different dynamics that go into achieving the vision.  The income statement will give a measure of cost and margin risk analysis.  The cash flow statement will highlight the risks of working capital in a growth situation. The balance sheet will give liquidity and capitalization insights.

Risks, Failure, and the Pursuit of Opportunities

Small businesses must be conservative and operate within their means.  These businesses must be self-sufficient.  If these businesses get overextended, there are usually limited resources to carry them through a rough spot.  The result of unmanaged risk quickly becomes total failure.  Risk avoidance becomes a high priority. 

To this essential nature, we would add that studies on business decision-making show that most people have a propensity to avoid risk.  Therefore, decisions will be naturally risk adverse.  Add these two together and the conservative strength becomes a weakness. 

Management is the answer to this dilemma.  Risks are part of the business; therefore they must be managed even as all other parts of the business must be managed.  There are several tools available to management, which allows managing risk to be easier. 

1. The first tool is information. Financial statements and financial data and other operating information are critical to identifying risks early. 
2. The second tool is anticipation. Most risks are known, just as the SWOT analysis gives some measure of the weaknesses and threats, so the owner knows what the potential risks can be.  Developing strategies for addressing risks in advance of occurrence can lead to both avoidance and minimization of occurrence happens.  “To be prepared is to be forearmed” is a motto that is a basic management technique for risk management. 

The last item to address is the unacceptable risk.  In a discussion many years ago with the CEO of Unilever, a Giersch Group Managing Director was given an excellent description of the unacceptable risk.  The CEO stressed that any risk that could break the company was unacceptable, even if it could be managed or even if its probability of arising was small.  The CEO stressed that Unilever had been in existence for hundreds of years and was entrusted to him.  His goal was to leave it stronger than when he received it.  (It would have been nice if other public company CEOs’ had held to the same principles over the past several years.)  The point to all owners is that the SWOT analysis will identify weaknesses, which should be managed, and threats, which form the kinds of risks that need to be addressed strategically.  Threats need to be systematically reduced so that they cannot break the company.  With planning this can generally be done, but it is not a one-year exercise. This is why they become part of the strategy for the company.

Further Actions

1. Determine or clarify your vision.
2. Establish a yearly target for revenue and profit.
3. Identify the necessary steps from now through next year to reach the target, overcoming the propensity of risk avoidance.
1. Identify the SWOT analysis of the steps decided given the market, competitors, and the economic environment.
2. Develop the actions to minimize the impact of the threats by the end of three years.
4. Develop or update your three-year financial model.

Articles for Further Reading

1. “Persuasive Projections.” This article discusses the necessary elements of financial projections particularly focusing on what loan officers and investors are looking for. http://www.inc.com/magazine/20000401/18118.html
2. ‘Living’ Business Plans help Businesses Flow with Future. This article tells the story of a company who was able to adjust their strategic plan quickly when learning that their business was seasonal in nature. http://www.inc.com/articles/2000/03/18184.html
3. “Making Your Financials Add Up.” This article focuses on developing an accurate financial forecast for revenues rather than broad guesses and general percentage increases. http://www.inc.com/articles/2002/03/24019.html
4. “Strategic Planning: Not Just for Big Business.” This article addresses the difference between strategic and business plans and sets forth parameters for strategic plans for the small business owner. http://www.smallbusinessnotes.com/planning/strategicplanning.html
5. “Integrated Measurement Systems.” This article explains the purpose of the balance scorecard management tool and how to create one for your company. http://www.toolpack.com/scorecard.html
6. “Small Business Management Audit.” This 9-question article helps you quickly audit your firm regarding strategic planning. http://www.prenhall.com/scarbzim/html/audits/audit2.html

For more information, please visit the Giersch Group at http://www.gierschgroup.com/ or contact us at prosper@gierschgroup.com