It is difficult to predict market conditions for 2014. There could be a material change in interest rates, a change in exchange rates, or a change in economic conditions.
The two-speed economy that dominated much of 2012 and 2013 has partially stalled, with the mining industry even suffering from uncertainty caused by Chinas perceived slowdown in demand, reduced capital expenditure, and downward cost pressure.
In uncertain times, businesses often stall or delay their business planning. This is a mistake; planning should go ahead. But its wise to think differently about planning when conditions are changeable.
Your business planning should focus on four key aims:
- Consolidating and strengthening the core business
- Ensuring adequate funding for current operating activities
- Mitigating risk on the downside
- Providing a platform to capitalise on opportunities, if and when the right conditions present themselves
The first task is to form the planning team, ensuring that the best people are involved. It is often advisable to involve external resources, directors, non-executive directors, or facilitators in this process. Usually, the planning team will include the CEO and senior executive team.
The second task is to consolidate and strengthen the core business. The planning team will determine the businesss key purpose, which should be aligned with the primary beneficiaries (in most cases, the shareholders) objectives.
Recently, we have been helping two professional service firms develop their strategic plans. Even though their businesses are relatively well defined, aligning the partners views around the purpose statements was not straightforward in either case, and this is where an external facilitator can bring together diverse views in a common purpose.
The planning team should conduct a SWOT analysis as an integral part of the process. Matching strengths and opportunities of a business may identify the source of competitive advantage.
Matching can also identify potential opportunities the business may be well placed to exploit. For a recent client in the mining-services sector, we used matching to identify restructuring initiatives that they could readily implement.
Once the core has been defined, the planning team should review the existing operations to determine which business units, locations, resources, products or services, and customers are part of the core business.
A Pareto Analysis, more commonly referred to as an 80:20 analysis, may be useful. For example, this might identify the top 20 per cent of products that deliver 80 per cent of the businesss gross profit, and is often a useful analysis for companies with many customers or products.
In one instance, we used it to compare retail sales per square metre of tenancy space for a large retail chain. As rent is one of the key costs, knowing which outlets generated the greatest sales per rental dollar was useful to identify the stronger outlets.
Logically, the strategy should include consolidation of business units, locations, and resources around those that are core or on strategy.
Third, the planning team should review the impact of the above on the assumptions that will underpin the financial forecastsincluding profit and loss, balance sheet, and cashflow statementsand prepare or review the businesss consolidated financial forecast to assess the base level of funding required over the next two-year period.
Fourth, the planning team should analyse the risks faced by the business. Matching weaknesses and threats from the SWOT analysis will provide a good starting point, as will considering the concerns and objectives of all stakeholders, such as shareholders, directors, employees, customers, suppliers, financiers, and the Australian Taxation Office.
Risks are usually analysed in terms of their significance and likelihood. The goal of this analysis is to identify the risks most material to the business.
Strategies to mitigate material risks should be developed and monitored. Working with a not-for-profit organisation about to embark on a significant construction project, the risk analysis highlighted a number of new risks and enabled the senior management team to plan accordingly.
Fifth, the planning team will consider potential opportunities identified earlier by matching strengths and opportunities or by converting threats into opportunities. An opportunity matrix can be used to assess those opportunities that are attractive and viable.
Viability will be a function of the opportunitys strategic fit. For example, if a new product can be produced using existing materials, labour, and machinery, as well as sold to existing customers through existing distribution channels without cannibalising existing products, it would be highly viable.
The planning team can then focus on feasibility analysis to determine the projected return and cashflows likely to be generated from investing in opportunities. The feasibility analysis should consider risks, benefits, and triggers. Triggers are used to describe those conditions that would need to exist to increase the likelihood of the opportunity succeeding.
When Virgin Australia launched in 2000, the Australian market appeared crowded, with well-established operators Qantas and Ansett. However, the demise of Ansett in 2001 was a trigger for Virgin to accelerate its growth and take advantage of a temporary market opportunity.
The incremental effect on the financial forecasts of any opportunities should be evaluated. This is commonly referred to as scenario analysis. Scenario analysis allows the planning team to verify that there are appropriate financial resources in place to exploit opportunities should the trigger events occur.
In cyclical economies, change is certain: so consolidate now and prepare for the next upswing.
Key business-planning actions
- Recruit planning team
- Define core purpose
- Model financial effect of base case
- Conduct risk analysis
- Assess opportunities
- Ensure adequate capital in place to exploit opportunities
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