Archives for posts with tag: Contingency Planning

by Merlin Hernandez

Many consultants swear by the SWOT analysis and often develop a strategic focus on that basis. I share the notion that the SWOT remains fundamental to building strategy but by itself, it is incomplete. Strategy should be multi-perspectival using different tools for broad-based analytics that leverage risks across the business profile. A SWOT analysis is a conceptual approach to strategy formation that can overemphasize internal strengths and ignore the fact that a strength that does not directly impact the opportunities and threats in the external environment may not necessarily be a source of competitive advantage. Furthermore, SWOT analysis does not usually factor changing environmental threats.

Strategic analysis should integrate the strengths and weaknesses of the SWOT with the necessary activities for creating value for the customer through Value Chain Analysis (VCA). VCA examines activities throughout the supply chain, production processes, and distribution networks that add value to the product. Each step or link in the process adds value to the product along the way.  Best practices which are repeatable and can be further used for on-going product improvement or new product development, can be extracted from the VCA as a template for quality delivery.

The SWOT analysis is also enhanced by Resource-Based Analysis to determine the degree to which available resources can become the basis of sustained competitive advantage. Resource capabilities that support organizational strengths and reduce the impact of weaknesses should be shown to mitigate threats to customer and supplier relationships, delay competitive entry and rivalry, and retard the threat of substitute or alternative products in the market.

Resource capabilities can be analyzed through the value, rarity, inimitability, and organization (VRIO) framework for the strategic process. VRIO is part of internal analysis that can be used to audit all resources and capabilities of the firm to evaluate the competitive potential and sustainability of a venture. As a complement to the SWOT analysis, VRIO poses four questions about the value of resource capabilities in exploiting opportunities and mitigating threats; the rarity or uniqueness of resource capabilities in sustaining competitive advantage; the difficulty to imitate or duplicate the resource base on the part of a competitor (due to significant cost or other disadvantages), and organizational readiness to exploit available resources to advantage.

VRIO ANALYSIS
 Strength

(1 – 5)

Value Rarity Inimitability Organizational

Readiness

Market

Advantage

Organic Food

5

4

4

5

4.5

Total Customer

Service

5

4

3

5

4.25

Exotic Cuisine

5

4

4

5

4.5

 

Elegant Setting

5

3

3

5

4

 

Customization

5

5

5

5

5

 

Nutritional Value

5

4

4

5

4.5

Supplier Relationship

5

4

3

5

4.25

Expansion Capability

5

4

5

5

4.75

AGGREGATE SCORES

5

4

3.88

5

4.47

Market Advantage

4.47

Fig. 1    The VRIO analysis is linked to market advantage based on criteria that offer growth opportunities in value creation. It is a way of defining the market space to determine the strategy map. The venture scored high on market advantage, driven by high scores for value creation and organizational readiness. But the median score for inimitability is an indication of some competitive pressure.

In the above scenario, decision-making would be enhanced by considering the imitability factor. If the new product is no more than a clever amalgam of available methods and technologies, then no wall of patents could stop opponents from getting in on the opportunity. Recognizing this vulnerability, an entrepreneur might want to think more carefully about the length of the expected entry lag between insertion and meaningful competition. This critical period allows the business to build some market power through brand identification before the entry of direct competition (expectational advantage).

An appropriate response might be more aggressive advertising, publicity and/or customer incentives. There may also be some possible advantage due to firm-specific learning or asset mass efficiencies i.e. the years of accumulating those efficiencies in the knowledge base – recipe building, skills mastery, specialized talent  – or the cost and availability of specialized equipment. Additionally, it might help the business to utilize the expectational lag to take advantage of gains for enhanced contingency planning. 

The business that offers a well-differentiated, inimitable product might consider trying to use this head start to build other cospecialized resources that are less available e.g. customization or a reputation for service on a new technology. The general point is that by analyzing the value chain the business would be able to evaluate the maturity of the business idea as well as its readiness to exploit the opportunity. An analysis of the resource position would give a clearer indication of whether the situation meets necessary conditions for a sustainable advantage.  Approaching the feasibility of the business idea from several angles means that fewer strategic mistakes would be made. This combination of resources and strategies can satisfy VRIO questions and Value Chain Analysis for sustained competitive advantage, and only begins with a SWOT Analysis.

Related articles on this blog

Decision Making

Developing the Business Idea

Focusing the Business

Resource Planning and Costing Systems

Strategic Capacity Planning

Supply Chain Management 

Merlin Hernandez is an entrepreneurial development and management consultant who operates mainly in the small and medium enterprise sector. For more information on this and other topics, please send enquiries to businesssolutions1168@gmail.com

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by Merlin Hernandez  

A well-executed business evaluation provides a valuable planning instrument for the establishment of priorities and resource allocation for overall operational improvement and the satisfaction of customer needs. Evaluations also offer a measure of whether objectives and goals are being achieved, and whether the organization is effectively adapting to new environments, trends, and technological changes. 

Evaluations, however, can be a double-edged sword in that they often bare deficiencies in operations especially if there is a granular approach that does not recognize integrated efficiencies. This can become a disincentive to making the necessary improvements which may appear overwhelming if each deficiency is viewed in isolation. Cost is the most common deterrent and many smaller businesses may not be able to afford the time and expense of installing new systems and procedures. Evaluations can also bring some disruption to work routines which can impact short term goals. 

Business evaluations assess policies and procedures for coherence between systems and specific objectives e.g. measuring whether customer service policies actually respond to identified customer need. Evaluations allow the business to take an objective view of where it stands in relation to where it wants to go. The business might then leverage its assets to achieve its objectives through more informed choices about what systems work and what do not. 

Evaluations might examine organizational culture and structure, governance policies, work flow processes, KPIs, employee turnover, client satisfaction, and funding streams, among other inquiries. They also bare inherent and potential risks that will guide decisions about the design of business functions and the establishment of priorities. The elements of an evaluation are organizational objectives and goals, a needs assessment from end users of evaluation results, and a trained assessment team. 

These assessments can be done in anticipation of a strategic move to better position the company for success or as an exercise in assessing effectiveness. It is through the evaluation process that the most meaningful strategies are developed, improved, and refined. An evaluation provides the kind of insights that bring clarity of vision and purpose in building strategy. There are distinct advantages to an integrated evaluation framework that examines preparedness or efficiencies throughout the entire organization in order to maintain internal and external consistencies. An integrative evaluation takes a collaborative approach among both internal and external stakeholders so that findings dovetail seamlessly for an action plan that is strategically acquired. 

Key factors for a meaningful assessment are the organizational culture and decision-making policies, power hierarchies and centers of influence, horizontal communication, and a trained assessment team. It is often a good strategy to use external SMEs for organizational assessments since having line managers (internal SMEs) as evaluators risk introducing bias to the process through departmental agendas and priorities. But external evaluators can add to the cost and many medium and small enterprises may postpone or eliminate the evaluation exercise as a planning tool. One way to address the issue is to have line managers trained in evaluation techniques and expectations. 

But an evaluation is not a luxury that can be cut from the budget or postponed. It needs to be done from an assessment of a new venture’s potential to meet an identified market need, through an expansion of the customer base or to tap into new markets, to evaluating the resource capability required to achieve goals and objectives. Evaluations also enable the development of contingency plans that would mitigate an emerging risk profile to emphasize anticipation and preparation over after-the-fact response and crisis management.   

As the business plan evolves from the assessment and analysis phase, it is also good strategy to measure the proposed venture against industry best practices and the heuristic rules that apply. This is done from the perspective of process mechanics as well as change management aspects to arrive at a conceptual framework suited to that particular business in all its specific peculiarities in terms of cost, flexibility, work flow, time and resource constraints etc. Failure to conduct an evaluation when it is indicated can result in ill-informed decision-making, unrealistic expectations, poor appreciation of threats that can impair desired outcomes, and unpreparedness for contingencies. 

Related articles on this blog

Decision Making

Developing the Business Idea

Performance Metrics

Resource Planning and Costing Systems

Strategic Capacity Planning

 

 

by Merlin Hernandez

A budget is a financial plan that is based on an estimate of future income and expenses. Developing a budget begins with an estimate of future sales (sales forecast) in order to calculate the expenditure necessary to achieve those revenues. Sales forecasts predict sales volume for a particular period by comparing estimated future sales with the actual sales of the prior period. This would make the forecasted ending balance sheet for the prior budget period essential to developing the sales forecast as it brings important insights about trends and seasonal fluctuations, and can be a reminder of unexpected environmental determinants like rising unemployment levels, changing interest rates or credit market challenges.

The sales budget clarifies required product volumes, defines cost driver budgets, and helps to determine the best price at which to sell. The sales forecast responds to some basic questions:
– The number of different products the company plans to sell.
– The number of units of each product to be sold.
– The selling price of each unit.
The Sales Budget uses this information to determine the level of production required and at what intervals, the costs of bringing the product to market, and expected revenues for the period. Costs are broken down into an Operating Budget for variable costs and selling/administrative expenses, and a Financial Budget for fixed and capital costs as well as cash requirements. The sales forecast, therefore, drives the master budget in that it gives form to the sales budget and other cost driver budgets that lead to the development of operating and financial budgets.

Continuous Budget
The continuous budget is a valuable tool for better planning and performance measurements by factoring the changes that could affect sales projections in order to take preemptive or corrective action. A continuous budget strategizes by drawing from past performance within the period to adjust strategies for the future. But it applies the most recent information like economic factors, new technological applications or market changes for a new starting point to forecasting revenues. For example, a new competitive product on the market could determine a need to increase the advertising budget, offer new volume discounts to customers, or increase sales efforts, which would alter budget allocations and/ or revenue expectations, all of which are designed to mitigate possible revenue contraction.

Continuous budgeting does however, present moving targets that dictate a constant need to re-strategize ways to achieve them. But failure to accommodate environmental changes or changes in resource availability will mean that the budget remains in a vacuum and devoid of the up-to-date and realistic input that would inform corrective action and budgetary adjustment.

Control Management
A company that manufactures and sells a product may experience fluctuations in sales from month to month. A static budget would aggregate monthly production needs based on previous sales data and allocate a monthly production budget to reflect one twelfth of the overall allocation. This does not take into consideration months of high or low activity and would present a distorted view of production efficiencies or shortfalls – high-activity months would reflect cost overruns, and months of reduced activity would mean lower variable costs and not the ability of
the business to generate cost savings.

A flexible budget would link the observed revenue patterns of the previous budget to anticipated expenses for the new period and factor cost variances that reflect variable cost differentials for each month or quarter. Flexible budgeting is a useful feature in contingency planning for uneven levels of activity and is best used in the variable expense sub-section of the Operating Budget. It is the kind of budgeting that adjusts for changes in the volume of activity and is driven by expected cost behavior. It would be of greater benefit to a company than a traditional single value static budget which assumes a world of certainty and only factors one budgeted amount regardless of the volume of activity. A flexible budget is a more comprehensive accounting of the static budget’s cost variance and should be used in conjunction with continuous budgeting for enhanced tracking of variances and more effective control management.

There is need for greater flexibility in contemporary business environments which are characterized by the market volatility and technological changes that would favor continuous budgeting. Small businesses are particularly vulnerable but any type of business, small or large, can benefit from flexible budgets once there is a profit imperative with the need for cost controls. This would include companies engaged in manufacturing, service delivery or even non-profits that would still need to show their ability to generate a small profit as a mark of efficient management in order to maintain their funding.

But flexible budgeting can present control challenges as we target specific financial objectives that do not necessarily change because of threats in the environment. It comes down to the management of systems and processes for contingencies and short falls. The flexible budget is the practice of management by exception i.e. giving more attention to areas of significant variances for more efficient resource allocation and strategic implementation to achieve financial goals. The combination of continuous and flexible budgeting enables more intense contingency planning and adaptability as well as short term performance variance analysis that feed into better cost controls and profit projections.

Related articles on this blog
• Managing Small Business Financing
• Performance Metrics
• Resource Planning and Costing Systems

Merlin Hernandez is an entrepreneurial development and management consultant who operates mainly in the small and medium enterprise sector. For more information on this topic, please send enquiries to businesssolutions1168@gmail.com