SWOT – A strategic tool to create your sustainable niche

business strategy, strategic planningNo it doesn’t mean burying your head in a textbook cramming for an exam…and nor does it mean a team of battle-hardened commando’s…it is in fact a business planning discipline for identifying the key environmental (EXTERNAL) issues which will impact a business, as well as the strategic capabilities (INTERNAL) of that business …all of which will impact its strategy.

The technique is attributed to Albert Humphrey – an American management consultant based at the Stanford Research Institute who worked with some of the largest global businesses in the 60’s and 70’s.

The beauty of SWOT…is its simplicity and the fact that it works for individuals personally, for small businesses, not-for-profit organisations, government and even the big end of town….it can even be used in decision-making scenarios, like a viability or new product study.

 “The Good, the Bad and the Ugly”…

SWOT is pretty comprehensive and it provides an all-round perspective of both the GOOD (favourable factors) and the BAD/UGLY aspects (unfavourable factors) relative to either:

(1) a COMPETITOR business/es …or

(2) the business’s or the project’s specific OBJECTIVES.

How to perform a SWOT analysis…

  • Start with what the business or the project looks like today?

Then think and talk about things from an entirely Inward/Introspective viewpoint:

  • How does your top management team or Board rate, are there functional gaps, are they cohesive/communicative and focused on achieving pre-defined objectives?
  • What are the skills and attitudes of your management and staff like, could they be improved, what do customers say about them and are they stable and productive?
  • What products and services are in high-demand? Which are considered the best of their ‘breed’ in the market place?
  • What are the marketing and advertising resources and skills like? Are they achieving their desired objectives? Are you driving the ‘right’ #’s and ‘$’s’ of sales and are you growing your sales and sales pipeline continually?
  • What is the state of your bank account and do you have adequate finance facilities to grow?

It is likely that when you spend time dissecting these internal ‘STRENGTHS’ and ‘WEAKNESSES’ that you will find that some conflicts or anomalies occur. A strength in one scenario might even be a weakness in another e.g. a broad, highly skilled and experienced Board maybe a great strength in terms of institutional recognition, quality and leadership …but a possible weakness would be the attendant cost and the constraint on internal staff being able to be promoted to those roles in the near-term?

Then move onto the external situation – AND LOOK OUTSIDE yourself or your company:

  • Consider the various things that influence your business (think broadly in terms of Political, Economic, Social, Technological, Environmental and Legal issues) and see which of those factors …or the changes that might be occurring in each of those areas will be able to be turned into:
    • OPPORTUNITIES for the company
    • THREATS
  • ALSO think about how each of these factors will impact your most important competitors – how well do they shape up …and where are their GAPS/WEAKNESSES that might be commercially
  • What would you need to do to highlight those …and do you have adequate resources to exploit those deficiencies?

Once you have a high-level picture of where things are at please DON’T stop…otherwise all the hard work will never yield anything of real value! At this point you will need to consider and PLAN ACTION STEPS which will exploit the company’s STRENGTHS as well as the OPPORTUNITIES which present themselves in the market…whilst at the same time counteracting or reducing the impacts of the negative or riskier elements of the company and the threat’s posed by competitors….

Spend plenty of time categorizing (an A-B-C prioritisation system works well) the various actions on the basis of their IMPORTANCE and URGENCY …so that they can be allocated to various members of the management/staff for implementation…and try and make sure that no more than 6-8 key areas are to be focused upon at any point in time…

STRATEGIC EXECUTION or “IMPLEMENTATION”, and the success you achieve from taking the various actions is where the REAL VALUE of having taken this important strategic step will be revealed!

SWOT analysis is not an all-encompassing strategy tool – however it has been extremely valuable for more than 40 years and we use it regularly as a business valuation and strategic positioning tool which quickly helps us to benchmark and understand a client …as well as determining how such might grow and improve?

Start using SWOT TODAY…to provide a clear picture of the market and where in it your company sits!  Sun Tzu’s ancient quote reminds us of the perils of not doing so…“If ignorant both of your enemy and yourself, you are certain to be in peril!”

For additional information or assistance on strategic planning visit us at www.latticecapital.com.au.

Join us next week when we’ll show you how to use the Boston Matrix within your business.

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Vision and Mission statements, mere jargon or essential for business planning?

corporate vision, business strategy, reality visioning, mission statmentChristopher Columbus didn’t jump into his boat and discover the New World prior to arranging the required finance, loading provisions and investigating the best route to get there! So why should you?

Well, business strategy isn’t too much different from global exploration.  It starts with cleaning your glasses (none of us sees well without clear vision!), doing some thinking and building a plan.

A strategic plan which articulates a:

  • Carefully considered GOAL/PURPOSE (something which you’re hopefully passionate about achieving!) and which may take time but which will have a durable quality. This over-arching purpose is sometimes called the “mission” and larger companies often publish complex mission statements in their annual reports;
  • POINT OF FOCUS or the DIRECTION (“vision”) …of you and your team.

One thing our experience tells us is that all successful businesses have a clear purpose, and then the… focus and discipline …to push towards that objective/s even when the going gets tough, as it undoubtedly will.

High growth businesses are usually founded on a simple, often big picture, mission or an internal capability even though they usually supply more than one product or service However the offerings of those companies reflect significant synergies.

Said another way, they specialize in one thing, and then the other parts of the business logically hang off of it.

It is easy to fall into the trap of starting out with a product/service which then gets extended until you suddenly realize you are in a different “market” from the one you thought you were in. Because every industry has a fairly unique set of opportunities, risks, personalities, quirks, regulatory frameworks and associated industry associations / networks etc. It takes lots of time, and effort, to develop the depth of knowledge and reputation that allows one to become a key participant with a significant market share! As a result it is only the largest listed groups – with access to large-scale capital, human and other resources that can straddle multiple industries without diluting their energy, competitive effort, making costly mistakes or missing out on key growth opportunities.

Not every business will be a high growth entity …but EVERY business needs to regularly think about the following:

  • What problem are we solving for your clients?
  • Who are those clients?
  • How many markets do we have clients in?
  • Do people outside our business understand what our business does?
  • What do we need to invest to pursue an opportunity / new client?
  • What is the process of selling our goods or services?
  • Are the risks and profile in terms of buyers and buyer behaviour similar?
  • Does that decision leverage an existing product / service / staff member / resource? OR does the staff member or product need to be trained / reworked?
  • Are there any other synergies …with the things we have been doing?
  • If we offer that additional product/service, are we further focusing our business or are we making it more disparate / diffuse?
  • What do we do that is better than all others in our space?

And most importantly, in conclusion

  • WHAT BUSINESS ARE WE IN and DOES OUR STAFF KNOW WHAT BUSINESS THAT IS?

When the above things are resolved, you will be a position to communicate easily and clearly to staff and clients WHY you are in business, as well as WHAT you are trying to achieve. Also decision-making becomes a lot easier as ‘it’ either is ‘in’ or ‘out’ of the frame and the actions of you and your team are simplified, become more targeted and energized.

You will also be in a position to:

  • Determine the values and principles, which will be upheld and adhered to – which will determine the culture, which just means the rules of behavior, which govern the way your people and your business behave.

WOW! Isn’t that a better place than most of the businesses you come across?

Unfortunately these concepts, which usually get fitted into a nice hierarchy aren’t often properly applied, or they don’t achieve what was hoped for and staff become cynical, disillusioned or even destructive! Worse still, to coin the words of David Maister, ”there are many more firms with mission statements than actually have missions[1]”.

However much we might like to avoid the annual planning weekend and to throw away what is often no more than jargon, it remains vital for management to define their organization, to set the boundaries and to mobilize the “troops” to achieve the objectives as agreed.

As Nikos Mourkougiannis [2] stresses – you have to begin with the “purpose” in mind!

When we think about it, we usually have a pretty good idea as to WHAT we should be doing in both our personal and business lives, and WHY we should be doing it, and even HOW we do it, and HOW REGULARLY we should be doing it – the hard bit is ACTUALLY DOING IT.

Over to YOU – where are you going to start in 2012?

Join us next week when we’ll show you how to conduct a detailed SWOT analysis on your business including providing you with a worksheet to get you started.

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[1] Page 61 Strategy and the Fat Smoker – David Maister: Spangle Press Ó 2008

[2]  Purpose: The Starting point of Great Companies – Nikos Mourkogiannis

Finding Your Path to Success in 2012 – 5 Tools to Help You in Developing Your Business Strategy

SWOT, PEST, Porters 5 forces, Boston Matrix2011 has been a tough year for most smaller and mid-sized businesses in Australia. 2012 is just around the corner and what better way to kick-start the New Year than by committing to re-visit, refresh or even initiate development of a formal business strategy?

After all, strategy is no different from a map – it’s all about setting course and then staying on track – in this instance with a view to growing your business and meeting (and hopefully exceeding) your objectives.

Business strategy can be an intimidating area for many business owners. The terminology used by business strategists such as USP’s or competitive advantage can be confusing and there are lots of business strategy tools available which at first glance, look like you need a PhD to understand.

We’re going to cover some of these business strategy tools and get back to basics so that, as a business owner, you can have a far greater understanding of strategy and an appreciation of the benefits it can provide.

5-step process to developing your business strategy

We have developed our own 5-step process (using well known and proven tools) to develop your core business strategy.

 1. Vision and mission

Everybody needs a purpose in life, according to Eleanor Roosevelt…….”The purpose of life is to live it, to taste experience to the utmost, to reach out eagerly and without fear for newer and richer experiences”.

The simplest way to think about corporate vision is……..If you don’t know where you’re going then how are you ever going to get there?  Spend some time over the holiday period considering your vision for your business in 2012 and beyond.

2.       The SWOT analysis

After developing your own corporate vision and mission you know where you want to go. The next steps are all about understanding your current position.

SWOT stands for Strengths, Weaknesses, Opportunities and Threats as they relate to your business. A carefully considered and honest SWOT analysis will help you understand some important issues about your business and the industry in which it competes. That process will give you some direction around future decisions.

According to Arthur Ashe, the legendary tennis player and AIDS activist, “Success is a journey, not a destination” – accordingly the preparation and ‘doing’ are more important than the outcome.

3.       Boston Matrix

Not all strategy tools are applicable to your business, but for companies with a number of different businesses or even businesses with a number of different products or services, this is a useful way to consider your business mix.

The Boston matrix will help you decide which products or services are ‘stars’, ‘cash cows,’ ‘problem children’ or, worst of all ‘absolute dogs’.

That doesn’t mean that you must automatically get rid of the ‘problem children’ or ‘dogs’ as you may have plans to address one or more of those negatives …and by the same token that also doesn’t mean you should keep your ‘cash cows’ either, as that may distort balance and direction.

Like many strategy tools the Boston Matrix creates context and develops insights, which better inform future decisions.

4.       Porters 5 forces

Named after the guy who developed the concept, and one of the founding fathers of business strategy – Michael Porter. A “Porter’s 5 forces” assessment is an industry analysis tool, which is a simple, quick and effective way of analysing the industry you compete in and the forces which drive business.

Importantly it involves assessing:

  • Competitive position;
  • Barriers to entry;
  • Substitute products;
  • Supplier bargaining power; and
  • Customer bargaining power,

many of which impact the SWOT assessment above.

This discipline helps you determine which elements of your business need the most attention from an industry perspective.

5.       PEST analysis

By now, you will have probably noticed that many of these tools overlap with each other. That’s fine, each tool provides a different means of looking at the industry and your business within that industry, and it’s expected that you will come up with similar issues using the different tools! If you don’t get duplication… something is wrong!

A PEST analysis is a macro-economic analysis tool. It looks at the big picture and what’s going on in the economy in which you operate and what that means for your business.

PEST stands for:

  • Political
  • Economic
  • Social
  • Technological.

Conclusion

Change is never a destination, just as hope is not a strategy (Rudy Giuliani). You can’t sit back and expect your business strategy to reveal itself, you need to proactively follow the above steps and determine your own destiny.

So now we’ve set the scene, share your business goals below.  Where would you like to be in 2012?  How do you plan to get there?  If you would like a more in depth analysis of each these steps, subscribe via email or rss as we break each of these steps down into bite size chunks to assist you in developing your own business strategy.

If you can’t wait and need to take action on your business strategy now, contact us at info@latticecapital.com.au and we‘ll discuss your business strategy needs directly.

Business valuations – The fundamentals all business owners should know (part 2)


So last week we looked at the first 2 steps of business valuation, namely what are you valuing and why. We’re going to continue this week by looking at the next two valuation fundamentals, when to value your business and how to value your business.

So let’s get straight into it:

When to value your business?
Seems like a pretty straightforward question, doesn’t it? Well it is pretty straightforward but at the same time, very important.

The purpose of the valuation will determine when the valuation should be conducted.

For example, in a family law matter, the date of valuation should be the point at which the divorce is finalised by the judge. In terms of a valuation for accounting purposes (for example, an impairment review) this would have to be at the financial year end of the company or business being valued.

I would suggest you seek professional advice on this simple but important matter.

How to value your business?

Well, I could talk all day about this but for now let’s keep it simple. When valuing a business we normally use one of three methods, namely:

  • Earnings based approach
  • Discounted cash flow
  • Asset based approach

There are various nuances relating to each of these methods but let’s look at each one in turn.

Earnings based approach

An earnings based approach, as the name suggests, takes the earnings of the business and multiplies this by an earnings multiple to calculate your business value. It’s an ideal method for a mature business with a track record of historic profits. Again, it seems pretty straight forward until you ask yourself the following questions:

  • Which earnings do I use (Earnings Before Interest & Tax, Earnings Before Interest, Tax, Depreciation & Amortisation, Profit Before Tax or Profit After Tax)?
  • Do I use historic or forecast earnings?
  • Are my earnings sustainable or do they include a number of one off items of income or expenditure?
  • Which multiple should I use and how do I determine it?
  • Where do I get earnings multiples from and do I need to make any adjustments to these multiples?

As you can see when you start asking these questions the complexity starts to emerge.

Discounted cash flow (DCF)

DCF valuations are probably the most scientifically sound but still have their problems. The DCF method takes your future cash flows and discounts it back to present value.

The simplest way to think about present value is to ask yourself the question, would you prefer $1 now or $1 in a year’s time? Hopefully you would like the $1 now because it’s worth more than the $1 in a year’s time. The reason for this is because you could invest that $1 in an investment account and earn interest so that by the end of 1 year it could be worth $1.03 for example. The longer you go out the less that money is worth in today’s value.

A DCF takes all of your anticipated future cash flows and discounts them back on a similar basis to present value. The problem is of course that the result of the DCF valuation will depend on the inputs into the valuation, namely your future cash flow forecasts, i.e. RUBBISH IN, RUBBISH OUT.

The other problem with a DCF valuation is that it is recognised that in theory cash flows run in perpetuity (i.e. forever) and so even though your cash flow forecast will stop after 3 or 5 years the valuer may still take a view on cash flows after that. This value in perpetuity can account for a large portion of the overall valuation result even though there is nothing to substantiate it and hence this causes a lot of debate.

Asset based approach

An asset based approach is ideal where the item being valued has a market value that is easy to determine. For example, when valuing an investment property, you could either use an earnings basis and take the net rental divided by the market yield to determine a market value or you could just look at the value that similar properties have sold for in the area to determine the market value.

The same would apply for other assets such as motor vehicles, trucks, commercial property etc.

Conclusion

Valuations can be a complex issue and although we believe in keeping things simple we would caution against taking the easy way out when it comes to business or company valuations. You can easily miss the boat completely.

The best thing to do when encountered with a business valuation is to seek professional advice from people who value businesses for a living.  Do your research and look for those valuers who are able to add substance and rigour to a valuation process so that the valuation itself can stand up to scrutiny for other parties.

Contact Lattice Capital on info@latticecapital.com.au for more advice on valuing your business.

Business valuations – The fundamentals all business owners should know

valuing your business, how to value your businessWhat does a business valuation actually involve?  Do I need one?  Well, if you need to know what your company’s value is, a business valuation is a good place to start.

We’re going to take a closer look at business valuations and specifically the 4 steps to valuing your business.

 

 

Part 1:

  • What are you valuing?
  • Why are you valuing it?

Part 2:

  • When are you valuing it?
  • How are you valuing it?

What are you valuing?

Seems like an easy question, right? Well this is where many business valuations fall at the first hurdle. This is one of the valuation fundamentals and if you get this wrong, the whole valuation will be wrong and that could end up costing you a lot of money.

Business vs company valuation

The most popular area of confusion is business vs company valuation. Most people see these as one and the same but they are in fact very different. A business typically operates within a company and sometimes there can be a number of different businesses operating within the same company.

business valuation, valuing your business, how to value your businessA business has a number of assets and liabilities associated with it that the business needs to continue trading; things such as debtors, stock, plant and machinery, etc.

The company on the other hand, has a number of things, independent of the business, that it needs to operate and this is normally related to the capital structure of the company; things such as debt and shareholder equity and loans.

If someone wants to buy your business, they are not interested in the capital structure of the company, they don’t want to take over your debt, your shareholder loans and your historic tax liabilities.  All they want are the assets they need to continue operating the business and required to generate the cash.

Sometimes though buyers want to buy the company (for various reasons) and in those circumstances they do want the debt and shareholder loans. This could be the case, for example, where the company has some contracts that cannot be transferred to another company and so a buyer has no choice but to buy the company, i.e. the shares.

Value drivers

The other area of confusion is caused by not really understanding what drives value in your business.

Let’s look at a simple case study to demonstrate this:

  • You run a pest control business from a property in central Brisbane that is also owned by the company; and
  • The business needs the property to operate from and you intend to sell the property with the business.

In this case you can’t just value the business using one methodology, such as an earnings based approach (more on that in later posts). You need to value each different aspect of the business. Firstly, you need to value the business on its merits and then value the property separately.  The two valuations are then combined as they are both owned by the same company.

You will probably need to make a few adjustments to your numbers to achieve this. As an example, you will have to impute a market related property rental for the use of the property into your business expenses and then exclude all other property related expenses from your business expenses.

It’s vital to break a business down into its respective parts and then you can determine the best way to value each piece.

Why are you valuing it?

So now you know what you’re valuing it, the next question is why are you valuing it?

This is important as it will determine your approach to the valuation. There could be a number of reasons for valuing a business including:

  • Sale of the business as a going concern
  • Forced sale due to pending bankruptcy
  • Taxation purposes

Your reason for valuing can have a dramatic effect on the valuation result. If you are forced to sell the business due to pending bankruptcy then it is important to be able to sell it quickly. When you do that, you have to expect to apply a discount on some asset values.

So make sure you understand the purpose of your valuation and the impact this will have on the valuation result.

Conclusion

Getting these valuation fundamentals right will set you on the right path for determining your business valuation. If you don’t consider these fundamentals you run the risk of under-estimating the value of your business and potentially selling it for less than you should have, and that’s a direct impact on your back pocket. Alternatively you may not be able to sell it at all because your valuation expectations are too high.

So before you start valuing your business think about the above and be absolutely sure about the what and why of business valuation. Don’t be afraid to seek professional advice if there is any element of doubt.  Do you have any questions on what a business valuation is and why you need one?  Post your questions or comments below.

Join us next week where we’ll take a look at the next two steps of when and how you value your business.

Business, like life, turns full circle

"Business lifecycle", "Raising finance", "Business valuation", "Business strategy"

“Those who do not learn from history are doomed to repeat it”…an old but relevant saying.  The business life cycle theory is very much alive and kicking. At what stage of the circle of life are you with your business?  You may be just starting out or you may be getting ready to retire or maybe, you’re somewhere in the middle?  Whatever stage you’re at, it is important to understand the life cycle of a business and where strategy and finance can have the greatest impact.

Welcome to Lattice Capital’s blog, The Business Circle of Life.  Subscribe now and join us in looking at the Circle of Life from a business perspective and specifically the financial issues affecting business during the various stages of its lifecycle.

The Four Main Stages of the Business Life Cycle

We have broken this down into four main stages – Birth, Growth, Maturity and Decline.

"Business lifecycle", "Business Valuation", "Business strategy", "Raising finance"

Stage One – The Birth Stage

This stage represents the birth of a new idea or perhaps a new product or service offering. The birth stage could involve starting a business from scratch or possibly buying an existing one. This is an exciting time but you could be so wrapped up with your new baby that you may not have considered all aspects of the business.  The types of issues arising could include:

Stage Two – The Growth Stage

This stage is probably the most rewarding stage of the business lifecycle. It’s when all of your hard work starts to pay off but it’s also probably the period when you are most busy. So you know where your business is heading but the question now is how do you get there?  You could be facing one of many issues during this phase including:

Stage Three – The Mature Stage

The mature stage is when things typically start to slow down a bit. Your business is ticking along at a reasonable pace with acceptable growth, your financing needs are probably in place, your business vision has been bedded down and your systems and procedures are well engrained. This should be the time when you get to enjoy the fruits of your labour- a bit more fishing or golf perhaps, the first family holiday in a few years? There will still be some issues you will want to address for your future such as:

Stage Four – The Decline Stage

The decline stage is when you’ve had enough of being in business and it has run its course. Typically, during this stage, growth starts to slow down. Perhaps you start to lose clients or customers to competitors or new and better products and services are introduced by other businesses. The sooner you accept that you’re in this phase, the sooner you can do something about it, such as:

  • Re-innovate – find new products or services that are aligned to what you know
  • Sell your business and retire

A lot of these issues will recur during the various stages of the lifecycle, albeit in slightly different forms

Conclusion

The consequences of business failure are normally bankruptcy and unfortunately many of these issues causing failure are usually avoidable and come down to poor management and a lack of understanding of business fundamentals.

"small business failure", "Business circle of life"According to Insolvency & Trustee Services Australia the number of business related bankruptcies has been steadily growing over the last 5 years as seen below.

So unless you want history to repeat itself and before you become a statistic why not try and understand the business lifecycle issues more thoroughly and apply them in your business.

We’ve set the scene and now it’s time to delve into a little more detail and look at some of those business life cycle issues more closely. You probably noticed that a number of issues re-occur at various stages of the business lifecycle and we can broadly put them into the following categories:

  • Business valuation;
  • Business strategy;
  • Business finance (start-up, expansion and working capital);
  • Business Acquisition; and
  • Business exits.

We’ll be taking a closer look at each of these issues so subscribe either by email or RSS and get the latest topics directly to your inbox.