Strategic Analysis: Building Profitability and Business Value

Have you taken a strategic look at your business lately? Shrewd business operators know you cannot manage a company optimally without understanding your current position in your industry and contemplating alternative ways forward. Where do you want to be in 3-5 years? In helping our clients with strategic planning, we generally consider the following:
Current Competitors– How well do you know your competitors? What are their strengths and weaknesses? How do you compete with them? How can you beat them? Can your customers differentiate you from them? You should strive to make investments and introduce new products/services to separate yourself from your competitors. Try to identify new trends early and exploit them. You should know the average industry profitability. You should know who your competitors are, their relative competitive positions, and how your firm stacks up against them.
Potential Competitors– Different industries have different barriers to entry. You should know these barriers to entry and should strive to know where future competitors might come from. For example, if you are in the tire business, you should know that 75% of the Wal-Marts in the U.S. sell tires and the Wal-Mart next door to you could start selling tires tomorrow. How will you compete with that?
Current Customers and Potential Customers– Do you bring true value to your customers? Do you demonstrate that value to them regularly and consistently? Are you overly reliant on one or two customers? Generally not healthy for you or them. Expand your service or product offerings and work on diversifying. Don’t grow your sales just to grow them. Consider the quality of revenue. If the new business is not profitable now, when will it be profitable? If it’s not likely to be profitable why are you doing it? Do you know your costs well enough to answer that question with confidence? How sensitive are your markets and customers to price?
Suppliers– Are you overly dependent on one or two suppliers? What happens if they raise prices, can you pass along increases to your customers or does that come out of your profit margin? What if your supply line is interrupted? Concentration of suppliers is generally dangerous and needs to be actively managed. Keep your product specifications as general and simple as possible to help open up alternative sources of supply and keep your costs down. Keep up to date on your suppliers and their markets. Before you sign a long term agreement (LTA) you should consider your industry and where you might be in the business cycle. You may look like a genius if you sign an LTA right before prices jump, but you won’t be so happy if you lock prices in before a steep price decline.
Product Substitutes– Are there readily available substitutes for you what you’re selling? A dangerous competitive position to be in. How do you differentiate your business and bring value to the market?
Strategic Cost Structures– Do you know what your fixed and variable costs are? Are you able to manage this mix as conditions change in your company and industry? If you expect your sales to grow consistently, have you considered how you might increase the proportion of your fixed costs to allow you to make more money? Conversely, if you expect sales to be stagnant or trend downward over time, consider migration to a more variable cost structure to help maximize profits and reduce risk.
Identify ALL your Risks– In your strategic brainstorming sessions, develop a list of all risks you can think of. Not just property and casualty risks that you generally insure. What would happen if your phone or internet pipeline goes down? Maybe not a big risk to some, but if you’re a Holiday retailer and it goes down for a day or two in peak season it could be very damaging! Do this risk identification exercise regularly and keep it updated. Once you have the risks identified, consider frequency and severity and how you might manage each of the risks. Can you reduce them, manage them, or shed them? Some risks you may elect to accept. The important thing is to analyze the situation and not be surprised. Your business will be much stronger over time if you take time to do this.
Always remember the 80/20 Rule– Work on the things that really matter! Where do you spend your time?
What’s the End Game? Whether you plan your business exit or not, it will happen. Take the time to consider your alternatives and develop plans. Where does your business stand in regards to your current customers and future prospects, suppliers, rivals, and substitutes? Consider what the potential of your business could be and work to increase that value. Optimization of value and understanding your alternatives will help drive an optimal solution for you and your family, your employees and their families and your other business stakeholders.
Ultimately, strategic analysis comes down to understanding your strengths, weaknesses, opportunities, and threats (SWOT) and identifying where you want to take your business.

B2B CFO® is the nation’s largest CFO firm providing small and mid-market business owners with CFO services on a part-time basis.

We are more than 220 CFOs with over 6,100 cumulative years of experience. No matter what your company’s issues or needs are, it is highly likely that we have already successfully handled similar situations and have worked in your industry. No accounting firm or independent CFO can match us. All this experience is available to any business owner engaged with a B2B CFO® Partner.

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