The Seventh Commandment Of Strategic Planning: Prioritize Your Strategies And Resources
Jacob M. Engel Forbes Councils Member
All organizations are built on the same four foundations. I call them the 4 Ps (pillars), and these strategies and resources are your responsibility. 1. People 2. Processes 3. Products or services 4. (Ph)finances
The difference between successful organizations and those that fail or falter is how strong, thick and deep are the four pillars and how the four pillars are allocated or prioritized so that you don’t have a lopsided building.
If you ask an architect to build you a one-story house, the foundations will be built to accommodate one story. What happens when you build two, three, five, ten, twenty stories on a one-story foundation? It all collapses. The same goes for businesses. You can’t build a five-, ten-, twenty-million dollar business on the same foundation as when you started the business. Most business owners only realize this fact when things start to fall apart, as they are reluctant to “rebuild from scratch.” They would rather keep on pushing harder and harder, but it’s like trying to go at a high speed in first gear. It will only wear out the engine and burn more fuel, but you won’t go any quicker.
Recently I was asked to evaluate a company that over the last few years lost half its sales. I found that at this company, each of the pillars was lopsided at best. No wonder they couldn’t sustain growth. Of course, they had great excuses, but any excuse will bring down a lopsided or weak structure.
Pillar 1: People The reason why people are the most critical to success is because most companies don’t know how to hire. So, either they hire and fire, or worse, they don’t fire and keep the wrong people on board. According to a Gallup study, 82% of hires are wrong: “Companies fail to choose the candidate with the right talent for the job 82% of the time.” People are by far the most important resource and priority. I tell all CEOs that in reality, they are the chief coaching officer, and you’re coaching your people either up or out. Jim Collins is famous for his quote that you need to have the right person in the right seat on the right bus. This is priority number one.
Pillar 2: Processes In order to make successful people a success, they need to have clearly defined processes. Otherwise, you are tying their hands behind their backs and throwing them into the water, where they will mostly sink. If the processes are not well-defined, then your people will have to figure it out by themselves (i.e., reinventing the wheel again and again). The question you want to ask yourself is, “Why do we have the time to redo things again and again but never have the time to do it right the first time?” There are many processes that you can use. I like using the horizontal process versus the vertical process, which can be used effectively in business process reengineering (BPR). In the traditional vertical approach, companies are structured by their functions, such as sales and marketing, operations, financing, etc. The challenge is that too often, things fall in the cracks and everyone points fingers at the other departments. In the horizontal process, you identify the company’s core processes. For example, almost every company will have something called “order to cash,” meaning how an order gets processed and how the company gets paid. A great exercise is to “staple” yourself to an order and see how many steps it takes to get it to the customer and for cash to be in the bank. Each step should be evaluated as to how important it is for the customer or for the company. Eliminate unnecessary steps. More importantly, one senior person should have the full bird’s-eye view of the process, get instant notification when something gets stuck and have the authority to move it along. Once it’s set up smoothly, then that process is repeated again and again and all the executive needs to do is monitor the roadblocks — say with an enterprise resource planning system.
Pillar 3: Products Or Services Products or services is another priority. Many companies lose track of what products or services are key to their success and what might be dragging them down. A great exercise is to annually run an 80/20 report, which references economist Vilfredo Pareto’s Pareto Principle: 80% of consequences come from 20% of the causes. This means that 80% of your business is done with 20% of your customers, or that 80% of business is done with 20% of your products or services. Run your report to see which items or services are generating most of your business and eliminate those that just bog you down.
Pillar 4: (Ph)finances Financing is very crucial to the success of any organization. I see companies making huge mistakes that cost them their profits and sometimes their entire business.
My father used to say that everyone can sell a dollar for 99 cents — meaning, selling below cost or below margin isn’t a strategy, it’s stupidity — as is a failure to define the reasons customers should buy from you.
Many companies don’t realize that if their cost of goods sold is, say, 75%, then for every dollar in sales, you need 75 cents of cash flow.
Many companies don’t prioritize collections, or they wait way too long before taking action, and once it becomes a huge outstanding amount, companies can’t pay.
You should be reviewing the receivables with your controller every week.
Without cash flow, you can’t run your business. Part of your strategy should include having great banking relationships. Your bank should be willing to help you through a crisis, not pull the plug on you. Banks are your friend if you set up the relationship correctly.
My best friends were my bankers!
Bringing It All Together Build a strong foundation, using the four pillars from day one, and you will reap the benefits of consistent high growth.