Category Archives: Business Strategy

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Company Pulse Brexit blog

How can your business plan during the Brexit process?

We have heard a great deal about the Brexit process since the referendum, but most businesses are still unclear about how it will affect them and how they should (or indeed whether they can) plan for the future.

We now know what the government’s objectives are (a “clean Brexit”), what the position of the EU27 is (no “cherry picking”) and what the process and broad timetable should be.

But there are three main areas of uncertainty: which of its objectives the government can achieve and what trade-offs each side will make during the negotiations; how the negotiations will be affected by political events, including UK and EU parliamentary votes and upcoming elections in France and Germany; and, when we get to the end of the negotiations, what happens next in terms of implementation and any transitional period.

The economic background is a little clearer than when we posted our last blog on this subject. Sterling has fallen by around 15% from pre-referendum levels on a trade-weighted basis. The fall in the exchange rate is driving up inflation, which can be expected to rise above the official 2% target. The labour market remains tight and skills shortages abound, so we expect greater pressures for wage increases in response to rising prices. Overall UK economic activity has held up well during 2016, mainly due to consumer spending, but the rise in inflation and elevated levels of consumer-credit means that consumption is unlikely to sustain the economy so strongly over the next year or two.

And then there is a new major external factor – the Trump presidency and its unpredictable impact on international relations, global trade and the global economy.

So what can you do plan for the period of change Brexit will inevitably bring when there are so many uncertainties?

Probably the best tool in these circumstances is scenario planning. Scenario planning can be a detailed, rigorous, laborious and lengthy process. But, in the case of Brexit, we think a less formalised approach will quickly give you the insights you need to prepare your business.

We recommend that you start by identifying possible outcomes for uncertainties (in the case of Brexit, one uncertainty is whether or not the UK remains a member of the customs union) and group these together to form a coherent scenario. Each scenario must be internally consistent – a plausible future reality. Next you reduce the number of scenarios to a manageable number of alternatives for analysis, perhaps 2 or 3, which, to be useful, should be markedly different. Then you need to work out in reasonable detail what each of these scenarios would mean for your business, including how your business could respond, what resources you would need, and how other market players (suppliers, customers and competitors) might react.

Having analysed and war-gamed the shortlisted scenarios, you should be able to identify a set of weaknesses, risks, threats and opportunities some of which may previously have been hidden. These can be classified by impact (from existential down to minor) and whether they arise in all scenarios or are scenario-specific. These insights should give you a clear set of priorities for de-risking and improving the ability of your business to deal with Brexit.

We can help you work through this scenario planning process and we recommend you start by taking one of our business health checks. A business health check will help you understand how your business is currently doing, what your main strengths, weaknesses, opportunities and threats are, and how prepared you are to face the impending challenges.

We’ve also set out some key Brexit-related questions to help start your planning. These should give you a better understanding of any immediate problems requiring attention.

We think that the best ways to face the challenges of Brexit are to map out and plan for all likely scenarios, keep your options open, and to maximise the agility, flexibility and adaptability of your business.

Click here to start a Company Pulse business health check.

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Company Pulse Brexit blog

How should your business plan for Brexit?

Four weeks on from the EU referendum vote and the details of how Brexit will proceed are still unclear. Whilst the new government has said that “Brexit means Brexit” and given some indications that it won’t be hurried, solid information to help businesses plan for the future has not yet emerged.

We are unlikely to learn anything concrete from the government until the autumn, and perhaps even until the end of the year. Official data relating to the post-referendum period will not be published for a few months. Market reaction and surveys of business sentiment may give some guidance – a downturn in the short-term is the current consensus – but these based on hunches, not data.

So what can you do to prepare your business for the inevitable changes Brexit will bring when useful information is scarce?

The first point to recognise is that the Brexit process is likely to take two or three years and its full implications will not become apparent for some years after that. So this is a case for long-term planning.

Second, this lengthy timescale is not an excuse for doing nothing. Waiting would mean missing opportunities and playing catch-up later. Nor should you necessarily defer investment decisions. What is needed is a realistic assessment of potential outcomes and how your business could react to Brexit. You should use the current period of uncertainty to take stock of your business, develop ideas and work up game-plans for a range of scenarios.

A third concern is not to jump to conclusions without hard evidence. Over-reacting to limited data is also dangerous, particularly if that cuts off other possibilities. If you do need to make any big decisions in the near future, be rigorous in your analysis and critical of all assumptions.

We’ve already set out some questions to help you plan in an earlier post. These will build a better understanding of your business strengths, weaknesses, opportunities and threats.

The next step is to consider how the business environment will develop. All aspects of the economy will probably be affected by Brexit, so many established assumptions around your business may need to change. External factors to review include macro-economic (consumer demand, price inflation, labour mobility, wage rates, terms of trade, interest rates, credit availability and the relative value of Sterling); governmental (regulation, public investment and taxes); and market-specific (competition, new entrants, substitutes, productivity and the supply chain).

Taking one of our business health checks will help understand how your business is currently doing and how prepared it is for the challenges posed by Brexit. Our Gold business health check specifically includes the scenario planning that is most beneficial when faced with great uncertainty.

We think that the best ways to face those challenges are to plan ahead, keep options open, and to maximise the agility, flexibility and adaptability of your business.

Click here to start a Company Pulse Business Health Check.

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Company Pulse Brexit blog

What does Brexit mean for business and for small businesses in particular?

The result of the EU referendum vote has taken many by surprise and the financial markets, at the time of writing, have been marked down sharply. Those who are running small businesses might find the prospects confusing and worrying, with little hard information available to help plan for a post-Brexit future.

We have to assume that Brexit will proceed but, at present, it is far too early to know what the full implications are for business as the political process hasn’t begun and negotiating positions are unknown. We don’t know which of the free-trading or anti-immigration aspects of the Leave campaign will predominate. If it is the former, and the ‘Norwegian model’ is adopted, many things will remain the same and business to could expect to recover to something like pre-referendum norms. However, that doesn’t reflect what many voted for and we may end up with higher trade barriers and consequently greater challenges and uncertainties for business.

While most people in business dislike uncertainty, there are some things that businesses can at least think about to prepare themselves for the inevitable changes to come. We have addressed these in the form of questions you could ask yourself under our 5 Pulse topics

People + Processes

  • If we employee EU nationals, what do we need to do to ensure we retain them? (at least until the legal position becomes clearer)
  • If the current skills shortage is unlikely to improve, and may well get worse, what can we do better to attract new employees?
  • Wage rates may come under pressure: the pound’s fall will raise the cost of imports, feeding into inflation – what can we do to ensure we remain attractive as an employer?

Utilisations + Outcomes

  • Productivity is likely to be a key ingredient to future success, especially if wages rise – what can we do to improve productivity?
  • Sales to overseas markets: can we take advantage of a lower pound and enter new overseas markets? And are there good alternatives to existing EU markets if our trading relations with the EU deteriorate?
  • If market conditions are depressed in the short term, what are the implications of a lower growth trajectory (e.g. on staff incentives, investor relations and banking covenants)?

Logistics + Infrastructure

  • Is our supply chain at greater risk of disruption (especially if we currently rely on EU suppliers) and what can be done to mitigate those risks?
  • Do our business continuity plans adequately reflect increased business risks post-Brexit and during the transitional period?
  • Do we need additional intellectual property protection to cover EU countries post-Brexit?

Strategy + Finance

  • Do we need to update our business strategy for Brexit, and have we considered the implications of any short-term recession?
  • When trading conditions are tough, cashflow management can make the difference between failure and survival – what can we do to improve working capital and cashflow?
  • UK banks are likely to be under greater pressure in the short and medium term – what alternative sources of finance are available to the business?

Ethos + Relationships

  • If we currently serve EU customers, what can we do to reassure them and retain their custom?
  • We should bear in mind that many of our employees will be confused and anxious about their prospects – what do we need to do to reassure them and how could our employee communications be improved?
  • In due course regulations will change (but probably not very quickly) – are we fully compliant today and how do we ensure we keep abreast of regulatory changes?

Taking one of our business health checks will help understand how your business is doing in each of these areas, and help you plan for an uncertain future.

The businesses that are most likely to rise successfully to these challenges are those that are well-prepared, by thinking through the implications and developing appropriate responses to each scenario, and are agile, adaptable and flexible to implement change quickly and effectively. So let us help you be one of those successes.

Click Here to Start a Company Pulse Business Health Check

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Company Pulse business health check

Prevention is better than cure

Most of us recognise that preventative care is cheaper than curative care (or treatment), and more effective than palliative care (which just reduces the impact of symptoms). And not just in medicine, but in many activities. That’s why we have routine services for our cars, planned maintenance for our infrastructure and quality assurance in manufacturing.

It’s the reason why at Company Pulse we offer business health checks as the primary tool for improving the commercial and financial health of businesses. We think that if you want to help a business grow, step up to the next level, or even just survive, you need to know its strengths and weaknesses and how it can use them. One of our business health checks is the first step in understanding business potential, helping the management team think strategically about their business and actively planning its future direction.

The easy option, of course, in not to check your business health. But can you afford not to?

Back in the day, most people thought quality management systems were a nice-to-have that added costs to a business. But Armand V. Feigenbaum (in a 1956 Harvard Business Review article) showed to the contrary, that the costs of NOT taking preventative actions were almost always higher. The cost of quality failures generally far outweighed the costs of prevention. Feigenbaum’s work lead directly to the development Total Quality Management and Six Sigma. He defined four main cost areas (with typically increasing overall cost to the business):

Costs of Control
Prevention (planning, training, process control)
Appraisal (inspection, testing)

Costs of Failure
Internal failure (scrap, rework)
External failure (complaint handing, servicing, warranty, reputation)

A business health check falls under the costs of control, with elements of both prevention and appraisal. Analysis of the business environment is an essential element of strategic planning, and such elements of a business health check are pure prevention, as is the review of business capabilities. Benchmarking business performance comes under appraisal in the quality costs model and will highlight potential deficiencies and areas for improvement.

A Company Pulse business health check is an independent and objective review of your business that should lead to real performance and profitability improvements, enhancing business value and delivering a positive return on investment. And because our business health checks are low cost and fixed-price, the initial investment will probably be less than you expect and almost certainly less than the costs of not taking a precautionary check-up.

Unlike an MOT or filing your accounts, there’s no fixed schedule for checking the health of your business. Best practice is to take regular (say, biennial) health checks of your business. But if you haven’t got into that routine yet, when is a good time to take its pulse? The two main triggers are whenever you are considering major change; and when you know there is a problem, but you’re not exactly sure what it is.

The sorts of major or strategic change in your business, when a prior business health check is advisable, include:
• Entering a new market
• Launching a new product line / category
• Acquiring or merging with another business
• Raising new finance or refinancing existing debt
• A fundamental change to existing business strategy
• Implementing a turnaround
• Succession planning
• Seeking an exit (through selling your business)

If you’re about to embark on one of these potentially risky ventures, a modest investment in a business health check, which should alert you to any hidden problems and steer you towards a better outcome, is likely to be time and money well spent. After all, prevention is better than cure.

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Company Pulse financial planning

What is the correct assumption? Or how to choose a good set of baseline assumptions

In a meeting to review business case projections, the discussion ranged over various assumptions in the financial model and someone asked “But what is the correct assumption?” For those with a background in analysis, this question was an amusing distraction, but it raises an important point – what assumptions should you use in your business forecast?

One of the problems of any forecast is that it reflects the biases of the forecaster. And when you build a financial model of your business you are also making potentially biased structural assumptions about key business drivers. So, even though you’ve constructed a ‘rational’ financial model, it will inevitably be biased and the assumptions potentially unrealistic or inconsistent.

So what should you do to minimise bias? The best approach is to view all assumptions as just that, assumptions, and not facts, and to use sensitivity analysis to refine your understanding.

Sensitivity analysis helps answer the “what happens if…?”questions, such as sales X% down on forecast, payroll inflation up by Y%, or overheads reduced by Z%. A good financial model will have the capability to do this quickly and easily, perhaps with switches for key variables or scenarios.

The main benefits of sensitivity analysis are to evaluate the range of potential outcomes, to understand better the relationships between inputs (assumptions) and outputs; and to test the robustness of the model by revealing potential errors (as highlighted by unexpected, counter-intuitive or non-linear relationships between variables).

If you use sensitivity analysis systematically by adjusting your assumptions incrementally away from a central value, rerunning the model and reviewing the output, you can start to understand which variables are the most important to your business. A more sophisticated version is to use the Monte Carlo method to generate a large number of outputs having randomised each of the key input variables. Ideally you will automate this process and then run the model through a large number of iterations.

However accomplished, reviewing the range of outputs will give you a sense of the most likely outcome, and the potential range around that expected outcome. This process also provides a ‘sense check’ for your baseline assumptions.

There is another useful variant of sensitivity analysis to consider before finalising your baseline assumptions: break-even analysis, which allows you to find the levels for key variables where the model breaks even, for example sales volume, selling price or cost of sales (whilst holding all the other variables at their central assumption). Break-even analysis is a simple and powerful concept, but surprisingly under-used.

So, having reviewed your sensitivities and evaluated the break-even points, you have arrived at a better understanding of your assumptions. You may find that something previously considered insignificant is a critical, or the impact of some variables is reduced by self-correcting mechanisms, others may affect timings but not quanta, and yet others will be much less significant than the received wisdom would have suggested. You should also consider each assumption in the light of the others: are you assumptions mutually consistent? Such insights may provoke further research and debate as you home in on your baseline assumptions.

You will probably have realised by now that there is no such thing as a “correct assumption”. The best you can have is a baseline set of realistic assumptions that are internally consistent. What you do need is a management process: a progressive approach to a better understanding of your assumptions leading to a better forecast of the outcome.

This review process should continue every time you update the model with actual performance. After an update that results in a step change from the original plan, ask yourself “Is this the start of a trend, a blip, or a timing issue?” Keep running sensitivities (especially those suggested by recent actual performance) and, if necessary, update your assumptions. You should converge on an increasingly accurate forecast which, after all, is the goal of your modelling.

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Company Pulse business health check

When should you review your business strategy?

You might want to ask yourself “when should I review my business strategy?”

A strategy review is not a trivial task (at least when done properly), so you should only carry out a review when you really need to.

That said, there are several events that should prompt you to review your business strategy:

  • A significant new entrant in the marketplace (not just new competitors, but major new suppliers or customers can dramatically alter the competitive landscape)
  • Withdrawal of a significant market player – perhaps through insolvency or a tactical retreat
  • Merger of major players in your competitive arena
  • Development of new technologies that facilitate new products, production processes or ways of doing business
  • Major legislation or regulatory changes that affect your operating environment
  • Fundamental changes to the economic or business landscape

To be relevant triggers for reviewing your strategy, such events need to be potential “game-changers”: major developments with medium- or long-term effects. You should also look out for developments in complimentary and substitute markets as well as those in your current field.

Not all such changes will be dramatic revelations – quite often, the significance of new developments takes time to emerge. You need to be alive to new developments as often an accumulation of small changes leads to a big shift in the competitive landscape.

There is no substitute for continually monitoring the business environment. If any of these game-changers occur in your business environment, they create an opportunity to rethink your business strategy – and they might transform your business.

Returning to the question, one response might be “Not during the budgeting process”. Although the annual budget often prompts a rethink of your strategy, you really need to have locked down your strategy before you start the budgeting process – then use your strategy to inform your budget.

It is advisable to ask a few strategic questions before embarking on your budget process:

  • Is my current strategy still suitable for current trading conditions and my current operating environment?
  • Is my current strategy still feasible? Or, put another way, Does my business have the right resources and capabilities to deliver its strategic goals?
  • If my strategy is achieved, will it still deliver acceptable returns?
  • If you can’t answer “Yes” to these three questions, you probably need to review your business strategy before preparing your budget.

So, the best answer to the question “When should I review my business strategy?” is “Whenever a game-changing shift happens in your operating environment”. You therefore need to keep monitoring the environment for such changes. Also you should check annually that your strategy is still relevant, well in advance of preparing your budget.

Of course, if you don’t have a proper business strategy in place you should start developing one now as a matter of priority.



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