Center for Simplified Strategic Planning

Author: Robert Bradford

  • Ways to Estimate Value When You Just Don’t Know How to Price

    By Robert W. Bradford, President/CEO

    Robert Bradford
    Strategic Planning Expert Robert Bradford

    One of the hardest things to get right, strategically, is the true value of your product or service.  This is understandable, since the only true measure of value is what an individual customer will pay at a specific point in time.  Most of us look at our costs- commodity based – or competitors’ prices- also commodity based – when thinking about pricing.  This is silly when pursuing a specialty strategy, since the customer is your best source of value information.

    Some companies, realizing this, will ask their customers directly what the value of a product or service would be.  While this can give you decent guidelines for pricing, we should be aware that customers won’t verbally answer this question the same way they would if they were actually reaching into their wallets to buy your product or service.  Indeed, in many situations, customers will consistently under-report the prices they would be willing to pay, because they expect their answers will cost them in the future.  Fortunately, there are a few other clues we can look at to help us with our thinking on prices.

    1.           Substitutes

    Substitutes are a rich source of information about value.  There are three key substitutes you should be aware of in pricing:  (1) Directly competing products, (2) Indirectly competing or combination products, and (3) the ultimate substitute, not buying anything at all.

    2.           Measured changes

    This source of value information relies upon the impact of purchasing your product or service.  Sometimes, this is very direct – using a product or service may save your customer money that they would have spent on something else.  A super simple example would be drinking cheap beer instead of expensive champagne – you know the value is no more than the price of the champagne, since the customer will save that much by switching to another (if inferior) product.  Another example would be consulting services – if working with a sales trainer, for example, is guaranteed to increase your sales by a certain amount, you would expect the cost to be less than or equal to that net value.

    3.           Actual buying behavior

    Without question, this is the best data on value.  When a customer buys, you know that the value – to that customer – is greater than or equal to the price.  Conversely, when the customer does not buy, you know the customer’s perception of value is less than or equal to the price.  If you have many, many pricing opportunities (such as in retail sales), you may want to rely very heavily on this data, as long as you have a good means of tracking buyer behavior.

    How do you set your pricing?  Given that 90% of pricing errors are under-pricing, what do you do on a routine basis to evaluate how your pricing fits with your company’s overall strategy?  We’d love to hear any stories you have about what is – and isn’t – working.

    Robert Bradford is President/CEO of the Center for Simplified Strategic Planning, Inc.  He can be reached at .

  • Gaining Strategic Alignment Between Business Units

    By Robert W. Bradford, CEO/President

    Robert Bradford
    Strategic Planning Expert Robert Bradford

    The other day I was talking with a CEO about building strategic alignment between business units in his organization. I was intrigued, because my questions about the company’s strategic competency yielded a history of the company – but no clear sense of strategic competency. In other words, the CEO knew WHY the company had the dozens of different products and markets they had – but not why it made sense to have all of those business units in one company.

    On reflection, many of the business units had elements in common – some sold to similar markets, made similar products, or used similar processes. There were even a few that could be combined into a vertically integrated supply chain. But all of this was the result of opportunistic acquisition – not a clearly defined strategy of building skills, processes and knowledge around a true strategic competency. Without question, in this situation, the key to good strategic alignment – getting the business units pulling together into a company with a unified strategy – is a clear, concise definition of a true strategic competency.

    Those of you who have been to our Simplified Strategic Planning seminar will recall that a strategic competency is a combination of skills, processes and knowledge that create value for your customers, differentiate you from your competition and are difficult to copy. As the global economy makes the world smaller and more commoditized, true strategic competency is the key to profitability for any successful company you can name. I can name small delis that have a strategic competency…and large multinationals that do not. Interestingly, the existence of a true strategic competency seems to correlate with long term profitability and – perhaps more importantly – the ability to weather ups and downs in your market environment.

    When considering questions of strategic alignment, it’s always a good idea to start with a clear understanding of your strategic competency. If it’s real, everyone in your company will “get it”, and it will be simple to focus on building your business around it.  If you try to work with an unrealistic strategic competency, it’s very likely your people will fail to support it because they simply can’t believe in it. A workable strategic competency does not have to be something you are the best in the world at – but you do have to have a realistic shot at that title. If you do, everyone in your organization will have something they can align with and strive for. If you don’t, your strategies can be just another “make believe” exercise that fails to garner the necessary support below the top level of your organization.  The larger your company is, the more important this characteristic of strategic competency becomes.

    In the case of the CEO I spoke with at the top of the article, the key for his organization is to: first, arrive at a clear understanding of the company’s strategic competency, and then realistically assess the relationship of each business unit to that competency. It’s likely some business units will not support the ultimate competency – and those units should be spun off, sold, or (in the worst cases) closed down. In the best of all possible worlds, each business unit would find a place supporting a strategic competency either independently, or as part of another company whose strategic competencies are well served by the skills, processes and knowledge present in that business unit. This approach would lead to greater profitability for each business unit, and a much clearer shared sense of direction for the company as a whole.

    Robert Bradford is President/CEO of the Center for Simplified Strategic Planning, Inc. He can be reached at .

  • Evaluating Acquisition Targets – Part 2

    By Robert Bradford, President/CEO

    Robert Bradford
    Strategic Planning Expert Robert Bradford

    In my earlier posting about evaluating acquisition targets, I discussed four common approaches to evaluation a company:  market value, asset value, operating value and strategic value.  Today we will look at the exact approaches to market value and asset value, with objective formulae.

    First, market value.  The objective numbers for this come, obviously, from a market – usually, the stock market.  There are two approaches here:  direct value and proxy value.  The formula for direct value is only applicable for public companies:

    Value = Stock price X Number of shares outstanding

    If there are very similar public companies on the stock market, you can use proxy value:

    Value = Target company earnings X EPS of similar public company

    Be aware that this second approach involves some shaky assumptions about the similarity of the two companies, and in some industries, assets, sales or some other number may be more useful in calculating a proxy value.  Due diligence when using this as a value basis should be about understanding the similarities and differences between the companies, as well as the normal look into the fundamental soundness of the business.

    The second approach is asset value.  Again, there are two common approaches, each with limitations.  The easiest (and least accurate) is accounting asset value:

    Value = Book value of net assets on balance sheet

    The limitation of this valuation is that, as with any balance sheet item, assets may be over or undervalued.  The true value of a piece of real estate is rarely represented well on a balance sheet, for example.

    A more difficult approach to asset value is market asset value:

    Value = (Sum of market value of assets) – (Sum of market value of liabilities)

    This requires an added step over the plain accounting value – you have to research and quantify the market value of the important assets of the company (usually, real estate and similar holdings).  There are times when this valuation is a very important part of what other buyers are willing to pay for an acquisition target, so you should be aware of it.

    In postings to come, I will discuss the formulae for operating value and strategic value.

  • Evaluating Acquisition Targets – Part 1

    By Robert W. Bradford, CEO

    Robert Bradford
    Strategic Planning Expert Robert Bradford

    Even with a strategically appropriate acquisition, price is an issue. In the end, one could argue there are only two prices that matter in an acquisition offer: the price offered by the buyer, and the price that the seller is willing to accept. Reality is a bit more complicated than this, but we should always have an idea of several different approaches to pricing an acquisition.

    The two simplest approaches to valuation are market value and asset value. In market valuation, you attempt to calculate what you could sell the target company for, while in asset valuation, it’s what you could sell the underlying assets for that is important. In both cases, valuation can be simplified if there is a clearly understood objective market for the company or its assets. This isn’t always true – but both approaches to valuation can be useful, if for no other reason than to act as a proxy for the value you (or some other buyer) could extract from the acquisition with no further effort at integration.

    Operating value is an attempt to understand the value of the target as an operating business. A simple approach to this would be to attach a value to all anticipated cash flows of the target and discount them. In reality, many acquisition deals are initially priced using this model. This makes sense, because it reflects the true value of the target to the current owners at the moment of the sale. Any price paid that is above the operating value must include some value based on assumptions about the future value of the business – either independently, or to the buyer.

    Operating value could also be modified by assumptions about the integration of the target with the acquiring firm. This value – the integrated operating value – is very useful to the buyer, since, with valid underlying assumptions, it may help identify a target whose sale price is lower than the value the buyer could extract from the acquisition. Generally, you would figure integrated operating value by making assumptions about the increased revenue and decreased costs the combined companies would experience. In practice, many people pay much more attention to the decrease in costs, because it is easier to trust that cost savings can be effected (for example, by reducing head count in overhead operations like accounting and IT) than it is to trust that revenue increases will result from an acquisition.

    Strategic value is much more difficult to calculate. In addition to the integrated operating value, you need to make assumptions about the strategic impact of the acquisition and attach a value to that impact. For example, a software company acquiring a competitor may gain the following strategic benefits: access to new technology, elimination of a market-disturbing behavior (such as aggressive pricing), a broader human-resource base, a wide range of cost reductions due to economies of scale, the ability to combine technologies from both companies to create value for customers, the ability to expand distribution, product development or marketing due to increased size. Few of these values are widely understood – how, for example, would you put a number on “access to a broader human-resource base” – and this is one of the critically difficult areas of evaluating truly strategic acquisitions.

    Robert Bradford is President/CEO of the Center for Simplified Strategic Planning, Inc.  He can be reached at .

  • STRATEGIC PLANNING IN THE RECESSION

    By Charles L. Bradford, Founder and Chairman

    Recession or Depression

     

    Are we in a recession or a depression?  Whatever we call it is only a matter of semantics and really doesn’t matter.  The fact is that the economy is off by about 15% and still heading down.  What really matters is that businesses are suffering from a substantial loss of revenue, causing significant cash flow problems.   

     

    First Survival

     

    Couple substantial revenue loss with cash flow problems and a tighter credit market, and you have a crisis.  The three overarching goals for business have always been growth-ability, profitability and survivability.  Today, for many the paramount goal is surviving.  The knee-jerk response to this is a) an all-out scramble for more revenue and b) massive cost cutting.  Now, there is nothing wrong with seeking more sales and eliminating truly unnecessary spending.  However, there is a great deal wrong with doing it excessively or poorly.

     

    Proactive marketing and sales is always good.  But a knee-jerk obsession with sales often leads to wasting valuable time chasing sales that are not going to happen.  Even worse, it often involves marginal pricing which damages profit margins.  And damaged profit margins are very difficult to reverse after the crisis is over.

     

    Excessive cutting of “discretionary” spending also can do further damage.  There are things you spend time and money on that are not absolutely essential for short-term survival, but are essential for long-term success.  Cutting these is “penny wise and pound foolish”.  

     

    Uncertainty

     

    The problem facing you is made worse by great uncertainty about the economy.  How bad will it get?  When will there be a recovery?  How far and how fast will the recovery be?  What will our business climate be like after the recovery? 

     

    What we do know is that :  

    1. Things will get worse before they get better.
    2. The bottom will probably not be reached before the end of 2009.
    3. Things (e.g. competition and market behavior) will be very different after the recovery than before the downturn.
    4. Anything else, including the particulars regarding what we know, is uncertain.

     

    Strategic Planning Now?

     

    We hear the following story many times from clients and prospective clients: “We want to do strategic planning, but not now, because a) we are all too busy scratching for new business, b) strategic planning is discretionary spending (i.e. not essential to short term survival) and c) we can’t plan when there is so much uncertainty.

     

    What is wrong with this?  As previously pointed out, obsessive selling and the elimination of things that are non-essential for the short term but essential for the long term are damaging responses to the downturn.  Furthermore, great uncertainty is a reason to do strategic planning – rather than a reason to not do it.  Your entire situation has changed drastically.  Your strategy (intended course and direction) is probably in great need of review and revision.  It is time for a fresh look.

     

    Strategic Planning Options to Consider

     

    You have some quick and inexpensive options.  Fast Track Strategic Planning is a thorough strategic planning process that takes less time and money.  The In-House Strategic Staying Power Workshop is a one-day program specifically designed to give you a fast, low cost way to update existing strategic plans.  Or you can try to do it yourself using the Simplified Strategic Planning Manual.  (DIY is obviously less expensive, but it is more time consuming.)

     

    Charles Bradford is the fonder and Chairman of Center for Simplified Strategic Planning and can be reached at cbradford@cssp.com.

     

     

  • Strategic Planning – Building Better Value Signals

    Robert Bradford
    Strategic Planning Expert Robert Bradford

    One of the intractable problems of economics is that first-time buyers bring a lot of uncertainty about the value they will receive to a transaction. An excellent example of this is to compare the sale price of new electronic items on eBay with those at an online retailer like Amazon.com – inevitably, the individual sellers on eBay will be selling the same products at some discount to the prices on Amazon. This happens because most online buyers have some experience buying from Amazon – and no experience buying from a specific eBay seller (of which there are thousands).

    Your company faces this same “value uncertainty discount” when selling to a new customer for the first time Your customer, never having experienced doing business with you, does not know much, if anything, about what that experience will be like. Will you be accommodating or difficult? Will you be generous or nickel-and-dime the customer? If there are issues, how easily and quickly will you handle them? In many markets, these are not trivial questions. Indeed, for customers in some markets, the answers to these questions are more important than some of the basic features of your products or services.

    Imagine you are a customer who is looking to switch suppliers – or establish a new supplier – for a given product or service. If you have no way of establishing confidence about the utility of the relationship with a given vendor, you are very likely to discount it entirely. This can lead to very commodity-oriented buying behaviors, which isn’t really in anyone’s long-term best interest. The smart customer, then, starts looking for signals that you might offer more than the basic product or service.

    Here are a few clues that people commonly look at when trying to establish value:

    Referrals from other customers – perhaps the most credible clue

    Guarantees

    Price (higher price signals more quality/service)

    Quality and responsiveness of sales support

    Appearance of “packaging” – including sales literature, and possibly even your plant and office

    There are more – but this list should give you some ideas about how you may signal higher value to prospective customers. Clearly, it is the function of your marketing to address how you will signal this value – and it one of the primary tasks of strategic planning is to assure that other elements of your business, such as finance and operations, reinforce that value in execution.

    How do you signal value to your customers in your marketplace? More importantly, is this signal any different or more credible than your competitors? Strategic planning is an excellent time to consider how to set yourself apart from the competition in this way – and having your human resources, IT, customer service, operations and product line support this vision is a wonderful way to increase the strategic muscle and staying power of your business.

  • Strategic Planning – Avoid Being Late to the Party

    Robert Bradford
    Strategic Planning Expert Robert Bradford

    One of the tricky strategic issues for many managers I’ve talked with is “Clearly, there will be a recovery sometime.  When should we return to the party?”

    1. The answer to this question will vary by industry, but it’s important to keep a few key concepts in mind:

      Going back to the party before the party is ready to start can be disastrously expensive.

    2. Many things that are cheap now will become MUCH more expensive as the economy heats up.
    3. The same can be said of people…the best people will tend to be the first to have multiple opportunities.
    4. By the time the recovery starts, it’s safe to say the acquisition fire sale will be over.
    5. Finally, unlike in previous recessions, we have not seen a big inventory build-up in this recession – this means that we should come out of the chute going pretty quickly.  Just as the recession got very bad very quickly, it’s quite likely to get good very quickly as well.

    For many of us, the recession is likely to be over in a tactical, rather than strategic time-scale.  How we plan for the recovery will, however, have a great strategic impact on your company.  What are you doing to get ready?

  • Strategic Planning – Malthusian Catastrophe and Success in a Recession

    Robert Bradford
    Strategic Planning Expert Robert Bradford

    Reading an article about Darwin this weekend, I couldn’t help but think that evolution and business strategy have a lot of interesting parrallels.  One that struck me relates to a couple of fascinating stories – the first about the horrible rise of the deer population on a resort-covered island in the Carolinas after hunting was banned.  Of course, the deer had a huge population explosion, and then began to eat everything – including some very expensive landscaping.  It was not unusual to see the corpses of starved deer, and groups of 3-4 could be seen bravely eating geraniums out of window boxes.

    The 19th century English political economist Thomas Malthus commented that populations can experience what is now known as a “Malthusian Catastrophe” of runaway growth when there is an increase in food available.  Since resources are rarely infinite, such explosive growth often leads to this kind of problem.  The same can be seen in business – when money is easy to come by in a given industry – or using a given practice – the population of companies exploiting that resource explodes.  Two excellent recent examples are the dot com boom and bust of the 1990s and the more recent real estate boom and bust.

    How can we use an understanding of these pressures to succeed during a recession?  We should be aware that everyone – individual consumers, employees, companies – is looking to graze in the window boxes where there is still money to be had.  In the late ice ages, isolated wooly mammoth populations evolved to be smaller, more efficient, and able to survive on less food when faced with similar catastrophe.  Human beings, on the other hand, under the same pressure, developed the use of tools and language to enable their populations to feed on a wider range of foods.

    Will your business be a mammoth during this recession and become smaller to survive?  Or will you develop capabilities that broaden your markets?  Ordinarily, I’d strongly recommend a tight focus, but I can see that for some businesses, learning to feed on different resources may be an appropriate strategic option.  I’d be very interested in hearing what is working for people in either circumstance.

  • Strategic Planning – Stealing from Customers, Part 2

    Robert Bradford
    Strategic Planning Expert Robert Bradford

    by: Robert Bradford, CEO, CSSP, Inc.

    One of the real upsides of a recession is the cleansing effect it has…I notice a high correlation between poor strategy and disastrous performance in recessions.  That isn’t to say that good strategy makes you completely immune to a downturn, but you will weather the storm much better with a good gameplan in place.

    In particular, the problem I mentioned earlier about “stealing from customers” tends to precipitate interesting behaviors during tough times.  This is partially because EVERYONE wants your business when their markets get soft – so the commodity players amp up their products and service, while the specialty players trim their prices.  The people who made money by cheating their customers…well, they don’t have anywhere to go.  That’s why we are starting to see the end of certain stupid practices in the airline industry, the hotel industry, and other places where it has become fashionable to take money from customers without delivering value.  The only places you don’t see such practices challenged is where there is some kind of monopoly power – such as your local cable, phone or power company.

    I’m curious…is anyone seeing this trend, too?  Are there any counter-examples, where a company is removing value from their product/service and becoming more successful?

  • Things that worked in the last recession (part one)

    Robert Bradford
    Strategic Planning Expert Robert Bradford

    by: Robert Bradford, CEO, CSSP, Inc.

    Thinking about the current recession, I couldn’t help but think back to recessions I’ve gone through in the past – and how clients succeeded (or didn’t) during those difficult times.

    Several important concepts come to mind, especially about the importance of maintaining strategic discipline, but the first I’d like to point out is that your challenges will probably be driven by your strategy. Put another way – you will probably have challenges, but different strategies will lead to different problems during a recession.

    If you are pursuing a specialty strategy, you are probably already seeing increased price pressure and declining volume. If you are pursuing a commodity strategy, you may be experiencing the same thing. The difference lies in how you are experiencing these pressures. With a good specialty strategy, you can give up margin and still have room for profit. With a good commodity strategy, you can give up volume and still keep your operation humming. If you have made the mistake of pursuing a “hybrid” strategy – a bit of specialty, and a bit of commodity – you are in for a world of hurt, because you probably don’t have enough margin cushion and you probably don’t have volume cushion, either.

    Assuming you have been following the advice in Simplified Strategic Planning, you have a clear specialty or commodity strategy, though – and this means your adaptation to a recessionary environment should be simpler and more effective. If you are using the specialty strategy, you need to find a way to adapt your operation to a temporary decline in volume. If you are using the commodity strategy, you can maintain volume if you can manage past a temporary decline in your already thin margins. Obviously, this highlights yet another reason we tend to prefer specialty strategy – scaling a specialty company for lower volumes is much simpler than adapting a commodity company to even thinner margins.

  • Strategic Planning Blunder – Stealing from Customers

    Robert Bradford
    Strategic Planning Expert Robert Bradford

    by: Robert Bradford, CEO, CSSP, Inc.

    Stealing from customers. Some would tell you it’s the secret to profit in today’s economy.  If you are only worried about the next quarter, it is. You can always make more money in the short term by delivering a little less than your customers expect. For example, if I am making automobiles, I can use less steel, making the body lighter and, unfortunately, less durable than previous models. Customers won’t know the difference until years later, when that model starts to fall apart faster than its predecessors. Did I get the same price from the customer as I did for the earlier, more durable design? You bet! So why wouldn’t I continue to behave this way, cutting little bits of value out of my product or service in order to fatten up the bottom line at the customer’s expense?

    Obviously, this strategic approach starts your company down the road of commoditization. If you are pursuing a commodity strategy, you should already be driving towards the “no-frills” experience your customers are willing to pay for. But for a company with a specialty strategy, this amounts to trading some of your specialty status (usually irrevocably) for short-term profit.

    What do you think? Is this a viable strategy? If I’m an executive in a big auto company, who can’t even trust that I will have a job three or four years from now, why would I care? Are you adequately addressing this issue in your strategic planning process?

  • Screening Acquisition Targets – Part II

    Strategic Planning Expert
    Strategic Planning Expert

     

    By Robert W. Bradford, CEO of the Center for Simplified Strategic Planning, Inc. 

    Once you have identified your reasons for making an acquisition and the specific enhancements you are seeking to your strategic competencies, your first stage of acquisition screening involves creating a list of potential acquisition targets. At this point, we don’t need to know much about the targets except that their acquisition is a possibility, and their strategic resources may include the desired assets or competencies we are seeking in our acquisition.  You will want to capture six data points about each possible target: 1) Name, 2) Sales, 3) Ownership, 4) Competency Enhancement, 5) Asset Value and 6) Probability of Success.

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