Dan Reiter, CFP®, CPA, CExP, CVGA
This writing is the fourth and final in our discussion on improving the planning component of a business. In our first post, we discussed how business owners often ignore the key value drivers that buyers seek. Then we discussed the importance of establishing a company’s core purpose and values.
Establishing purpose and values creates the baseline for your company culture and defines a critical roadmap and behaviors for your team to follow. Almost every business is worth more when employees collectively understand the mission and behaviors necessary for success. Most critically, no business can achieve optimal value if employees are not modeling those behaviors without relying on consistent direction or oversight from you as its owner.
Next, we discussed the critical need to identify internal and external elements of your business that serve as either constraints or catalysts for growth in the form of a strengths, weaknesses, opportunities, and threats (SWOT) analysis. The SWOT analysis will help you identify the company’s best value discipline and market positioning strategy to reduce risk and improve growth in your business.
Is your business seeking to lead the pack in customer price and convenience? Innovation and quality? Customer intimacy and best total quality solution? Helping a buyer understand how your business will achieve the future growth they are buying will maximize value. Moreover, understanding the strategies or opportunities to say no to is equally as important as those to target.
In this final planning installment, we bring everything together by drawing a distinction between what one author refers to as the two activities of strategic planning: strategic thinking and execution planning.[1]
Defining internal culture, mission, and overall business strategy is the strategic-thinking side of business planning. However, even the best intentions and strategic plans get stuck in the mud of everyday business activities without execution.
Strategic Thinking vs. Execution Planning
“Vision without execution is hallucination.” —Thomas Edison
One of the most misunderstood elements of a strategic plan is the need for both high-level strategic thinking and the plan to execute it.
There have been many corporate retreats focused on the “big vision” that have left attendees feeling refreshed, motivated, and filled with new energy to dominate their industry—for a few weeks. Then the “urgent” needs of the business slowly bubble back to the surface, and eventually, that goal or initiative is but a faded memory of simpler times. At least until the next retreat, at which point the cycle is rinsed and repeated.
If I had to guess, I would say that you have probably been part of a few of these cycles, right? Don’t worry—you’re certainly not alone!
Perhaps the best reasoning behind why entrepreneurs struggle to execute is summarized by Chris McChesney in his book The 4 Disciplines of Execution:
“There are two principal things a leader can influence when it comes to producing results: your strategy (or plan) and your ability to execute that strategy. Stop for a moment and ask yourself this question: Which do leaders struggle with more—creating a strategy or executing that strategy? Every time we pose this question to leaders anywhere in the world, their answer is immediate: ‘Execution!’ Now, ask yourself a second question: If you have an MBA or have taken business classes, which did you study more—execution or strategy? When we ask leaders this question, the response once again is immediate: ‘Strategy!’ It’s perhaps not surprising that the area with which leaders struggle most is also the one in which they have the least education.”
So how do entrepreneurs and business owners avoid this dreaded repetition of an ambitious strategy being devoured by the day-to-day needs of the business? The answer lies in putting forth at least as much effort in executing a strategy as planning it.
Three Steps to Execute Strategy in Your Business
Step 1: Begin with the End in Mind, but End with Bite-Sized Pieces
Have you ever heard the saying that people tend to overestimate what they can accomplish in a month but underestimate what they can accomplish in years?
I find this is often true in the context of business planning. Owners set ambitious long-range goals, and when they fail to achieve them, they attribute the problem to being too aggressive. However, I find that more often, missing the mark is due to the lack of effective execution rather than setting aims too high.
The first critical step in an execution plan is to start with your company’s long-term goal and then break it down into smaller chunks. First, this goal must be specific, measurable, and bold. There must be no question as to whether you have hit your goal. For example, “being the market-leading widget maker” is not specific enough.
Business writer Jim Collins calls this the BHAG, an acronym for “Big, Hairy, Audacious, Goal.” He says that “a BHAG engages people—it reaches out and grabs them in the gut. It is tangible, energizing, highly focused. People ‘get it’ right away, it takes little or no explanation.”[2]
Let’s say your company has revenues of $5 million and EBITDA of $1 million, and your 10-year goal is to increase this to $15 million of revenue and $4 million of EBITDA. Not only is this a high bar to set, but it’s also specific and measurable! You will know whether you have hit your revenue and EBITDA targets.
Your first task will be to break down your 10-year goal into five-year, three-year, one-year, and quarterly goals. Doing so helps define the “path” necessary to get there. For example, these might be as follows:
Current Revenue/EBITDA: $5 million/$1 million
One-Year Goal Revenue/EBITDA: $5.5 million/$1.2 million
Three-Year Goal Revenue/EBITDA: $7 million/$1.6 million
Five-Year Goal Revenue/EBITDA: $10 million/$2.3 million
Ten-Year Goal Revenue/EBITDA: $15 million/$4 million
Once you have broken down your 10-year measurable goal into smaller pieces, your next step is to envision what your business must look like at each step. For example, how many employees will you have at the five-year mark? Do you have the current capacity to support that much in revenues? How many customers will your company serve? What’s your revenue and profit per customer? What constraints or roadblocks will prevent you from hitting your targets, and how do you solve those?
Be sure to reference the key findings in your SWOT analysis to answer these questions.
Reflecting on these questions will help you begin to set shorter-term objectives and strategies that must be accomplished on the road to hitting your 10-year target. Working backward will allow you to go through this process all the way to the one-year mark from which you can complete your annual operating plan. Then, into quarterly actions or “rocks” that you and your team can act upon.
Before moving on, one other critical point must be stated: There must be absolute alignment between your goals and strategic plan. Is the value discipline you identified one of “customer intimacy,” where you aim to be the most comprehensive and best total solution software provider serving the construction industry? If so, increasing price promotions or increasing your level of low-cost/high-volume engagements is inconsistent with your strategy!
Moreover, your company’s core values, which define desirable behaviors for employees, should be consistent with your overall business strategy. You certainly don’t want “unparalleled efficiency” to be the core focus of your employees when your success is based upon building dynamic and long-lasting relationships with your customer base.
Step 2: Track the Right Things
The next step in effective execution is to define a set of weekly core metrics and bite-sized quarterly goals to achieve in pursuit of your long-term goals. Again, there should be alignment between the shorter-term goals and metrics and achieving your longer-term plan. Your quarterly goals should lead to the achievement of your annual goals, your annual goals should bring you closer to your three-year goals, your three-year goals should lead you closer to your five-year goals—and so on.
Weekly Core Metrics
First, your leadership team should identify a handful of key metrics (commonly referred to as key performance indicators) that can be measured and reviewed regularly to determine the quality of your company’s performance.
Think of it like this: If you as the leader were unable to set one foot in the business operations for a month and wanted a picture of whether the business was running on its tracks and headed in the right direction, what key numbers would give you the best picture?
A few key notes on these metrics:
Fewer is better. If you are constantly tracking 20 different numbers, it will be impossible to determine which ones are most critical. If everything is a priority, nothing is a priority. Your focus should be increasing intensity on a fewer number of critical measures.
Target leading indicators, not lagging. For example, profit is a lagging indicator of marketing, sales, and operating efficiency. By the time your lagging indicators show issues, it’s too late. However, measuring the number of sales calls made or the revenue per new customer gives you a better indication and prediction of where your profit will end up.
Set appropriate targets. If one of your key metrics is to achieve a profit margin of 25%, and your profit margin per new customer is 20%, you may have a problem. Identifying your key metric targets and where you fall short helps you identify clear issues in your business to solve.
Track them weekly. The greater frequency you keep a “pulse” on key activities will help you adapt and respond more quickly to issues and challenges. I have found even monthly is too long for most businesses because issues and habits that fester longer are harder to address and adapt to.
Quarterly Goals
Next, you should establish quarterly goals that will bring you closer to your long-term plans. These goals are often tied to things like launching a new product, solving a key constraint to growth, or developing a new plan. For example, let’s say your one-year plan includes launching a new manufacturing facility. To do so, your team identifies it will require the following:
Purchasing and testing equipment
Designing and documenting the manufacturing process
Identifying and securing supply resources
Each of these steps may be established as a separate quarterly goal to achieve. Ultimately, this takes an annual goal (to launch a new manufacturing facility) and breaks it down into manageable quarterly actions.
Once again, there must also be a clear understanding or estimation of how this new facility will impact longer-term growth in revenues or EBITDA—which impacts your three-, five-, and 10-year plans!
Quarterly goals are also sometimes referred to as “rocks.” This illustration was borrowed by Gino Wickman in his book Traction, and he describes it as follows:
“Picture a glass cylinder set on a table. Next to the cylinder are rocks, gravel, sand, and a glass or water. Imagine the glass cylinder as all the time you have in a day. The rocks are your main priorities, the gravel represents your day-to-day responsibilities, the sand represents interruptions, and the water is everything else that you get hit with during your workday. If you, as most people do, pour in the water first, the sand in second, the gravel in third, and the rocks last, what happens? Those big priorities won’t fit inside the glass cylinder. That’s your typical day.
“What happens if you do the reverse? Work on the big stuff first: Put the rocks in. Next come the day-to-day responsibilities: Add the gravel. Now dump in the sand, all those interruptions. Finally, pour the water in. Everything fits in the glass cylinder perfectly; everything fits in your day perfectly. The bottom line is that you need to work on the biggest priorities—your Rocks—first. Everything else will fall into place.”
Ultimately, beginning with your “Big, Hairy, Audacious Goal” and working backward will help you establish the most critical elements to focus on over the short term to make sure your business is on the right path to hitting your long-term goal.
Once identified, you must then understand how to deal with the small margin of available time faced by most owners. This is where failure most often occurs in strategy planning and execution. Smaller quarterly goals help identify those items that are important (but not necessarily urgent) to help ensure they are prioritized.
Step 3: Create a System of Accountability
The final critical step in execution planning is to set up a system where your organization’s members are held accountable for accomplishing quarterly goals and keeping weekly metrics on track.
First, you must identify specifically who in your organization owns each metric or goal. This is the person who will take ownership and ensure over the course of a quarter that these things remain on track.
One note: There must be only one owner. If there are multiple people, you have either a goal too broadly defined or a “management by consensus” problem. If multiple people have ownership, nobody does.
Once you identify goal or metric owners, the owners and your leadership team should hold each other accountable. Now, I don’t mean “accountability” in the “tear each other down” sense. Any team member who has ever existed is accountable to their teammates. Even the best pitcher in baseball cannot win the game on their own. They rely upon the batters at the plate to hit in a few runs. Otherwise, nobody wins!
Business is the same. No single individual can possibly create a business that has any transferable value or staying power on their own. Businesses with the highest value are those with people who have figured out how to effectively organize financial, tangible, and human resources and translate them into a product or service with a value greater than the sum of its parts. However, the destination is the same—your organization’s strategic goals!
The solution is to create “productive tension” amongst your team. This is created when there is a clear understanding between leadership on who is accountable for what but is also reviewed on a regular basis.
Most teams find that a weekly leadership review session where each member gives a very brief report on their metrics and goals is critical in keeping the important issues top of mind. Moreover, this forum creates an opportunity for your team to discuss anything that is not on track. This weekly cadence is critical in quickly identifying issues and constraints and finding resolutions before the problems show up on your profit and loss.
Conclusion: How Execution Maximizes Value
The development of a comprehensive and fully integrated execution plan is a critical function in maximizing business value in several ways.
First, setting long-term goals and a fully developed strategic plan impacts every core area of the business—finance, marketing, sales, human resources, and operations. As issues are identified more quickly in each area, key risks to the business are revealed and addressed.
For example, a company that is strong operationally without a fully established sales and marketing function has a strong product or service nobody knows about. Likewise, a company with strong sales and marketing but poor human resource management and operations won’t keep customers for long!
A more balanced organization is a more valuable one. A fully established management team in each area that has long-range and short-term goals, key metrics to track progress, and a system of accountability provides such a balance.
Buyers of businesses are most attracted to cash flows that are predictable, sustainable, and transferable. They will quickly discount value for any key risks to cash flow that are unidentified and left unaddressed. A process of goal setting and execution with a good accountability system will help identify what those risks are and address them long before a buyer does.
Ultimately, developing an execution plan helps paint the full picture for a buyer in how they will realize the return on their investment. One common misunderstanding for business owners is that their current or historical profits and cash flow drive value. They don’t.
Buyers care only about the future. They will only pay top dollar for an organization with a clear growth strategy that is more than just aspirational but can paint the full picture and help the buyer envision how it will be achieved.
Discuss your situation with a financial advisor with experience in working with business owners. Schedule a 30-minute discovery call today.
[1] Harnish, Verne. Scaling Up: How a Few Companies Make it.. and Why the Rest Don’t. ForbesBooks. 2014.
[2] Collins, Jim. Good to Great.