By Karen Macleod
After rounds of cost cutting over the past two years, many organizations have reached a somewhat steady state. However, as we move into 2011, most executives share the same question: how can today’s leaner organization shift to gaining strength?
In a recent survey, half of U.S. companies say they will deploy accumulated cash reserves in 2011. Two-thirds of these companies plan to use their cash to increase capital spending and one-third plan to pursue acquisitions in order to gain strength. However, gaining strength in this economy requires a new mindset. Your planning process must become more fluid, with frequent checkpoints to allow for course-corrections.
The following steps will help you plan for many different possibilities because, in this weakened economy, nothing is guaranteed.
Assess where you stand financially
Before developing your plan for gaining strength, first assess your current financials to ensure your goals are within reach. If you are considering an acquisition, be realistic about your options for external funding—only the most credit-worthy companies are receiving credit today, and private equity financing, although beginning to flow, is tied to a more involved due diligence process than ever before.
Determine your goals
If you haven’t already, take a look at your five-year plan to see what makes sense and what should be modified. For example, if you hope to sell your company in the distant future, begin by examining who might be a potential acquirer and what that company would be interested in purchasing. Focus today’s investments on those selling points. If your goal is to accelerate growth, is an acquisition a smart move in today’s buyer’s market? If yes, does your financial standing make this path viable? Depending on your primary goal, consider multiple paths that move the organization in that direction.
Gain insight—both inward and outward
Avoid “flying blind” in a weakened economy. Effective business analytics help you more easily understand your organization’s strengths and weaknesses. If you don’t understand which products, services, channels, or customers are driving your profits and cash flow, you are at risk for making less than optimal decisions in a climate of such uncertainty. This may be an area of “organizational blindness” in which an objective review (e.g., from an outside firm) can provide tremendous value.
In addition to looking inward at your own strengths and weaknesses, also learn what you can about competitors—analyze their market and growth strategy so you can stay one step ahead. Are there companies serving your markets—even with a dissimilar offering—who are flourishing? If yes, what are they doing differently?
Take into account your industry’s trends and future projections. Also, talk to your customers. Find out how they use your product or service and what they consider most important in doing business with you and what would trigger their desire to purchase more. Often what you learn from these customer discussions is quite insightful and may be surprising. This “inside-out and outside-in” view of your business is critical in setting the right path during a time of such uncertainty.
Target your competition
Once your research is complete, use that knowledge to influence your strategy. Three ways to gain strength are to (1) leverage a superior offering, (2) identify an unmet market need, or (3) buy out your competition. For example, if your competitor has a great product or service but is in poor financial health, you may want to acquire that company to gain their products or distribution channels. Recessions reshape industries faster than strong economic times because long-established business models have been weakened, and your competitors have lost customers.
M&A activity was solid in 2010, especially in certain areas abroad. Global takeovers in 2010 totaled approximately $2.24 trillion, up 19% from 2009. Additionally, acquisitions completed during and immediately following the recession of 2001–2002 generated almost triple the “excess returns” of those made during the preceding boom.
Evaluate your financing options
There are numerous options for financing, including the most obvious options of price increases, seeking credit, or freeing liquidity through process improvement. However, the current economy has created trends you should consider, particularly with regards to capital investments and private equity.
If you’re like many companies, you put investments in capital expenditures on hold through the economic downturn. This no doubt resulted in minor, if any, investments in your long-term productive assets like property, infrastructure and equipment. Now is a great time to examine if an investment is needed.
Additionally, many private equity firms are accumulating cash. Experts estimate that these firms have more than $800 billion available in “dry powder” that they are looking to invest. To private business owners contemplating retirement, selling a controlling interest to a PE firm can diversify their interests and help reduce risk. However, only the highest quality companies are attractive to PE investors, meaning companies with sustainable revenue streams, solid management and growth potential. Some of the “hot” industries include cyber security, IT, healthcare, government contracting, clean technology and distribution and logistics. When evaluating financing options, consider having an objective third party assess what actions you should take to increase the probability of a successful financing event.
To capitalize on an uncertain economy, you must do things differently. 2011 is the year to get creative. Outsource your noncore functions. Consider joint ventures or partnerships with your vendors, customers, or competitors. If you are tackling a large project, such as a system implementation, consider hiring flexible leadership for the short term instead of overusing your current resources or making an expensive permanent hire.
Involve cross-functional teams and objective external advisors in your planning process and encourage them to think outside of the box. Create a culture where your employees aren’t afraid to be wrong and share ideas. Get closer to your core customers and include them your discussions. However, remember that you need to balance creativity with a firm understanding of the major drivers of your business and your goals.
The companies that will prove strongest are the ones that reassess their strategy constantly and adjust as business and market conditions change. The speed of change and degree of risk have increased, as many learned in the bankruptcy boom of the past two years. Now, more than ever, gaining strength requires a focus on the marketplace and a planning structure that acknowledges and adapts to market realities.
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