A Process for Developing and Implementing Business Strategy. Larry Martin

Transcription

1 A Process for Developing and Implementing Business Strategy Larry Martin

2 Objective of the Webinar Introduce and explain a process used to develop business strategy, and The process to plan and implement it for a farm Tie to the previous webinar by incorporating financial performance into the process

3 Citation Our planning process is based on many ideas of Michael Porter from Harvard, As translated by Joan Magretta in, Understanding Michael Porter, HBR Press, 2012

4 A Few Principles Customers define value, strategy is about deciding what value to provide and how to do so All aspects of your internal value chain must be aligned You can t manage what you don t measure Plans should be written and used to manage

5 Strategy/Strategic Planning What is strategy? Most mis-used word in business The set of integrated choices that define how you will achieve superior performance in the face of competition Magretta/Porter Not the goal (eg be #1) Not the actions (eg build a new barn, rent more land, hire more people) Rather it is how one positions the organization to achieve the goal (ie vision, value proposition) and actions taken to achieve the positioning

6 Strategy/Strategic Planning Positioning reflects choices you ve made about the kind of value you ll create and how you will go about creating it Your strategy defines what makes you unique Also defines what you won t do. What is superior performance? In business it is return on invested capital higher than the industry average (Porter) What is average return on invested capital in agriculture?

7 LM Paraphrasing Magretta Strategy is the way you organize and focus your business s internal value chain to deliver on a unique value proposition to your target customers in order to earn profits higher than the industry average

8 The Strategy and Planning Framework Shown diagrammatically below Then the steps and terms are defined Note that we position this such that Vision and Core Values are not directly part of the strategy cascade : they inform it. More discussion later. Because of the principle that customers define value, the first step in the process is to examine your external environment

9 External Environment Internal Environment Value Proposition Vision Core Values Strategic Intents Mission Operating plans and Implementation: Actions, Accountabilities, Timelines, Resources Required, Measures Feedback/Management Systems Management, Supervision, Coaching, Incentives, Rewards

10 External Environment Examine the factors that affect your business that you do not control You are searching for opportunity, the potential to create something that adds value for your buyers or end users by solving THEIR problem Elements of the External Environment Technology and socio-economic factors Policies, laws and regulations Competitors products, services Customers and what they want

11 External Environment Internal Environment Value Proposition Vision Core Values Strategic Intents Mission Operating plans and Implementation: Actions, Accountabilities, Timelines, Resources Required, Measures Feedback/Management Systems Management, Supervision, Coaching, Incentives, Rewards

12 Value Proposition Results from your external analysis. What do your current or potential customers want and how, precisely, are you going to respond - better than our competitors, within the constraints of policy, making use of appropriate technology, so that we have returns higher than the industry average? Where/how do we want to position ourselves in the industry? Value proposition needs to include: Which product and service needs will we meet? Which customers and where in the supply chain, will we serve? What relative price will we charge? Defines what we won t do

13 After Evaluating Your External Environment, You May Conclude: We will produce a consistent supply and quality (Commodity) for established market intermediaries at commercial prices, gaining quality premiums where possible, or We will provide a consistent supply of commodity, sorting for specific end use features, delivered just in time to end users at prices reflecting the values of the end use features, or We will provide an array of quality produce as the local supplier of choice to final consumers at our farm market (CSA, farmers market) at premium prices.

14 External Environment Internal Environment Value Proposition Vision Core Values Strategic Intents Mission Operating plans and Implementation: Actions, Accountabilities, Timelines, Resources Required, Measures Feedback/Management Systems Management, Supervision, Coaching, Incentives, Rewards

15 Internal Analysis Analysis of the things you do control within the farm business your internal value chain Done to organize those internal factors to most effectively deliver consistently on your Value Proposition What are the gaps you need to fill in order to deliver more effectively? We follow Porter s Value Chain to be specific about identifying what needs to change to delivery consistently and efficiently

16 An Approach: The Value Chain (Porter 1985) FIRM INFRASTRUCTURE TECHNOLOGY DEVELOPMENT HUMAN RESOURCE MANAGEMENT PROCUREMENT INBOUND LOGISTICS Shipping Inputs In: Seed, Feed PRODUCTION/ OPERATIONS Producing New Products from What You Bought OUTBOUND LOGISTICS Moving Your Products to Market SALES & MARKETING Pricing, Promotion, Tak- Ing Orders for Your Product SERVICE Anything Done After Delivery:

17 Porter s Value Chain Porter identifies all the potential activities in your business that can contribute value The bottom row is the primary processes directly involved in creating something that has more value than the things used to create it The upper activities are those that support the primary activities and that can make the primary activities more or less effective.

18 Porter s Value Chain Five Primary Activities: Inbound and Outbound Logistics the logistical cost of acquiring inputs to your production process and your final products to your customers. Production/Operations turning inputs into final products seeding, protecting, harvesting, breeding, feeding, protecting, butchering Marketing/Sales marketing is promoting, branding, merchandising, pricing your product(s), sales is the acts of order taking and/or making transactions Service - any after sales work you do or guarantees

19 Four Supporting Activities Procurement Purchasing finding vendors of your inputs, negotiating prices HR Mgt - how you recruit, hire, train, motivate, reward, and retain employees Tech Dev - managing and processing information, staying current with technological advances while managing costs Infrastructure - Accounting, legal, administrative, and general management. For farms, key people, succession go here.

20 How Can You Manage the Value Chain Better? What your internal analysis is about is two fundamental things: Seek cost drivers in each activity, or between activities, then manage them to lower fixed and/or variable costs Seek differentiation drivers in some or all activities, then deploy them to make your farm different from competitors. Adjunct: How can you service customers to reduce their costs/increase their opportunities?

21 How to Approach the Internal Analysis For each part of your internal value chain, ask: How do others in my industry add value here? Are there other industries that have better approaches to adding value? How do we add value in our business? What are the gaps in our business?

22 Usually Includes Financial Analysis The internal analysis is where we include analysis of our current financial performance The financial analysis will give some quantitative evidence of how well parts of our value chain are working and where there are strategic strengths or weaknesses Eg, if the standard for gross margin is 65% of revenue and yours is 55%, it suggests Problems in production Problems in marketing, and/or Issues with procurement

23 Two Farms Farm 1 Farm 2 Gr Mar 76% 55% Con Mar Op Effic 8 20 Current D/EBITDA

24 We Usually End Up For Each Element of the Value Chain: With answers to four questions: What are we doing well that we should continue doing? What are we not doing well that needs to improve? What are we doing that we should stop doing? What are we not doing that we should do?

25 External Environment Internal Environment Value Proposition Vision Core Values Strategic Intents Mission Operating plans and Implementation: Actions, Accountabilities, Timelines, Resources Required, Measures Feedback/Management Systems Management, Supervision, Coaching, Incentives, Rewards

26 Strategic Intents Result mainly from our internal analysis of what we re doing and need to do to deliver better on the Value Proposition how do we close the gaps? They are apparent from the improve/start/stop/continue process, summarized at a strategic level. Things like: Improve our production efficiency Improve our proficiency in marketing Increase our production capacity enhance our management effectiveness What will make us deliver successfully on our value proposition, therefore differentiate us, and give us higher returns than the average? No more than four (3, 5) and are measureable

27 External Environment Internal Environment Value Proposition Vision Core Values Strategic Intents Mission Operating plans and Implementation: Actions, Accountabilities, Timelines, Resources Required, Measures Feedback/Management Systems Management, Supervision, Coaching, Incentives, Rewards

28 Mission Porter/Magretta are not fans of mission statements because they are usually too vague to be of value in management They can be useful as an overall statement of what we re focusing on in the plan, so a statement that integrates the intents may be useful In the foregoing example of strategic intents: Improve our production efficiency Improve our proficiency in marketing Increase our capacity enhance our management effectiveness Might have a mission statement such as: manage effectively to reduce costs and improve marketing of increased product

29 External Environment Internal Environment Value Proposition Vision Core Values Strategic Intents Mission Operating plans and Implementation: Actions, Accountabilities, Timelines, Resources Required, Measures Feedback/Management Systems Management, Supervision, Coaching, Incentives, Rewards

30 Strategic Intents Drive Implementation and Performance Measurement They are the basis for quarterly or monthly operating plans Who will do what, when, with what resources, with what measureable outcome? Also, the basis for holding people accountable in management meetings The transition to operations is shown separately

31 External Environment Internal Environment Value Proposition Vision Core Values Strategic Intents Mission Operating plans and Implementation: Actions, Accountabilities, Timelines, Resources Required, Measures Feedback/Management Systems Management, Supervision, Coaching, Incentives, Rewards

32 Visions and Core Values Long term visions can drive an operation. Visions and the core values of people define their culture at the very least We don t include them directly in the process of getting to an operating plan because they supersede everything else. Value propositions and strategic intents have to be aligned with the long term vision of owners about where they want to take the business in the long term Operating plans must be aligned with core values: if honesty and transparency are important, then marketing plans that include misleading information are not possible or else honesty and transparency really aren t core values!

33 Visions Should be eternal big enough and far enough in the future that we re always striving for it, but never quite getting there Martin Luther King s I have a dream The question is, where in the process does one identify the vision? Two answers: If it s clear and well articulated, it goes in the front, it informs the plan from the beginning If it s not clear, our experience is that it is best done either just after defining value Proposition or Strategic Intents after the management team has already been talking about some of their dreams.

34 Visions The opportunity to talk among themselves about where they see their markets going and where they see their business going helps to identify whether their visions are the same or not. We use a simple process after there has been ample discussion to share ideas Each member write an article to appear 10 or 20 years from now describing what your farm business did over the next 20 years to earn a national award. These articles define the shared vision, then in subsequent planning periods, we start with the vision: has it changed? Are we on track? What does it mean for next year.

35 Visions Like core values, vision provides an internal check against the other elements of the plan is this (value proposition, mission, strategic intent) consistent with what we want to be in 20 years? While eternal, it s not a fantasy or a pipe dream, but may be unthinkable We will put a man on the moon and bring him back safely by the end of the decade. U.S. President John F. Kennedy, 1961 Is short enough for people to remember

36 Core Values Can be identified anytime, should be fairly early on in the process then the plan, and performance, measured against them The ethical foundations of your operation How we will treat: each other, our employees, customers, suppliers, environment (soil, water, air), animals What is really important in our operations eg customer service, continuous improvement, continuous learning, profitability, safety, respect, orderliness,