In business, it is always important to step back, take an objective look ahead at upcoming trends, and do your best to understand what they mean financially for your company.
Most likely, this will prompt you to make adjustments.
Years ago, for example, when I worked in Strategy & Development at Kraft Foods, we would pause every year and look ahead. One year, KKR had just bought Nabisco for an unheard of price. Everyone in the industry knew that soon Pillsbury would be on the block too; we had to know if we wanted to buy it or not — at an unheard of price as well. Also, at that time, we had been raising prices and cutting advertising to fund new products.
We knew we needed to get in front of the Pillsbury issue and make a decision before it went on the block.
We also knew we needed to know where the business was headed were we to stay on our current course of raising prices and spending on new products.
So we did baseline projections on the business; the trends, if unabated, did not look pretty. There were easy fixes for an outsider to quickly improve performance which meant that Kraft was vulnerable to a low-ball takeover offer. We knew we couldn’t raise prices and grow margins forever — that would soon invite competition into our markets.
After some analysis, we decided that Pillsbury was executing pretty well, they were just in bad markets.
So we made the decision to pass on a purchase.
And we changed direction in the core business. We moved to flat margins, flat market share and brought advertising back to prior, higher levels. To compensate, we dramatically dialed back new product development (it had been expensive, unfocused and unsuccessful), put a lid on growing corporate overhead and made dramatic changes in one mismanaged business unit, Duracell. We monetized the upside in Duracell by selling it to KKR, the Nabisco buyer. KKR did what we told Duracell to do and executed on our revised plan. Kraft performed so well as a result of these changes that a year or so later, Phillip Morris came knocking with an offer that, once finalized, paid shareholders a 63% premium and made senior management wealthy.
Unfortunately, these kinds of favorable results are not the norm;
many of my clients call me because they
didn’t
do a “look ahead” exercise.
One was an IT consulting firm of sorts that had grown rapidly. The firm had shifted its customer base over the years from early stage start-ups to Fortune 500 clients. Startups pay retainers; Fortune 500 companies pay in 60 days, if you are lucky. My client was well aware of the change in terms, but didn’t work through the financial impact until it was out of cash.
Another client was in a labor-intensive service business and state law mandated increases in the minimum wage. They never worked through the financial impact on costs until they, too, ran out of cash.
These are just two examples, both of which highlight
the importance of taking an objective look ahead at your business so that you can understand the financial and operational impacts
that may occur when trends collide with changing conditions. Doing so can lead to increased value and wealth.
Failing
to do so can lead to financial distress and worse.
A few pointers on how to best “look ahead:”
- Schedule the time. Looking ahead is important, but rarely urgent. If the time is not planned and allotted, the day-to-day will always get in the way. Bigger companies should institutionalize it. (Read more here.)
- Stay out of the weeds. Forecasting at a high level using key business drivers should be sufficient for a first pass. Beyond that, perhaps more depth is warranted for a second pass that reflects action plans that address what you see. For example, when I first joined Kraft’s Strategy & Development Department, I was tasked with overhauling both the annual and strategic plan processes. At the time, both were so excessively detailed they weren’t really used by senior management. So much so that the International Division had submitted the same detailed plan for the previous five years for both the operating and strategic plans, knowing that only the summaries, that were updated every year, were read. What a waste.
- Look externally. What is changing? Are labor or material costs going up or down? Is new competition entering or are competitors leaving? What is happening to your customers’ markets and do they have any emerging substitutes for your product or service? How close is your business to capacity? Does new technology mean you have to upgrade your production technology or, perhaps, your products? (For additional ideas, read here.)
- Apply some common sense. I always look at gross profit margins; they can never grow forever. Unprofitable businesses tend to favor hockey stick plans, whereas steady businesses often go for “margin growth forever” plans. Look at other metrics too. For example, does the steady DSO metric still make sense? It didn’t for my IT consulting client. Every business should have a set of operational metrics. Project the business and see if the projected metrics make sense. At Kraft, projected gross margins were simply too high. Competitors would surely jump into our space sooner rather than later. So we changed course.
- Keep a close eye on cash flow and the balance sheet. Do you need new equipment or a plant expansion? What about growing the sales force, a tactic that will create more salary expense before the sales increase kicks in? Whatever the specifics, remember that you can’t get in front of a problem if you don’t see the problem coming.
Long term success and profitability will always be closely tied to the way you operate your business. That said, there are factors — both internal and external — that may appear on the horizon and that can throw everything for a loop. Make it a habit to pause from the day-to-day and take a good look ahead. Then work through what that means to your business in a rigorous way.
