As consumer demand evolves, you might be faced with the challenge of adapting to new trends or adopting new products and lines of business. I had the privilege of working on such a project early in my career, when I learned meaningful lessons on the role of finance in business strategy to evaluate new opportunities and determine whether to jump on the bandwagon or let it pass.
In this blog, I will share the approach my former team took when putting together a strategy presentation for my former company’s top executives before getting the greenlight to go forward with the project. I’ll break it out into three parts:
- Modeling, and
- Strategic Clarity.
My team and I used these three steps when we put together the presentation to transition from licensing a product to bringing the product and process in house.
The Role of Finance in Business Strategy, Part One: Research
“No research without action, no action without research”Kurt Lewin
When you notice innovations or a void in your line of work, start researching. Whether you have an inkling on what your position is on the new idea, or you are in the process of determining where you stand, research can help define, reorient or reinforce your position. Chances are either the specific idea you are considering has been executed by a different company, or something similar to it has. And more likely than not, it’s been attempted by your direct competitors. By analyzing past case studies, you can use your competitor’s strategy to your advantage.
The importance of doing your due diligence and thorough market research cannot be overstated. For example, let’s say your company is considering entering a new market. If your competitor has already taken the leap, it offers a chance to study their every move and evaluate their success. If you can recognize patterns across the industry, you might discover unleveraged opportunities by the competition or learn your company is better suited for success due to unique synergies. You might even find your competitors are struggling to find their footing due to fundamental problems that any company would face, and avoid entering that market.
The Information is Out There
When I first started my job, I was shocked to learn how much information is available… some of it free and some at a premium. For example, you can find a lot of information needed to measure success or failure just by going through a company’s annual and quarterly reports, which might answer questions like:
- Is the company pivoting to a new strategy to counteract some low numbers?
- Is the company ramping up and pushing forward even stronger after reflecting significant growth?
Aside from looking at the numbers alone, reading through those reports will offer great insights for your research. Furthermore, with a monthly subscription to some industry-specific websites, you might even be able to get your hands on some revenue data or user data by SKU. As someone straight out of college, I was surprised to learn that competitors have access to this information, but it’s out there.
Lastly, one highly underrated method for conducting research is Googling. Companies get a lot of press coverage, so you might find gems of information by reading through some articles and press coverage.
Benchmarks and Consumer Understanding
Moreover, researching the market helps you determine benchmarks for success. Numerous reports are available for research that can provide market value for the industry and directional forecasts into where the industry is headed. Moreover, reports can provide details into what subcategories of products the consumers are more likely to purchase. You can apply this information to your company’s capabilities and offerings to set more meaningful goals. Perhaps the standard revenue model and projections don’t apply, or the market standard is exactly what you expected. In either case, knowledge and comparison are more productive shooting in the dark.
Furthermore, market research gives insight into arguably the most important player in the field: your consumer. Understanding customer response can help you determine your key demographics, project revenue flow, analyze marketing strategies and assess overall demand.
Going back to the project I worked on for my former employer, we did thorough market research into the industry, consumer patterns and trends, and direct and indirect competitors. We identified some mistakes our competitors made as well as some profitable actions. Some of the factors we considered when comparing ourselves with the competition included:
- Owning the IP,
- Having strong intercompany marketing platforms,
- Already having dipped our toes in the space with the licensing model, and
- Being large and desirable enough as a company to hire top talent.
The Role of Finance in Business Strategy, Part Two: Modeling
“Those who have knowledge, don’t predict. Those who predict, don’t have knowledge.”Lao Tzu
While financial modeling and strategizing should go hand-in-hand since each feeds the other, for the purpose of this blog, I’m listing it as the second step.
After your market research, you should be informed enough to move into financial modeling. The benefit of financial work compared to purely creative work is that it is quantifiable and—at least to some degree—directionally accurate.
Build or Buy?
One common fork companies reach is the build vs. buy dilemma. (This can be expanded to anything between joint venture to strategic partnership and more.) With a proper financial model, you can offer concrete numbers and projections to help with the decision-making process. Does it make sense to start the new line of business, enter a new market and launch a new product from scratch? Or would it be more strategic to buy a company that already does everything you are looking for, and integrate them into your own company?
To determine the cost of buying a company, you’d need to build a valuation model. There are plenty of resources available that offer insight into how to determine the value of a company, so I will leave that to you (to research!). Alternatively, to project how much a new line of business costs to develop, you would need to build a financial model from scratch using all the knowledge you gained from your market research.
Unlike a valuation model that can be based on the company’s financial statements and growth rates, you would need to build a bottom-up model based on assumptions you set for the business’s operations. This is where industry averages and timelines come into play. The assumptions should reflect the market and your competitors. For example:
- What will the product release cadence be?
- What is the average revenue for each product?
- Is there seasonality?
- What is the optimal quantity?
- When does the business become profitable?
- What will the new organizational chart look like, and how much will it cost?
- How much does marketing cost? Etc.
Most, if not all, of these questions should be answered in the research portion.
Some assumptions can reflect the value your current operations can provide. Are there any synergies and revenue boosts? Does the company have enough facilities, or will it need to buy/lease? Are there ways to cut costs with already-available resources?
When my team and I built our model, we looked at a few potential acquisition targets. We realized that although we might get a great deal, our company had priorities that wouldn’t be addressed with an acquisition, so we built a model from scratch for the new line of business. We forecasted each line item of our business’s P&L, including the cost of hiring a new team, development, marketing, facilities and other costs to our business. Our revenue forecast included some successful product launches and some failures to get a realistic outlook on how the business would perform.
By putting all your assumptions together, you should be able to build a solid model that forecasts the profitability of the new line of business. And if you identify unquantifiable benefits, you can include them in the strategy with all the quantifiable advantages.
The Role of Finance in Business Strategy, Part Three: Strategic Clarity
“Strategy is simply resource allocation. When you strip away all the noise, that’s what it comes down to. Strategy means making clear cut choices about how to compete.”Jack Welch
As I mentioned in the section above, strategizing and building financial models go hand-in-hand. The financial models should reflect the strategies under consideration. And many of the questions asked while building financial models are asked when illustrating the strategies.
Now that you’ve built multiple financial models, you can leverage sensitivity analysis and scenario analysis to evaluate which scenario is financially optimal for your company’s needs. You might find your company desires some intangible benefits that may be harder to quantify accurately. For example, between the choice of a strategic partnership or an acquisition, the company might prefer having more ownership of the operations and go with an acquisition. However, if having a say in every single step isn’t a priority, perhaps a strategic partnership is the better option. These types of considerations are harder to quantify in a model, but they often carry a lot of weight in the decision-making process.
One of the key synergies my former employer considered was the relationship between consumer products and media. In a way, a movie/TV show and consumer product market each other. Your TV or local theater is a marketing tool for toys sold in stores, and toys and games are marketing tools for a TV show or movie. You might find subtle or massive boosts in revenue or a cost savings for either business segment. Scenarios like this might sway leadership’s decision when it comes to strategy if it is more prominent in one model vs. another. These considerations could be included in the financial model, if applicable, or added as a few bullets in the presentation/deck.
Clear Explanation and Illustration of the Strategy
A key aspect of strategy is to be able to represent all your research and financial modeling in an easily digestible way that depicts a narrative for your company. The strategy is your proposed plan for the company to go from Point A to Point B, and why it’s the best path to take to stay competitive. As you might be thinking, it should be quantified in the financial models, so all that’s left is to put it into words and graphics. A strategy deck will often be presented in a certain structure that includes:
- Market research,
- Competitor case studies,
- Strategic perspectives and capability, benefits and synergies,
- The game plan (the strategy itself),
- Additional growth opportunities and
- The financials.
Each project’s presentation will differ based on needs, and all the research and thought put into the models need to be captured in the presentation.
For example, in the project I’ve referenced earlier, our strategy deck started with an overview of our strategic perspective and the rest followed the narrative. As mentioned earlier, our goal was to show why taking more ownership of the process would be beneficial to our company in a directly quantifiable and non-quantifiable way. We started by showing the state of the market and why we believed it optimal to enter in the capacity we were outlining. Then we followed with the strengths and weaknesses of our competitor’s entry into the market and why we were better suited to succeed. Then we presented our launch timeline and approach, resource allocation and headcount needs, an overview of synergies and growth opportunities, alternative strategies we rejected and revenue projections.
It must be noted that you can have the greatest strategy ever, but it will just be great ideas in a presentation until you execute. To conclude this blog, here’s another quote from Jack Welch, “In real life, strategy is actually very straightforward. You pick a general direction and implement like hell.”
Categorized in: Business Advisory, Financial Planning & Analysis