Do You Have An Effective Market Strategy?

"Strategy should be developed from the bottom up, not the top down . . .In military warfare, the serious student of strategy begins with the study of the bayonet"

- Marketing Warfare, Ries & Trout

What is the underlying message in this quote? A smarter strategy will overcome just working harder in the trenches. Do not confront your opposition head-on when they have the high ground. If you are number 2 you seek higher ground. If you are number 3 you seek a flanking action to go around the high ground, And, if you are just entering the market your tactics would involve going under the high ground.

As a market leader your strategy would be defensive to protect your market position. For years Microsoft protected its strong position with its bundling strategy which positioned its browser, for example, ahead of others, possibly better performing, products. Apple comes to the market late and offers leading design, technology rich products that exceed the capabilities of the market leaders and taking advantage of their disadvantages.

Do openings exist when the market is dominated by one leader? As a company becomes a market leader it begins to struggle with being all things to all customers. Its success may have originally been serving a market segment very well and, over time, adding improvements to the product or service to make it attractive to a larger customer base. What often happens then is that the sharp features set and message that originally attracted customers becomes fuzzy and less distinct allowing smaller companies to step in and grab market share with targeted product solutions that respond to rapidly changing needs in the market place.

Customers react well to products that are refreshed regularly to meet their changing needs. Larger companies find this difficult to do as they become more bureaucratic and key decision makers become removed from the front lines where they were in constant contact with the market.

The strategic planning development process is a critical aspect of the ability of a company to hold or gain market share. Many companies fall into the top-down approach where decisions are made without the benefit of direct contact with tactics currently at play in the market. A bottom-up approach is able to use this tactical information to more effectively define what it will take to overpower a competitor or market leader for a segment of the market. This process is more likely to include the anticipation of what a stronger competitor will do and the best way to attack the weakness in the competitors strength so that they cannot respond without giving up its strength.

A market leader is more likely to believe they can do anything if they allocate enough resources. However, a poorly conceived strategy using a top-down approach will shift resources away from the point of battle where they are needed.

What is your market strategy process? Is it top-down where you are not incorporating current tactical information from the marketplace? Are your key resources improperly allocated to be effective in the development and execution of a market growth strategy?

Examine your market strategic planning process to make sure it is appropriate to your market objectives and position in the market place.

Resource: QuickMBA

The Benefits of Revenue Linearity

"Through improved revenue linearity and strong working capital management, we improved DSO, decreased inventories and, as a result, generated $46.8 million in positive operating cash flow, our 46th consecutive quarter of positive operating cash flow."

Chairman and CEO Robert Hagerty, Polycom Inc.

Many companies measure revenue on a monthly basis and overlook the "flow" of revenue during the month. In some cases companies are captives of their customers as it relates to the demand curve that they place on them. We often receive promotion offers to order by . . . which are designed to improve the linear flow of revenue for the company. In other instances, companies do not apply sufficient planning(forecasting)/control to the manufacturing process which can result in a hockey stick flow of revenue at the end of the month. This can be particularly true for build to order products versus those that are more commodity oriented. Insufficient order backlog can also produced a non-linear revenue flow as manufacturing will produce products for potential orders that do not arrive until late in the month placing extreme demands on operations as they do final assembly, configuration and test to ship by the end of the month.

Why is linear flow necessary and valuable to the financial performance of the company?

Revenue Linearity Example: Ideally if you have a monthly revenue budget set at $1.2M and there are 20 working days in the month then a linear flow would be to deliver to finish goods and ship $60K per working day.

This example assumes that there are sufficient orders and customer approved ship dates to ship available inventory each day at a $60K rate. This linear flow allows the collection process to begin earlier than if the bulk of the $1.2M is shipped the last week of the month. Also, inventories and work-in-process can be optimized to support a $60K/day flow instead of a large "burp" the last week of the month (in some cases this could occur over a few days).

By the end of the first month or by the 15th of the next or second month a good portion of the cash from the first part of the month would be received or on its way. A non-liner flow would push many receivables out into the third month putting pressure on working capital and credit lines.

The graphic below highlights the difference in collection is a linear and non-linear revenue pattern. In the Linear example the first collections are on their way by the middle of next month and would continue to increase as the each receivable aged. In the non-Linear example we see a substantial portion of the receivables delayed and additional 15 days or more depending upon the severity of the non-linearity. The cash is delayed but demands for cash regular wages, utilities, inventory for the current month revenue still exist and would have to be paid by reserves or a draw on the credit line.

When build-to-order products are involved the scheduling and production performance are critical to produce the linear flow. Lean manufacturing methods have improved the ability of manufacturing operations to meet scheduled delivery dates that also support linear revenue flow.

In the case of Polycom above, it improved revenue linearity along with strong working capital management and produced an attractive positive operating cash flow.

What is your linear revenue strategy? Are you taking advantage of revenue linearity to improve cash flow in your company?

Cash Flow Planning and Profits

Cash Flow Planning is something that many companies do not integrate with the normal budgeting and profit forecast process. For some companies this is not a serious problem in a "normal" economy as they have sufficient cash reserves or credit line that can absorb the normal ebbs and flows of cash demands of the company. In todays economy where cash reserves have been depleted or credit lines tightened or "lost" raises a new demand for "accurate" cash flow planning.

If I make a profit then whats the big deal about cash flow? Profits on most company financials do not represent cash but a sale that is a liability on the customer to pay at some time in the future. Until the customer pays the company uses working capital to pay for inventory, employee wages, heat, lights and other expenses. It is the management of customer payments and company obligations that results in either positive or negative cash flow.

Isn't it just a matter of making sure receivables are greater than payables - right? This would be a simplistic view of managing cash flow as this attitude would most likely not recognize factors that influence the changes in Days Sales Outstanding (DSO) or balancing non-uniform demands for cash such as new products, tax payments. capital expenditures or debt reduction.

DSO is a measure of the number of days that a company takes to collect revenue after a sale has been made. Why would DSO vary?

1. Products that have quality issues and do not operate properly will cause payments to be delayed until the products perform.
2. The customer mix changes where the majority of customers paying in 45 days days may transition to customers who push payments out to 60 days - or more.
3. Customer cash flow problems can filter down to you where they may delay payments to improve their own cash flow situation.

So if I do a good job on collections cash flow can be managed? Managing the inflow of cash is important but it is also critical that you look what expense and asset strategies you are using in the company. Such as:

1. Carrying inventory that is not being used consumes cash making it unavailable for other purposes such as paying wages, lease payments, etc. Excess inventory can even result in lost cash if the inventory becomes absolute and is written off - thrown away.
2. Capital expenditures such as equipment or buildings consume cash prior to getting a return on the investment. Timing of investing in capital expenditures can put positive cash flow at risk.
3. Factory cost or the cost of goods sold - labor and material - will put pressure on cash if productivity and quality objectives are not kept to insure that a dollar of sales will yield a predictable gross margin. Loss of control in labor cost, productivity, quality or material cost can create products that cost more than expected and/ or delivered later that expected resulting in a cash flow crisis.
4. Vendor financial stability can become a problem where they may need to tighten their collection policies which may require you to pay early if there are not otters sources for the same product or service that will let you pay on the same schedule you have planned into your cash flow plan.

Summary

Good cash flow management is not an accident. Intentional action is required on a regular basis to make sure that all of the factors that support your cash flow plan are in order. Cash is king - but you have to take a proactive role with your organization to make sure you achieve your cash flow objectives. Integrated cash flow planning is essential. Developing cash models of your business will help you and your team understand the sensitivity of your specific business model to factors that can cripple or impede good cash flow management.

Are you Managing or Leading?

I am passionate about the four key elements that I feel are critical to running a successful company. These elements are Leadership, Process, Metrics and Organized Financials. The cornerstone of this four-step methodology is Leadership. Do not use confuse this with the term "management" or "managing". Leadership involves inspiring others with a clear vision of how things can be done better. Those who manage tend to implement someone else's vision or what they believe is the "corporate" vision and normally slow things down by limiting what their part of the organization can do to just what has been asked or expected - to play it safe and no more.

Leaders work between the lines and interact with their organization to test their vision and assumptions by getting feedback from those who actually work in the operations they are responsible for. Taking the time to understand what is holding people back from higher levels of job satisfaction and job performance. Leaders try to find out how the employee can be unleashed to higher levels of performance than they thought possible and then get out of the way. This is true for individual contributors and those in intermediate supervision positions as well.

Too often artificial ceilings trap employee performance because of misunderstandings, poor vision implementation and access to the facts that drive the business. The Leader looks for this condition and gets to the bottom of the problem. Few people intentionally perform poorly when provided with reasonable training, equipment, work environment and motivation. The leader is conscious of the whole picture and looks beyond the traditional boundaries to see that his business (or department) is successful and that their employees are excited about what they are doing and are onboard with the direction of the business.

Have you trapped yourself into a "manager" mindset? Are you excited about your business? Are you transferring that excitement to others in your business? Can you recognize that excitement in those who produce your products or deliver your services. Take a fresh look at your business, take a new look at your business plan (even better - develop one), identify what is necessary to energize not just your key people but all employees. Become a facilitator and less a controller. Celebrate the independent accomplishments of employees and supervision when they do well and lift the performance of the team(s).

Be a leader!