Laying The Quantitative Landscape for Business Strategy.

The school of business strategy among today’s affluent and blue-chip corporations contains characteristics that will define it in future economic cycles.  A prominent characteristic seems to be, in our observation, the propensity to shift corporate strategy regularly whenever short-term gains are not realized.  Executive personnel are transferred also, creating change that itself must be administered before getting down to the progress work of strategy and growth.

Many academics - and some practitioners - in the business strategy field acclaim the benefits of the “buy-and-hold” business strategy, where economic and industry fundamentals are thoroughly analyzed and broken down to predicate the construction of a comprehensive plan to drive growth, mission, and ethics.

Another shortfall in the traditional strategic exercise within executive ranks is the tendency to abdicate due diligence, reasoning that strategy is a “gut thing - the province of the weathered and experienced – you don’t need numbers to tell us what we already know.”

Research tells us that those who recognize past realities, learn from them and alter course to acclimatize to current conditions have a higher chance at success (however that’s defined) than those who maintain the same course and resist change.  This is no less relevant in the arena of business strategy.

Complementing asserted agendas and strategies with empirical research and grounded diligence provides credibility; the diligence upon which that credibility is grounded can be tested, discussed and evaluated.  If the numbers match and complement the strategy, then it becomes harder to argue against the strategy.

The numbers being evaluated can take the form of economic forecasts, sales predictions, and the component forecasts upon which they themselves are based, such as future economic conditions, interest rates, anticipated political climates and political figures open to imports.  What remains is a strong and time-after-time reinforced reality: plan and forecast your strategy, and prove it in your due diligence.  The approach is strong because well-analyzed numbers tell the truth; reinforced because many executives, some revered, fail to do this and pay the ultimate price by being moved along in the C-level turnstile.

The focus groups, meeting, assessments, studies and surveys are necessary to create strategy.  Now it has to be adjudicated in the standardized realm of econometric models and forecasts.

Whether we realize this or not, our thought DNA is entrenched in research and reason.  Models and forecasts of the proposed plans justify and build the message so that it can be championed with confidence throughout the corporation.  This is how small companies breach the barrier of corporate inertia to become international players.

Laying the Quantitative Landscape

The executives have spoken, the 5- year strategic plan is gaining traction at high levels within the company.  The strategy is to penetrate Asia with an alternative, “tweaked” version of your main product because, based on market surveys, customers in the region will be drawn to the new offering – there’s a vacuum within the area for your offering, and, at the very least, you need to jump at the chance of being the first entrant.

Do the numbers justify such a move?  Preliminary forecasts show conservative market traction of 10% ROI.  Is this realistic?

Anticipated costs to modify the product line, engage in marketing, advertising, logistics and ancillary efforts in the Asian region to present the company as a viable player will run, in the estimate of the corporate planners, at $50 Million over the next 3 years.  At a unit price of $45 for each unit, are the numbers viable?  What is the target population, you ask, to blank response.

With the parameters laid, we suggest the comprehensive quantitative approach as follows:

1. All assumptions in the plan need to be research, hopefully reasonably quantified, and considered appropriate to the strategic plan; otherwise, they are discarded.

2. Analyses executed:

-Domestic economic

-International economic

-Domestic industry

-International industry

3. Quantitative modeling to justify and clarify proposed plan based on findings in #2:

             Utilization of multiple regression, time series, decomposition, exponential smoothing, and ARIMA modeling alternatives provide an opportunity to assess the proposed strategic plan from a broad spectrum initially.  Subsequently, through series’ of iterations of the data and the plan, the plan is refined to establish quantitatively – and in the process minimizing the risk of – the optimal strategic plan for the corporation to execute, given available resources.

Of course, a comprehensive analysis extends to plans that extend the reach of current available resource.  If the obligations of additional debt and/or equity can easily be met by the concomitant cash flows, then such a review is warranted.

Premium Accounting and Tax Assistance - call Nicholas Kilpatrick at 604-327-9234 to find out more for your business and click here to see our latest first-time offers.

  #3 is symptomatic of #2; some strategic plans will lose all steam when evaluated against the objective coldness of numbers and economic reality – and, again, render them inert.

 We see the marriage of #2 and #3  in the valuation of potential acquisitions; the ultimate price cannot be calculated exclusively on the rigid net present value of the future cash flows and the fair market value of the assets alone.  Rather, something may exist qualitatively (example: a strong brand), that, absent of numbers, strengthens the value of – and the price of - the potential acquisition.

Similarly, strategic planning involves the qualitative discussion and thought process as well as a due diligence exercise similar to what is outlined above.

If I’m the person writing the cheques to fund the new expansion to Asia outlined above, I want to see numbers that reasonably, from a common-sense perspective, tell me that there is high probability to the proposed potential ROI.

The #2 analysis will expose the assumption that the champions used the economic conditions and landscape in the home market to plant their forecasted product sales in Asia.  Then they’ll have to adjust that accordingly.

I’m going to want to see financial models – the champions need to research markets, economies, and industries and find a template that, to the extent possible, can be used to build a model, supplemented with betas to tweak the model for anticipated variables.  We’ll use r values to determine the fit of the model to the data, and apply that model to the economic and industry data that we mine from Asia.

I’ll get the champions to nail the quantitative methodology down so that the numbers say to reviewers and decision-makers that the plan is well-researched, due diligence has been thorough, and that this is our best option for investment and future growth moving forward.

If there are seasonal adjustments required, then they need to be incorporated into forecasts.  Such seasonality variations may call for an ARIMA model to fit the historical data and then implement into the Asia data, if the 2 data pools show high levels or correlation.

Ultimately, strategy is a sales presentation; it, and the people giving it, will invariably be tested on the quality, reliability and applicability of the data as well as the  model used to substantiate the plan put forward.

Unfortunately, we cannot control how we are perceived by those judging our words, presentations, and conclusions.  We can, however, control the parameters within which their decision-making process is determined – by providing quantitative data.

Quantitative analysis has numerous advantages:

1. It levels the playing field, eliminating possible bias, whether positive or negative, and allowing the strategic plan to be assessed on its’ own economic merits.

2. It becomes its own sales presentation, leaving the presenters to add qualitative narrative that enhance to overall picture and to assist the reviewers understand how the plan remains consistent with the overall mission of the Company.

3. It lends a credible view to the way the Company does strategic planning, which media, stakeholders, shareholders and other persons of interest to the Company will, hopefully and eventually, pick up on.

Not many companies engage in thorough quantitative analysis.  The benefits of such an analysis lie as much in refraining from the execution of financially and economically unwise decisions as justification for the implementation of wise ones.

We all know that, over that last 15 years, corporate malfeasance and fraud have modified shareholders’ perceptions of the so-called “corporate guardians” – those in the C-level suite charge with protecting companies assets, investing them wisely, and acting as corporate caretakers for the next generation of business leaders.

Today shareholders are pragmatic, slow to invest, and wary of what they perceive to be excessive spending.  Similar to only a few other things, quantitative analysis of data is proof to stakeholders that company growth and sustainability is at the forefront of the minds of the corporate guardians.

Nicholas Kilpatrick is a partner at Burgess Kilpatrick, CPA’s in Vancouver, BC.  He leads the firm’s consulting and strategy practice and works with companies at all stages of development (start-up, emerging, mature).  The practice’s focus includes quantitative forecasting, corporate and unit strategy and planning.  Please visit our website at www.burgesskilpatrick.com or on Facebook at www.facebok.com/BurgessKilpatrick for more information on our firm.