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Strategy Process for a Leveraged
Middle-Market Organization
By Robert J. Meehan
Studies over the last 10-years estimate a 70-90% failure rate for developing and implementing a strategy. Based on my experience, I estimate the strategy failure rate for a leveraged middle-market organization (“LMMO”) to approximate 90%. Many of these LMMOs try to implement an approach designed for a Fortune 1000 size organization. Such a Strategy Process won’t work.
Developing and implementing a Strategy Process for an LMMO will result in a more predictable and profitable revenue stream and will minimize wasted expenditures. It counterbalances the risks of a leveraged balance sheet and improves return on assets (ROA). An appropriate LMMO Strategy Process will prevent the company from “peanut buttering” its scarce resources throughout the organization or distributing them to the loudest voices. An appropriate Strategic Process is a guide—don’t view it as a magic formula. You will get better the more you apply the concepts. The key is: begin the process.
“Hard data is used to refine or substantiate strategic options but is not the route to developing a strategy.”
My interest in the Strategy Process began in graduate school when I wrote my master’s thesis “Strategic Planning in the Energy Business: Environment Scanning Using the Delphi Method.” As a CEO of middle-market companies, a Senior VP & CFO of an NYSE company as well as a turnaround consultant with an international firm, I have learned that a Strategic Process cannot be universally applied. The constraints of LMMO require a different Strategy Process.
Private Equity Firms (“Firms”) have had great success increasing LMMO’s equity value through operational improvements, cost cutting and financial restructuring. All organizations must continually improve operations as well as eliminate unnecessary expenses. However, these Firms have an opportunity to further increase profitable revenue and thereby increase equity value by implementing the appropriate Strategy Process. Such LMMOs are usually constrained by available cash and depth of their infrastructure—as well as management breadth.
Many LMMOs make some or all of the following glaring mistakes:
- Copying competitors’ strategies
- Allowing senior management to dominate the process
- Using inadequate data to sanitize brainstorming
- Including SWOT strengths that competitors possess
- Developing a strategy without the resources to implement
- Not regularly reallocating its resources
- Not identifying things to avoid
- Not focusing on customer needs and wants—what they value
“Everyone in the organization should be able to explain your Value Proposition—the distinctive value you’re providing to targeted customers as well as your distinctive capabilities that support that distinctive value.”
There are endless definitions of strategy. Simply, strategy is a continual process focused on creating a sustainable, distinctive value for the buyers of your goods or services. A few of the words defined:
- Continuous process: Customers’ needs, wants and preferences keep changing, so the strategy must change to continue providing distinctive value to specific customers.
- Distinctive: Offerings to your targeted customers must be something they need and value—as well as something different from what is offered by your competitors. (Distinctive does not refer to the basic skills everyone must have to exist in the marketplace.)
- Value: The quality of what you are offering is subjective because what one customer determines as a distinctive value, another customer may not.
- Buyers: The specific customers (and groups) identified as “buyers” should be those that will pay a premium for the distinctive value you provide. Just as importantly, the customers to avoid should be identified.
The strategy must achieve greater profitability or you have the wrong strategy. If your current strategy is not working, start over.
A few specifics on the Strategy Process:
- Identify and then leverage your distinctive capabilities (skills, services, technology, activities, processes, culture, etc.). Consider grouping together various activities.
- Offer a sustainable, distinctive value proposition—one that competitors can’t copy. Support this with your distinctive capabilities so you don’t just compete on price.
- Identify targeted market segments and then targeted customers that need and will pay a premium for your sustainable, distinctive value proposition.
- Identify what you need to avoid or sell—customers, product lines, geography, and business units.
Consider the following in beginning a Strategic Process:
- The process must be ongoing and formally discussed at least quarterly.
- The implementation process must include all levels of the organization.
- Creativity must drive the Strategic Process.
- An inductive—rather than deductive—approach should be used: Keep reaching preliminary conclusions and then challenge them rather than waiting to reach conclusions at the very end of the Strategic Process.
I initially developed a Strategy Process Roadmap Flowchart in 1990. Since then, I have fine-tuned the Roadmap Components based on my experience in leading and consulting to LMMOs. In order to make the Strategic Process less intimidating, I’ve listed the Roadmap Components in rest of the article.