All kinds of companies – both publicly and privately listed – fail to reach their full potential for a myriad of reasons. Perhaps the business is family owned, but the ownership group is content with generating an adequate level of recurring cash flow, despite underperforming against peer groups. Or, perhaps the business is publicly owned, but the management and the board are not incentivized to explore new avenues of growth and diversification. Rather, they are compensated to remain risk averse.
In both cases, there is the potential to unlock incremental shareholder value. And in the case of public companies, the board and the leadership team may even have a fiduciary obligation to do just that.
It can be empirically argued that for most businesses, there is a direct correlation between the size and level of diversification on one hand and the enterprise value of that organization on the other hand. Additionally, key drivers of shareholders’ wealth creation are cash-flow resilience and the comparative performance in terms of growth and profit margin versus direct competitors.
Common Business Issues & How to Successfully Address Them
1. No Well-Defined Strategic Plan
If a company does not have a clearly articulated strategic plan and a shared end goal, it is rudderless and its employees are unable to cooperatively work towards a future state.
An effective strategic plan describes what the company should ideally look like in a defined period (typically 5 years), and it sets key milestones.
The strategic plan needs to be simple, focused on no more than 5 key criteria, and it should be universally understood throughout the organization. It is imperative for the leadership to actively go out to its workforce to explain the strategic plan, its merits for all involved, and the importance of the contribution of each employee to the achievement of the end goal.
2. Lack of Organic Growth
Companies that fail to grow organically will risk a weakening of their position in the marketplace. For many organizations, mediocre performance essentially becomes institutionalized. The sales force lacks the right sales playbook because these companies fail to sufficiently invest in the training and assessment of their sales force, and they have incentive schemes that do not incent the right behaviors.
Key to turning around the revenue trend of an organization is the continuous comparative assessment of salespeople based on objective criteria, combined with (1) tailored sales force training, (2) a redesigned and simple incentive opportunity, and (3) a clear program of relevant KPIs to assess performance quality. In a situation where the sales force as a whole is underperforming and requires upgrading, forced ranking of talent with predetermined levels of attrition and inflow of new talent may offer an effective tool to enhance the overall quality of the sales effort.
3. Outgrowing the Leadership Talent
As a company grows and becomes more diversified in terms of its product/service offerings and geography, it is certainly not unusual to have to upgrade the leadership team in tandem. The demands on the executive team of a small and geographically concentrated business are vastly different from those imposed on the leadership of a rapidly growing and geographically expanding organization. It is important to ensure the quality of the leadership team is in sync with the ambitions of the company. The recruiting policy must be such that the talent attracted is scalable to lead the company through the 5-year horizon of its strategic plan.
4. Lack of Aligned Culture and Core Values
Once a company has clearly defined its mission, its vision, and the supporting behaviors through a process of consultation, it is imperative that the leaders of the organization demonstrate those behaviors in their professional and personal lives. Any form of lack of adherence or dissenting behavior should be addressed in a direct conversation. If the individual continues to openly or otherwise fight the agreed-upon core behaviors, the individual should be let go (in a fair and respectful manner). The biggest threat to the strategic plan is to allow festering passive-aggressive behavior – especially at the leadership level. While cultural alignment is extremely important between the associates, it is equally important that this alignment extends to the board and, in the case of a privately owned corporation, the shareholders of the company. Too often a cultural divide, and not the performance of the team and the company, inspires ownership groups or their representatives to make impulsive management changes.
5. Inconsistent Quality in Operations
The long-term future of a business is negatively impacted if it does not provide world-class levels of quality in its products and services. The company should develop a detailed operating system that is prescriptive in nature and that defines how its facilities and back-office functions should operate across each geography or location. Such a system will guarantee a predictable and excellent customer experience. The operating system should focus heavily on concepts of lean manufacturing, six sigma, continuous flow and first-time-through quality.
6. Lagging IT Infrastructure and Business Analytics
Any business benefits greatly from a thorough and modern ERP solution that covers the entire spectrum of financial accounting, distribution or supply chain management, manufacturing, human resources and CRM. Businesses also benefit from access to relevant business analytics in each of these areas. While boards are often reluctant to implement a new ERP solution (it can be costly and can cause distracting business interruption), the ERP solution is truly the engine of the business. Not only should a business invest in modern ERP solutions, it should also expect to constantly reinvest in modernization and to upgrade every 10 to 15 years.
7. SG&A Overhang
A company needs to identify how much it is willing to spend on the sum of support functions, based on a comparison to its peer group and its strategic ambitions. It also needs to institutionalize the notion that SG&A is scalable, up and down, and to think of it as a semi-variable expense. When a company hits a rough patch, the impact on its cash flow – and even its survival – is often defined by its ability to scale down SG&A. Conversely, when a company grows, it should take advantage of the scalability of support function. SG&A-costs, expressed as a percentage of sales, should decrease as the company grows.