June 24, 2020 - When discussing strategy, an un-costed idea is just that – an un-costed ideas. Until you have put the effort into building a financial model to show the financial outcome (as a discounted cash flow calculation) of the ideas, then you cannot call it a complete strategy.
You cannot just string a collection of scenes together and create a great movie, it just will not flow or make sense to the viewer. If it is an action film, you may be entertained, but you will walk out wondering what it was all about. There is no such doubt with great films. Titanic was a love story, not a maritime disaster.
In business it is the same. You cannot just string together a whole bunch of tactics and turn that into a strategy. Strategy rolls downhill from the Vision and Mission. Tactics should complement strategy. Strategy is working out the basis that you are going to compete and try to sustain an enduring advantage over your competitors. It is how a company looks to leverage its Valuable, Rare, costly to Imitate capabilities as it seeks a competitive advantage.
W Edwards Denning is widely acknowledged as the leading management thinker in the field of quality, coming up with Total Quality Management that helped Japanese get back on track after WWII.
W Edwards Denning once said, “Without data you are just another person with an opinion”
Whilst making assumptions in a plan for the future is not a precise science, in the mergers and acquisition (M+A) area, they talk of how assumptions should be ‘defensible’.
Typically, people would ask – where did you get the sales price assumption from, or how did you arrive at the volume of goods used for this? The defence of these needs to be backed up by enough ‘homework’ or analysis. Whilst you may not be able to ‘prove’ the number, at the same time someone else is unlikely to dis-prove it. In the M+A process, because there is so much value tied up in the future earnings of the entity, every assumption is an opportunity to discount the sale price.
Strategy is one of the 5-Pillars of ‘Profit Metrics’. The ‘Profit Metrics’ method embeds reliability and predictability into business finances. It allows owners to anticipate, evaluate and navigate. It enables them to get out in front of the business, be strategic and boost their bottom line.
For more information about Profit Metrics, please click here