Strategic Planning & Propensity of Risk Avoidance
At Cathedral Consulting Group, LLC we believe that a systematic approach to strategic planning
lays the foundation for good decision making throughout the year. In August we encourage the
review of the company’s strategic position. Understanding the strategic position lays the
foundation for the company strategy, which we look at this month. The company strategy lays
the foundation for the issues covered in the October and November monthly topics of Year-End
Maximization and next year’s Budget.
Last year at this time we extensively covered the process on how to build a strategic plan
(www.CathedralConsulting/Resources and go to “Strategic Planning”.) This paper will review
some aspects of a strategic plan and then consider how risks affect our strategic thinking.
Be Visionary
Strategy is about visioning and turning the vision into executable plans. At Cathedral, we
believe that if you cannot vision growth, you cannot achieve growth. We often find that a
struggle with vision can be due to risk aversion that gets translated into a sense of caution.
Therefore, when creating or evaluating a strategic plan, the question must continue to be asked:
“What should the business look like in three to five years?”
When viewing the weaknesses reported on their last month’s SWOT analysis, business owners
have a bias towards a conservative potential for the business in three years. Add to this caution
a general bias toward goals that can be achieved or for easy success, and the answer becomes
even more conservative. Better safe than sorry, might be another way to summarize this
orientation.
Let’s address the role of a strategy and this kind of conservative approach. A strategy is a
vision with implementable steps. It is not a commitment of the firm. Instead the strategy leads
to the budget, which in turn is based upon achievable inputs from the current business activity
(to be covered more in the November topic.)
This propensity to conservative visioning is why we require a second question be asked: “If the
business doubles in the next 3 to 5 years, what does the business look like?” By asking
this question, the business owner is forced to be visionary without feeling he/she has to be
conservative. Rather, the question allows the business owner to develop a picture of both the
company’s potential growth and the company’s needs to address that potential growth.
Often we have seen a three-percent-growth company answer the first question as “a ten percent
increase in revenue with similar profit increases.” When we then challenge the company to
answer what it would look like with double the revenue, the conversation completely changes.
Initially, it is that double is preposterous. Then we begin exploring what would change in the
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company if it did double the revenue. Then we explore where that revenue could come from.
We follow that with exploring what it would take to get the revenue. It is quite amazing how
different the answer to the first question becomes after this exploration. Often the ten percent
moves to thirty or fifty percent increase, because the potential was there, but the vision was
missing.
Utilize Financial Models
Financial models bring the vision to life and lay the groundwork necessary to create an
implementable strategy to achieve the vision. Without a financial model, the vision is merely a
shell, a concept without economic meaning or purpose. Financial models aid in identifying risks
in the plan, thereby allowing the business owners to be conservative and visionary at the same
time.
We recommend full financial statements be used in the financial modeling process: balance
sheet, income statement, and statement of cash flow. Each of these components gives insights
into different dynamics that go into achieving the vision. The income statement will give a
measure of cost and margin risk analysis. The cash flow statement will highlight the risks of
working capital in a growth situation. The balance sheet will give liquidity and capitalization
insights.
Risks, Failure, and the Pursuit of Opportunities
Small businesses must be conservative and operate within their means. These businesses
must be self-sufficient. If these businesses get overextended, there are usually limited
resources to carry them through a rough spot. The result of unmanaged risk quickly becomes
total failure. Risk avoidance becomes a high priority.
To this essential nature, we would add that studies on business decision-making show that most
people have a propensity to avoid risk. Therefore, decisions will be naturally risk adverse. Add
these two together and the conservative strength becomes a weakness.
Management is the answer to this dilemma. Risks are part of the business; therefore they must
be managed even as all other parts of the business must be managed. There are several tools
available to management, which allows managing risk to be easier.
1. The first tool is information. Financial statements and financial data and other operating
information are critical to identifying risks early.
2. The second tool is anticipation. Most risks are known, just as the SWOT analysis gives
some measure of the weaknesses and threats, so the owner knows what the potential
risks can be. Developing strategies for addressing risks in advance of occurrence can
lead to both avoidance and minimization of occurrence happens. “To be prepared is to
be forearmed” is a motto that is a basic management technique for risk management.
The July topic addressed other components of operational risks, which are not covered
here, because the focus here is on strategic risk management.
The last item to address is the unacceptable risk. In a discussion many years ago with the CEO
of Unilever, a Cathedral Managing Director was given an excellent description of the
unacceptable risk. The CEO stressed that any risk that could break the company was
unacceptable, even if it could be managed or even if its probability of arising was small. The
CEO stressed that Unilever had been in existence for hundreds of years and was entrusted to
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him. His goal was to leave it stronger than when he received it. (It would have been nice if
other public company CEOs’ had held to the same principles over the past several years.) The
point to all owners is that the SWOT analysis will identify weaknesses, which should be
managed, and threats, which form the kinds of risks that need to be addressed strategically.
Threats need to be systematically reduced so that they cannot break the company. With
planning this can generally be done, but it is not a one-year exercise. This is why they become
part of the strategy for the company.
September Actions:
1. Determine or clarify your vision.
2. Establish a 2012 target for revenue and profit.
3. Identify the necessary steps from now through 2012 to reach the target, overcoming the
propensity of risk avoidance.
a. Identify the SWOT analysis of the steps decided given the market, competitors,
and the economic environment.
b. Develop the actions to minimize the impact of the threats by the end of three
years.
4. Develop or update your three-year financial model.
Articles for Further Reading
1. “Persuasive Projections.” This article discusses the necessary elements of financial
projections particularly focusing on what loan officers and investors are looking for.
http://www.inc.com/magazine/20000401/18118.html
2. ‘Living’ Business Plans help Businesses Flow with Future. This article tells the story of a
company who was able to adjust their strategic plan quickly when learning that their
business was seasonal in nature. http://www.inc.com/articles/2000/03/18184.html
3. “Making Your Financials Add Up.” This article focuses on developing an accurate financial
forecast for revenues rather than broad guesses and general percentage increases.
http://www.inc.com/articles/2002/03/24019.html
4. “Strategic Planning: Not Just for Big Business.” This article addresses the difference
between strategic and business plans and sets forth parameters for strategic plans for the
small business owner. http://www.smallbusinessnotes.com/planning/strategicplanning.html
5. “Integrated Measurement Systems.” This article explains the purpose of the balance
scorecard management tool and how to create one for your company.
http://www.toolpack.com/scorecard.html
6. “Small Business Management Audit.” This 9-question article helps you quickly audit your
firm regarding strategic planning. http://www.prenhall.com/scarbzim/html/audits/audit2.html
Phil Clements is CEO of Cathedral Consulting Group, LLC and a Managing Director in the
New York Office. Michelle Fitzgerald is a former Associate in the New York Office.
For more information, please visit Cathedral Consulting Group LLC online at
www.cathedralconsulting.com or contact us at info@cathedralconsulting.com.
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