Strategy Implementation

Issues

By
Santiago Ibarreche, Ph. D.
 Why do strategies fail?

 Some answers:
 Purpose
 Process
 Resources
 People involvement
 Support Systems
 Follow up

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 Purpose

 Unclear
 Generic
 Impossible
 Too Easy
 Not shared with others
 Incongruent

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 Process

 Not clearly defined

 Too detailed
 Information not available
 Responsibilities not clearly define
 People not capable

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 Resources

 Unavailable
 Unattainable
 Time as a resource
 Accountability
 Not delivered on time
 Lack of control

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 People

 Not involved in planning

 Not trained
 Lack of authority
 Not clear accountability
 “You get what you pay for”
 Motivation

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 Support Systems

 Accessible
 Versatility
 Up to date
 Coordinated
 Understandable

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 Follow up
 We need to follow up strategies otherwise:
 “Norma Implantada no supervisada, vale para ….”
 Paralysis by analysis
 Plan is fun, action is not
 “All I do is spinning, spinning, and spinning again”
 “I have the sensation that I am wasting my time in
controlling things instead of looking for more
business”
 “I got into this business to work less … not more”

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 Follow up

 Do not Micro Manage

 Set Key Indicators
 Set parameters
 Establish a routine
 Set time for reflection
 Be flexible
 Stay current
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 General Financial Analysis Scheme

Contribution Margin for the

Industry Co. Contribution Margin
Multiplied By Multiplied By Operational Margin
Market Efficiency Multiplied By
Operational Efficiency
Financial Efficiency

Margin before taxes

Multiplied By Net Profit on Sales
Return on Permanent Investment
Tax Efficiency Multiplied By
Permanent Investment Turnover
Multiplied By
Financial Leverage

Return on Equity
Multiplied By Internal Growth Index

Reinvestment Index

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 Financial Analysis Scheme for Following Strategy
implementation (Marketing)

Market Gross Margin

x Co. Gross Profit Margin

Marketing Efficiency

Formulas:

Market Sales /
Market Gross Profit Margin
Co. Gross Profit /
x
Co. Sales
Co. Market Share in Sales/
Co. Market Share in Margin

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 Analysis (Marketing)
 Market Gross Margin Indicates:
 How competitive is the Industry
 How has it mature (historically)
 Marketing Efficiency indicates:
 How well are we doing against the industry
 Co. Gross Margin Indicates:
 How much of each dollar we sell is left after deducting those costs
directly associated with the goods or services sold

 Key Questions:
 Are we High Volume or High Margin Business?
 Is the market place changing? How so?
 Is our marketing Efficient?

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 Strategic Issues (Market)
 Product
 Variety
 Satisfaction of needs and wants
 Price
 Competitiveness
 Place
 Scope
 Promotion
 Direct and indirect
 PEOPLE
 Compensation
 Motivation
 Capacity
 Training

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 Financial Analysis Scheme for Following Strategy
implementation (Marketing)

 Other Indicators:
 General:
 Number of customers and sale per customer
 Margin analysis per customer or type of customer
 Geographic analysis
 Services (including construction):
 Margin by type of service
 Mix of services in terms of contributions to the mix
 Wholesale or Retail:
 Sales generated by space (sales per sq. foot)
 Manufacturing:
 Margin by product and/or Model
 Mix of products

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 Financial Analysis Scheme for Following Strategy
implementation (Operations)

Co. Contribution Margin

Multiplied By Operational Margin
Operational Efficiency

Formulas:

Co. Gross Profit /

Co. Sales
Operational Profit /
x
Co. Sales
Operational Profit/
Co. Gross Profit

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 Analysis (Operations)
 Co. Gross Margin Indicates:
 How much of each dollar we sell is left after deducting those costs
directly associated with the goods or services sold
 Operational Efficiency Indicates:
 How much of each dollar of gross margin is left after paying operational
costs
 Operational Margin Indicates:
 How much of each dollar we sell is left after deducting cost of goods
and operational expenses

 Key Questions:
 Are we using our capacity wisely?
 What are the fixed and variable elements of operations?
 How is our operational efficiency if compared with the rest of the
industry?

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 Break Even Charts
Break Even Chart
Break Even Chart
Fixed Expenses = 10
Fixed Expenses = 40
Variable Expenses = .8 (Dollar)
Variable Expenses = .2 (Dollar)

120 120

100 100

80 80
Amount

Amount
60 60

40 40

20 20

0 0
0 20 40 60 80 100 120 0 20 40 60 80 100 120
Amount Amount

Sales Expenses Sales Expenses

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 Financial Analysis Scheme for Following
Strategy implementation (Operations)
 Other Indicators:
 General:
 Percentage of Types of Costs
 Costs per Customer or Location
 Geographic analysis
 Services (including construction):
 Activity Costs by type of service
 Mix of services in terms of contributions to the total costs
 Wholesale or Retail:
 Costs per square foot
 Manufacturing:
 Cost by process
 Mix of products
 Efficiency and Productivity Indexes

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 Financial Analysis Scheme for Following Strategy
implementation (Financial)

Operational Margin
Multiplied By Margin before taxes
Financial Efficiency

Formulas:

Operational Profit /
Co. Sales
Profit before taxes /
x
Co. Sales
Profit before taxes/
Operational profit

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 Analysis (financial)
 Operational Margin Indicates:
 How much of each dollar we sell is left after deducting cost of
goods and operational expenses
 Financial Efficiency Indicates:
 How much of each dollar of operational margin is left after
paying financial costs
 Margin before taxes Indicates:
 How much of each dollar we sell is left after all expenses are
deducted
 Key Questions:
 Are we using the right mix of resources?
 Is the cost of money congruent with its risk?
 How well do we invest the resources borrowed?

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Financial Analysis Scheme for Following
Strategy implementation (Finance)
 Other Indicators:
 Weighted cost of capital
 Cost of operations for obtaining capital
 Cost of resources as compared with industry
 Strategic Elements:
 Borrowing or issuing capital
 Buying or making
 Buying or leasing

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 Financial Analysis Scheme for Following Strategy
implementation (Tax)

Margin before taxes

Multiplied By Net Profit on Sales
Tax Efficiency

Formulas:

Profit before taxes /

Co. Sales
Net Profit/
x
Co. Sales
Net Profit/
Profit before taxes

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 Analysis (Tax Effect)
 Margin before taxes indicates:
 How much of each dollar we sell is left after all expenses are deducted
 Tax efficiency indicates:
 How much of each dollar of profit before taxes is left after paying taxes
 Net profit on sales indicates:
 How much of each dollar we sell is left after all costs including taxes

 Key Questions:
 Are we using the right tax strategy?
 Are there some risks implicit in the tax strategies followed?
 How can we minimize the payment of taxes without incurring in
excessive risks?

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 Financial Analysis Scheme for Following Strategy
implementation (Permanent Investment)

Net Profit on Sales

Multiplied By Return on Permanent Investment
Permanent Investment turnover

Formulas:

Net Profit/
Co. Sales
Net Profit/
x
Permanent Investment
Co. Sales/
Permanent Investment

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 Analysis (Investment)
 Net profit on sales indicates:
 How much of each dollar we sell is left after all costs
including taxes
 Permanent investment turnover indicates:
 How many times did we “sell” our permanent
investment (Working Capital + Fixed Assets)
 Return on permanent investment:
 How much of each dollar of permanent investment
has yielded during the period under analysis

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 Key Questions
 Is our level of investment adequate?
 Do we have too much or too little investment?
 What are the components of investment?
 How is the investment in current assets financed
by short term debt?
 How is the working capital financed?
 Do we have enough or too much investment in
inventories?
 How do we compare with the industry in days
for collections and inventories?

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 Other indicators
 For working capital:
 Current ratio
 Inventories turnover
 Days for collection
 Aging of accounts
 For fixed assets:
 Fixed assets turnover
 Productivity index

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 Financial Analysis Scheme for Following Strategy
implementation (Financing)

Return on Permanent Investment

Multiplied By Return on Equity
Financial Leverage

Formulas:

Net Profit/
Permanent Investment
Net Profit/
x
Stockholders Equity
Permanent Investment/
Stockholders Equity

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 Analysis (Financial Leverage)
 Return on permanent investment indicates:
 How much of each dollar of permanent investment
has yielded during the period under analysis
 Financial leverage indicates:
 How much of each dollar of equity “leverages”
permanent investment
 Return on equity indicates:
 How much each dollar of equity yielded during the
period under analysis

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 Key Questions
 Is our level of financing adequate?
 Do we have too much or too little debt?
 What are the sources of financing?
 What alternative sources of funds are there?
 How could we finance new projects or natural
growth?
 Is the mix of capital adequate for our industry?
 Is the risk level something we can bear?

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 Financial Analysis Scheme for Following Strategy
implementation (Growth)

Return on Equity
Multiplied By Internal Growth Index
Reinvestment Index

Formulas:

Net Profit/
Stockholders Equity
Reinvestment/
x
Stockholders Equity
Reinvestment/
Net Profit

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 Analysis (Financial Leverage)
 Return on equity indicates:
 How much each dollar of equity yielded during the
period under analysis
 Reinvestment index indicates::
 How much of each dollar of net profit is reinvested in
the business
 Internal growth index indicates:
 How much are we growing in relation to the initial
equity

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