CFO Series: Creating Value Sustainably and Strategically

Richter’s latest CFO Series webinar, Crafting a Holistic Strategy for Sustained Value Creation, featured partners Stéphanie Lincourt and Michael Black. The pair discussed how to translate a strategy into an actionable business plan, how owners and entrepreneurs should align their near-term actions with their long-term objectives, and some of the common challenges companies face when trying to grow – namely, how to prioritize organize growth initiatives versus M&A-driven strategies. The conversation was moderated by Richter VP, Josee Delli Colli.

So what should CFOs prioritize when it comes to strategic sustainable value creation? Here is a summary of the key points highlighted by our partners.

 

WHY DOES EVERY COMPANY NEED A LONG-TERM PLAN?

Everyone works in the business all the time. The long-term plan is working ON the business. It’s determining the path forward and having regular check ins to ensure you’re on track.

If you document a plan to establish where you want to go and what you want to achieve, it gives you an opportunity to identify challenges and wins; course correct against changes in the market; focus on your priorities; and plan for the road ahead.

It is also easier to navigate growth when your entire team knows and understands the plan. You want your long-term plan to be understood by everyone in the organization. It helps them stay engaged in the business in a few different ways. Overall, having everyone on side with a well-documented long-term plan enables:

  • focus for all team members’ activities;
  • prioritizes your time and money and your investment in those activities; and
  • enables regular reporting and monitoring – how you track success.

 

WHAT ARE THE DIFFERENT TYPES OF GROWTH?

There are a lot of different types of growth, but the two most common are: organic and inorganic. Organic growth is just as it seems: growing naturally by introducing new customers, building your market base, selling more product, etc. Inorganic growth most commonly happens when you acquire a company or form strategic partnerships. Of course there is also diversification, market penetration, core, adjacent, or transformational growth, as well as horizontal versus vertical. Each type of growth can mean a different thing for, and to, your business.

TYPES OF GROWTH MEANING
DIVERSIFICATION VS.
MARKET PENETRATION
DIVERSIFICATION: expanding with new products or into new industries, markets, or geographies

MARKET PENETRATION: increasing sales of existing products or services through new customer segments, channels, or marketing efforts

CORE; ADJACENT; OR TRANSFORMATIONAL CORE: Building upon the company’s strengths; typically low risk

ADJACENT: Expanding into new but related areas; comes with moderate risk.

TRANSFORMATIONAL: Creating an entirely new business model, product, or service; going into markets that will disrupt the status quote. This type of growth is typically high risk and requires substantial innovation and capital investments.

HORIZONTAL VS. VERTICAL HORIZONTAL: Expanding into similar products or services to gain market share and a competitive advantage.

VERTICAL: Expanding into different stages of the value chain to improve control over the production process and reduce costs.

All these options come with risks, as well. So you must ask yourself or your fellow leaders: what type of risk can you, or are you willing, to take? If the company is risk-averse, maybe organic growth is safer. How aggressive are your growth targets? If transformational growth is desired, maybe it’s worth taking the time to enter a completely different market or completely change the business model. However that then begs more questions: will the company incur losses to capture market share or is profitable growth a requirement? Does the organization have the capabilities to execute the strategy? Does the intentional strategy fit into your long-term plan?

It’s crucial to assess the capabilities and requirements within your company when determining the type of growth you want to achieve. A good indicator for determining the type of growth to undertake is to look at the company’s history. If the company has a history of acquiring companies and pursuing M&A, then maybe that’s a natural option. If not, you must assess whether you have the capabilities to acquire and integrate a new company. Do you have to hire the right staff to do this? Are your systems and processes able to handle this new challenge? If your growth goals aren’t aligned with current skillsets, it’s best to retain external advice or support throughout the process if you feel the option is still worth pursuing.

 

WHAT ARE THE COMMON CHALLENGES OF GROWTH?

For some without a growth plan it is the internal challenges that cause a company to stumble:

  1. Being opportunistic – we see this as the number one destroyer of growth because if you are always chasing the newest thing, you’re not focused on your mission or long-term plan.
  2. Scaling operations – as you get bigger, what worked when you started may not work for you now. How do you get more efficient at something while at the same time growing your company? You may have growing pains that require more capital, like needing to create an HR department where there wasn’t one before.
  3. Automation – another common oversight when navigating growth is IT systems or digitization – are there manual processes that you can automate? Can the people managing these tasks be redeployed to something that is of higher value?
  4. Company culture – maintaining this throughout the growth process is key so that your team members aren’t being burnt out or being pulled in too many directions. Focus on having everyone working in the same direction.

For others, the challenges are created by external factors:

  1. Access to capital – cashflow projections and budgets may not be in line with what is in the growth plan.
  2. Competitors – they may have a response to what you are building. Understanding this as being a risk and planning how to mitigate it is important.

Through a proper planning process with strategic growth professionals, we acknowledge the challenges and craft how you’re going to respond to your potential circumstances. Thinking about the ‘what if’ is the beginning to avoid being caught off guard.

 

HOW DOES A COMPANY CREATE THEIR OWN GROWTH PLAN?

Growth for the sake of growth is a strategy but with a lot of owner-entrepreneur businesses, growth for the sake of growth isn’t the objective.

First, set the objective. It’s important to look at growth objectives both financial and non-financial. This could be a full day workshop, or it could be simply a matter of just getting the right people on the same page.

The key is to start setting up a series of ideas or hypotheses then identify the best avenue. We help you assess some ideas. Is there room in the market for this new product… Maybe it’s a margin game… this is where the next part comes into play: research. What are the channels, who are the consumers, where is the market… is it viable? If it’s not, then what’s the pain point and can we solve for that? If the return isn’t there, then it shouldn’t be a prioritized idea.

Finally, you must ask: can this be executed as a company? What do you need to do as an organization to achieve this or where do you fall short? What’s possible? Can you create a market? Can you do it yourselves?

Once done, it needs to be reviewed top to bottom to ensure coherence. If there is misalignment at any stage, then the growth plan might not be viable. This also all needs to translate into action and actionable items with a defined timeline. Having the plan and determining the milestones for go- or no-go decisions allows you time to check in with your team and course correct if needed. Once you’ve put the plan through every scenario enough you can then understand if it will work or not work.

 

MERGERS & ACQUISITIONS – HOW SHOULD COMPANIES CONSIDER THIS IN THEIR GROWTH PLAN?

Mergers and acquisitions (M&A) is a tactic to achieve certain growth goals – whether growing revenue or market share; acquiring new products, services, or capabilities; or attaining personnel, patents, or copyrights (especially if innovation is a big part of your growth plan). M&A is often underestimated, but it can be a way to achieve such goals quickly.

 

WHAT MAKES A MERGER OR ACQUISITION SUCCESSFUL?

A company needs to have a post-deal integration plan and complete proper commercial due diligence. This type of growth can change a company drastically and quickly. Commercial diligence helps you take their top line revenue and dissect it to evaluate the relevancy and reality of a merger or acquisition.

However, companies need to integrate beyond just the financials. Integration planning considers what the company or new structure of companies will look like post-deal close; essentially, from day one to day 100. A robust integration plan is a big undertaking and requires support from various professionals. Overlaying this with industry trends can help in evaluating the sustainability of the endeavour.

Determining the new business plan prior to day one of close is crucial.

  • Will the acquired company run independently?
  • Is there an operational component?
  • From a commercial perspective are you speaking to the right suppliers?
  • What are the shared values and vision?
  • Do you have a communications and change management strategy? How is that being executed?
  • Have you done your IT diligence to determine if you need to switch systems, move to the cloud, or merge ERP systems? Having different systems for payroll, CRM, scheduling, etc. can mean duplicating services or licensing fees, causing your technology costs to go through the roof.
  • Have you considered HR diligence (that goes beyond discussing compensation and benefits)?

There is a more holistic view to be taken which will dictate what the next 100 days beyond day one will look like. For many team members of a company, an acquisition or merger can come with a lot of uncertainty, so it’s important to communicate with your team along the way. Something as simple as paystubs looking differently post-merger may cause unnecessary confusion or uncertainty. With proper planning you can mitigate or pre-empt these issues, so you don’t have to figure them out on the fly.

It’s recommended to create a dedicated integration team to make sure the acquired company feels at home in their new company. This can take months of planning before it is executed.

This too, goes back to having a solid high-level growth plan and strategy. This way, everyone is already on the same page. You’ve built the rapport so you can fast-track integration efforts.

Integrating both teams and the operations successfully is a challenge. We’re seeing longer diligence cycles right now given current macro-economic conditions. What can make a deal successful is post-deal support.

 

Partner Michael Black also spoke on this subject at The Globe and Mail’s Growth Through Acquisition webcast. He was joined by fellow panelists Navaid Mansuri, CFO of Dialogue, Stephanie Ciccarelli, Co-founder of Voices and CMO of Lake, and George Rossolatos, CEO and Managing Partner of the Canadian Business Growth Fund; the event was moderated by The Globe’s Capital Markets Reporter, Jameson Berkow. A full recap of that discussion is available here.