Middle market growth companies need to operate in two time frames. The first is the one-year operating plan, which defines the tactics for achieving the company's financial goals (e.g., revenue, cash flow) and operating goals (e.g., launch new products, enter new markets). The second is the three-year plan for business strategy. It's important to create a clear distinction between the two and to know how to start the process.
According to the NCMM 3Q 2013 Middle Market Indicator, the middle market continued to grow revenues at a healthy 5.5 percent in the 12 months leading up to the report. But how can your company kick-start growth? NCMM's Blueprint for Growth: Middle Market Growth Champions Reveal a Framework for Success concludes that companies who have experienced the most growth since the financial crisis have set specific growth goals and communicated these goals to their staff. Moreover, these companies actually emphasized a strategic growth process.
This is important to consider. Many growth companies are so focused on execution that they find it challenging to get out of the weeds and think beyond the current year. One danger of this mindset is that the current business model will run out of gas in the next year or two, resulting in declining growth and no backup plan. Another danger is the risk of colliding with a market trend, a technology sea change, or a disruptive competitor that can make the current business model obsolete. When will Google Docs become a serious threat to the Microsoft Office franchise? When will online cash transfers via Xoom have a significant impact on Western Union's international franchise?
The answer is to have a business strategy that parallels the operating planning process. I like to think of "strategy" as any opportunity or challenge whose time frame is beyond one year. Hence, any investment this year that delivers a return in future years is strategic. Some cynics say that "strategy" means anything that loses money. This statement has a germ of truth but neglects the idea that this year's loss is intended to produce substantial future gains. In short, these cynics are not thinking strategically.
How do you institute an effective strategic planning process? It starts by aligning your leadership team around a shared vision of where the company should be in three years. Three years is the sweet spot when it comes to a planning horizon. No one believes in a five-year vision anymore because the world moves too fast, especially for middle market companies. And even if you believe in the five-year vision, it's so far out that nobody is motivated to take action. Three years is far enough in the future to get people out of the weeds of today's operating problems and business model. On the other hand, three years is near enough that if a team can create a shared vision of what the company could look like, in as much detail as possible, then it will seem as though there is no time to lose in laying the groundwork to get there.
Once you have the three-year vision, work backwards to your operating plan. Ask yourself what you need to do in 2014 to achieve your strategic goals in 2016. Your 2014 operating plan has to fund your strategic initiatives first before funding the tactics to achieve the 2014. If you start with the operating plan, you'll use 100 percent of your resources on tactics and have nothing left to fund your strategic initiatives.
Ideally you would get your management team off site for a day or two, at least once per year, to create or update your three-year vision of the company. Don't boil the ocean with all the "standard" planning tools (market trends, SWOT analysis, competitive analysis) - these are supporting tools. Get the executive team aligned instead on (1) gap analysis, or how much growth you will need from new products and services three years from now; (2) your vision of the company in three years; and (3) what you need now to make sure you get there.
Dave Power, an NCMM contributor and president of Power Strategy, has guided growth companies as an operating executive, board member, and advisor for over 25 years. Dave was CEO of Novera Software, SVP Marketing of RSA Security, and a venture capital investor with Fidelity Ventures. He is a Certified Gazelles International Coach and teaches innovation and strategic management courses at the Harvard Extension School. Dave earned an MBA at Stanford Business School.