Strategy Implementation
Issues
By
Santiago Ibarreche, Ph. D.
Why do strategies fail?
Some answers:
Purpose
Process
Resources
People involvement
Support Systems
Follow up
Santiago Ibarreche © 2003 2 - 32
Purpose
Unclear
Generic
Impossible
Too Easy
Not shared with others
Incongruent
Santiago Ibarreche © 2003 3 - 32
Process
Not clearly defined
Too detailed
Information not available
Responsibilities not clearly define
People not capable
Santiago Ibarreche © 2003 4 - 32
Resources
Unavailable
Unattainable
Time as a resource
Accountability
Not delivered on time
Lack of control
Santiago Ibarreche © 2003 5 - 32
People
Not involved in planning
Not trained
Lack of authority
Not clear accountability
“You get what you pay for”
Motivation
Santiago Ibarreche © 2003 6 - 32
Support Systems
Accessible
Versatility
Up to date
Coordinated
Understandable
Santiago Ibarreche © 2003 7 - 32
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”
Santiago Ibarreche © 2003 8 - 32
Follow up
Do not Micro Manage
Set Key Indicators
Set parameters
Establish a routine
Set time for reflection
Be flexible
Stay current
Santiago Ibarreche © 2003 9 - 32
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
Santiago Ibarreche © 2003 10 - 32
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
Santiago Ibarreche © 2003 11 - 32
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?
Santiago Ibarreche © 2003 12 - 32
Strategic Issues (Market)
Product
Variety
Satisfaction of needs and wants
Price
Competitiveness
Place
Scope
Promotion
Direct and indirect
PEOPLE
Compensation
Motivation
Capacity
Training
Santiago Ibarreche © 2003 13 - 32
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
Santiago Ibarreche © 2003 14 - 32
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
Santiago Ibarreche © 2003 15 - 32
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?
Santiago Ibarreche © 2003 16 - 32
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
Santiago Ibarreche © 2003 17 - 32
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
Santiago Ibarreche © 2003 18 - 32
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
Santiago Ibarreche © 2003 19 - 32
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?
Santiago Ibarreche © 2003 20 - 32
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
Santiago Ibarreche © 2003 21 - 32
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
Santiago Ibarreche © 2003 22 - 32
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?
Santiago Ibarreche © 2003 23 - 32
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
Santiago Ibarreche © 2003 24 - 32
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
Santiago Ibarreche © 2003 25 - 32
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?
Santiago Ibarreche © 2003 26 - 32
Other indicators
For working capital:
Current ratio
Inventories turnover
Days for collection
Aging of accounts
For fixed assets:
Fixed assets turnover
Productivity index
Santiago Ibarreche © 2003 27 - 32
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
Santiago Ibarreche © 2003 28 - 32
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
Santiago Ibarreche © 2003 29 - 32
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?
Santiago Ibarreche © 2003 30 - 32
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
Santiago Ibarreche © 2003 31 - 32
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
Santiago Ibarreche © 2003 32 - 32
