Strategic Planning At Portfolio Cos.: Helping Management Get On The Right Path

A well-developed growth strategy is more critical than ever in driving shareholder value creation


Given continued challenges in today’s economy, a well-developed growth strategy is more critical than ever in driving shareholder value creation. As sponsors and members of Boards of Directors, private equity professionals play important roles in ensuring their portfolio companies are executing the right strategy. And they have an opportunity to contribute more. Solid strategy begins with a good strategic planning process, but the quality of strategic plans developed by portfolio company management teams varies greatly from company to company. By providing analytical leverage, thought partnership and process roadmap support during the strategic planning process, PE professionals can sharply increase the likelihood that a portfolio company’s strategy is robust, pragmatic and executable.

It is important to understand why there is so much variability in the quality of strategic plans. The first problem is that while company leaders usually know about 70% of an answer, they often miss critical information and analysis to complete the picture. For instance, say a company must decide on the level of investment to make in two business units where revenues, EBITDA margins, and market share are similar but where growth is 4% at Unit A and 7% at Unit B. The instinct will be to disproportionately invest in Unit B, but what if Unit A has low 'share of wallet' while Unit B has a high share of wallet and must grow through new customer acquisition in a highly competitive market? This kind of additional information raises important questions whose answers require a concerted research effort.

For a variety of reasons, management teams often do not launch these efforts; instead they base decisions on experience and intuition. In cases where they do seek more complete perspectives, many companies are unable to close information gaps. This is typically because those assigned research tasks are consumed by day-to-day operational responsibilities, lack the skills needed to find hard-to-get data or lack the judgment required to deal with ambiguity.

Another problem is talent bias. Everyone has their own predispositions that color the way they view various topics. As a result, leaders often default to pursuing the strategic paths with which they are most comfortable—for instance, an over-reliance on organic growth versus acquisitions—and give little attention to alternatives that might lead to a better outcome. Finally, while most CEOs know what a good strategic plan looks like, few have experience building one and therefore lack a methodical process for developing a strategy specific to their own company.

Which brings us back to the role of the PE firm. Since these issues are widespread, private equity professionals have an opportunity to improve the outcome of the strategic planning process by boosting their support on three dimensions:

1. Analytical Leverage

Private equity firms above a certain size have traditionally been able to provide hands-on operating resources to their portfolio companies. These resources are typically seasoned professionals ranging from former consultants and general managers to functional experts in manufacturing, HR or other domains. What is often missing in all but the largest firms are the 'arms and legs' to provide data collection and analytical support on the operating side—someone to answer questions such as those raised in the Business Unit A/B resource allocation example above. A sponsor that can fill this kind of resource gap can add significant value in making important strategic decisions.

2. Thought Partnership

Almost universally, sponsors provide oversight and advice through the Board role. Many offer ongoing support through operating professionals. However, they are appropriately sensitive to management’s desire for a certain level of autonomy and independence and try not to be too invasive. While well-intentioned, sometimes this desire to give management 'breathing room' dilutes the impact that senior private equity professionals can have on the quality of thinking that goes into the strategic plan.

While it is a tricky dynamic to manage, sponsors need to adopt a stronger thought-partnership role during the strategic planning process. For instance, we recently worked with a company whose sponsor representatives stayed engaged throughout the strategic planning process and participated in working sessions to evaluate and prioritize strategic alternatives being considered. They provided constructive insights that were very useful in the final strategy. Additionally, the objectivity and strategic bent they brought complemented management’s deep domain expertise and knowledge of the business.

3. Process Roadmap

Perhaps the easiest contribution private equity firms can make is to provide CEOs with specific guidance on developing a high-quality strategic plan. There are many processes that yield good outcomes; the one we have found to be consistently effective includes the following five steps, presented here in abbreviated form:

Step 1: Define the current and targeted end states. The first step in developing a solid strategic plan is to set the aspiration for the future. This aspiration should include visions along multiple dimensions such as revenue and EBITDA; markets served and positions within those markets; customers, products and/or services offered; channels and assets/capabilities. Management should then candidly assess the current state of the business along these dimensions to get the management team on the same page about the point at which they are starting and where they are headed.

Step 2: Identify and evaluate the Sources of Growth needed to get there. Sources of Growth are discrete opportunities such as pricing, new product/service development, increased share of wallet, etc. Companies should think exhaustively about what their important Sources of Growth could be so they do not disregard potentially compelling opportunities. With the possible sources identified, management must then prioritize them based on the financial opportunities skills and capabilities needed to succeed, market dynamics and key risks.

Step 3: Determine Key Initiatives to be executed. Key Initiatives are thematic efforts that require dedicated focus and attention, investment of time and/or financial resources and have measurable costs and benefits. For instance, if a Growth Source is new customer acquisition, Key Initiatives might include customer segmentation and targeting, sales organization realignment, new marketing tools and formalized sales training.

Step 4: Develop integrated action plan and metrics. For each Key Initiative, leaders must (a) establish an action plan that includes key milestones along with the timing and responsible individuals and (b) define a series of metrics and associated targets that will be tracked as measures of progress and success. Financial metrics such as revenues and margin should be part of this, but other outcome-focused metrics tied to the sources of growth should be included as well, such as number of new customers.

Step 5: Design an ongoing monitoring process. To be valuable, action plans and metrics need to be tracked. It is therefore critical to institute an ongoing monitoring process (e.g., monthly reviews) that serves as a forcing mechanism to keep progress on track. Ongoing monitoring also allows for new risks to be identified and discussed as well as provides visibility to the impact that missing the deadline on one milestone has on interdependent milestones.

Once these five steps are completed, management will have all the pieces needed to document and communicate a robust strategic plan. While driving plan execution is critical to a company’s eventual success, growth begins with a strong plan. Today’s private equity firms have a powerful opportunity to ensure these plans are optimal for the organization and likely to deliver their promised shareholder value.


Originally published in PitchBook.


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