Managers have one central theme running through their lives: understanding how their firm works. Some who’ve been in business for many years in the same market will develop ‘gut feel’ that works for them. Others will delve deeper and develop models that they can change and evolve.
‘Gut feel’ only works until something changes – like the market or the competitive situation. Then the old understanding no longer applies and the firm is at risk. ‘Gut feel’ has been the death of many British firms over the years as management fail to take account of change in the operating environment.
Knowing how the firm ‘works’ is key to change and growth and to making business plans live. It’s key to manpower planning. Without such an understanding, it’s impossible to say what the staffing will be in the future to meet growth targets. And it’s impossible to say what training and development is needed to meet change.
One of the basic models that managers need to understand is the relationship between promotional marketing and orders received. We all intuitively know that if we promote our goods and services, orders will result. All other things being equal, more promotional marketing results in more orders.
There is therefore a relationship between promotional marketing and orders received. For simplicity, let’s assume that it’s a straight-line relationship. This is shown adjacent (Relationship 1).
Testing this relationship is simple. Try some more promotional marketing and assess the result. And try some different promotional marketing in search of greater efficiency and the gradient will change (Relationship 2). The aim of course is to find the promotional marketing that works for the firm – ideally giving a step shift in outcome for the same investment (Relationship 3).
Given intelligent investment in promotional marketing, orders will rise. Staff with the required competencies and behaviours can be developed or recruited and the operational side of the business can respond to meet the new business state.
What an ideal situation! If only the world was that simple.
Firms are comprised of multiple relationships. There are many mechanisms like that described above. Take the promotional marketing to order relationship again. Firms will find that as the orders rise, the lead-time to shipment of goods or services lengthens (assuming the same delivery organisation).
As the market learns that lead times from the firm are long, its desire to place orders with the firm reduces and they seek alternative suppliers. If the firm then increases its promotional marketing to compensate for reduced orders, the result is less than before – the simple linear relationship no longer holds.
This is shown by the intersection of two graphs on the model. First there is a positive linear relationship between promotional marketing and orders received (Promotional Marketing Component). But then there’s a negative linear relationship between lead-time and orders (Lengthened Lead-time Component).
The actual resulting orders received graph is shown adjacent and is the sum of the two effects – the positive promotion and the negative lead-time (Resulting Effect).
There are many other relationships including events such as new product introduction and new market exploitation. The effect of each must be able to be estimated.
Managers must understand these effects for their firm. Most business plans involve change. Most business plans illustrate growth. Understanding how growth will affect the firm as a system of relationships will allow the business plan to be met.
Effects of Time
Time is often forgotten.
Promotional marketing seldom results in immediate orders. There’s a delay. Understanding that delay is critical to organisational development. And that delay and how it operates is different for every firm.
If a firm sells high-value capital products, its customers typically need to apply internally for budget. Budgeting is often an annual cycle. Many then have to go to tender – or at least get several competitive quotes. And all that is after they’ve found the firm, liked the product and been persuaded to buy. Such a cycle from initial contact to order received could take three years.
Other firms have lower cycle times but the effect is the same. There is a lag between promotional marketing (and other variables) and orders received and effect size must be estimated.
These two ideas now merge. Being able to estimate the growth in orders from associated marketing activities, modified by negative effects, yields a forecast of reality.
Possibility, Not Hope
Once the effects of positive drivers like promotional marketing and negative drivers like delivery lead-times are known (or at least estimated), the business plan takes on new meaning.
For each year of estimated turnover (resulting from orders received), the organisation needed to support that turnover can be determined. For example, a consulting firm seeking growth at £500k per annum might need a further £50k per annum in promotional marketing budget. To support this turnover, it might then need to recruit additional consultants too. Given that a consultant can contribute £120k per annum to the top line, that means recruitment of four consultants per annum. And every two years it might need to add a new marketer to help spend the marketing budget.
And of course, given that time has a major effect too, it may well be that some of these consultants will need to be recruited two years ahead of when they are expected to fully contribute to turnover. They may be pivotal in marketing and in convincing would-be buyers that lead-time will not be lengthened if orders are placed.
Many senior teams develop business plans simply on hope. Hope only becomes possibility when the various effects in the firm are known.