This part of the series: “How Small and Mid Sized Firms Grow” deals with the concept of how large well managed companies use modeling for their company and do what if analysis.
Any company can be broken down into the key components to describe how it operates. These are the variables which can be changed to determine how the company will do as conditions change, for better or worse. All well managed companies create a model of their operations and flex these variables to determine what happens to the company’s performance under different circumstances. There may be many such models for different aspects of the companies business and as many of these can be developed as necessary.
One does not need to be a math wiz to do this, but simply understand the fundamentals of their business “drivers” or influences and have someone with the math skills translate that understanding into a simple Excel Spreadsheet to determine the consequences of change. This brings us to the concept of change, for nothing in this world is either constant nor is everything under your control. There are things that you can pretty much control such as new product introduction, compensation plans, staff size and so called “fixed costs”. Then there are those things you can’t control but need to determine how you will react to, such as the economy, government policies and the competition. The integration of these two factors, internal and external variables can be used to create models of your company.
This does not mean that you can be certain of the outcome as things change, but you can do a far better job in being aware of those things that will impact you. You can then figure out how you will either be impacted by events or better yet how you will proactively react (or anticipate) events in your best interest.
So let’s do a simple example. You determine your sales and the size of the market to first determine your market share. You see than there is a good possibility of a downturn and know that unless you provide better service, lower your price or reduce your cost, you will likely have lower profits. You might determine the sensitivity of your volume to prices. In a commodity market this will likely be rather high. In a specialty market, one where your have a valuable brand name, recognized higher quality or special customer relationships you will be more immune, but not likely to be bulletproof. This information can be translated into a pricing model.
Compensation plans and staff size are under your control, for example structuring you comp plans with a modest base and high commission to provide your staff with an incentive to hold or increase market share in a declining market or else pay less if sales fall. Likewise, staff size and “fixed costs” can be reduced if conditions warrant. Integrating these concepts as well as, as many more elements are necessary can be translated into a business model that you can use to run your company more efficiently. Running several models under different conditions will allow you to determine how to best deal with changing events.