The name is intriguing right? It sounds like something you might be interested in just because the words themselves evoke something within you. And you’re right. It’s an up-and-comer in the world of business management. It’s a new ‘buzz’ phrase worth looking into.

Blue Ocean strategy has been one of the more popular corporate strategies to be talked about in recent years. Exactly what does blue ocean strategy involve and how can it be effective? What is the role of the manager or leader in effectively designing and implementing blue ocean strategy?

What is it?

Industries today are overcrowded. There is a continuous, long, arduous battle to capture market share, and to keep it. Originally created and discussed in a book by W Chan Kim and Renée Mauborgne, this strategy is an effort to avoid some of the stresses of head-to-head competition… by getting around it altogether (kind of). It is a systematic approach to ditching the traditional ways of regarding your competition and in some ways, making it irrelevant.
Blue Ocean Strategy involves the creation of new market space through innovation and careful observance. It focuses on creating new factors that add value to your product and de-emphasizes the obsession with competition.

The well-known book-selling giant Barnes and Noble can illustrate this concept. Instead of focusing mostly on what types of books to sell, B&N used a more innovative approach. They took a step back and asked what consumers do, or want to do, in connection with buying a book. They want to sit in a big comfy chair and have a latte. They want to peruse magazines without feeling pressured. They want comfort and Barnes and Noble made this a hot commodity. They found a niche, a veritable “blue ocean” and capitalized on it.

This strategy shifts the perception that in order to be profitable you must out-compete the others in the market. Blue Ocean strategy serves to disprove this common belief and give organizations hope that they, too, can get ahead of the game.

Why is it successful?

This can be an extremely successful strategy because it captures under-the-surface demand and encourages the unlocking of new resources. It gives consumers new options that other competitors do not offer and can lead to substantially increased profitability.

At the Management Level:

The manager or leader plays an integral role in the implementation and design of this strategy because they should be the main driving force behind it. They are responsible for communicating with team members the need to expand their horizons and create new value rather than just trying to improve on what is currently offered. It is also their job to ensure that there is no “canyon” or misunderstandings amongst employees. In order for the strategy to work, everyone must believe in it. And if they do, it can be a powerful force!
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At the Implementation Level:

Of course this all seems overwhelming. And wouldn’t it simply take too many precious resources to put a plan like this in motion? You probably think there isn’t room in an already-stressed budget to even consider something so out-of-the-box. But the best part about Blue Ocean Strategy is that it is designed with simplicity.

As discussed in the Blue Ocean Strategy book, the two key pieces to successful implementation are leadership and fair process. In order to expend the least amount of resources during a change, an organization’s leader must capitalize on influential employees’ strengths to complete changes at a low cost. The other side of the coin is utilizing a fair process, an essential part of winning employees confidence in your project. This mitigates the possibility of negative reactions and resentment that can arise when trying to implement something as novel as Blue Ocean Strategy concept.

The book, Blue Ocean Strategy, is a fantastic resource to explore if the concept sounds like something you might like to tackle. If you’re unsure, that’s understandable. Just keep in mind that you can’t always exist comfortably in the niche you’ve created for your company or product, especially if successful. There will always be a line of competitors looking not only to replicate your success, but to exceed it entirely. Keeping your finger on the pulse of your competitors is an important practice to keep, and learning what could be done better is even more so. Nonetheless, we’re reminded that no matter what space you’ve carved out for yourself, it’s rarely permanent. Blue Ocean’s included.

How much do you know about the North American Industry Classification System (NAICS)? If you’re like a lot of business owners, chances are, not much.
Here is a short overview of the system and how to navigate it:

What is NAICS?

The North American Classification System was introduced to essentially replace the older method, Standard Industrial Classification (SIC). Developed in the 1930’s, SIC was the go-to method of industry classification. However, it has recently been overshadowed by NAICS because of frequent criticism that the SIC process has proved unable to handle the rapid current economic change.
NAICS assigns a code to a business to correspond with their economic activity. This system breaks down into twenty industry sectors. For small businesses, these codes are typically used for contracting and tax purposes.
As the SBA states on its website, a NAICS code is comprised of six digits. The first two indicating your economic sector, the third your industry subsector, the fourth corresponding to your industry group, the fifth referring to your industry and the sixth denotes if an establishment is specific to the US, Canada or Mexico.

Why is it Relevant to You?

Potential applications of the NAICS knowledge include:

• Statistical analysis
• Risk assessment for insurance
• Tax incentives
• B2B
• Benchmarking
The NAICS is can play a substantial role in the life of a small business. One application of these codes is by the government to generate statistics for analysis to aid research. When applying for business insurance, an agency will likely use your NAICS code when assessing risk and generating rates. High-risk industries require different action. In addition, some federal and state agencies require an establishment to have a NAICS code for tax reasons and occasionally tax breaks are given to businesses in specific industries. If you work with a company that has B2B (business to business) arrangement with other companies, you can use the NAICS code to glean important information about prospective customers. In short, it is a system of industry categorization that could be used for a wide range of analytical purposes. Take benchmarking for instance; as a business owner, you may be interested in determining how your financial statements compare with that of your peers. It is important to at least have a marginal understanding of the NAICS code system before setting out on your benchmarking quest.

How can you place your company within NAICS?

For instance, you run a software publishing firm and need to determine your NAICS code. Publishing is within the “Information” economic sector, thus NAICS 51. This economic sector includes Publishing Industries (NAICS 511), but also includes Motion Picture and Sound Recording Industries (NAICS 512), Broadcasting (NAICS 515), Telecommunications (NAICS 51), Internet Service Providers (NAICS 518), and more. If benchmarking and looking for financial data and trends from firms in our example industry, we need to refine our NAICS code to the six-digit level. Let us follow the three-digit Industry Subsector of NAICS 511 for Publishing Industries.
Within Publishing Industries, the four-digit Industry Group reveals two industries: Newspaper, Periodical, Book, and Directory Publishers (NAICS 5111), and Software Publishers (NAICS 5112). This particular industry does not break down into any further segments so the five-digit Industry code takes on a single “one” showing NAICS 51121. Likewise, if there were several types of Software Publishers within the NAICS code system, they would correspond with a fifth digit as 1, 2, 3, and so on. Lastly, the six-digit U.S. National Industry code for our sample industry is NAICS 511210 Software Publishers, as no further breakdowns exist.

Learn more

A wonderful source for searching NAICS codes and learning their structure and descriptions is the U.S. Census Bureau’s NAICS website at http://www.census.gov/eos/www/naics/. In addition, FINTEL offers its own resource for researching the NAICS system linked with its Industry Metrics tool. Happy searching!

Just when the economic outlook seems very bleak to us in the US, as well as abroad of course, there is some hope for selling a company. Obviously, it’s extremely tough to sell a business and it is not for the feint of heart. Buyers want positive cash flows, profit growth etc etc etc. You have heard it a million times. But fortunately there seems to be a light at the end of the tunnel. Investors overseas, particularly in the massive force that is China, are dying for ways to get an “in” into the American market without paying the high price tag.

So you want to know the approximate worth of your interest in a business. You want to pin down the exact economic value you have spent innumerable hours perfecting. How do you even begin to get a clue about this? If you are looking to sell, would you have the remotest idea about a legitimate selling price? Lets go over some of the most basic concepts of business valuation to give you an idea.

Defining your Motives and Describing Your Environment

First and foremost you must define why you are constructing a business valuation. What are the reasons for and circumstances surrounding your decision to conduct this analysis?
Next, you need to describe the conditions of the economic world surrounding the deal. It’s important to research the vitality of your industry currently as well as the more basic local and regional economic conditions.

Comparable Transactions

Another good initial step toward putting a value on your enterprise is looking to your peers. Find a similarly structured transaction to your proposed financing deal structure. This means finding a company with the following criteria:
• Comparable in size of
o Market
o Number of employees
o Product type
o Industry
• Similar life stage
• Geographic proximity
Looking at a business that somewhat mirrors yours is a good way to project some things for yourself. It is also good to investigate how the deals went for both parties and what percent ownership investors acquired in proxy transactions.

Valuation Techniques

Book Value

This is the simplest way to define what you are worth. The numbers. The book value is, simply put, the value an asset carries on a balance sheet. This is calculated for a company by subtracting intangible assets and liabilities from total assets. The book value is helpful in one of the most basic ways- it is a tangible starting point for evaluation. It gives you something to base other analyses off of. Of course it is important to note that accounting practices have a significant effect on book value and should be taken into consideration.

Adjusted Book Value

The adjusted book value is designed to reflect fair market value. This is done by considering the book value but also subtracting off balance sheet liabilities. The ABV is able to adjust for large discrepancies between the book and actual market value of tangible assets. It also adjusts intangible assets to zero, which is an often criticized part of the method. This can be a good way to showcase the equity of a company but is not often accepted as a trustworthy valuation technique.

Liquidation Value

This particular practice is not usually of any importance to a buyer or seller but it can be constructive as a “floor value.” This estimates the value that could be made from a quick sale but is merely an indication rather than a concrete estimate to base decisions off of.

Market Multiples

A market multiples analysis, also referred to as a comparison analysis, uses comparable businesses in your industry to assess value. It uses averages to produce more broad-range, but accurate results. One of the most praised parts of the market multiples approach is its ease of use. There is no need to compute discounted cash flows and it is a relatively easy to understand. Components/ ratios of this approach are:
• Price to Earnings Multiple
• Price to Sales Multiple
• Price to Invested Capital
• Price to Book Value

Net Present Value/Discounted Cash Flows

This is difference between the present value of cash inflows and cash outflows. It is a cash flow summary designed to reflect the time value of money. A company’s cash flows are discounted back to the present value using a market-adjusted discount rate.

Art and a Science

There is no doubt that valuations are much more complex than the basic methods outlined here, and this list is not exhaustive. However, these methods do fall into one of the traditional categories of valuation: assessment of business assets & liabilities (Asset Approach), historical earnings, future earnings (Income Approach), and industry or market-specific trends and multiples (Market Approach). In reality, a combination of several methods is generally applied for a more comprehensive approach to business valuations.

How does one determine the appropriate combination? For values achieved by each complementary method, how is a weighted average applied to arrive at an appropriate value? Defining your motives and describing your geographic, economic and competitive environment all play a role in this complex decision. It is this facet of valuation that leads many Business Appraisers to refer to their trade as more of an art than a science.

Solutions

Considering the complexity involved in any serious business valuation, we suggest hiring an experienced Business Appraiser. However, to get a “ball-park” perspective on what your firm may be worth, there are plenty of tools on the market. Business Owners may consider several of the Financial Calculators available online, like those available at http://www.dinkytown.net for instance.
For Business Coaches with a need to analyze existing and pro-forma statements for clients, the FINTEL Business Analyzer provides a great solution to quick and powerful business valuations, using methods including Book Value, Earnings Capitalized, Capitalization of Current Earnings, Average and Top Quartile P/E Ratios, and Operating Income Multiple showing values for each method with a weighted average considering all methods for a more comprehensive approach.

Food for Thought

Whether business owner, business coach, or prospective entrepreneur - it pays to learn more about this very complex topic of business valuation. Why, you ask? Why not just leave the valuations to the experienced Business Appraiser as suggested? Consider, the financial and operational decisions that have been made, currently applied, and prospectively planned within a company all impact its current and future value. Thus, a more complete understanding of valuation allows decision-makers to maximize value-enhancing strategies and minimize value-reducing mishaps with this perspective in mind.

‘Tough Economy Sends Holidays Back to the Future’, says Fox News on its website dated Dec 07, 2009. Christmas shoppers flocked to the Walmarts and Targets this weekend but failed to loosen their purse strings even as much as they had the previous year. And this is when experts are speaking cautiously of the much-awaited recovery of the economy. The National Retail Federation spokesperson, Kathy Granis, said, “We knew [consumers] would be cautious, stick to a budget.’

Having been branded as habitual spenders who do not know how to save, Americans are now becoming financially responsible and are looking for ‘deals’ that would help them buy and save. Hence, discounted prices are the shortest route to American wallets. The savvy businessman knows that he has to match this trend. He also knows this will not last long. The businessman in you is certainly looking beyond this festive season not only to the year 2010 but also to the phase beyond this economic downturn. So, how do you manage in these tumultuous times?

For the present, sustenance is the name of the game. And this should see you through till the tide has well and truly turned. So fine-tune your business. Overhaul your finances. Streamline your operating procedures. Smart maneuvers of your business will help you tide over this long spell of uncertainty. The days when you start trending towards better times are going to be challenging ones too. After all, it is not a week or a month or even a year that we are talking about. It is the entire transition phase that you have to prepare for.

Have you checked out on how your assets are performing? Are the resources and assets being adequately utilized? Get a firm grip on your overall business operations. Check out on the Efficiency Ratios. It will help you measure how well your business is utilizing its assets and receivables. This will guide you on the kind of controls you need to exercise over the assets for optimum utilization for a long haul. There is a gamut of Efficiency Ratios that should be studied in totality to get a complete picture of your business functions. This is especially so in a market-driven economy. Some of these ratios are:

Operating expenses to Average Assets ratio
Collection period ratio
Sales to inventory ratio
Assets to sales ratio
Sales to net working capital ratio
Accounts Payable to Sales Ratio

You can even measure your Management Efficiency ratios by studying the Return on Investment and Return on Equity ratios. After all, Equity is the investment of the shareholders. The results are effective indicators that can assist you in your decision-making from thereon. While you are at it, check out on your Management Team, too!

After you have studied the ratios of your company, compare it with that of your specific industry and your competition. And work your way through this maze of economic uncertainty. FINTEL is a company you may like to take assistance from on this account. Take assistance or training or consultancy. www.fintel.us is the website that you may want to visit online.

Meanwhile, keep your ears to the ground so that you do not miss out on the sound of the first footfall of recovery. That will be music for your ears!