Using a strategic planning matrix to improve a firm's competitive position.
Strategic planning is not just for large firms. In fact, smaller CPA firms need a way to classify and evaluate strategic alternatives (business and service opportunities) even more than do large, diversified firms. While large firms frequently can survive even if they make several poor decisions, one bad decision can be fatal for a small firm. Consequently, small firms have an even greater incentive to narrow their targets.
Because many firms don't have the strategic planning tools they need to help them choose specializations, they find it increasingly difficult to decide what business they are in and, even more important, which business they should be in. By using a simple yet powerful strategic planning tool, the strategic planning matrix, firms can find the best fit between their own distinctive skills, competencies and resources and external market characteristics.
STRATEGIC PLANNING MTRIXES
In the 1960s, large, growth-oriented businesses found themselves with more business opportunities than resources, but with no way to evaluate these opportunities. While the companies were large enough to enter any business, they were not large enough to enter every one. They developed strategic planning matrixes to allocate resources and to show how internal capabilities match external factors.
Boston Consulting Group matrix. The Boston Consulting Group (BCG) developed and popularized the first resource allocation matrix in the late 1960s. According to the BCG model, the two primary considerations when deciding what businesses to be in are relative market share and industry growth rate. If a business (referred to as a strategic business unit, or SBU) has significant market share in a fast-growing industry, the SBU is considered a star. According to the BCG model, the corporate parent should direct monetary support to stars, since they often need more cash than they can generate.
Conversely, an SBU with significant market share in an industry with flat or declining sales is termed a cash cow. A corporate parent can use a cash cow to generate some of the cash needed for star SBUs. A business with an SBU with a small market share in an industry with flat or declining sales (called a dog) should consider disposing of it. Finally, an SBU with a small market share in a fast-growing industry is a question mark. The corporate parent must either come up with a plan to make the SBU a star or move it to the dog category and get out of the business.
The BCG matrix forces businesses to evaluate investment opportunities in terms of common criteria. Once a firm has classified the various business alternatives, it can tell which businesses it should be in and which it should not.
The General Electric matrix. In the BCG matrix, the only decision variables needed are industry growth rate (on the vertical axis) and market share (on the horizontal axis). General Electric (GE) was one of the first businesses to conclude these were incomplete measures of more general concepts. Industry growth rate, for example, ignores other important aspects of industry attractiveness, such as the degree of industry competition and profitability and the effect of outside forces. Market share certainly is an important measure of competitiveness, but it is a potentially misleading indicator of future success. To correct these problems, GE developed its own matrix in the late 1960s.
The GE approach attempts to make more explicit comparisons between external opportunities (industry attractiveness) with internal capabilities (business strength). The vertical axis becomes industry attractiveness and the horizontal axis becomes business strength.
A STRATEGIC PLANNING MATRIX FOR CPA FIRMS
The BCG and GE matrixes were designed specifically for companies with more than one SBU and may not appear to be applicable to CPA firms, especially small ones. However, it is possible to develop a similar matrix just as relevant to CPA firms. By using it to plot potential services, practitioners can get a clearer picture of which are likely to be stars and which may be dogs.
Exhibit 1 below shows a strategic planning matrix designed specifically for CPA firms. The vertical axis is market attractiveness, while the horizontal axis is ability to compete. Components of market attractiveness might include measures of community growth, size and composition of the local market, its profitability, availability of labor and existing competitors. The ability to compete depends on whether the firm has distinctive skills and competencies that can produce a service perceived as a superior value, either because it has certain unique characteristics (indicating a differentiation strategy) or because the firm is able to supply it for a lower cost than competitors (indicating a least-cost strategy).
Comparisons of the firm's strengths and weaknesses and ability to compete should be made with those of the strongest competitor. There should be a separate matrix for each strategic alternative a firm is considering. Each should be evaluated and plotted in terms of its attractiveness and the firm's ability to compete in that market. For example, if a firm is trying to decide which geographic market segments to target, each one should be evaluated and plotted on a matrix. If the firm is trying to decide which services to offer, another matrix should be completed to evaluate various service alternatives. The planning matrix can be used to make three different types of decisions:
1. When starting a new firm and trying to decide which services to offer.
2. When exploring growth opportunities and trying to decide which, if any, should be pursued.
3. When evaluating a firm and trying to decide what changes, if any, should be made.
Exhibit 2 above illustrates how a prospective CPA firm's owners might assess market attractiveness and ability to compete for each of four services. Once these assessments have been made, all four services are plotted on the strategic planning matrix shown in exhibit 3 at left. A service that plots in the upper left should have a good chance of success, while one in the lower right has few prospects. A service that plots in the upper right is questionable unless some improvement can be made in the ability to compete.
The illustration shows the most promising alternative is a mix of tax return preparation and planning with compilation and review services. The local market is attractive because it has an abundance of small businesses and upper-middle-class residents and one of the owners has a great deal of experience in providing tax services. Auditing is the least attractive choice. There are few local businesses that require an annual audit, two firms in the area already specialize in auditing and neither of the accounting firm owners desires to specialize in audits.
This simple example demonstrates the type of analysis CPA firms should undertake. Completing the matrix for each major decision variable makes it easier to visualize the relative attractiveness of the service opportunities under consideration. Explicitly evaluating each opportunity using a matrix minimizes the chance important variables will be overlooked and increases the probability that service choices will be based on both ability to compete and market attractiveness.
GREATER CHANCES OF SUCCESS
Strategic planning is just as important for CPA firms as it is for other types of businesses. The strategic planning matrix is just as relevant to mature firms as it is to start-ups. It can be instructive for all firms to plot their service and market alternatives annually to determine if they remain promising or if they need improvement or reconsideration.
It can help identify why a firm is not doing as well as anticipated. In some instances, it may indicate the firm needs to develop some distinctive skills and competencies, while in others it may be that the firm needs to look for a more attractive market.
As competition among CPA firms increases, strategic planning cannot be ignored. Practitioners who use this simple model can improve the quality of their strategic decision making and increase their likelihood of success. . EXECUTIVE SUMMARY
* STRATEGIC PLANS allow CPA firms to maximize their strengths and differentiate themselves from the competition. The process is just as important for small firms as for large ones.
* STRATEGIC PLANNING matrixes were originally developed by large businesses to allo- cate resources and to show how internal capabilities match external factors.
* MATRIXES ADAPTED TO CPA firms plot market attractiveness and the firm's ability to compete in each service area. They can be used to determine which services a new firm might offer, which growth opportunities to pursue and which changes to make in existing services. They make it easier to visualize the relative attractiveness of the services under consideration.
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|Title Annotation:||accounting firms|
|Author:||Beam, Henry H.|
|Publication:||Journal of Accountancy|
|Date:||Jul 1, 1993|
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