fm32-01.business assessment part 1 analysis framework sept 2016_secured_lms

LOCUS™ Field Manual 32-01

September 2016August C. Tetzlaff

Mapping and managing position & outlookof a middle market industrial company

Agile Business Assessmentand

Operational Due Diligence

Part 1: Analysis Framework



Part 1: Analysis Framework

September 2016

CONTENTS

Catalog and Copyright Information / II

Framework Fundamentals / 1

Terms in Engagements / 5

Rating Importance of an Element / 11

Rating Position on an Element / 15

Closing Words on Wars and Winning / 19

I

LOCUS™ Field Manual 32-01August Tetzlaff Contributors: Lavon Winkler, David Bankey, and Steven de la TorreDesign and publishing support by: Lynda Swafford



Part 1: Analysis FrameworkSeptember 2016

LOCUSLeadership • Operations • Capital in Unifying Strategy

Copyright © 1992-2016 by August Tetzlaff. All rights reserved.

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August Tetzlaff [email protected] publication contains authoritative content for the purpose of professional education. It does not present valuation data, findings, or recommendations for unique circumstances of a specific organization, group, seller, or investor. It can be used as a reference for appropriately qualified individuals and teams working to discern, discuss, and act on matters applicable to their organizational subjects and circumstances.

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II

Agile Business Assessment 1

FRAMEWORK FUNDAMENTALS

Agile leaders take pivotal actions to turnaround declining businesses and develop and grow great operating performance and business value. At the outset development and growth opportunities are identified and characterized in general. Alternatively, defect opportunities—distractions, unprofitable drains on resources, and indications of or vulnerabilities to bad actors and current or

impending distress—are identified and characterized. This is followed by applying knowledge and effort to diagnose these in detail and then constructing and enacting plans to actualize those opportunities

Managing assessments of significant scope and applying them in decisions, plans, and processes involves cross-functional communication. Holistic understanding of position and outlook is a prerequisite to gains and growth in adding value, operating performance, and business value.

Levels: A business’ work and its determination of sustainable profitability in operating performance is done at three levels: strategic, operational, and tactical.

Strategic work has a long-range outlook, typically extending 10 to 20+ years out then in to the current year in yearly increments. Scope and scale

encompassed are broad. Duration of a single strategic plan can be for one to five years.

Operational work has a mid-range outlook, typically extending 1 to 5 years out then in to the current month in quarterly or monthly increments. Scope and

scale encompassed are moderate with a few separate and interrelated plans concurrently active. Duration of a single operational plan can be for a quarter or month. Operational level work involves translating strategic aims into tactical activity.

Tactical work has a short-range outlook, typically extending 1 to 18 months out then in to the current week and often disaggregated to a day, shift, or hour

increment. Scope and scale encompassed are narrow. A Master Schedule can cover a facility and its supply chain (total demand loads, supply capacities, outputs, and activities) with detailed schedules covering departments or work centers and, as appropriate, specific workers, machines, and tools. There can be many concurrently active schedules. Duration of a single Master Schedule can be for a month or week with detailed schedules for a day or shift.

Tactical work involves both:

a) Scheduling—defining output items and amounts with delivery dates, times, and places plus conversion times and inputs sources (suppliers and work centers) and input items and amounts with delivery dates, times, and places.

b) Execution—real time activities, outputs, and reporting of results.

Agile Business Assessment2

Types: A business’ work involves elements in each level producing outputs which serve to principally link, structure, or support other elements and adding value.

Linkages produce time-based information and positioning of resources to enable and influence adding value and maintain formal logical connections.

Linkages involve both:

a) Vertical connections—providing quantifiable direction, demand/supply balancing, timing, and coordination downward and feedback upward in the planning-scheduling-execution hierarchy.

b) Horizontal connections—providing guidance horizontally across and down levels.

Structures produce durable targets, conduits, and conditions around the work performed in other elements and areas.

Structures involve:

a) People—parent company’s business units and joint ventures, business unit’s organization, a department or work cell’s organization with team and/or role assignments and skills matrix.

b) Processes—site locations and facilities, process layouts, work area/work cell layouts, equipment, maintenance, and related capabilities (what possible) and capacities (what rate).

c) Products—product, service, branding, and touchpoint designs and specifications.

d) Information Systems—hardware and software from enterprise level down to individual.

e) Controls—physical process controls, policies and procedures, alert conditions, database administration.

Supports produce aids to adding value, sustaining gains and sustainability, and making discoveries and learning as well as making transitions such as to new

markets and strategies, structures, and performance in quality, productivity, and costs.

Elements: Universal component categories of a business’ work. Their relative importance and the processes, adaptations, and interfaces within and among them should be attuned and scalable to the business’ purpose, environment, markets, customers, resources, and strategy.

Elements in the table of Elements of Enterprise Performance are color coded to the level with which they have the most regular association. Some elements, however, have significant regular association with multiple levels.

An index number for use in organizing reports is in the upper left corner.

Elements of Enterprise Performance is a conceptual framework for organizing information and illustrating interrelationships in managing and assessing a business.

It enhances multi-disciplinary understanding and coordinated action in and between levels of planning in preparing for and proceeding through change, development, and growth.


Questions: Placing and prioritizing concerns and opportunities regarding a specified purpose: strategic aims, investment attractiveness, business turnaround, development, or growth.

Importance? Criticality of an element or areas in it.

N/A (skip) 0 = None 1 = Very Low 2 = Low 3 = Moderate 4 = High 5 = Very High

Current Position? Summary rating for condition of an element or key area in it relative to requirements for a specified purpose or for presence of applicable high performance practices.

0 = “Off” (nonstarter) 1 = Very Low 2 = Low 3 = Moderate 4 = High 5 = Very High

Target? Summary rating for desired condition or presence of high performance practices.

Gap? Size, character, and costs of gap. May note present progress and anticipated size.

How to address gap? Action options to close or accept gap or abandon investment activity.

Why? Why close this gap—ever? Will it affect survival, sustainability, or value? Affect a big opportunity? Needed to make progress in Lean, ERP, growth, or to qualify for new business?


Professional Management

The pioneering sage of management, Peter Drucker, said the professions of medicine and management could use the oath: “First, do no harm.” He felt managers had to consider the whole body of a business long term, to include its stakeholders, when making decisions. The human mind and body and businesses are complex and integrated. Care has to be taken to restrain compulsions to exert one’s own special expertise, increase immediate personal rewards, and impose an “instant” cure or covering for one obvious symptom in one area and as a result cause deeper and long lasting damage and costs to the person or organization.

Management encompasses and utilizes perspectives of many professions inside and outside of the organization. Various professions have their respective conceptual frameworks.

A Certified Management Accountant (CMA) might use a table to illustrate and explain costs. Levels could range from high (business unit and product families or lines) to low (individual products and production runs or lots). Types might classify finished units’ direct costs; related manufacturing and distribution activity costs; amortized product development and abandonment costs; brand, product family, and product marketing and sales costs; and general and administrative costs. A law professor’s table might have levels of federal, state, and local. Types might classify criminal, civil, administrative, constitutional, and administrative. Law schools put the number of separate legal practice specialties between 105 and 260.

Reference Points for the Middle Market• $1.43 billion ― Annual revenue of smallest company on 2015’s Fortune 1000 list.

• Tiers in the U.S. middle market:

Upper — $500 million to $1 billion annual revenue

Middle — $50 million to $500 million annual revenue

Lower — $10 million down to $50 million annual revenue

• $35 million ― Annual revenue threshold above which a business should ensure use of professional management for sustainability, development, and growth. A simple stable business may move the threshold up; a complex or growing one may move it down.

• $2 million / $5 million / $10 million / $20 million ― EBITDA minimums used in determining the level of private equity investment interest, valuation multiples, and fees. (Businesses with EBITDA of $750,000 or less often use brokers to conduct business sale transactions. $250 million is the annual revenue guideline threshold above which prudent business unit level diversification is not automatically viewed as a moderate risk and devaluation factor.)

• 35 to 40% ― Failure rate in public company audits to adequately validate a client company’s representations. (Per PCOAB’s Chief Auditor & Director of Professional Standards in 2014.)


TERMS IN ENGAGEMENTS

Managing involves understanding, interpreting, and speaking many languages. There are languages of customers, marketing, design, suppliers, production, logistics, planning and scheduling, quality assurance, field service, management accounting, information technology, human resources, finance, financial

accounting, safety and environment, and legal and regulatory compliance. Important conversations need to be scheduled and managed . . . and sometimes translated for jargon, assumptions, and accuracy.

This section illustrates some terms used in agile business assessments and operational due diligence. Effective communication and action require that people share some essential terms.

Terms of management

management: The portion of an organization’s total resources allocated to supporting achievement of the purpose, goals, and values of the organization. It encompasses the collective body of managers, specialists, support staff, knowledge and information systems, and resources which ensure that total resources are productive and able to earn a profit.

Management responsibilities:

• Demonstrate good stewardship of resources in pursuit of gains, growth, and balance in demand and supply and the legitimate interests of stakeholders.

• Make decisions and act to support today’s business and prepare for tomorrow’s.

• Apply knowledge, make resources productive, and achieve improvement (continuously and in episodic breakthroughs and innovations in value and quality, productivity, costs, and market adaptations as well as in judicious abandonment of products and activities).

Management tasks:

• Define — The business and its purpose, highest goals, and values. Determine and, as warranted, revise the answer to “who are its customers and what does it do for them.”

• Direct — Express aims and expectations for development and growth, continuation, or abandonment in applicable time ranges for business units, markets, and products.

• Organize — Design, acquire and develop or prune resources, position, and coordinate.

• Plan — Form and enact strategies and their resource allocations, methods, and timing.

• Control – Maintain useful cost-effective guides, parameters, policies, and procedures. Assist, lift, and protect people pursuing profitability, sustainability, and productivity. Avoid/prevent, reduce, restrict, and remove bad actors—impediments, defects, etc.

• Monitor – Scan the environment and internal systems, create and use the right performance measures the right way, and pursue organizational learning.


Chief Executive Officer (CEO): Highest ranking manager of a business. Responsible for:

1. Setting overall direction. Includes finalizing strategic plans, conduct of strategic planning process, monitoring strategic position and progress, and capital budgeting involving acquisitions, new business unit start-ups, divestitures, major items, and new products. 2. Communication with board of directors and investors. As warranted conducts or directs communication with lenders and creditors, joint venture partners, and other external parties. 3. Culture. The CEO determines the intended culture of the organization and the selection, direction, retention, or dismissal of senior managers and business unit managers.

Chief Operating Officer (COO): Second highest ranking manager. Responsible for:

1. Enacting direction and strategic plans, particularly in regards to functions performing the primary value adding work of the organization – product and service design, purchasing, production, logistics, field service, and related support by IT, HR, and management accounting. 2. Design and operation of planning and scheduling processes, alignment and coordination in and across functions, continuous improvement, development of people, support of strategic planning as well as operating and capital budgeting, and the selection, direction, retention, or dismissal of the managers over value-adding functions.

Terms of business agility

agile leadership: Individuals who vitalize and elevate—“breathe life into”—an organization, project, or cause. Individually and collectively they practice and promote values and outcomes that support legitimate interests of stakeholders and productive stewardship of resources. They develop and deploy human energy, learning, knowledge, information, creativity, and innovation toward continuous and breakthrough improvements and sustaining them.

Agile leaders impart clear consistent values and aims while adapting to dynamic, complex, and possibly ambiguous situations, perspectives (often specialized, situation-specific, and conflicting), and options (for action, communication, and exchange of counsel and guidance).

Discussions, processes, decision logic, and outcomes are as open and visible as practical while decision authority is positioned by thoughtful design and controlled. Agile leaders anticipate, respond to, and foster shared awareness of external and internal opportunities, dangers, and impediments. They make processes and people productive. They manifest rigor, not ruthlessness nor coddling, being regularly present without anxiously and instantly attending to all emails, messages, alerts, contentious negative individuals, and distractions.

Agile leadership qualities have been described as servant leadership, Level 5 leadership, and in military models such as BE-KNOW-DO. (BE of good character, moral strength, and competence. KNOW the organization, its systems of work at strategic, operational, and tactical levels; and the immediate situations and tasks. DO by applying knowledge and taking action to work the right way to accomplish the right things.)


agile enterprise: An organization of one or more business units or joint ventures which is extensively oriented to adding value and continuous improvement; one which has congruent, responsive, and robust systems of work and systems of information which are melded and managed to reliably perform, adapt, and foster trust and accountability.

Employees and other stakeholders in agile enterprises maintain awareness of their organization’s strategic position as well as developments involving customers, markets, production and information technologies, and applicable current best practices for enhancing productivity (a.k.a. Lean or Just-In-Time) and coordination (a.k.a. Enterprise Resource Planning or ERP to link planning, scheduling, and execution in and across levels and functions).

Agile enterprises may use leading edge technologies. However, this is a product of established excellence in fundamentals in concert with disciplined innovation and implementation. Technologies considered for routine use must serve a defined purpose and be proven and methodically introduced. Core processes often utilize simple visual tools to fulfill or supplement needs. Examples of this include andon lights or flags to signal a malfunction and schedule boards and kanbans to guide item replenishment or project management.

agile business assessment: An evaluation of a business’ position and outlook emphasizing its operating performance and functions which add value and support adding value. The assessment considers applicable aspects of agile leadership and an agile enterprise.

The functions which add value primarily in internal operations and the external supply chain. The assessment’s design and conduct reflect utility and adaptability with latitude to respond to unique and discovered circumstances as fitting for its context. The context or arena is formed by the assessment’s purpose, conditions, and rules of engagement for information gathering and sharing, for debating and finalizing findings and recommendations, and for disclosures.

demographic distribution: A study of factors and related attributes and statistics associated with a specific group of people.

Groups of interest for purposes of professional management and institutional investment could include a company’s current employees and available labor pool in contrast to each other and perhaps extend to the current employees and available labor pool of a major direct competitor.

A factor of interest could be knowledge and skill. Attributes to gauge could be the presence and progress of cross-training and skill development. There could also be a count of levels and types of trade certifications and program completions, literacy, college degrees, and total annual continuing education contact hours earned on average.

Qualities of very high integrity, intelligence, knowledge, endurance, and leadership may be inherent in five percent of the U.S. population and randomly dispersed throughout it. Organizations can reflect that distribution or move by design or by default to a different overall percentage or to a higher concentration in particular functions or levels.


At the other end of the spectrum four percent of the U.S. population has the mental disorder of sociopathy according to the American Psychological Association (APA) and Harvard psychologist Dr. Martha Stout, author of The Sociopath Next Door. It is attributed to neurological abnormalities. It produces a pattern of deceit, manipulation, lying, and self-obsession with a belief in personal supremacy and entitlement. Those with the disorder are incapable of remorse, shame, or empathy. They display superficial charm and strive to ingratiate while appearing perhaps as sophisticated or as simple and folksy yet with some unique skill, insight, or access. Per the APA some people develop acquired sociopathy and behave as a sociopath as a result of upbringing and social conditioning in spite of having normal brain functioning.

A guideline for a population’s innate ethical composition is the 10:80:10 ratio or spectrum.

It holds that without cultivation or shaping influences a random big group will be composed as:

5% will be Heroes. Heroes have a true moral compass and great moral strength. They do the right thing—for their organization and society—even with a high risk of job loss or other costs to themselves. They are loyal to ideals of their communities and functions and possess a strong work ethic and humility. They encourage productive work and improving knowledge and skill in the organization and themselves. They readily perform critical analysis on proposed changes. If a proposed change passes their personal analysis of it then they will support it.

5% will be Conditional Heroes. Conditional heroes perform like or nearly like heroes if there is low risk or cost to themselves and good probabilities for increasing or maintaining gains.

80% will be Swayable. Swayable individuals can be influenced to shift within the spectrum. They comply with their work group’s norms and acquiesce to or imitate behaviors of the most influential individuals in their work areas. They weigh the risks, costs, and benefits to themselves in their decisions and actions regarding their work, teams, and workplace.

5% will be Conditional Culprits. Conditional culprits perform like or nearly like a shirker, crook, destructive activist or accomplice to one if there is low risk or cost to themselves, sizable gains or social pressures, coercion, or to correct a perceived wrong. Culprits can: a) be aggressively indolent, b) seek personal monetary gain by fraud, embezzlement, theft, or coercion against the organization, employees, customers, suppliers, or other stakeholders; c) sabotage or vandalize; or d) be a destructive activist or aid one in deploying deception in pursuit of personal power.

5% will be Culprits. The most determined culprits as in undeterred by risk to themselves are destructive activists: amoral, unconcerned about others, deceptive, unremorseful, and persistent in pursuit of personal power. They enjoy seeing deceptions produce awe, status for themselves, and damage and diminishment or their control over people they consider to be do-gooders, rivals, and potential whistleblowers and to those work systems and senior managers they see as accepting, acknowledging, and promoting meritorious efforts.


bad actor: An impediment or a defect’s symptoms and causes detracting from adding value, continuous improvement, and legitimate interests of stakeholders. Types of bad actors include:

• Defect symptoms and causes. Applicable to delivered bundles of products, services, and touchpoints. Defects diminish value from the perspective of any downstream customer.

A guideline for quality is the 40/30/30 rule. It suggests 40% of defects are from design, 30% from supplied inputs, and 30% from production equipment, steps, and handling.

In complex cases the identified possible causes can be tested to gauge potential as in the degree and probability of influence on effect, relationship to effect, and presence.

Potential: High, Moderate, Low, No, Untested, or Latent (inactive or usually dormant).

Relationship: Direct, Contributing, Cosmetic (influences superficial aspects or is only coincidentally present), and Opportunity (provides an opening for other causes to act). Presence: Inherent (constant or common) or Aberrational (intermittent or special).

• Wastes. Applicable to execution activities in conversion or value-adding processes.

A guideline for manufacturing costs holds that 70% of costs are determined by Design with 30% determined by Purchasing, Manufacturing Overhead, and Production.

Levels of Connection to Adding Value: 1. Adds Value, 2. Supports Adding Value, 3. No Value Added but Required (limit of current technology owned or available; obsolete or unnecessary requirement from government, industry, or customer), and 4. Pure Waste.

Types of Waste: Overproduction (over current needs), Overprocessing (overly elaborate tools, materials, methods, and specifications), Excess Inventory, Excess Transportation of Product, Excess Motion of workers and machines, Delay and Waiting (plus interruptions), Defects (inspection, sort, scrap, rework), and Non-use or Under-use of Intellect (knowledge, skill, creativity, and innovation).

• Noncompliances. Inputs, process characteristics, and outputs not meeting standards expressed by governments, industries, customers, and internal requirements.

• Systemic and strategic failures. Expansive costs from disconnects and chronic errors in knowledge, information, communication, discernment and decision-making, and action. Can include major disconnects in demand and supply planning or risk management and under-managed internal initiatives and strategic moves.

A guideline for Enterprise Resource Planning (ERP) information systems is 50% of first time buyers will not reach their minimum project justification targets or effectively and beneficially operate with the software after their first implementation attempt.

• Fraud, embezzlement, theft, sabotage, and coercion. Acts and patterns to misinform, steal, damage, demoralize, and obstruct productive work and workers or otherwise misuse assets, access, or authority for unscrupulous purposes.


It is a fact of life that defects, setbacks, wastes and chaos costs, sabotage, and frauds will occur. Some will be surprises. Others will not. Progressing along learning curves, learning from bad and good outcomes, and adapting to changing markets and customers are a part of work. Conflicts and communication errors occur in most, even the best, organized efforts.

The intellectual curiosity, the drive to understand and improve, and the presence and situational awareness of agile leaders will, over time, convert many “surprise” bad actors into anticipated ones, and likely prevented or at least diminished ones. Good teams and good persistent efforts by employees, suppliers and service providers, cooperative customers, and non-profit professional associations have and will produce great results.

Organizations have, unfortunately, always had exposure to a few people prone to using their power to impair the good work and legitimate interests of others. Charles Kelly, in his book The Destructive Achiever, said that such a person uses their power principally to enhance their own and diminish that of others while destroying trust and commitment, suppressing innovation and improvement, and turning a vibrant organization into a survival-oriented bureaucracy. In the long run in the private sector of a free capitalist society such a bureaucracy will not be as economically viable nor as rewarding for stakeholders. As a cautionary note, however, in the work of managing business turnarounds and administering requests for rushed infusions of capital due to distress it is common to find a destructive activist with considerable influence in or on the subject organization.

Charles Kelly was interested in the unusual Destructive Achievers (DAs) who had moved up to the highest rungs of management in the largest public companies. However, the type has been in and affected private middle market companies and done so in roles of middle management as well as in supervisory and specialist roles in every function—accounting, human resources, information technology, maintenance, materials, production, sales, and so on. A few have been found in general management, in ownership and advisor ranks, and in external but powerful organizations of government and current or purportedly potential customers and suppliers.

Here and in related discussions the term Destructive Activist has been used in place of Destructive Achiever. Others have used the term Self-Absorbed Progressives (SAPs). However, that term is associated more with unscrupulous power-seeking individuals in publicly funded entities in government, universities, government sponsored enterprises, and unions.

Organizations build from strengths and the most valuable and perishable resource of any organization is the time of its good people. The emphasis here is on that and providing a simple cross-functional framework for assessment and discussion of operating performance and value. This section illustrated eight essential terms germane to those discussions.

Details on practices of leadership, good management, Lean, and ERP as well as dirty tricks and tactics and appropriate preventive and counter-measures are beyond this field manual’s scope.


RATING IMPORTANCE OF AN ELEMENT

The actual importance of vital areas encompassed in a specific element varies according to the purpose at hand and the element’s relationship to the strategy of a business unit’s parent or holding company and the business unit’s own strategy.

The perceived importance of a specific element may vary according to assumptions applied; role and level of experience and expertise on the part of an individual, function, or entity; and the level of shared knowledge and information in the group doing the assessment.

A zero to five rating scale gives a quick summary gauge of priority in assessment work for what to look into, what to look over, and what to overlook or for the likely impact on strategic aims.

Importance: Criticality of an element or areas in it to a specified purpose or to strategic aims.

N/A = Not Applicable (not a relevant factor in this assessment) or Not to be Assessed 0 = None 1 = Very Low 2 = Low 3 = Moderate 4 = High 5 = Very High

In case of conflicting opinions regarding importance of an element it is fine to consider the average rating and perhaps the range of ratings applied to that element.

For some purposes there are stages of assessment work and attribution of importance rating.

Assessment projects involving due diligence and post-merger integration may proceed as:

Qualification stage: Importance assigned by capital providers of equity, mezzanine, or debt.

Exclusive importance on: a) Leadership and Culture for ethics in the organization and accuracy of representations plus degree of distributed involvement and support of strategy. b) Strategy for what it is and how it is defined, articulated, enacted, and monitored. c) Demand Management for definition of market and share and current and potential position. Output at this stage determines interest in proceeding.

Due Diligence stage - Phase 1: Importance assigned by prospective capital provider in conjunction with advisor input in general management, legal, and financial accounting.

Variable importance. All elements could rate either “0” or “3” for whether or not to assess. Output at this stage determines if and what to assess broader or deeper in Phase 2 for potential high value or presence of possible high risk or “red flags.”

Due Diligence - Phase 2: Importance typically recommended by advisors.

Deeper dive conducted on priority elements which remained uncertain after Phase 1. Output at this stage determines ratings assigned for valuation and go forward planning, monitoring, and guidance.


Financial Distress Indicators Checklist

Capital providers, notably private equity firms, have compiled a short list of the indicators (variables or factors) that are highly correlated with current or impending financial distress.

1. Messy and unproductive physical environment.

2. Little clarity or maintenance in responsibilities, authority, and accountability.

3. No clear strategy―not defined, articulated, or applied for alignment or enactment.

4. No meaningful performance measurements.

5. No shared goals. No actionable plans for improvement, direction, or even sustaining.

6. One or more quarters with no achievement of positive developments or gains.

7. Neglect and little interest in execution, quality, or company culture.

8. Pervasive distrust or antipathy within or between stakeholder groups.

9. Costs, cash, and financial performance measured minimally and perfunctorily.

10. Low awareness and concern for emerging direct and indirect competitive offerings, customer changes, and market demand trends and share.

11. No monitoring of demand or supply markets or logistics for highest risk changes or interruptions and no related sensitivity analysis, cash cushion, or contingency planning.

Correlation is not the same as causation. Statistically it means a variable or factor, here a listed indicator, may coincidentally precede or coincide with financial distress or the indicator is caused by the distress, both are caused by something else, or the indicator may cause it.

Practically, however, a distress indicator warns that a company is not an attractive candidate for investment unless, perhaps, it is deeply discounted. Even then the acquirer might need depth and breadth of operational talent to fix it. Per legendary investor Warren Buffett: “I would rather buy a good company at a fair price than a fair company at a good price.”

For banks an indicator means that a loan or revolving credit arrangement would likely entail higher risk for default, higher maintenance, and a higher risk of eventual lender fatigue.

Please note that some institutional investors and experienced strategic business acquirers do not proceed to or through the preceding checklist if indications of poor ethics are found.

Some groups first apply their qualification or check for fit. They then assess the ethics of the selling owners and throughout the business offered for sale. These steps have disqualified 89 to 97 percent. Companies passing these proceed to a letter of intent and Phase 1 due diligence. Due diligence can start with a form of acid test checks or interviews (some gauge level of shared involvement in support of strategy in managers below the level of Chief Operating Officer), a check for financial distress indicators, and then, if passing, proceed to deeper operational, legal, and financial concerns. Phase 2 depth and detail are done as warranted.


For managers the financial distress indicators checklist can be of interest, even if they work in a privately held company which may not come up for sale for decades, if ever. It is beneficial to know what capital providers look at. There could be applications to attracting debt or mezzanine capital, raising and sustaining profitability, quality of work life, and considerations for one’s own career.

Other purposes and associated high priority considerations follow.

Business Turnaround areas of interest • Investment philosophy and strategy for the enterprise.

• Cash flow and profitability by business unit, product family or product line, product, and account.

• New business units, acquisitions, divestitures, and new products being considered or in progress.

• Appropriateness and coordination of capital expenditure and operating budgets in and across business units.

• Cash and cost controls by level:

annual Business planning

monthly Sales and Operations planning

weekly Master Schedule reflecting cash constraints and cash-to-cash conversion

weekly Flash Report and, if warranted, daily updates for conformance confirmation or deviation alerts

daily coordination of actions based on cash in and cash out.

Process improvement and Lean areas of interest• Clarity in purpose, highest goals, and values.

• Clarity in strategy. Avoidance of any inclination to pilot Lean elements around a facility, product line, or product slated for abandonment in 18 to 24 months in order to ostensibly “reduce risk;” chronically under-support an overall initiative; or do a single actual or contrived improvement one time and enshrine it for years; or install a bureaucratic and counter-productive Six Sigma or employee involvement program to “get ticket punched” with a perfunctory appearance solely to appease a parent company or investors.

• Appropriate groundwork done in knowledge management, performance measurement, and projects management.

• Knowledgeable selection, support, and sequencing of elements in the tactical and operational level and scope and scale of pilot efforts for introduction and/or upgrade.

• Work area teams perform pilot adaptations and implementations. Pilot results reflected in subsequent steps.


Enterprise Resource Planning (ERP) areas of interest• Knowledge management for widespread education on ERP fundamentals shared across

functions and for specialized education related to specific functions.

• Project Management for the work of preparing and defining processes to eventually be modelled in ERP software and likely requirements, functionality, and configuration settings.

• Project Management for the work of strategic and effective software selection. If using external resources to augment or facilitate software requirements definition and selection then it is important to ensure independence. Independence requires that the individuals developing requirements, selection criteria, and competitive selection evaluations not receive compensation whether in the form of commissions or prizes to their firm or firm’s management or spiffs paid directly to themselves or others.

• Performance measurements on data accuracy done and showing performance at or above minimum required levels. For example: Master Production Schedule validity (95+%), Bill of Material accuracy (99+% accurate on finished product content items and quantities), inventory record accuracy (98+% of all active bins’ on-hand records matching their actual in-stock item quantity and condition in that bin), and distribution fulfillment (on time, right items and quantities).

• Project management for ERP implementation, operation, and review.

Growth areas of interest• Strategies for marketing, operations, and capital are achievable, aligned, and effective.

• Organization, infrastructure, and platforms for investment, IT, marketing, sales, and administrative interactions ready. In addition there is cohesive understanding in regards to scalability and how capacity increases will lead, pace, or lag increases in demand.

• Demand management has prepared for the ancillary services likely needed—staff training, field support, reverse logistics in terms of product returns, and increased phone, web chat, or in-person technical support/problem resolution and order entry.

• Business Planning clear and flexible in aggregate demand load and supply capacity.

• Sales and Operations Planning encompasses all units and dollars of demand (sales, promotions, trade shows, R&D, etc.) and supply by product families and supply bottleneck resources. Supply bottlenecks include current and those that have been calculated to be potential future bottlenecks. Financial planning covers requirements for growth capital and its integration with Sales and Operations planning.

• Master Scheduling captures and balances all demand loads and work center capacities by week. All associated work and information systems appropriately scaled and scalable. Supply chain responsiveness, capacities, and inventories processes positioned.


RATING POSITION ON AN ELEMENT

“Where are we?” is an important and difficult question. In some cases a summary answer could be the amount of cash in the bank or current assets compared to current liabilities. In other cases net income in annual financial statements is suitable while recognizing that it reflects information that is too late, too aggregated, too full of assumptions, and not intended for management

decision making.

The question comes up in strategic planning, marketing, business planning, board of directors meetings, sales and operations planning, master scheduling, and daily huddles and flash report communications. It also comes up in conjunction with strategic initiatives and projects for development, growth, and market adaptation as well as valuation.

Elements of Enterprise Performance is a tool for consolidating and communicating diverse information regarding a business’ primary value adding functions, operating performance, and value. A zero to five rating scale gives a quick summary gauge of position.

Current Position: Summary rating for condition of an element or key area in it relative to requirements for a specified purpose or for presence of applicable high performance practices.



Position Comments

Red Flag (RF): A classification label to highlight a major threat or an indicator or symptom of a possible major threat whether an external condition or event or a chronic or acute internal weakness or vulnerability that could harm current or future performance. It can include a weakness that could preclude pursuit of a specific opportunity or that a specific window of opportunity was closing. It may be used to identify where a particular condition or set of circumstances were significantly different than as represented in a prospectus or other key reference document.

Significant Opportunity (SO): A classification label to highlight a major opportunity either externally as in a new or expanded market or customer account, internally as in improved quality in product, service, or work environment; productivity; cost improvement—cost savings (net reduction of a current and continuing cost) or cost avoidance (avoiding a new or increased cost if no action were taken), and sustainability; or both as in promotion/public relation as in participation or sponsorship of an educational event, charitable project, or open house.

Position Rating Scale

The 0 to 5 scale is intuitive for communicating position on each element. The assessment can be relative to general business or to a specified purpose or perspective. Examples follow.

a) Requirements of a given purpose—new or changing strategy, market, account, or resource supply; joint venture or merger, or valuation from strategic or a financial perspective.

b) Process improvement/Lean—appropriate and productive adaptations of high performance practices.

c) Enterprise Resource Planning (ERP)—effective support of management and linkages plus application and database integration and informational agility to support users’ work.

d) Growth.

N/A Not Applicable or Not Assessed0 “Off” (Nonstarter) not engaged, active, or progressing.

a) Not consistent or economical meeting emerging requirements in terms of capability to meet requirements at any output rate.

b) No practices in any area consistently and productively adapt and apply high performance practices associated with process improvement/Lean.

Neutral, inconsistent, and opposing practices exerting dominant influence.

c) Information requirements—appropriate form and accuracy—not defined or enforced for the inputs or outputs of any key process.

d) Current capacity not sufficient to meet anticipated increased loads and not prepared or able to effectively and economically scale up.


1 Very Low / Entry a) Very few examples of consistently or economically meeting emerging

requirements in terms of capability at any output rate.

b) At least one key area associated with value-adding or support of value-adding has been operating with one or more effective adaptations of high performance practices for 6 months or more. Neutral, inconsistent, and opposing practices exerting moderate to dominant influence.

c) Information requirements—appropriate form and accuracy—have been defined and enforced for the inputs or the outputs of at least one key process.

d) Very limited capacity coverage or scalability to meet anticipated increased loads.

2 Low / Novice

a) A few examples of consistently and economically meeting emerging requirements in terms of capability at any output rate.

b) Multiple areas—with at least one being key—associated with value-adding or support of value-adding have been operating with one or more effective adaptations of high performance practices for 12 months or more. Neutral, inconsistent, and opposing practices exerting no more than moderate influence.

c) Information requirements—appropriate form and accuracy—have been defined and enforced for multiple processes to include several key ones.

d) Some, but limited, capacity coverage or scalability to meet anticipated increased loads yet able to do so economically.

3 Moderate / Intermediatea) Most areas can consistently and economically meet emerging requirements in

terms of capability at current and near-term projected output rates.

b) Most areas associated with value-adding and support of value-adding have been operating with effective adaptations of high performance practices, some for 36 months or more and in 3rd generation of development. Neutral, inconsistent, and opposing practices exerting no more than minimal influence.

c) Information requirements—appropriate form and accuracy—have been defined and enforced for most key processes, particularly in support of adding value and execution. Related schema, documentation, configuration settings, education and training, and procedures reviewed for currentness and alignment with strategy.

d) Moderate capacity coverage or scalability to meet anticipated increased loads and able to do so economically.


4 High / Advanceda) Almost all or all areas can consistently and economically meet emerging

requirements in terms of capability.

b) Almost all or all areas—particularly those associated with value-adding and support of value-adding—operating with effective adaptations of high performance practices. Many areas have operated with them for 48 months or more with examples in 4th generation of development. Several examples of improvement in prior 12 months. At least one area or practice that is advanced for its industry, market, or type of process.

Neutral, inconsistent, and opposing practices exerting no more than a low influence. Most of those practices and associated wastes have been identified and categorized. In regards to their connection to adding value it is known as to whether they are part of deliberate sub-optimization of one system or process in order to optimize the whole business or are the result of the limit of current technology owned or available or result from unbeneficial but still standing requirements from government, industry standards, or a customer.

c) Information requirements—appropriate form and accuracy—have been defined and enforced for almost all or all key processes. Related schema, documentation, configuration settings, education and training, and procedures reviewed for currentness and alignment with strategy.

d) Robust and responsive capacity coverage or scalability to meet anticipated increased loads and able to do so economically in support of the strategic determination of whether to lead, pace, or lag demand.

5 Very High / World Classa) Requirements for a given purpose—same as 4 plus sustainable advantage.

b) Process improvement/Lean—same as 4 plus many areas have operated with high performance practices for five years or more with examples in 5th generation of development. At least one practice or process involving the element is benchmarked and comparable to global best.

c) Enterprise Resource Planning—same as 4 plus have concurrently refined and integrated the systems of work and systems of information for effectiveness, robustness, and simplicity. Have moved to use visual physical communication tools as much as practical and as only as much of any large configurable software packages as is strategically necessary, stable, and secure.

d) Growth—same as 4 plus demonstrated excellence in growth whether through organic, alliances, or acquisitions through middle market tiers or to large size.


CLOSING WORDS ON WARS AND WINNING

Army field manuals make a fitting model. An Army field manual provides information of interest to soldiers in the field. It is goal oriented. It has inferences about users’ values, concerns, and circumstances. It aids preparation and is a handy reference. Its work environment encourages discussion and shared understanding of concepts and practices involving strategy and tactics

prior to team action.

When communication and decision-making are adrift and unmanaged there are losses in transmission and translation. This, in turn, degrades effectiveness, efficiency, alignment, and coordination. That foments frustration. In response a few may amplify their own anxious messages and elbow out other messages and messengers regardless of the criticality and urgency of what they could convey. This cycle has come to have its defenders in spite of the overall opportunity costs and wastes when there is no other mental model to replace it.

Breaking this cycle in regards to participation is not at all a license for large, long, and agenda-less meetings, showboating, or adding players for the purpose of piling on to block vital feedback—even on realities possibly proving to be brutal—or positive change. The work of agile business assessment and operational due diligence assumes that essential cross-functional meetings are scheduled and conducted effectively. The application of assessment output is most beneficial when authority, responsibility, knowledge, and information are purposely and clearly positioned in the organization and everyone shares a common frame of reference, terms, and information.

This field manual’s team has led turnarounds, development, and growth in positions of Chief Executive Officer, Chief Operating Officer, Director of Materials, Plant Manager, and Project Leader for process improvement/Lean, Enterprise Resource Planning (ERP), plant expansions, acquisitions, new product introductions, and sell-side preparations. We have instructed executive MBA, graduate accounting, and professional certification courses and workshops.

As advisors to middle market and large businesses we have worked to provide custom management team education and task support for business turnaround, development—adapting and leveraging practices from strategy, Lean, ERP, growth, and collaborative design—and assessment for opportunity diagnostics, sell-side preparations, and due diligence.

A LOCUS™ field manual provides information of interest to people in free enterprise. The acronym stands for Leadership, Operations, and Capital in Unifying Strategy. The goal is to be of service to productive ideals and efforts in and across organizations, levels, and functions. Scheduling topical discussions over coffee and SOS in the mess hall, though, is optional.


Questions: Placing and prioritizing concerns and opportunities regarding a specified purpose: strategic aims, investment attractiveness, business turnaround, development, or growth.

Importance? Criticality of an element or areas in it.

N/A (skip) 0 = None 1 = Very Low 2 = Low 3 = Moderate 4 = High 5 = Very High

Current Position? Summary rating for condition of an element or key area in it relative to requirements for a specified purpose or for presence of applicable high performance practices.


Target? Summary rating for desired condition or presence of high performance practices.

Gap? Size, character, and costs of gap. May note present progress and anticipated size.

How to address gap? Action options to close or accept gap or abandon investment activity.

Why? Why close this gap—ever? Will it affect survival, sustainability, or value? Affect a big opportunity? Needed to make progress in Lean, ERP, growth, or to qualify for new business?



Part 1: Analysis FrameworkSeptember 2016

LOCUS™ Field Manual 32-01

Leadership • Operations • Capital • in Unifying Strategy

fm32-01.business assessment part 1 analysis framework sept 2016_secured_lms

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