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Strategic Capacity: The Key to Business Success.

As a measure of a business’ ability to reach its goals, ‘Strategic Capacity’ refers to a demonstrated ability to deliver predictable profits, growth and equity value, the Three Dimensions of Business Growth™. The term ‘predictable’ is used to connote low risk/high confidence that the described result will occur. This is important because understanding predictability is at the root of the due diligence process attendant to M&A and similar processes. Businesses with high Strategic Capacity typically outperform their peers and are best-in-class competitors.

Strategic capacity has two elements: growth capacity and value capacity. Growth capacity refers to the ability to deliver predictable profits & cash flow, and predictable sustainable growth. Value capacity refers to the ability to deliver predictable equity value to the shareholders. High growth capacity and high value capacity together create high strategic capacity. If we accept that the ultimate measure of business success is high shareholder (equity) value, then understanding strategic capacity equates to understanding a business’ ability to maximize value.

The methodology and process for maximizing strategic capacity is described in George Sandmann’s The Growth-Driving Advisor: Proven Strategies for Leading Clients from Stuck to Best-in-Class, Forbes Books 2023. In this work the author defines the Three Dimensions of Business Growth and describes a proven system through which privately held businesses in the pre-middle and middle market can increase their strategic capacity and reach their shareholders’ goals. The work is based on client cases of over one thousand business advisors including management consultants, business coaches, accountants, investment bankers, wealth advisors and fractional CFOs.

To visualize the symbiotic impact of strategic capacity on equity value, imagine a graph. High strategic capacity is in the upper-right corner with a value of (for example) $10MM, and low strategic capacity is in the lower-left with a value of $0. The $10MM represents maximized equity value calculated from a financial perspective. Plotting growth capacity in the horizontal x axis, and value capacity in the vertical y axis, imagine a point on the chart determined by scoring each capacity. One can see that a business with high growth capacity but low value capacity might deliver lower equity value than one with high performance in both. It follows that where a business cannot demonstrate highly predictable profits and growth, in addition to having low value capacity (the connection between revenues and transferable equity value not being automatic), low or no monetizable value exists. Not that the business’ latent value remains $10MM; understanding strategic capacity delivers insight into the ability of the shareholders to monetize value.

Achieving high strategic capacity as accomplished by re-designing the subject business so that it harnesses people, cash and processes in a manner that creates a best-in-class business engine, delivering profits, growth and value at or above those delivered by competitors. It is logical that such a business is best-in-class, and will be best positioned to attract customers and capital.