Strategic planning for real estate companies.

Strategic planning helps a company decide what it wants to be when it grows up.

Broadly defined, strategic planning shows a company where it is going and how it plans to get there. Especially at a time when the real estate industry is changing and consolidating so rapidly, it is important

On the other hand, a company with a well-defined strategic plan and business strategy has the distinct advantage of having clearly articulated common direction for the company. For publicly traded companies, this clear focus garners a premium from analysts and shareholders. For all real estate companies, a strategic plan and the strategic planning process itself offers a competitive edge and enables the company to measure achievements against expectations.

Strategy and Business Plans

The outcome of the strategy planning process is a strategy plan document, designed to identify the goals and objectives of a company and the strategies that will be used to reach them. The intent of the strategy plan is to identify guiding principles of an organization that will pass the test of time and reflect a point of view regarding future business operations.

The starting point of a strategy plan is the mission statement which is the organization's fundamental reason for existence and serves as a perpetual guiding star on the horizon.

Core values support the mission statement and are essential and enduring tenets, not to be compromised for financial gain or short-term expediency. Strategies are the means to accomplish the company's goals, providing a framework for establishing the actions or tactics that will be used on a day-to-day basis.

The Strategic Process

The strategic planning process consists of four basic steps:

* Situation Analysis

* Strategy Planning

* Implementation

* Assessment

Situation analysis. Before determining a strategic road map for a business, it is vital to understand where the business is now in terms of its own competencies, in relation to competitors, and in relation to its industry and the economy as a whole.

Begin by assessing the company. Does the description of the company's current mission actually correspond with what the company does and how it operates? Does it measure up to its own standards?

What are the company's greatest assets and strongest core competencies? A company that does not have clearly definable core competencies is probably doomed to play a marginal role in the industry.

How is the company organized and how are personnel compensated? Does the mix of employees and their skills correspond to the business needs of the organization? What are the relative profitabilities of the company's activities?

Most companies know if they are profitable, but they do not always know which specific activities produced what percentage of that profit. If the company buys land, develops apartments, and then manages those apartments, where is more of the profitability produced. If most of the profits come from one area, it may be prudent to consider limiting your activity to that area, or begin to work toward improving efficiencies and profits in less profitable areas.

Next, assess the competition. What advantages and skills do your competitors possess?

How do they measure up in terms of profitability and market penetration?

What trends do you see emerging among competitors?

In assessing competitors, it is important to think locally, regionally, nationally, and even internationally.

Assess the industry and the economy. Understanding the current condition of the real estate industry and where it is going are critically important to successful strategic planning. Real estate is a very cyclical business and reacts strongly to even small changes in the underlying business cycle. It is important to recognize that a moderation of growth in the overall economy can create a recession in real estate, particularly if there is a rapid erosion in consumer confidence. Where real estate is in the business cycle will certainly affect the strategic decisions that are made. To ignore cyclidity is to place your company in peril of not surviving the next cycle [ILLUSTRATION FOR FIGURE 1 OMITTED]. The current consolidations and other changes in the structure of the industry must also be taken into account. In addition, the form of the real estate industry may change over time as may the sources and mechanisms for financing.

Forming A Plan

While the strategic planning process itself has value in understanding a company's business position, the goal of the exercise is to create a company mission statement (Figure 2) and then to translate that mission statement into goals and tactics with specific time frames and measurable results. It is often in the step of translating goals into tactics that the disconnect occurs in strategic planning. For example, a company may say, "We are going to grow to succeed." But the questions remain: how are you going to grow - new markets, acquisitions, etc. How much do you want to grow, 25 percent a year? Stopping with just broad goal statements makes the process incomplete and may doom it to failure.

There are several different strategies that a company can adopt to achieve its goals:

* Growth strategy: a set of strategies related to the growth of the business. Focus is on geographic market, product type, and product segment.

* Rationalization strategy: the opposite of growth. Downsizing strategies decrease the scope of the business.

* Efficiency strategy: a set of strategies that reduces the cost of doing business, increases the speed of delivery, and improves customer satisfaction.

* Organization strategy: a set of strategies that modifies the organizational structure and improves company morale.

* Capital formation strategy: a set of strategies that defines how the company will access and deploy capital.

These strategies are all complementary, and multiple strategies of each category should be incorporated to reach a company's goals. Of course, during certain periods in the real estate/economic cycle, some strategies will be paramount.

Where does the company fit into the functions of the industry? What sorts of capital and operating risks does it face? In real estate, the risks and rewards of a function tend to increase the closer the function is to the land - thus land speculation probably has the highest risks and highest rewards of any real estate specialty [ILLUSTRATION FOR FIGURE 3 OMITTED]. A major concern of capital risk players is to survive real estate cycles. Operating roles, such as property management, are often seen as ways to survive during downturns. Remember all the developers who became fee managers in the early 1990s.

A company will pursue or emphasize different strategies at different points in the real estate cycle. For example, in the upturn phase, it is important to emphasize capital risk industry roles and growth strategies.

In the mature phase, emphasis should be given to the industry and growth strategies as demand and supply move more toward equilibrium. Toward the end of this phase, efficiency and capital formation strategies should be pursued more aggressively in preparation for a possible downturn. Organizational issues gain prominence as the company settles into a routine that should lead to a more efficient and profitable organization.

The strategy for the downturn centers on rationalization strategies as the major focus of the company. Efficiency and customer satisfaction strategies must also be emphasized to increase/maintain profitability. Organization strategies take on importance as the company scales down to emphasize its essential core productive activities.

Growth strategy. Determining the growth strategy of the company depends, in part, on how much risk a company is willing to assume. Deciding to expand market penetration in a local area is fairly low risk. Expanding geographically in the same specialty, while expanding into a new market segment, has greater risk. In considering growth, it is important to assess core competencies needed for a strategy and assuring that either the company possess or can acquire the skills needed to succeed. For example, if your company wants to grow by managing student housing, you may have competencies in operations and accounting, but may know little about university relations or the special needs of students. In such a case, a strategic plan would include tactics to develop these competencies if the growth strategy makes economic sense.

Rationalization strategy. A rationalization strategy is a plan for surviving downturns. Often it involves battening down the hatches for survival and planning for ways to maintain core competencies and key personnel. Of course, as the vulture funds showed during the early 1990s, a downturn may also be a time for growth. Here strategic planning is vital to ensure that the company has the capital and personnel to take advantage of these growth opportunities.

Efficiency strategy. This strategy shows you ways to do things better, faster, and cheaper. Because any efficiencies drop straight to the bottom line, efficiencies are particularly important during down cycles. However, improving the speed of delivery, technology, customer satisfaction, and purchasing are important in any phase of the cycle.

Organizational strategy. Decisions affecting this strategy include how the office is structured - levels of management, centralization versus decentralization, and outsourcing versus internalizing operations. Because human talent is so important to the success of a service business such as real estate management, making the maximum use of organizational resources should always be included in a strategic business plan.

Capital formation strategy. These strategies for capital formation include decisions on public versus private ownership, equity versus project-level financing, and other capital generation plans. Financial strategies also should address the levels of debt in the company and how well that position coincides with the real estate cycle.

Implementation and Assessment Plans

Once all planning is completed, the senior management of the organization must take the lead in translating strategies and goals into a business plan. While this is often a top-down process, determining the tactics needed to achieve company goals should involve middle management. This group is ideally situated to recommended specific resources and methods to achieve goals. Next, responsibilities for actual strategies and completion dates are assigned. Employees must understand the goals of a strategic plan and be held accountable for their achievements.

Finally, regular assessments must be made of how well goals are achieved. Tactics should be reviewed annually; and goals every two years or so.

In general, strategic planning should be done every three to five years, or when the business climate is undergoing a major change, as is the case now. Often an outside consultant can assist with the process of self-evaluation that is the basis of strategic planning.

The strategic planning process is very intensive, and companies must be prepared to allocate the time and resources necessary to see it through. To be successful, a strategic planning process must have an alignment of key decision makers all on the same page. Then and only then will it produce the desired results.

FIGURE 2: MISSION STATEMENT

A mission statement is the organization's fundamental reason for existence and serves as a perpetual guiding star on the horizon. It goes beyond just making money and is not to be confused with specific business goals. Typically, a mission statement is a concise statement of the company's reason for existence, including who the company is, what it does, and how it does it. Typically, a mission statement embodies the company's commitment to its customers, shareholders, employees, and communities.

Examples:

Robert Charles Lesser & Co.: "to exceed our clients expectations."

AvalonBay: "We create superior communities."

Disney: "To create shareholder value by continuing to be the world's premier entertainment company from a creative, strategic, and financial standpoint."

Motorola Advanced Messaging Group: "To have the world's finest people, products, quality, services, and technology to expand customer value and create new markets for the Paging Products Group."

Charles A. Hewlett is the vice president of Robert Charles Lesser & Company's Washington, D.C. office. He has more than 15 years of real estate experience and has consulted on a broad spectrum of commercial and residential real estate. His consulting activities include a full range of strategic planning and consumer research, demographic and economic forecasting, market and financial feasibility, and product planning. He has managed and conducted assignments in most major U.S. real estate markets.