Setting strategy and taking growth to the next level

May 2021  |  SPECIAL REPORT: BUSINESS STRATEGY & OPERATIONS

Financier Worldwide Magazine

May 2021 Issue

Every year, top management teams meet in dull boardrooms to review past performance, assess goals and objectives for the coming year, and define their strategy, internally and vis-à-vis their competitors. The reality, however, quickly intrudes. Teams could discuss the best strategy ideas, but everyone knows what matters is the first-year budget. The result? The hockey-stick projection, showing future success after the all-too-familiar dip in next year’s budget.

Redefine strategy

To avoid this trap, this article will suggest that it is time to change our definition of strategy or its components. Instead of creating yet another strategy framework, it is time for management teams to address the social side of strategy arising from corporate politics, individual incentives and human biases. How? With evidence.

First, companies need to stop focusing on comparisons with the last year, on immediate competitors and expectations for the year ahead. Then, have your management teams embrace uncertainty and bold strategies. To do so, however, explore ideas and solutions beyond the experiences of the people making decisions.

For instance, when you bring management teams together, they wind up telling themselves stories, generally favourable ones. It is comforting and gives us a sense of security. In his book ‘Thinking, Fast and Slow’, Nobel laureate Daniel Kahneman highlighted that people often tend to concentrate on the “inside view”, which leads them to extrapolate from their own experiences and data, even when they are attempting something they have never done before. While the “inside view” is an unintentional mental shortcut helping us filter and deal with information in our daily lives, it nevertheless distorts the outcomes when making a big decision. A 2007 study found that 80 percent of executives believe their product stands out against the competition. In reality, only 8 percent of customers agreed.

Three ideas to develop, nurture and maintain a successful strategy

Avoid the agency problem; debate ideas. Unfortunately, most strategy discussion aims to approve or reject a single proposal brought into the room. As a result, presenters are often seeking to get that all-important ‘yes’ to their plans. For instance, presenters may define market share, so it excludes geographies or segments where their business units are weak or attribute weak performance to one-off events such as weather, restructuring efforts or a regulatory change. Executives argue for a large resource allotment in the full knowledge that they will get negotiated down to half of that. Egos, careers, bonuses and status in the organisation all depend primarily on how convincingly people present their strategies and their business prospects.

However, the focus should be on debating different options, questioning the plan’s premise and whether it should even be under consideration. Deeper reflection is essential as it brings choices, and those choices are the essence of real strategy. The planning process of any strategy should be geared to shining a spotlight on options.

The boardroom conversation changes when you reframe it as a choice-making rather than a plan-making exercise. To do so, management should implement a strategy decision grid encompassing the major axes of hard-to-reverse choices. Afterwards, for each dimension, management should describe three to five possible alternatives. The debate will inevitably focus on the most difficult decisions – and this where growth lies. In other words, when you force a discussion about real strategic alternatives – such as different combinations of moves and scenarios with varying levels of resources and risk – you help your team move away from all-or-nothing choices, as well as from those 150-page decks designed to numb the audience into saying ‘yes’ to the proposal.

Strategy is more than adopting budgets. Management needs to put an end to the ‘budget strategy’. This is where growth dies. One of the worst culprits in budget-driven discussions is the ‘base case’ scenario: some version of a planned business case anchored in various (largely opaque) assumptions about the context and the company strategy. Often, the base case scenario obscures the view of where the business actually stands, which makes it harder to assess which aspirations are realistic and which strategies should be followed through to deliver on these aspirations.

Instead, management should try building a ‘momentum case’, a simple version of the future that presumes the business’s current performance will continue on the same trajectory. As such, companies can get a real sense of how much impact their decisions need to deliver to change that trajectory. However, to do so, one needs to have an unbiased understanding of where the business stands and what has been driving its performance – in other words, where and why your business is making money today.

To begin, management could ‘tear down’ the results of the company. This is a crucial part of sharpening the dialogue around big moves, and it is not that hard to do. One needs to take the business’s past performance and build a ‘bridge’, isolating the different contributions that explain the revenues and changes in the most recent years. Companies are already doing it when they assess foreign-exchange changes and inflation operations. However, for more tremendous success, management should consider an even broader array of factors, such as average industry performance and growth, the impact of submarket selection, and the effect of M&A.

Most chief finance officers regularly do this for factors such as foreign-exchange changes and inflation. The bridge we are talking about considers a broader array of factors, such as average industry performance and growth, the impact of submarket selection, and the effect of M&A.

Once management has an unbiased understanding of where the business stands and what has been driving its performance, it can focus on what it would take to change the trajectory. Instead of focusing on the budget, top management could perhaps prepare a list of the 20 things they would need to accomplish to produce a series of big moves or changes over a certain period. Then, debate the actions rather than the numbers expected to result from them. Why is a move better than the other? Why should the company avoid this move? In short, talk about moves first, budget second.

Liquid resources. Once your big moves are identified, and a specific budget is allocated for them, the company needs a certain resource liquidity level to execute the big moves. The handover between strategy and execution happens when the resources are made available to follow through on the big moves. An easy way to create resource reallocation is to create an ‘80 percent-based budget’, which means that you will only use 80 percent of your budget for all your needs and projects during the coming year. The remaining 20 percent is a pot that is available for reallocation when the times come.

Take, for example, Danaher, an American globally diversified conglomerate, which strongly emphasises resource liquidity and reallocation. Although the company started as a real estate investment trust, Danaher now manages a portfolio of science, technology and manufacturing companies across the life sciences, diagnostics, environmental and applied solutions, and dental industries. In order to avoid budget inertia, senior management spend half their time reviewing and recutting the portfolio – much like private equity firms do. The company’s approach is based on the kaizen philosophy of continuous improvement. Danaher has even institutionalised the resource liquidity required to chase the best opportunities at any point in time. It systematically identifies investment opportunities, makes operational improvements to free up resources, and builds new capabilities in the businesses it acquires. Over the years, Danaher has pursued a variety of M&A opportunities, organic investments, and divestments – big moves that have helped the company increase economic profits and total returns to shareholders.

Conclusion

One must never forget that strategy and growth are not a once-in-a-year project; it is a constant journey. Management teams need to hold regular strategy conversations with a ‘live’ list of the most critical strategic issues. Throughout this continuous journey, data must play a central role. Management should constantly check their assumptions, the underlying data, verify and reassess strategy needs, as well as constantly explore whether the context for a given decision has changed. In the end, strategy is similar to venture capital: one in 10 ideas win. But to get to this idea, management teams need to review, debate and analyse dozens of ideas.

 

Oleg Stratiev is an associate at Fasken Martineau DuMoulin LLP. He can be contacted on +1 (514) 397 7623 or by email: ostratiev@fasken.com.

© Financier Worldwide

BY

Oleg Stratiev

Fasken Martineau DuMoulin LLP

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