This article covers the basics of developing a business strategy. My favourite maxim on strategy management is “The bus that runs over the pedestrian is never the bus the pedestrian is watching.” This maxim reinforces the point that the value of a business strategy is directly related to the assumptions that underpin it.
When establishing a strategy, the first assumption is that the management team formulating the strategy all frame the conversation the same way.
Invariably this is not the case and the book “Reframing Organisations” by Boleman and Deal describes this phenomenon very well.
In their book, they describe four frames through which a manager can view the organisation and environment they work in.
- The structural frame: a focus on how groups and teams are structured.
- The human resource frame: a focus on human resource management and positive interpersonal dynamics.
- The political frame: a focus on power and conflict, coalitions and dealing with internal and external politics.
- The symbolic frame: a focus on organisational culture.
Recognising that managers may not be aware that they view the organisation differently as do their colleagues, it is important to agree the frame or frames the team will use through the strategy development process. It is acceptable that different managers explicitly adopt different frames to enrich the conversation and ensure groupthink is mitigated. It is only important that everyone knows which frame each person is using through the course of developing the strategy.
The strategy management process is depicted as follows:
Simplistically, the purpose of a strategy workshop or process is to answer five questions:
1. What business are we in?
a. What is the corporate culture?
b. What is the risk appetite?
2. What is the endgame or, in other words, what does success look like?
a. Asset sale
b. Public listing
c. Family business hand-down
d. Stop investment and take the money in annual dividends.
3. Why will we succeed?
a. Analysis of the operating environment
a. How is value created?
b. Who are the competitors?
4. How will we succeed?
a. S.W.O.T. analysis
b. What is the business model?
c. What is the style and structure of management?
d. What are the priorities?
5. How will we manage success?
a. Organisation structure
b. Compliance management
c. Performance management
The strategy workshop should open with confirmation of the nature of the business, the company culture, and the risk appetite. The nature of the business is to answer the question: “What business are we really in?” Often the answer will revolve around business models such as treasury or risk. These models are then placed in the context of the business they operate in. For example, supermarkets are generally in the treasury business and construction companies are in the risk business. Understanding the company culture will inform the strategy process as to the nature of the risk the company is willing to take on. For instance, a conservative company will not endorse a high risk strategy.
It is difficult to develop a strategy if there is no consensus on the nature of business, culture and risk profile.
The strategy workshop can now move to an analysis of the endgame. The purpose is to establish agreement on the exit strategy. The exit strategy is a statement of how the owners will turn their investment in the asset into cash. Options include: sell it, list it on the stock exchange, or take the cash in billings without actually building the asset. An equally acceptable option is to give it to the kids.
The endgame question informs the investment decision. For example, it is very difficult to sell a professional services business and if the principles wish to exit the business, then investing in the business may not be the best way for them to get value from it. Rather they should maximise their billing and take out the value in dividends over the next few years, then simply close the business and walk away.
The endgame question is equally valid for a public company, but the alternatives are different. There is only one objective for the directors of a public company and that is to maximise shareholder value. This reduces the directors’ endgame to the alternatives of selling the entire company or selling the shares they hold in the company. There are a few additional complex options that are not included in this article.
If the business is saleable, or it is a public company, then the exit strategy will always be to sell the shares for the highest value possible. The business strategy must therefore focus on activities that increase share value in a sustainable manner.
The longest practical time horizon for a strategic plan is three years and many would argue that this is too long, but this depends on the market the company operates in. Developing a three-year strategic plan does not imply that the owners will exit in three years. The time frame is only to provide context for the strategy workshop and if the strategy development process is conducted annually, then the three years becomes a rolling three years. For some markets such as infrastructure development, the investment period is well over ten years.
At the beginning of this article I mentioned the need to manage assumptions. Through the course of agreeing the endgame, a number of explicit or implicit assumptions will have been made and the next stage of the workshop is to expose and critically examine these assumptions and answer the question: “Why will we successfully achieve the endgame?”
The intent of the question is to force an examination of the assumptions made about the market the business operates in (external environment) and the business’s ability to operate in that market (internal capabilities).
There is no right or wrong order in which to approach these two mini workshops. My experience is that workshop participants need to discuss their internal environment before they can properly consider the external environment. The problem with this approach is that it can become very myopic and the thinking becomes constrained to considering what is known, rather than including what is unknown. If the workshop sequence does start with an analysis of the internal environment then it should include a reconfirmation of the results after the external analysis concludes. This will ensure the capabilities considered in the internal analysis adequately address the opportunities and threats identified through the analysis of the external environment.
For the internal analysis workshop to be successful it is important that there is agreement on the core business. That is agreement on the question: “What business are we in?”
Understanding what business you are in, tells you what you must be competent in and, by inference, what the business must be capable of.
Many capabilities create a competency.
The internal analysis is therefore a review of the existing capabilities against the nature of the business. It is a review of what exists now and what capabilities need to be introduced or enhanced. To guide the identification and classification of capabilities I recommend the B.T.O.P.P. model. It is a simple but practical model for structuring the analysis.
It is important to keep the analysis at a high level to avoid getting mired in conversation on the nitty-gritty. The following table provides a good structure for collating the results.
Column A can be renamed “business objective” or “core competencies” or similar. The last column is important. It captures the group’s opinion on what needs to be resolved to close the gap. I recommend using the B.T.O.P.P. model here again to check for completeness. This is in addition to using it for the capabilities analysis. For example, if the desired capability is to be able to establish a “multi-local” distribution chain or to be capable of transacting in multiple currencies, then the issues will be multi-faceted. Using the B.T.O.P.P. model creates a common vocabulary for recording the issues.
There are many models that assist with the analysis of the external environment such as Porters Five Forces (shown below), the P.E.S.T. (Political, Economic, Social and Technological), and P.E.S.T.E.L. (PEST + Environmental + Legal) frameworks.
Source: Porters 5 Forces
The results of the analysis can be captured in a table as shown.
Column A describes the nature of change anticipated in the market.
While the table is simplistic, care should be taken to include as much detail as possible when describing the anticipated change. This may require adding additional columns. Depending on the depth of the analysis, a different table may be used for each analysis topic, or one table for all. The table is intended only to collate the issues, not to solve them so there is no column for mitigation actions.
The internal and external analysis addressed questions 3 and 4 (referred to at the start of the chapter) and provided the raw data required to answer question 5. The workshop is now ready to consolidate the issues and prioritise the actions for the next 12 months, 3 years, 5 years etc. The critical issues framework can assist with this process.
The methodology is to use the grid to “sift” the issues gathered through the two analyses to determine the critical issues. It is important to treat the grid as a “relative” analysis in the sense that all the issues are important, but some are more important than others. This means that you should be able to place an issue in all nine cells. Placing an issue in the low priority cell does not mean it is not important. It only means that, of the raised issues, it is of a lower priority. The critical issues are then further analysed as shown.
The final step in order to conclude this stage of the workshop is to perform due diligence. The approach is to cross-reference the priority actions captured in the previous table to the business objectives discussed at the start of the workshop, or the required competencies highlighted through the capabilities workshop. Using a simple light/dark analysis provides an easily understood summary. Dark shading represents a closer match between the objective and priority.
Cross-references that are overly dark should be examined for completeness. Is the underlying issue fully described and understood? Is the priority correctly applied?
The priorities are then associated with a high-level timeline and the workshop is now ready to answer question 5: “How will we manage success?”
On the basis of “a journey of a thousand steps starts with the first step,” the purpose of question 5 is to ensure there is agreement on the tactical changes or projects required to execute the strategy. The timeline provides the priority.
I close with the observation that managers frequently do not allow enough time for everyone to fully consider the points being discussed.
The commonly heard statement is, “Let’s just get something down on paper and we can refine it over email.” This approach may improve efficiency but it destroys the debate. It is recommended that each activity in the workshop is addressed twice, if not three times. If it is a two-day strategy session, then repeat Day 1 on Day 2 to give people overnight to really think about the issues. Then hold a further review a week or two later.