Hindrances of a Great Strategy

Cog Wheel

Most successful companies manage to create more value but they still find it difficult to select the right assets and use them the right way.  Research has shown that 1 in 10 companies become the leader and sustain their growth in their market over a 10-year period. The rest barely keep up or fall behind. There are seven common pitfalls that has been identified that gets in the way of the leadership team that develop and execute strategy. These pitfalls are briefly discussed below:

Tilting toward the assets you own vs. those you should own

Most leaders tend to hold on to their existing businesses for too long, rather than regularly asking themselves the “best owner” question. This happens because strategies are too often limited by the current business perimeter. They tend to ignore opportunities to expand or build new, transformative profit engines. They are not aware of threats from new players.

Leaning on today’s management routines

Leaders tend to get entangled in their existing reporting structures and routines, making it easy to define their business that way. They fail to recognize the true boundaries and interdependencies among various units in the organization. Managers can achieve greater clarity by looking across the organization to determine where business units share customers, costs and capabilities. They also tend to think about the potential of each of their businesses incrementally, relative to today’s results. This often leads to what is called “satisfactory underperformance” and discourages a full-potential perspective aimed at accelerating away from today’s performance.

Too much “today forward” not enough “future back”

In the absence of creativity, companies try to extrapolate strategy from the past and spend a lot of time scrutinizing short-term forecasts. They downplay or ignore the “future back” perspective, which bolder teams use to produce a fresh and radical set of alternative industry scenarios. In times of disruption, especially fast-paced digital disruption, companies benefit by understanding potential shifts in their ecosystems and how these might affect their position, as well as what implications any change has for their strategy.

Allocating resources democratically

When there is absence of transparency on investment options and potential returns on the part of the leaders, a couple of things happen. Rather than set clear priorities and resolve trade-off across portfolio, they tend to allocate capital like peanut butter, spreading it evenly across the enterprise based on last year’s performance, not future potential. They also get defensive, focusing too much on protecting against downside scenarios and not enough on capturing upside.

Ignoring the value-creation lens

Leaders too often look at the profit and loss only, which narrows the focus on top-line growth and margin improvement. Total shareholder return depends on more than that. It relies on external valuation, cash-flow choices and capital structure. Strategy has to account for all these factors, and it is important for leaders to understand and articulate the “equity story” that underlies a clear path toward full potential.

Using Mergers and Acquisitions (M&A)  as an end, not a means

Beyond synergies, the right acquisitions catalyse broader transformations, an aspect of M&A that is widely underexploited. Too often, however, deal fever rapidly overwhelms strategy when executives pin their hopes on a single opportunistic deal (often at the urging of investment bankers). The desire for an easy step change in the company’s fortunes very often leads to overpaying assets. The true value of mergers and acquisitions lies in establishing and executing against a clear transaction roadmap rooted in the company’s strategic vision.

Failing to account for uncertainty

Market trends like digitalization are shifting business boundaries at an ever-increasing speed. Expected M&A transactions may never materialize and economic conditions may change. Strategies have to navigate this uncertainty by augmenting the company’s no-regret initiatives with strategic options based on well-developed scenarios. In this sense, a strong corporate strategy is best expressed as a set of options and hedges that get triggered as conditions change on the way to the target state.

What a great strategy looks like

Great strategies generate growth and sustained profitability when they focus on scarce resources which includes a company’s capital, time, talent, and energy and where it can and should win. Five clear, actionable objectives help companies produce results:

  • Define an ambition: Define an ambition that sets a high bar for value creation, articulates the target portfolio, and aligns management and the board to embark on a multiyear journey.
  • Develop a clear view of the value upside and downside: Develop a clear view or each asset in the portfolio, with an understanding of each asset’s true full potential and how changes in the industry might affect it.
  • Identify the parenting advantages: Identify the advantages unique to the company and establish the decisions and set of interventions necessary to manage the portfolio to its full potential.
  • Set financial guardrails: Develop financial guardrails to manage the risk/return trade-offs between reinvesting in the business and returning capital to shareholders. Allocate resources differentially, favouring the businesses with the most potential.
  • Develop and orchestrate a transformation plan: Develop plans that will advance the company toward the target portfolio by combining a set of “no-regret” moves with “what-if” options tied to different scenarios that leadership can trigger as the future unfolds.

Research shows that when leadership teams and boards commit to achieving these objectives, they unlock significant shareholder value by laying out a clear plan of action that serves as a North Star for the organization for years to come.

 

COMMENT (1)
josh / January 30, 2020

Voila! Thanks for this,

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