Category: STRATEGY

The Company’s top administration body, usually the Board of Management, sets the long-term strategic goals, frequently taking into consideration the input of the top executive: the CEO or Managing Director.

At their turn, the CEO and the management team, elaborate, propose and, after the Board approval, execute the most convenient strategy to achieve the strategic goals. The key executives are, therefore, the Champions of the Strategy.

The implementation of a new strategy, due to the setting of new goals or to the adjustment of the previous strategy, should trigger the review of the suitability of the executive team in charge of carrying it out, either revalidating or altering its composition.

The ideal executive team must meet suitability requirements in two basic aspects:

• Capability: to have the necessary competence and empowerment
• Willingness: to be aligned and committed to both the strategic goals and the strategy to be implemented

There’s consensus between management experts on the importance of counting with competent and empowered executive teams committed to the business strategic success. Paradoxically, a systematic and regular analysis of the alignment of key executives with goals and strategic is far from frequent. Skipping this control might jeopardize the accomplishment of strategic goals and cause talent and opportunity losses.

Competence and Empowerment

When appointing an executive team to elaborate and execute a strategy to achieve the company goals, one must start by analysing and comparing needed and existing competences: does our management team the necessary competences (knowledge, skills and experience) to elaborate and implement the strategy? This is a dynamic checking, as company goals evolve with environment and business change: the ideal executives to reach yesterday’s goals are not necessarily (or not yet) the right ones to achieve tomorrow’s.

Moreover, managers with the necessary competences for the formulation and execution of the strategy must be sufficiently empowered to do it, through their formal (organizational position and decision-making power) and informal (based on authority, track-record and trust) leadership.

The double verification of Competence / Empowerment is an effective tool for the selection of management teams fit for the formulation and implementation of a specific strategy, according to their degree of specialization; for instance, different executive profiles are needed to implement a growth strategy than those idoneous to lead transformation, restructuring or profitability increase strategies.

We can illustrate this double verification with a simple graph:

An executive team located in zone A, highly competent and empowered, operating with sufficient autonomy, will maximize the chances of a successful implementation of a specific strategy.

In the absence of executives in zone A, managers in zone B (duly empowered) or in zone C (through a timely development of their skills) can be a good alternative. It is important to highlight that many senior executives or management teams with a successful track record fall in this area C when the company requires a significant turnaround in its strategy or substantially changes its long-term goals. In this case, the company should consider the temporary incorporation of one or more A zone executives, while the management team acquires the necessary missing skills.

Many strategies fail due to a non-systematic and rigorous application of this type of verification: zone B executives entrusted with the strategic mission often end up frustrated and burned-out, as they feel competent but powerless; in turn, executives in zone C who assume responsibility for the strategy will likely lose the confidence of the Board and end up in zone D.

Competent and empowered but… committed?

Executives who have the competence and empowerment necessary to carry out the strategy and achieve the long-term goals are potential candidates to form the team of Strategy Champions. To confirm their suitability, a final verification is needed: what is their degree of commitment to this mission?

This analysis is not about checking the loyalty and good faith of top executives, which is an initial assumption. It is about testing the degree of alignment of this team, in charge of leading the strategy, with the two key elements:

• Are they aligned and committed with the long-term goals set by the Board?
• Are they convinced that the selected strategy is the best one to achieve those goals?

One way to ensure this alignment and commitment from the start is to allow and encourage the contribution of senior executives to the setting of strategic goals by the Board, as well as the constructive dialogue between the Board and the Management Team in assessing and approve the strategy. The objectives and strategy created in this way will be more accurate and have greater odds of success.

It is, however, difficult to appraise the degree of commitment of an executive by means other than an open, candid and unbiased discussion.

However, it is difficult to assess the degree of commitment of an executive by means other than an open, honest and unbiased discussion.

It is also possible to graphically illustrate this last verification:

The ideal team will be led and integrated by Strategy Champions, aligned and identified with the long-term Goals and the chosen Strategy. However, the team may include Executors (capable of implementing a strategy without completely sharing the objectives pursued) and Critical Experts (who, without jeopardizing the advancement in the implementation of the strategy, may contribute with ideas for its improvement and optimization).

Managers who, being competent and empowered to participate, are not aligned with either the Goals or the Strategy cannot be involved in its implementation. They can be in charge and focus on other projects, although they often end up leaving the organization in search of projects to identify with.

Champions of Strategy

In summary, a critical process for the survival and success of the Company, such as the achievement of the Strategic Objectives and the determination and implementation of the Strategy, must be assigned to competent managers committed to those particular specific objectives and strategy.

Whilst it is a frequent practice in many companies, it is not advisable to leave a revisited strategy and goals in the hands of the existing management team without validating its suitability and commitment to accomplish it.

This recommended practice is not intended to install distrust between the CEO, the Management Team and the Board, rather the opposite: Boards can trust a CEO able to recognize and address the need to reinforce the top team with executives counting with the necessary competences to implement the strategy.

Author’s profile J. Miguel Noriega

The passion, the concentration of efforts and the commitment of executives to achieve the long-term objectives – the fulfilment of the company’s mission and social responsibilities towards shareholders, workers and other interested parties- are key elements in the success of any business.

Without a strong team involvement in carrying out the common mission, the long-term success of any company becomes very difficult, if not impossible. Managers committed to their strategy and objectives are personally bound to them, which maximizes the chances of success.

This close link between manager and strategy, while essential, presents an inconvenience not always well recognized and very infrequently addressed by companies: executives observe the strategy -the company business, in general- from the inside and rarely have the opportunity to stand and place themselves in the position of an experienced external observer. What’s more, if they did, they risk losing intensity and focus, both necessary for the successful execution of the strategy.

Without this “putting into perspective” it is easy for some management shortcomings to appear, such as:

Partial perspective

• Lack of regular benchmarking: comparing with ourselves along the time is not enough
• Vision exclusively intrasectoral or intra-business: “in this industry it is like this” or “this is how things are done here” impoverishes or eliminates innovation
• Searching for new answers to the same old questions (lack of “out-the-box” thinking): the possibility of creating a disruption that gives us a competitive advantage is reduced

Excess subjectivity

• Emotional bonding with strategy and products: how many companies “fall in love” with their products?
• Emotional bonding with the team and colleagues: trust and teamwork lead to the point of not challenging any decision taken by the peers.
• Personal and group previous experiences: good and bad experiences lead to repeat or avoid decisions, instead of reviewing and learning from them.
• Action limited to known ground by managers: one does not usually aspire to the unknown.

Decision making biases

• Confirmation bias: we select data seeking confirmation of our intuitive thinking
• Sunk costs: persisting with bad decisions due to irrational attachment to costs (monetary, emotional or reputational) that we cannot recover
• Group thinking: avoidance of discrepancy
• Authority bias: lack of constructive challenge to management
• Bandwagon bias: accommodation to others’ decisions without necessarily agreeing
• Strategic misrepresentation: unjustified excess of optimism

Nobody questions nowadays the need and usefulness of performing external evaluation exercises, such as financial audits (whether required by the law or by internal regulations), compliance or human resources audits, validations of industrial, IT and logistics processes or even commercial audits. All these processes, naturally integrated in the management practice of the companies, provide an external and expert vision that, properly used, facilitates the continuous improvement of the organizations.

However, it is rather surprising that the formulation and execution of the strategy -probably the activity with the most impact on the mid and long-term results of the companies- does not undergo an external periodic assessment to confirm the adequacy of the decisions taken and / or allow the introduction of adjustments and improvements at the highest level.

Someone may argue that the external validation of the strategy could undermine the leadership of the management team or its first executive, but that is – in sales language – a false objection. In fact, considering the top management of companies as infallible at all times and circumstances is an obvious anachronism.

Quite the contrary, the manager who challenges and tests the quality of his decision-making shows great maturity and solidity as a leader and, without a doubt, will be able to obtain better results in the mid and long term. No one is in possession of the absolute and immutable truth, all human processes are susceptible to improvement, even more those – like the strategic formulation – containing a strong component of subjectivity and that have to do with trust in people, in their capabilities and perceptions.

Therefore, it is highly recommended to include the Strategic Validation* among the periodic practices of the Senior Management and the Board of Directors. An external view, constructive yet unbiased, certainly carried out by professionals with an extensive and wide and comprehensive practical executive background, will improve to some extent – in the vast majority of cases – the strategy formulated or the quality of its implementation. The management team, at the head of the initiative, will be strengthen and the confidence – of the manager himself, of the shareholder and of the board of directors – in the direction taken will be reinforced.

* It should not be confused with the use – in most cases well justified – of external consultants for the organization and implementation of new projects or for the management of organizational change or transformation. The aim of the Strategic Validation is to assess the formulation and implementation of the general strategy, which is part of the responsibilities of the board of directors and / or the senior management.

Author’s profile: J. Miguel Noriega

The Shakespearean dilemma in the title is frequently included in the boards of directors’ and management committees’ agendas. Business leaders, faced with this quandary, tend to opt naturally – almost instinctively – for growth, the greater and the sooner the better. That leads organizations to embark on ambitious growth projects leaning on their existing structures. Without calling into question the convenience of thinking about continued growth, it is always worth considering what is the best way for businesses to grow or keep growing.

A successful company necessarily grows in the markets in which it operates, offering products and services with certain features and quality and with a certain way of doing that determine their position in the market, through their market share.

There comes a time when growing in the market in which we operate becomes difficult: we have reached a very high share in a mature market, which can hardly grow, or the cost of capturing additional share far exceeds the benefits, either by excess of competition, emergence of new technologies or other reasons.

At that moment, many companies consider either their geographical expansion, or addressing new market segments -with the same products adapted to different consumers- or, frequently, the introduction of new products and services more or less related to the current portfolio, through a diversification process.

The two strategic decisions of growth

The proper management of the strategy and risk – responsibility of any Board of Directors or Management Committee – includes the evaluation and selection of the growth strategy and, equally important, the best way to implement it. It is convenient to separate these two analyses and decisions to avoid the risk of giving up the most appropriate strategy due to the complexity of its implementation in the organization.

Once the ideal growth strategy is selected, it is wise to evaluate some items having an impact on the best way to implement it. We should answer the questions:

• Have we fulfilled the Company’s Mission? What is the chosen growth strategy contribution to it? Indeed, the mission must be a compass that guides all the company’s efforts. By answering this question, we will know if the Mission is alive, is real, of if it is just a nice phrase decorating the wall of the Board room. If our Mission does not help us to make decisions of this strategic calibre, it is probably time to revisit it.
• Have we reached the optimum organizational size from which the marginal value created can only drop? The cost efficiency provided by economies of scale does not always help maintain the level and quality of the value we bring to the market. It is necessary to identify that size that should not be exceeded.
• Are the current structure, organization, resources and equipment suitable for carrying out the chosen growth plan? Are we not risking to unbalance the organization, burn our teams and damage our current business by demanding something for which they are not prepared? What risk are we willing to take in our existing business to achieve new growth?

If, when answering this kind of questions, we conclude that the growth we propose cannot be achieved without great risk to our current organization or within the framework of our Mission, we must think of alternatives so as not to give up our growth strategy. An immediate option is the acquisition of an existing business that will directly place us in the chosen growth direction. This solution, which seldom fits perfectly with what is sought, deserves independent reflection. Therefore, I will focus here on other internal solutions, tailored to our company and controllable from within.

Decentralized growth

Jack Welch advocated the growth and innovation of the gigantic General Electric through autonomous and free action of independent and agile teams. The North American conglomerate – a paradigm of diversification – selectively gave up centralization for the sake of its growth model.

Indeed, our organization could benefit from the creation of autonomous units -backed by a common support infrastructure- that explore different options that would make the new business viable, as if they were small and agile start-ups, before or instead of embarking the company in a change of scale that would make it lose its optimal size and her focus on what already works well.

This is about going beyond the business units or divisions: creating truly autonomous entrepreneurship units, with their own decision-making capacity and framework – within a budget limit marking the limits of the accepted risk – and free of the burden and limitations of the central structure.

The decentralized growth model offers multiple advantages both to maximize the chances of success of growth projects and to boost organizational change and facilitate the management of financial risk. It is as well a powerful talent management tool.

It is definitely an option to be seriously considered by companies that face one of the most important decisions: growing and how to do it.

Author’s profile: José Miguel Noriega

Value is a subjective concept impacting most of our economic decisions, which makes it particularly attractive as a business strategy analysis tool.

In spite of the above, companies and organizations not always use value -at least not in a systematic way- when designing their business models or formulating their strategies. Figuring out the company’s Value Chain, far from being a purely academical exercise, consultants’ jargon or an exercise only valid for big corporations, actually is a powerful and practical tool that can be applied to all business sizes.

Any business’ founder has a clear notion of the value it brings to the market: this is what allows him to attract and keep the first customers, achieve the first sales and make his business grow. When business grows in complexity, diversification and -especially- when its organization grows, it becomes necessary to explicit and share the company’s value creation model so the entire team can organize around it: the company’s Value Chain formulation is a practical and useful tool to do it.

All the company’s resources and processes (design, development, manufacturing and distribution of products and services) are organized around the value creation or capture. The value so created has to be perceived by the customers and recognized through the product price, determined in a competitive environment.

We can design our Value Chain by addressing a series of simple questions (simple to ask, not always to answer):

• What does our product consist of? What does it bring to the customer and how does it do it? This is the value creation source.
• How do we obtain the product? How much time and how many resources are needed to obtain it? The answer will give us the key of the cost of the created value.
• Why our customers buy our product? This is the perceived value.
• What makes our product different from competition? This is the differential value.
• How is our product selling price set? Price represents the recognized value.

If we manage to answer this kind of questions (and/or some other more company/sector -specific ones), we will have in our hands a practical and powerful tool to manage the value creation that, properly shared, will allow teams to align to the Value Chain, the business’ backbone.

By identifying these basic concepts -properly adapted to our business- we will be able to produce action plans to achieve our strategic objectives and scan the markets and segments to address and the ones to avoid. For instance:

• To implement a differentiation strategy in a competitive market, we will focus attention and resources on the product design, development and manufacturing so we can increase our differential value.
• If our strategy aims at growth and market penetration, we will pay attention to increasing the customers’ value perception through marketing and promotion.
• A profit-oriented strategy will aim at maximizing the difference between the recognized value and the cost of the created value. Depending on the market situation and on our product differential value, we will do it through recognized value increase (average price increase), through reduction in the cost of value creation (resources optimization) or through a mix of both.
• A market/segment where -due to much competition or low products differentiation- the price level is too low compared to the value created is a market/segment to avoid.

When we formulate and share with the organization the Value Chain associated to the strategic objectives, we provide to individuals and teams with a simple and autonomous method to identify and discriminate the tasks and processes adding more value -to be potentiated- and those generating less or destroying value – to be suppressed. This is as well an effective method to involve and motivate people, as it creates a direct link between each individual’s contribution and the business backbone: The Value Chain.

Author’s profile: José Miguel Noriega