Formulating a Strategy
I have spoken about Purpose, Vision, Mission and Values elsewhere. These elements focus on the “why” behind you organisation or initiative and some of the “How” you are going to do it (like values linking to behaviours). That really sums up the being of your organisation. What is your organisations purpose and personality. Linking closely to Mission is Strategy. Answering the “So, what are we going to do? And, how are we operationally going to do it?”
I want to take a minute to make sure we are on the same page in terms of what a strategy is and what it does.
Strategy is a road map. It is a view towards getting to a particular destination. It is a view on the best route to take, the best mode of transport and who and what to take along the journey.
As you set out on your road trip, along route 1, in your car, with ACDC on the radio and a coke readily at hand – a warning comes onto the radio that there is a hurricane looming up ahead. What do you do? You go back to your map and you change course! Setting a new route or even choosing a new destination if the hurricane has destroyed your last one. And maybe even your mode of transport! (you’re too close when you hear the warning and need to get airlifted out of the hurricane’s path, for example).
Your strategy is also a view of where NOT to go, what modes of transport NOT to take and who and what will NOT be in the car.
And underlying all of this is a circle back to WHY. Why are we choosing this route? What are the TRADE OFFS between the routes and modes of transport and WHY are we selecting this combination of route, mode, and snacks to reach our desired destination?
There is no right strategy and there is no right level of detail. For example:
Strategy 1: We have spoken to others who have been along this route before. We are aware of the ups and downs and we prepare accordingly. We know where to stop for gas. Which motels to stay in and which sites to look at along the way. We develop a detailed plan and itinerary for each leg of the journey. Tom brings the tent. Jane brings the car snacks. Bill brings the grill. We are taking Mary’s SUV.
Strategy 2: Meet at Tom’s house at 5am on Saturday with basic provisions in a backpack and comfortable shoes. Led by Bill the Ranger, we will set out West and see what we find.
Each strategy is a good one. We can only judge them by the environment and the why.
- If the team was starting in New York and wanted to get to LA for a business meeting in the 21st century – both strategies suck. Take a cab and a flight!
- If the team wanted to raise money for a charity by hiking across the US – go with strategy 2
- If the team was charting the River of Doubt with Roosevelt in the early 1900’s, strategy 2 with a bunch of canoes is your only option!
- If you wish to take a leisurely road trip cross-country, strategy 1 is your answer
Okay then, back to business:
Why do we even need a strategy in the first place?
Well, to be honest, you don’t. You can wing it. However, as an organisation becomes larger and more complex, a strategy assists in a number of areas:
- It provides a conscious, thought-out path to achieve the business purpose and mission (including shareholder returns) which lowers the risk of achieving the goal
- It provides more explicit direction to the team on short and medium term priorities, opportunities and threats
- It provides a framework for capital requirements and capital management
- It is a reference point for staffing and capacity management across the business
- It is a reference point for division and department strategies to keep the moving pieces aligned in a conscious way (human capital strategy, technology strategy, operational strategy, product ……)
Here is my simple framework to strategy formulation. As with any framework, the pieces are complex and challenging to unpack. However, my aim here is to present what I have found to be a relatively straight forward methodology to tackling the development of a strategy.
The diverge and converge portions of the framework are marked to the left and the mapping to the McKinsey 7 Step Problem Solving Framework is mapped to the right. This framework is circular. This is an important observation. The strategy formulation process is not linear and not scientific. There are a set of considerations and inputs that you will circle and circle around, with your team, until you eventually spiral upwards towards a concrete strategic view of your path forward.
STEP 0: PROBLEM DEFINITION
Develop the Problem Statement Worksheet along with your shareholders and stakeholders. What is the Shareholder Mandate and what is the collective Board Mandate? What do shareholders want and what don’t they want? What are they tasking the executive committee of the business to do in order to achieve their desires? I would strongly suggest having this discussed and distilled into a clear Board Mandate and CEO Mandate so it is very clear what your strategy is required to achieve.
Marry this with your Purpose, Vision, Mission and Values as the starting point of your strategy process.
STEP 1: GENERATE STRATEGIC OPTION SETS
Simply put: What strategic choices do you have?
If we go back to our cross-country trip, we have strategic choices on:
- Best route concept to achieve purpose: West to east or east to west? North to South?
- If west to east, which destination: LA or San Fran or Portland?
- Mode of transport: Car, flight, ship, walking, skateboard, hot air balloon …?
- Route options from New York to each potential destination with each mode of transport
- Quality of route in terms of travel comfort
- Link back to mode of transport in terms of what the mode can handle (canoe versus ocean liner, SUV versus bicycle)
- Sleeping options: hotels, motels, camper van, tents, hammocks
What are the big picture variables that will materially change your strategy? Obviously for our road trip, whether we eat potato chips or corn chips along the way is immaterial in terms of developing our strategy. It is very difficult to determine what will matter and what wont when you haven’t done the trip before… Hence, draw off previous experience.
- Look at frameworks – how have other people packaged their learnings from developing strategies before you? What did they learn? What does Harvard Business Review say? Experts?
- Research case studies. What are the learnings from other companies in the same industry? Different industries? Different geographies? What did they find to be critical success factors or strategic choices that turned out well in terms of competitive advantage versus choices that led to issues and inefficiencies?
- Analyse the issues. What do you and your team think are the strategic drivers? What are the big moving parts that impact the outcome? What choices do we have in how to tackle these?
A simple business example: If you are going to have staff, you have some strategic choices.
- Hire staff straight out of high school. Train them and give them systems to do the job. Pay them minimal wage
- Hire staff out of grad school. Give them minimal training and let them design their own manual processes to get the job done. Pay them in the 80th percentile
- Don’t hire staff – build machines to do all the work
- Outsource staff requirements to a low cost country
Each of these strategic options have trade offs, pros and cons, cost advantages versus pain advantages.
Don’t judge. Don’t limit. Don’t assume it wont work or isn’t an option. Put it down. Think about it. Discuss it.
We are generating strategic choices here.
STEP 2: DEVELOP ARCHETYPES AND STRATEGIC SCENARIOS
Now that we have our universe of strategic options, strategic drivers and strategic continuums, we can start to package these into particular archetypes and scenarios.
What’s the difference? One is top down and one is bottom up. Do both!
I look at this as a top down process of creating strategic packages. For example:
What if we were the “Apple” of our industry? How would we package these strategic options? Where would we play on the continuums? What if we were the Microsoft? How would our package and choices differ? What are the implications?
Obviously this is very industry dependent but I would urge you not to draw off top down archetypes or analogies from your industry or geography alone. Remember, this is the divergent, creative, conceptual problem solving. Go wild! Be the MacDonalds of your industry. Be the Lance Armstrong. Be the Red Sox of your industry. How do these top down analogies help you distill particular archetypes for your industry?
- The marketing magnate archetype
- The talent leader archetype
- The execution leader archetype
- The product leader archetype
Linking closely to the above, is taking your different strategic options, drivers and continuums and packaging them into scenarios bottom up.
e.g., if we choose to outsource AND pay top wage in that country BUT we also invest in systems, what does that world look like for our company? Let’s call this our Outsourced Technical Archetype
I look at this as building archetypes from the bottom up. What combinations make sense? Which are a little wacky? Which are down-right silly? Why? Why? Why? Paint different worlds in different colours with different elements and determine what makes them different and the implications of them being different.
We are diverging here. Generating choices. We are learning about what’s possible, not what’s practical. That comes later. We then refine and package these into distinct and discrete scenarios of how we may choose to develop our organisation and our world across the different strategic dimensions. If we choose to be Archetype A then this is what we do and this is what may happen. This is what we wont do if we are Archetype A. Describe these enough to be meaningful and distinct from one another.
STEP 3: “WHAT DO YOU HAVE TO BELIEVE?”
We now start to take a more critical view of our archetypes and scenarios and start attributing pros and cons to each to develop trade offs. Here we start looking at drivers and KPIs for each archetype and determine whether we believe these to be reasonable and achievable.
For example: Lets consider our Outsourced Technical archetype: In this scenario, we are outsourcing our production to a country where we can pay top wage and investing in systems to support production. What do we need to believe to make this possible?
- We need to believe that we can get the right quality from this strategy. Could we? From where? Which country? Which production company? At what cost?
- We need to believe we could manage this outsourced solution effectively? Can we? Do we have Service Level Agreement expertise or can we buy it? At what cost?
- Can we manufacture systems in that country successfully to support production and quality? Who would manufacture? What cost?
For an aggressive retail expansion strategy, a scenario may have us doubling our store footprint in 3 years. We are currently in 75% of malls across the country. Do we believe that the number of malls will grow by 50% in the next 3 years so that we can grow our stores by 100%? Where are these malls going to be? Who is going to build and manage them? Are they in planning yet? De we believe we can be in every mall? Etc. This process allows us to further refine our scenarios, understand the core drivers underneath each scenario and attribute levels of probability or risk to each scenario.
STEP 4: FINANCIAL MODELING
It is now important to get a grip on finances. What will these scenarios deliver in terms of top line and profit? How much capital will be required to deliver this scenario?
Taking the core drivers from step 3, we can model the scenario with quite a bit of detail. We can build income statements and balance sheets. Staffing capacity requirements. Investments in infrastructure and so forth. We can then conduct sensitivity analyses on the core variables to determine which variables are the ones we MUST understand and control. For example, if we find in our modelling that size of store is twice as important as number of stores due to the nature of the stock we carry, we may discount the store expansion strategy and focus more on an existing space optimisation strategy with lower levels of new store expansion.
Build your model to be driven by the core variables so that you can effectively run sensitivities.
I would strongly recommend the book The Economist Guide to Business Modelling by Friend and Tennent - if you are new to this. Push your drivers to the limits. Double them. Triple them. Halve them. Vapourise them. See what happens.
If a driver proves to be really sensitive, it may cause you to go back to steps 1 and 2 to better understand the driver. Who elsewhere has mastered this driver? How did they do it? How far could we possibly push it if we really wanted to? If a competitor blew us out of the water on this core driver, what would we do? If consumers no longer wanted x product, what would we do?
This has often helped my teams identify more scenarios and get much closer to the drivers that really matter and creative ways of influencing them.
STEP 5: STRATEGY DEFINITION AND LEADING INDICATORS
Considering each scenario, the Board and Executive; founders and shareholders; husband and wife; have to determine which scenario best meets their:
- financial return requirements while being
- within their risk appetite for the investment and
- in line with Purpose, Vision and Values
Once the desired strategy is agreed upon, it is important to do two three things:
- Package and communicate this strategy to all relevant shareholders to ensure alignment and excitement
- To cascade the strategy through the organisation to ensure divisional and department strategies support the overarching business strategy
- Determine the leading indicators to be tracked to ensure the chosen strategy was indeed the best one and / or to manoeuvre and change the strategy to changing conditions (like hurricances)
The Leading Indicators should come directly out of the modelling procedure as the core drivers of value in the given scenario. These core drivers must be monitored and understood on an ongoing basis by the executives.
Horizons, milestones and leading indicators should all form part of the tactical planning, budgets and strategic focus areas / projects that come out of the strategy process and into the business.
Remember, strategy is a best guess at the future at any given time. The more time unfolds, the more we learn whether our estimate was a good one or the optimal one. Monitoring leading indicators allow us to determine whether our chosen path is unfolding as desired. If not, huddle and change course!
“Planning is everything, but plans are useless.” ~ attributed to both Napoleon and Dwight D. Eisenhower