| Mostly we are concerned with relatively low-stress situations where management wishes to drive faster growth, avoid possible constraints, or reverse declining performance. Sometimes, though, organizations find themselves in crisis, with resources and revenues in sharp decline and financial losses that are worsening so fast as to threaten their survival. Drastic action may be unavoidable – but what action? | |
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It seems Finance has taken over Strategy’s role in recent years (our fault, not theirs), and we know this can strangle a business. The CFO tells the CEO to keep operating margins up, so pushes down on R&D, marketing, training, and just about anything needed to develop. So we keep slogging along with little growth, just about keeping investors calm with decent ‘returns’.
At least this might keep business risk under control – right? Maybe not. If the business is squeezed so it only just about has enough people and revenue-spending to keep afloat - what happens if market conditions worsen, competition hots up, or some misfortune arises? Our top-line numbers suffer, and we have no slack whatever to respond. If the CFO is still in the driving seat, she or he will likely urge more cost-cutting, making matters still worse.
I hadn’t spotted this before – Finance-led strategy probably gives us the worst of both worlds!
| Resource attributes pose challenges for managers of non-commercial organizations, just as they do for business executives — clients, beneficiaries and other demand-side resources bring with them the service demands they place on the organization, staff bring skills and experience, and so on. What issue causes concern for many not-for-profit organizations? |
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There is a ton of academic stuff on this, but our dynamics terminology can be quite exact about it.
To “adapt” implies building specific resources and capabilities that previously did not exist. For example, a current client is trying to move from a hardware-sales focus to a “solution-provider”. They need to design solutions for distinct markets they serve (a solution = the hardware + control systems + ongoing support). Creating these solutions is a capability they currently do not have. Nor do they have the people (in sales, design, project mgmt) to start developing that capability.
We can specify not only the numbers of such people needed, but also the rate at which they can be hired or developed, the rate at which *they* can then build solutions, the numbers of potential customers those solutions can be sold to, the rate at which those potential customers can be developed, and thus how costs, sales and profits can grow over time – to get to a cash-flow forecast from this strategic initiative.
Jan 272012
Just spoke at the Austrian Financial Controller conference, organised by Contrast, the largest training and consulting firm in the market. “Controlling” in the German-speaking world is already a more strategic role than management accounting offers in the UK or US. Strategy seems to feature little in either the Chartered Institute of Management Accountants (CIMA) or the Institute of Management Accountants (IMA) – neither body’s professional qualifications appear to offer any content on strategic management. The Austrian controllers certainly get the need for strategy to guide business performance, and share a frustration that they get little input from strategy professionals in fulfilling their role.
Contrast’s founder, Professor Werner Hoffman is working on building strategy dynamics into the company’s training programs, as well as Vienna University’s Masters courses in strategy to help build this important link from strategy to financial performance.
| One specially useful case where resource attributes arise is when one resource brings access to other potential resources, most often customers… | |
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Just got this question on my LinkedIn group – Should a mid-size multi-business firm spin-off different businesses into independent companies to spur growth or pool-in collective resources for a common growth program?
This goes back to the issue of “related diversification” – not essentially much different for mid-size firms than for large ones. Back in the 1960s, unrelated diversification was all the rage, spurred by the BCG matrix ideas, but it then became clear that ‘corporate’ added no value to such random business portfolios, and raiders broke them up, selling the bits to groups where they added value.
Same applies today – if any one of your businesses really has no connection with the others, then it is probably worth more to someone else with whom it *does* fit than it is to you. How to tell? Estimate its likely future cash flows in your hands, then ask if someone else could make those cash flows grow faster – for example, do they have sales channels that could build sales faster than you can, or do they have similar manufacturing plant that could be rationalised with yours? If yes – call them up and see what it might be worth!
If one of your businesses *is* related to others you own, though, check which resources and capabilities are common, and seek ways to strengthen them. It’s not exactly a “rule”, but shareable resources and capabilities are commonly at the back end of the business – R&D, IT, sourcing, production – with the front-end (marketing, sales, service) being harder to combine across different businesses. The challenge is to make this resource-sharing effective, without becoming cumbersome and holding back any of the business units involved in the sharing.
Online groups seem obsessed with asking what Strategy is, and what’s its value. If we don’t know, we can hardly expect others to listen to us. It’s simply setting powerful but realistic aims, and defining how to get there. It’s purpose is to create business value (NPV of future free cash flows). Because things change, these must be updated continually. (In non-commercial cases, the purpose is to achieve non-financial aims, though within financial constraints).
So, let’s stop debating this basic issue, and focus on working out, codifying, and explaining how to do strategy well, whatever the circumstances.
| There are a few candidates for title of the most useful framework in strategy dynamics – and this is sure one! | |
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| It’s not just customers and staff whose ‘qualities’ affect performance – many organizations rely heavily on physical assets for their operations. How do they affect performance? |
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