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What is strategy, and why is it important for an organization? Mail Print

 

The first part of that question sounds simple enough, what is strategy. However, one of the biggest problems I see with strategic planning is that organizations often have a difficult time defining the word strategy, and using a consistent definition throughout the organization.

For some companies, strategy represents long-term goals, whereas for others the term refers to specific action plans or tactics. Still others may consider strategy a word picture of their ideal future, more akin to what I would term a vision. When multiple definitions are used within the same organization it creates confusion and skepticism among employees who need clear information on what they should be doing today to move the organization forward.

I define strategy as the broad priorities adopted by an organization in recognition of their operating environment and in pursuit of their mission. This definition ensures attention and focus on the organization's core purpose (mission) while also ensuring rigorous analysis of the factors influencing its chosen path (operating environment - markets, competition, demographics, technology, SWOT, etc.).

In the second part of the question you asked why strategy is important, and that is a very valid question. Given the unprecedented rate of change in the world and the fact that organizations must be more nimble and agile than ever to compete, some would question the relevance of strategy, which by its very nature often spans multiple years. But I would argue that strategy is more important than ever because in a fast-paced, change-filled landscape all organizations must possess the ability to quickly ascribe meaning to what is taking place around them and that meaning can only be gained through context. Strategy provides context that leads to meaning.

Let's take a company that has not developed a formal strategy, instead favoring what they consider to be a more agile approach, reacting quickly to the events swirling about them. If their sales go up or down, if employees are choosing to leave for competitors, if customers are defecting, what does that mean? Without the context of a defined strategy the data coming in is meaningless. If, on the other hand, they've chosen a specific market to serve, have identified what products to offer, and carefully considered a value proposition in serving their markets, the information they receive can be analyzed and dissected through the prism of that strategic lens, allowing them to make much more informed decisions on their next steps, now and in the future.

Crafting a strategy requires deep contemplation of the organization's current place in its market, the possible action of others in the space, and steps necessary for the organization to reach its desired future. It is only by undertaking this intense analysis that an organization is able to spot trends, capitalize on intangible assets it has at its disposal, and out-innovate rivals. In the future, only companies that think and act faster than their competition will win, and strategy is at the heart of the organizational thinking process.

 

How large does an organization have to be to consider creating a strategy? The general perception is that for a small company, strategizing is a waste of time.

In my book, "Roadmaps and Revelations: Finding the Road to Business Success on Route 101" I provide four fundamental questions that must be answered in order to craft a differentiating strategy.

1.      What propels us forward?

2.      What do we sell?

3.      Who are our customers?

4.      How do we sell?

The four questions are supplemented with analytical tools to assist in crafting appropriate responses. It is my firm belief that the questions above must be considered by any organization - whether a Fortune 50 or a small local nonprofit - as they are foundational to carving out a space that differentiates an organization, and makes success sustainable.

Large organizations are very different from small operations in many ways, but they share many simple and critical elements: Both rely on selling certain products or services to customers. Both must provide a value proposition that entices customers to buy from them, and both must be crystal clear on the path they will take to build relationships with customers over the long-term. Of course strategy ensures they do all of those things, and thus is vital to organizations of any size.

Small organizations typically rely on their agility to succeed and therefore, as you note in your question, consider strategy a waste of time. But they should not fear the strategic planning process as a tiresome path that consumes months of effort, tying up precious financial and human resources that might be used on what are viewed as more urgent issues. All that is required is a commitment to bring together your team and take the time to carefully consider and respond to the four fundamental questions I challenge all organizations to answer. As noted in the previous question, taking the time to do so will lead to consensus on vital issues driving the firm's future success, and provide the context necessary to make more rapid and effective decisions.

Note: For more information on my four questions, what I deem my Roadmap Strategy model, please visit www.senalosa.com

When does it become too late for an organization to think strategy?

There are organizations today that find themselves literally clinging to life, and for their management team's strategy most likely represents a luxury they can ill afford. For anyone in that situation, of course, it's vital to take whatever steps are necessary to ensure survival in the short term, but I would argue that strategy must be employed should they hope to emerge anew with legitimate hope for the future.

Although perhaps not on death's door, the American company Radio Shack had long been considered moribund; just a matter of time before the actions of behemoths such as Best Buy led to demise. But the company is enjoying a renaissance that can be pinned to an important strategic decision: Shedding it's ‘uncool' image "as the place to find connectors, electronic cables and batteries."  Now Radio Shack offers handsets and service plans from multiple carriers under the same roof, utilizing a menu-based approach that is popular in Europe. By re-thinking what they sell (one of my four fundamental strategy questions), Radio Shack has been able to carve market share which is leading to improved results - their stock has more than tripled since March 2009.

 

In today's fast-changing, highly competitive environment, how is a company's ‘purpose beyond money' justified?

Achieving fair returns for shareholders and other financial stakeholders will always be vital for any organization's success. It is only through strong financial results that organizations are able to invest in the engines of future growth such as top talent in their fields and cutting edge research and development. The danger emerges when financial returns become an end in and of themselves, in other words, when they consume the company, and become its primary focus. When that occurs we see the inevitable cutting of ethical and moral corners that brought down once highly-regarded companies such as Enron and Worldcom, among a host of others.

Peter Drucker, considered by many to be the father of management thinking, commented that the purpose of a business should be to create and keep a customer. With your focus pegged squarely on the customer - acquiring, providing value for, nurturing and growing your relationship with -attention naturally flows to what it takes to win in the marketplace; the innovations and new products that wow the public, thereby fueling your economic engine and completing a loop that drives future growth.

Ideally, how long-term should a company's core purpose be?

When you say ‘core purpose' I assume you are referring to the company's mission, its reason for being, and the force that motivates your employees to engage in the company's work.

I believe a mission statement should be written to last a hundred years or more. While strategies will undoubtedly change, the mission should remain the bedrock of the organization, serving as a stake in the ground for all future decisions. Consider the public mission statement of the Walt Disney company: "To make people happy." While this will forever remain their purpose as an organization, how they go about doing it will no doubt change. Their history provides a glimpse into this changing formula: from simple animation to theme parks located around the globe to blockbuster films, they have evolved but never swayed from their core purpose.

In your book "Roadmaps & Revelations," you have emphasized on ‘one driving force for an organization'. What is the philosophy behind this concept?

Every organization, whether they are consciously aware of it or not, is being propelled in a certain direction as a result of actions they've taken over the course of years; decisions on who they hire, what they sell, how they interact with customers, and many more. I believe the first task when creating a strategy is for an organization to consciously determine what is driving them forward as an organization. In my book, I outline six possible ‘driving forces:'

1.      Products and services: Companies propelled by products and services may sell to many different customer groups, using a variety of channels, but their focus is on a core product or service. Boeing is a good example.  With their technology and skills they could probably design and build a multitude of things, but they've remained committed to the aerospace industry.

2.      Customers and markets: Organizations dedicated to customers and markets may provide a number of product or service offerings, but they are all directed at a certain core audience. Johnson & Johnson's diverse wares have one thing in common: they're aimed at the needs of their core market, doctors, nurses, patients, and mothers.

3.      Capacity or capabilities: Hotels focus on capacity. They have a certain number of rooms available and their goal is to fill them, simple as that. Airlines operate on the same premise, using available seats. Organizations propelled forward by capabilities possess expert skills in certain areas and will apply that toolkit of skills to any possible product or market.

4.      Technology: Some organizations have access to a proprietary technology that they leverage to a number of different products and customer groups. In the fable, Sydney cites DuPont, who discovered nylon in the 1930s. They went on to apply the technology to a varied range of offerings including fishing line, stockings, and carpet.

5.      Sales and distribution channels: The operative word with this focus is "how," not "what" or "who." Organizations that are driven by sales channels will push a diverse array of items through their selected channels. TV shopping networks are a great example. Where else can you buy makeup one hour and DVD players the next?

6.      Raw materials: If you're an oil company, everything you sell is going to be derived from that that black gold you pumped from the ground. You may have the skills and technology to mold the oil into a number of things, but all will be directly descended from the original raw material.

I'm sure some people will be reading this and think: "We have to be a bit of everything to succeed." Forgive the analogy but that is the corporate equivalent of a person suffering from multiple personality disorders, a serious and debilitating condition.

We've already noted at a number of points in this interview the pace of change in the organizational world today. Focus is more important than ever, and organizations that try to do all of these things in an effort to please everyone end up wasting resources, confusing employees, and alienating customers who are looking for brands that resonate through the clutter that surrounds us today. Conversely, organizations that are clear on what drives them forward are in the privileged position of making stronger decisions when faced with competing alternatives because when push comes to shove they are well aware of their ‘corporate identity. Determine what propels you forward, and focus on optimizing it.

Many mid and large sized organizations do not deliver up to their potential. Having sufficient capital and resources, what in your opinion is the reason for this gap?

I believe what you're referring to here is primarily an execution gap. Organizations create a strategy, but are unable to turn it into tangible benefits for customers, employees, and shareholders alike. In fact, research suggests that organizations typically achieve only about 60% of their anticipated financial benefits from new strategies.

The reasons for this execution gap are many and varied, but among the chief causes are the following barriers that Balanced Scorecard architects Kaplan and Norton have identified:

1.      Vision barrier: This suggests that upwards of 95% of employees don't actually understand the organization's strategy. Perhaps it was never communicated, or the associated training necessary to implement it was never provided, but for whatever reason people simply don't know what they're supposed to do on a day-to-day basis to make the strategy a reality. Without that knowledge it's often business as usual, which tends to lead to mediocre (at best) results.

2.      People barrier: Many organizations rely on short-term incentive systems to motivate employees but they are frequently linked to financial targets only. In such an environment, managers will often resort to tactics that drive up short-term results only to jeopardize long-term prosperity. Think about a manager who cuts an important training program in order to lower costs. That action may very well inhibit creative thinking that could lead to the company's next innovative offering.

3.      Management barrier: My personal favorite. Studies have found that most leadership teams spend less than an hour a month discussing strategy. The CFO of one company I read about sheepishly admitted his team spent more time debating the annual holiday card they would send to key customers than their new strategy. Simply put, strategy cannot be executed without thoughtful discussion and analysis of results from a team of committed professionals armed with up-to-date information.

4.      Resource barrier: This one will probably be familiar to anyone who has ever created a budget. It suggests that only about 60% of organizations link budgets to strategy. Of course the budget lays out in painstaking detail what the organization hopes to receive and plans to spend, therefore it must be linked to strategy in order to make informed resource-allocation decisions.

The good news is that these barriers can be overcome by any organization willing to confront their deficiencies and face the facts of their situation. For many, the Balanced Scorecard has been a critical tool in surmounting the barriers. For more information on that topic see the next question, and I also invite you to visit my website at www.senalosa.com.

Being a strategy guru, what tools would you recommend for effective strategy execution?

As noted previously, many organizations fail to fully execute their strategies, and thus execution is an imperative for those that hope to achieve sustainable benefits for all stakeholders. I am a strong believer in the Balanced Scorecard system, a proven framework that helps organizations execute their unique strategies through the use of Strategy Maps (powerful communication tools that clearly articulate the strategy) and Scorecards of performance measures in four linked perspectives: Financial, Customer, Internal Processes, and Employee Learning and Growth.

The Scorecard system was developed by Robert Kaplan and David Norton in the early 1990s and has since been used by countless organizations - large and small, public, private, and nonprofit - around the globe. The tool has proven remarkably successful because it allows an organization to effectively communicate the strategy through objectives and measures, demonstrating to all employees what is necessary for the firm to succeed. Of course I've written three books on the Balanced Scorecard so I have much more to say on the topic. For anyone interested, I urge them to visit my website where they can download a multitude of articles on the topic.

Who is the right strategy owner in an organization? (What level and which department)

Most large organizations will have a Strategic Planning department who own the responsibility for coordinating with business units and senior management to facilitate the development of the strategy. In smaller organizations the role is often held by the company's leader or owner, with input on strategy received from his or her leadership team.

Perhaps a more interesting question is this: Who owns the strategy execution function in an organization? Most organizations would consider strategy execution a shared function, with each business unit, department, and individual responsible for their piece of the execution puzzle, and in some ways this is the case. For strategy to be executed it must be ‘owned' by every employee of the firm.

An emerging trend in organizations using the Balanced Scorecard system is the creation of an office or group with the dual responsibility of both strategy formation (facilitating the process) and strategy execution through the Balanced Scorecard. Although it goes by many names, early pioneers term this new function, the Office of Strategy Management.

Fundamentally, the Office of Strategy Management is the guardian of the many processes - normally cutting across organizational boundaries and requiring unprecedented integration - required to successfully create and execute strategy. As noted above, what's new and different here is the fact that one function or office takes responsibility for the complex and coordinated effort required to develop and execute the organization's strategy. Collaboration and integration aren't left to chance, but are carefully managed under the auspices of the Office of Strategy Management.

Although the art and science of this new function are relatively nascent fields, early research and practitioner experience has led to a number of key functions falling under the umbrella of the office, including: change management, strategy formation and planning, Balanced Scorecard coordination, strategic communication, alignment, initiative management, and corporate governance.

What is Senalosa all about? What is its core purpose?

I created Senalosa with the purpose of helping organizations think differently about strategy and performance management. My goal is to demystify those often confusing and vexing concepts by providing simple yet effective tools that any organization, be they public, private, or nonprofit can use to achieve immediate and, more importantly, sustainable benefits. Through a network of global partners, my firm provides training and consulting services to clients of all sizes. In addition to those services I personally spend a good deal of time speaking, researching, and writing on new topics in the fields of strategy and performance management. To date I have written four books, which have been translated in over fifteen languages, and have had the privilege to address audiences around the globe.

With your global strategy outlook and experience, what is your strategy concern for companies in the MEAPA region?

My concern for organizations in the region is primarily one I hold for organizations everywhere, and that is clinging to old ways of doing things even in the face of clear signals that a new order of commerce is upon us and every organization must adapt if they hope to succeed. Globalization, the rise of ‘customer capitalism,' disruptive technologies - the list goes on and on while just one thing is certain, the tide of change is unquestionable and growing in size and intensity as the days progress.

Paradoxically, refuge from this sea of change can be found in tried and true methods that have existed in some form or another for millennia. Committing to a strategic direction, communicating it ceaselessly, creating alignment among your team, focusing all your resources on execution, and being open to learning and adaptation in light of new information. Those are the steps every company must take if they expect to win in the twenty-first century.

Additional Info

  • Summary:

    This interview attempts to demystify some of the common reservations about strategy and performance management with Paul R. Niven, founder of the Senalosa Group, author and noted speaker with more than a dozen years’ experience in developing Performance Management systems for Fortune 1000, small and medium sized companies, public sector agencies, and nonprofit organizations.

    During this interaction he defines 'strategy' in simple terms, explains the importance of crafting a strategy whether for a large, mid-sized or small organization and discusses the possible driving forces of an organization, identifying which is vital to create a suitable strategy. He goes on to elaborate the common reasons for the execution gap faced by many organizations and recommends tools and best practices for effective strategy execution. Drawing liberally from his book, "Roadmaps and Revelations: Finding the Road to Business Success on Route 101," he provides four fundamental questions that must be answered in order to craft a differentiating strategy. Throughout the interview, he emphasizes the pace of change in the organizational world today and discusses how employing strategy is significant to have a clear vision on 'corporate identity', take the best decisions when faced with competing alternatives and to emerge anew with legitimate hope for the future. Before he concludes, Paul touches upon his reasons for setting up Senalosa Group and shares his concern for organizations that cling on to old ways of doing things in the new order of commerce without being open to learning and adapting.