By Andy Burrows
[First published 21 February 2018]
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This is part of a series of articles looking at Finance activities, and basically asking 'why?' The premise is that understanding why we do things helps us to do them better. It may even fundamentally change the way that we do them. If you haven't seen it already, take a look at the introductory article that explains the approach I'm taking: The Purpose-Driven CFO Part 1: Introduction
I guess the first question that might spring to mind is why consideration of strategy falls into a series about Finance. To some, Finance is still the bean counting, number crunching, function. And to them, the CFO is still the chief beancounter. These people don’t see Finance as having anything to do with business strategy. They see Finance as the people who count the pennies spent and pennies received, and tell the board how much profit the business has made. Why should Finance have anything to do with deciding how the business should be run?
That attitude ignores two key things.
Firstly, when investors, owners or shareholders want to understand why their business is not performing as they want it to, who do they turn to (or on!) first? The CFO! For them, the CFO should understand what is driving the performance (or otherwise) of the business.
Secondly, therefore, the CFO is responsible for providing the framework for managing business performance. And that framework must include strategy development.
So, a “purpose-driven” CFO must be clear what ‘business strategy’ is, why we have it, and how it should be developed. It doesn’t mean that the CFO should actually do all the strategy development, but they should set the parameters for strategy development.
I’ve said this many times before, but I think this is a good definition, so I don’t mind repeating it:
A strategy can be defined as a course of action to achieve an aspiration or overcome a problem.
In business, the most important aspirations are those of the business owners (including investors and shareholders); and problems are stated in terms of risks or issues that may detract from what the business owners want.
What’s the purpose of strategy? It’s to come up with a plan of action to ensure that your aspirations are achieved and problems are overcome. So, what a strategy looks like is a step by step action plan, with a statement of the intended outcome.
Therefore, some of the ways we think about strategy need to be reconsidered.
For instance, the way I used to think about it when I was first exposed to the annual cycle, when I moved from public practice accountancy into business finance, was like this:
In other words, if we’re not careful and purposeful, we can give the impression that a strategic plan is just a longer term version of a budget. It’s just an extrapolation at a higher level. Or worse, perhaps it’s just where we move from plans into “hopes” and “dreams”.
So, what are the implications of accepting this definition and the purpose of business strategy?
One of my first thoughts is that if strategy is about planning how to achieve the owners’ aspirations for the business, why do we only think about it once a year?
Let’s think about what goes into strategy development.
Well, first we have to understand and validate what the owners’ expectations are. What do they want out of the business? What profit margins? What increase in share value? And how do they expect us to do that? (By selling cars or servicing photocopiers? By being number one for quality? Price? Value for money?)
We then, maybe, look at a few different specific scenarios that fit those parameters, and create specific goals.
Critically, we then assess the current performance of the business (and projected financial performance) to start to highlight where the gaps (opportunities and threats) are. We get competitor information, customer feedback, etc., alongside financial information, KPIs.
We put a value on those opportunities and threats, and then we have to come up with ideas that will plug those value gaps. The ideas may come in the form of process improvement projects, acquisitions, price changes, new sales channels, advertising/sales/marketing campaigns, new systems, and so on.
Realistically, do those ideas all arise in those two months when we’re having the annual ‘strategic planning’ round? No. And if we want our people to be dynamic and free thinking, we shouldn’t limit progress by fixing a period when we listen to ideas.
Senior managers in business must always, no matter what time of year, be able to articulate what the current strategy is, and what the gaps are.
You may still have an annual focus on strategy, but if you do, my advice would be to see it in two ways:
The business environment changes almost constantly. Competitors are changing. Customers’ needs change. Threats and opportunities arise without much warning from legislation, regulation, government policy, economic events, and so on. Therefore, having a fixed strategy, or a fixed time to think about strategy, leaves the business vulnerable.
As I said earlier, you may still want an annual focus on strategy. That may be the right frequency for your business. But more frequent may be better. If we accept that the purpose of strategy is to come up with a plan of action to, “achieve an aspiration or overcome a problem,” then we will want to be flexible enough to be aware of, and respond to, the changes in the value gaps.
One of the things that has struck me over my years involved in business planning is the willingness of top level management to live with gaps in the plan. Every budget or long term financial plan I’ve seen has had one or more “overlay”. They sometimes call it a “task” or a “budget challenge”. It normally means that the individual functions have budgets that everyone knows don’t add up to the right number, but the Board didn’t have time to bring everyone in line.
Finance sometimes roll their eyes when this happens. It means that at the top level you have a financial plan that you know is not achievable. And that would certainly be a concern if you don’t have any process to narrow the gap, or to achieve the “task”.
But this is where the flexibility comes in. What the top managers are normally recognising is that people within the business are always coming up with ideas. Some of them have a longer lead-time than others. Developing a new product could take years. Running a new ad campaign could be done within weeks.
So, what’s needed is three things:
First, there needs to be an awareness in the business of what the challenges are, where the gaps are, and what potential solutions are being discussed. Focusing the attention of people in the business on what the biggest gaps are, and involving them in coming up with the solutions, is motivating, for a start. But it also means that everyone is aligned on the right priorities, and there’s a sense that we’re all pulling together in the same direction.
Second, there should be an explicit strategic element in the investment portfolio management process. What I mean by that is that, certainly in big businesses, managers come up with ideas and submit business cases for change projects all the time. And someone must decide whether to approve those projects. If the pot of investment funds is limited, how should it be allocated? I would argue that projects that are explicitly linked to one or more of the communicated strategic issues/gaps should be given greater priority. There may be other value-adding projects, but they shouldn’t be approved if it means that there won’t be funds available to address one of the recognised strategic issues.
Third, you need an effective process of regular strategic performance review. This means that you are continually monitoring how well your business strategies are turning out. Admittedly there is always a difficult question over whether a strategy is not working or just needs more time. And more than that, if a strategy doesn’t appear to be working, is it fundamentally flawed or does it just need a slight adjustment? But my point is that without regular review, without KPIs, you don’t even know whether there is a problem or not.
With these things in place, strategy can be reviewed, enhanced, amended and improved, all the time, without having to wait for that once a year ‘strategic planning’ round.
It must also be said that if strategy is a course of action to achieve an aspiration or overcome a problem, then it’s not always about the long term. We tend to think of strategy as being something special we do to focus on the long term. And it certainly is weighted towards the long term.
The reason that strategy tends to focus on the long term is because the aspirations of the business owners are normally long term aspirations. (Those of you who work in Private-Equity backed businesses probably want to argue they are more short-term-ist. But good PE investors, even those who want a quick return from a business sale, will be thinking of who will buy the business from them; and the value of the business will be greater if it has a credible long term future and a strategy to underpin it.)
So, I guess my point is twofold:
Having a purpose-driven view of strategy helps to give some meaning and value to a process that could otherwise become tedious. It can free you from ‘going through the motions’. And it can lead you to think strategically in all your business decisions, which should result in better decisions and a better performing business.
To save you looking, here are the links to all the articles in this series:
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