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“Everyone has a plan until
they get hit.” Mike Tyson
Shareholders are becoming
more and more impatient with CEOs who fail to deliver above average returns. Of
course, every CEO is trying very hard to deliver impressive shareholder returns,
but often, strategy is found wanting. The perceived frailty of strategy in times
of economic constraint has prompted many worthy research organisations to revisit
strategy. The authors have drawn from sources such as Wharton, Harvard, McKinsey,
Booz Allen Hamilton, Gartner and TCG to summarise the latest recommendations on
identifying and realising growth potential, and quickly!
Sackings of Chief Executives
rose 70% in 2002 over 2001; “forced turnover” has become commonplace. Booz Allen
Hamilton’s annual study of CEO succession in the world’s top 2,500 companies shows
dramatic differences in shareholder expectations and behaviour since 1995. They
herald “aggressive shareholder capitalism” as the new norm of the 21st
century. Performance related turnover accounted for 39% of all CEO succession
in 2002, up from 25% in 2001. And Europe is the most insecure place to be, CEO
succession events are up 192% since 1995. Below average returns are not tolerated.
Forced CEO turnover varies by industry sector, 44% of cases are in IT and telecommunications,
versus 22% in financial services.
BAH correlate the increasingly
short tenure of CEOs with how business media concentrate on celebrities, neglecting
institutional and economic forces that may be relevant. Nevertheless, individual
leadership is important. Shareholders expect not just vision, but speedy implementation.
Another study (DBM Thomson) puts the median tenure of a CEO at less than three
years, and many last less than eighteen months. 62% of CEOs in the UK have less
than 3 years in office. The pressure to concentrate on the short-term is obvious.
But CEOs who deliver results quickly but then preside over a tailing off of results
are even more vulnerable. Somehow, short-term and strategic has to be combined.
Adapting quickly to changing markets and managing a portfolio of strategic investments
are all-important. A Vancouver company successfully changed its business model
three times in four years, from serving marketing companies, to end-users, to
retailers.
So, you would expect to
see these pressures reflected in CEO behaviour and pronouncements. Apparently
not. PWC in their annual CEO survey in 2002 asked CEOs what factors determine
company value. 94% identified earnings, 87% identified cash flow, 85% identified
strategy. But industry analysts Gartner examined a 10% sample of the Fortune 1000
companies annual reports and found 30% listed no strategies, and many quoted could
be classed as business as usual, such as product improvement (31%), customer focus
(22%) and cost reduction (15%). As Michael Porter himself explains, operational
excellence may provide some short-term competitive advantage, but it is nowhere
near sufficient. It may be enough for the enterprise to survive, but shareholders
are ambitious and want growth at the expense of competitors.
New CEOs have to recognise
the pitfalls of corporate growth strategies, especially the functional hierarchies
and power struggles. They also need to avoid building in fat that is exposed when
growth slackens, and searching for “big bang” solutions that are rare.
To summarise the findings
on the new kind of strategising that is required, we recommend a linear path underpinned
by some core competences. No model can guarantee success because of the infinite
variables that impact upon them, but we believe that this consolidates some common
sense that should not be ignored.
The foundations
Risk management
Companies that are top performers
take risks, but CEOs will of course get sacked for one big mistake. So a CEO with
a career objective of longevity should be planning to reduce risk through on-going
management of it - containing risk, but not emasculating it.
There are many day-to-day
risks in business. The biggest are security (physical and virtual), infrastructure
resilience (these days primarily associated with network availability), sources
of supply (more partners, more risk) and customer litigation. All of these require
their own focus. Making everyone in the company aware of risk and equipping them
with the skills to make them comfortable with managing it is an essential foundation
for an ambitious business leader.
But the main worry for a
new CEO is strategic risk. A great hidden risk, which new CEOs overlook at their
peril, is a “change-averse” company culture. Most middle managers adopt a policy
of “do what I’ve always done” but try to do it better, cheaper and/or faster.
These are good intentions, but not good enough. In fact, the symptoms of corporate
dysfunction include managers with their own agendas creating delays so that nothing
new happens.
And yet another great hidden
strategic risk is “go with the flow”, following industry trends slavishly in the
hope that everyone else knows what they are doing. Financial services companies
followed each other in acquiring estate agents in the UK property boom of the
late 1980s, only to make losses on those businesses in the property bust of the
early 1990s. In fact, McKinsey note successful companies go against the flow -
making acquisitions and spending more on marketing in recessions, whilst being
cautious and spending less in periods of economic growth.
Communications
Who says that a CEO can
command and control? There are many people in companies who have informal power
bases, and a new CEO cannot necessarily expect them to jump when he/she says so.
Working with them and round them takes time to communicate and negotiate. Michael
Tanner of the Chasm Group estimates that 50% of something not getting done is
down to lack of communication. Recent research in the UK on the characteristics
of top communicators advocates empathy alongside decisiveness, supporting alongside
leading, but above all clarity and openness. Informal discussions with individuals
in advance of a meeting are worthwhile. Presentations at meetings have to be a
balance of factual evidence and emotional appeal. In addition to communicating
with the top team, shrewd CEOs build direct links with everyone, including the
cleaner and especially the receptionist, and have their own “all staff” distribution
list. Direct feedback from customers and business partners is also essential.
Financial prudence
Since so many CEOs in the
UK have a finance background, this may be stating the obvious. Nevertheless, mistakes
are made, such as releasing capital to projects in large tranches, rather than
deploying funds incrementally, therefore the model would be incomplete without
it.
The linear priorities
Eliminate waste
A group of high tech CEOs
who had weathered the e-bust of 2000 told the Chasm Group in 2002 that what they
had learnt was to cut deeper and earlier. One of the first things Lou Gerstner
set in motion when appointed to turnaround IBM in the early 1990s was to root
out parts of the business that were losing money or had no internal value and
close them or spin them off. “Slash and burn” is just what employees expect a
new CEO to do, so there is no point in holding back!
Set the strategic framework
Judging by studies of the
challenges facing middle managers trying to formulate strategy for their function,
many CEOs struggle to provide a strategic framework, leaving their team exposed
to lurching from project to project without apparent cohesion. A strategic framework
needs to do a job in the company; it needs to be a path for achieving company
objectives to guide those who have to implement it. In order to do that, it must
be based on reality about what the company is currently doing rather than a desired
state, and a realistic assessment of what customers want is also critical
(e.g. price, convenience, choice, security, good transactional experience, zero
errors with the things that are important to them, no hassle).
The CEO should provide a
framework for implementers that requires discipline, but also enables their entrepreneurial
talent to identify strategic initiatives. The framework must include the expected
deliverables. For example, make it clear that sales of new products are required,
or salespeople might think it ok to go out and sell familiar products. Set milestones
and make it clear what assumptions have to be tested at what stage, and whatever
degree of cost awareness is appropriate.
Other boundaries to guide
managers of functions such as HR, Finance and IT, might be geographical scope,
how authority is distributed in the company, what degree of innovation is expected,
what the balance should be between internal resources and partners, how strong
customer engagement should be, and how things will be financed. None of this should
imply that aspects of the framework could not be questioned if someone identifies
innovative alternatives. It establishes a reasonable starting point for “business
as usual” which may not have been previously formalised. It also establishes parameters
for financial and symbolic reward, which will help to align employees with the
company’s direction.
Adaptive strategy
Where then, will growth
come from? As Schumpeter pointed out, free market economies are ruthless. They
demand the destruction of companies that don’t adapt. Planned strategy seems to
default to risk aversion. It is disruptive innovations, opening up new markets
and enabling new business models such as “category killers” in retail and IBM’s
move into professional services in the 1990s, which deliver shareholder value
good enough to keep a CEO in office. They deliver much better value than mergers
and acquisitions, which have a very questionable record on delivering shareholder
value. So the new CEO should be considering the evolution of technical, social
and managerial ideas and aim to deliberately break existing norms.
Where do disruptive innovations
come from? Mintzberg suggests that real strategy is informal and happens “in real-time”.
Staff should be picking up on feedback from “the field” and advising senior managers
when the market is demanding a response, or just hinting at one. "Systemisation"
& "standardisation" are not good, especially in people to people interactions,
and will often degrade the quality of interaction in the minds of both the customer
and employee. A “creative culture” is often desired, but difficult to achieve.
Suggestion schemes, developing creative thinking skills, and applied workshops
on specific themes can all generate quantity. An objective concept evaluation
checklist can move the focus to the quality ideas.
McKinsey (and others) advocate
a portfolio of initiatives, which requires a creative culture of numerous small
bets for risk balance. Much that has been written about investment portfolios
concentrates on creating options for new products or services. It is equally valid
to include new pricing models, new processes, new routes to market, new skills,
and applications of new technology.
Evaluation of proposals
should not rely on fool-proof "business cases" and empirical planning approaches.
Numerical formulae cannot make us psychic. Nevertheless, each idea should be treated
with impatience – if there is no sign of early take-up then valour and discretion
dictate mid-course adjustment, or even shutting it down. In this way, strategic
ideas with immediate potential can start contributing to the business. This is
what genuine start-ups have to do. A study by a US venture capital company concluded
that 93% of technology start-ups ended up at VC exit with strategies completely
different from the ones that they had started with!
The "line of sight" of
an organisation is defined as the clarity with which its senior management can
view the situation in relation to all the factors below, in the financial and
business relationship between all of them, and in relation to any change programmes
defined to operate on these factors.
Business goals (in
the private sector, normally dominated by financial goals - but not limited to
this) are, at least in part, achieved through...
Evaluation should take into
account that customer commitment is best achieved if the customer is "involved"
in the proposition, has a belief that the proposition from this company is unique
and is satisfied with the product/service. This is demonstrated by their willingness
to recommend it and their commitment to potential future products/services.
Customer attitudes and behaviour will be stimulated by the relevance of the solution
to their needs, so it needs to be defined very well.
Detailed implementation
Even the most promising
strategy can be wasted by failure to implement. Some initiatives benefit from
traditional and simple project management methods. They are ones where goals are
clear, the scope relatively limited and the timeframe is short. However, novel
ideas require new methodologies. They are about doing things differently, not
about doing more of the same. This makes it therefore an “open” project.
Propositions are delivered
through activities that recognise the importance of experiential as well as logical
factors. These activities are carried out by people - both customer facing people
and "behind the scenes" people. Implementation programmes need to ensure
that implementers understand and believe in what they are doing, are committed
to it, feel skilled enough to play their part and empowered enough to influence
the outcome. Of course, people need the right context, encouragement, targets
and remuneration as well.
The art of managing open
projects also involves the ability not to pre-judge the end-solution too early.
Piloting, testing and feedback, involving employees, partners and customers is
very important. Desired outcomes and project activity must be modified as the
project proceeds. All projects demand overall control – a value framework for
the stakeholders involved, and some time and cost constraints. Because of variability,
adaptive projects rely on excellent change control procedures and speedy decision-making.
Frequent adjustments must be expected. Communications with team members about
the intent of change and its progress is also essential.
Metrics
Although metrics can add
cost to a project (on average 6% of operating costs), an open project will benefit
from regular and frequent monitoring, review and adjustment.
Wharton developed a methodology
for “discovery driven planning” that starts with listing key assumptions, which
may have to be adjusted at milestones. Then a reverse income statement will keep
the focus on required profit and allowable costs. Activity-based costing is the
ideal tracking method that will identify critical success factors such as a minimum
order requirement.
Investment in tools and
data to allow quality interactions and to enable employees (and partners) to carry
out the right activities in the right way is a prerequisite, and must be monitored.
Internal metrics around value production and value delivery are essential, but
not enough. An external perception of quality, from partners or customers, is
also required. Strategy must inform metrics, and information derived from monitoring
and measurement needs to feed back into it. In addition to the easily measured
financial inputs and outputs, decision-makers should predict what change in customer
motivation they expect from a particular input, and what changes in behaviour
that change in motivation should inspire which will deliver the predicted output.
A metrics dashboard with
breadth, depth and some trace between cause and effect is needed to inform strategy.
As Ambler says “A fuzzy sense of what matters is far more important than precise
calculation of the irrelevant”. He concludes that metrics are best used for broad
positioning – “illumination rather than control”.
Conclusions
The greatest business success
will be achieved and sustained if the organisation works towards an alignment
of its culture, structure, goals, strategies, policies, processes and customer
proposition with what its staff (managers, operational staff, customer-facing
staff etc.), stakeholders, business partners and suppliers want. All this takes
time, and if strategies have to change, then a company not only needs to align,
but it needs to know how it aligns, so it can change this quickly. Most companies
do not have this alignment, and recognise a need to change. But many don’t know
where to start.
Change programmes have a
history of failure. Many companies make constant re-adjustments to the status
quo, but achieve little significant change in the way they develop increased and
sustained business performance through improved customer management. Companies
have focused on today's business results, optimising the life out of what they
have, because this is the easiest thing to do.
By considering the evolution
of technical, social and managerial ideas, encouraging new ways of creating and
evaluating value propositions and effectively implementing change programmes,
leading CEOs are designing approaches to undermine their competition, win customer
commitment and deliver the results that will keep them in the job for the long-term.
About the Authors
Beth Rogers is Research
Director of the Institute of Sales and Marketing Management (UK).
Merlin Stone is IBM Professor
of Marketing at Bristol Business School (UK).
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