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Monthly Archives: November 2016

How Strategy Talk Creates Value

Traditionally, CEO strategy presentations are derided as little more than “cheap talk.” After all, it doesn’t cost much to rent out that conference room, set up the video link, and paint a grand vision of the firm for investors and the press. Real strategy is decided behind closed doors, the thinking goes.

What’s more, sometimes these presentations are viewed as a ruse to throw off rivals by laying out an agenda the CEO has no intention of fulfilling. In this sense, strategy presentations have been compared to “vaporware” announcements, in which companies claim to be developing something that they aren’t in order to compel competitors to commit resources to a phony war.

But devising a strategy and selling it to investors is perhaps the key componentof a CEO’s job. Some researchers have suggested that failing to follow through on promises, even vague ones, can do serious damage to a CEO’s reputation down the line, which can, in turn, send stock prices tumbling. These high stakes might give companies a reason to take strategy presentations more seriously. So might the trend toward transparency in business — researchshows that one in five Fortune Global 500 companies gives strategy presentations in any given year.

According to a new study, more companies might want to follow their example. The conventional wisdom that views strategy presentations as little more than window dressing is seriously misguided, the authors found — at least when it comes to presentations made by new CEOs. The strategy presentations these CEOs make in the months following their appointment seem to soothe investors’ uncertainty, and tend to provide an immediate and significant boost to the firm’s stock price. “In this sense, contrary to skepticism from theorists of cheap talk, investors see strategy presentations as credible and economically significant,” the authors write. “Strategy talk matters.”

The authors analyzed new CEOs because their appointment is typicallyregarded as a moment of strategic change, when setting out a vision for the firm’s future provides investors with their first real indication of the priorities of the new person in charge. These strategy reviews also give investors a chance to assess the new CEO’s charisma, competence, and experience up close.

The authors obtained data on strategy presentations carried out by companies listed on the NYSE and Nasdaq from 2000 to 2010. To isolate the effects of CEO presentations, they eliminated firms that also issued announcements about dividends, earnings, mergers and acquisitions, major contract awards, lawsuits, or new products within a three-week period around the time of the strategy review. They also controlled for other relevant factors that could skew the results, such as firm size, stock-price volatility, and the number of analysts following a company.

A Better Way to Engage Your Strategy

Here’s how dynamic engagement works: Whether it’s monthly, bimonthly, or quarterly, the CEO and board carve out regular time to work together on an ongoing, prioritized agenda of strategy issues and opportunities. At any point in time, this entails one or more of the following:

• Deciding which particular issues and opportunities have potentially strategy-changing implications for the company, and which need to be addressed now

• Agreeing on how to frame each issue/opportunity (a well-framed statement, based on an agreed-upon set of facts, that calls for a rethink of the strategy in some important way)

• Generating alternative responses to each particular issue/opportunity (the ideal number of alternatives is two or four — an even number to prevent defaulting to a middle-of-the-road fudge, and no more than four to avoid getting bogged down when presented with too many options)

• Choosing the criteria that will guide how alternatives are evaluated

• Agreeing on whether the alternatives have been evaluated well enough

• Selecting the alternative that’s best for the company (the question is not “What is the right thing to do?” — it’s “What is the best thing to do?”)

• Deciding on how the company’s strategy and plans should change in response to the issue/opportunity, given the selected alternatives.

Dynamic engagement also operationalizes the practical reality that strategy is not a one-and-done thing. It is either dying or evolving. The right attitude is not “We set strategy and then execute like hell” — it’s “We execute like hell and never stop evolving our strategy.”

Adopting the latter attitude is critical, because technological innovations, competitive disruptions, changing customer expectations, political movements, regulatory shifts, and many other forces ensure that there will be an unyielding stream of challenges and developments that demand change to some aspect of your strategy. A strategy that is immune from such things is likely pitched at such a high level that it’s not a strategy at all, but just a series of big, sweeping statements.

Thus, the true work of strategy is never done — and it certainly doesn’t follow the tidy, annual rhythm of the typical strategic planning process and board off-sites. Strategically important issues and opportunities can occur at any time, and they can’t always wait for the next planning cycle or off-site to roll around. Nor can you do full justice to the biggest issues and opportunities within an annual planning process or off-site, given their practical limitations on time and agendas that are necessarily packed with other essential duties.

Moreover, the CEO and board’s work together on strategy should be kept separate from their all-important business on governance, compliance, finance, risk management, investor relations, compensation, succession, and other such matters. Strategy making is a creative act that benefits from an unrushed agenda with external inspiration, new insight, and collaborative iteration. It does not mix well with the typical board agenda.

Directors love the dynamic engagement approach when they experience it. They much prefer doing the real work of strategy, rather than rubber-stamping visions, mission statements, and plans. When they are actively engaged, it does amazing things for the metabolic rate of a company’s decision making and execution because of the shared commitment and understanding it produces. They recognize how it forces execution-sapping differences to the surface, makes subsequent agreements that much truer, and renders resulting decisions much less ripe for unpicking down the road.

7 Principles of Strategy

1. Aim High

Don’t compromise your strategy or your execution. Set a lofty ambition for your strategy: not just financial success but sustained value creation, making a better world through your products, services, and presence. Apple’s early goal of making “a computer for the rest of us,” which effectively shaped the personal computer industry, is a classic example.

Next, aim just as high on the execution side, with a dedication to excellence that seems almost obsessive to outsiders. Apple, for instance, has long been known for its intensive interest in every aspect of product design and marketing, iterating endlessly until its notoriously demanding leaders are satisfied. The company’s leaders do not consider execution beneath them; it is part of what makes Apple special.

2. Build on Your Strengths

Your company has capabilities that set it apart, things you do better than anyone else. You can use them as a starting point to create greater success. Yet more likely than not, your strongest capabilities have been obscured over the years. If, like most companies, you pursue opportunities that crop up without thinking much about whether you have the prowess needed to capture them, you can gradually lose sight of what you do best, or why customers respond to it.

Take an inventory of your most distinctive capabilities. Look for examples where you have excelled as a company, achieving greatly desired outcomes without heroic efforts. Articulate all the different things that had to happen to make these capabilities work, and figure out what it will take to build on your strengths, so that you can succeed the same way more consistently in the future.

3. Be Ambidextrous

In the physical world, ambidexterity is the ability to use both hands with equal skill and versatility. In business, it’s the ability to manage strategy and execution with equal competence. In some companies, this is known as being “bilingual”: able to speak the language of the boardroom and the shop floor or software center with equal facility. Ambidextrous managers can think about the technical and operational details of a project in depth and then, without missing a beat, can consider its broader ramifications for the industry. If strategy through execution is to become a reality, people across the enterprise need to master ambidexterity.

Lack of ambidexterity can be a key factor in chronic problems. For instance, if IT professionals focus only on execution when they manage ERP upgrades or the adoption of new applications, they may be drawn to vendors for their low rates or expertise on specific platforms instead of their ability to design solutions that support the company’s business strategy. When the installation fails to deliver the capabilities that the company needs, there will be an unplanned revision; the costs will balloon accordingly, and the purchase won’t fulfill its promise.

4. Clarify Everyone’s Strategic Role

When the leaders of the General Authority of Civil Aviation (GACA) of Saudi Arabia decided to improve the way they ran the country’s 25 airports, they started with the hub in Riyadh, one of the largest airports in the country. They had already outsourced much of their activity, redesigning airport practices and enhancing operations. But not much had changed. Convening the directors and some department leaders, the head of the airport explained that some seemingly minor operational issues — long customs lines, slow boarding processes, and inadequate basic amenities — were not just problems in execution. They stood in the way of the country’s goal of becoming a commercial and logistics hub for Africa, Asia, and Europe. Individual airport employees, he added, could make a difference.

5. Align Structures to Strategy

Set up all your organizational structures, including your hierarchical design, decision rights, incentives, and metrics, so they reinforce your company’s identity: your value proposition and critical capabilities. If the structures of your company don’t support your strategy, consider removing them or changing them wholesale. Otherwise, they will just get in your way.

Consider, for example, the metrics used to track the results delivered by call center employees. In many companies, these individuals must follow a script and check off that they’ve said everything on the list — even at the risk of irritating potential customers. Better instead to get employees to fully internalize the company’s strategy and grade them on their prowess at solving customer problems.

6. Transcend Functional Barriers

Great capabilities always transcend functional barriers. Consider Starbucks’ understanding of how to create the right ambience, Haier’s ability to rapidly manufacture home appliances to order, and Amazon’s aptitude for launching products and services enabled by new technologies. These companies all bring people from different functions to work together informally and creatively. Most companies have some experience with this. For example, any effective TPE capability brings together marketing, sales, design, finance, and analytics professionals, all working closely together and learning from one another. The stronger the cross-functional interplay and the more it is supported by the company’s culture, the more effective the promotion.

7. Become a Fully Digital Enterprise

The seventh principle should affect every technological investment you make — and with luck, it will prevent you from making some outdated ones. Embrace digital technology’s potential to transform your company: to create fundamentally new experiences and interactions for your customers, your employees, and every other constituent. Until you use technology this way, many of your IT investments will be wasted; you won’t realize their potential in forming powerful new capabilities.

Any Factors That Keep You from Getting a Small Loan Business

Credit reports are one tool lenders use to determine a borrower’s credibility. If your credit report shows a lack of past diligence in paying back debts, you might be rejected when applying for a loan.

Paul Steck, former president and CEO of the international franchise restaurant Saladworks, has worked with hundreds of small business franchisees, many of whom have bad personal credit as a result of illness, divorce or other extenuating circumstances.

“Sometimes, very good people, for reasons beyond their control, have credit issues,” Steck said. “And, unfortunately, that’s a real barrier to entry in the world of small business.”

Cash flow — a measure of how much cash you have on hand to pay back a loan — is usually the first thing lenders look at when gauging the health of your business. Insufficient cash flow is a flaw that most lenders can’t afford to overlook. Therefore, it’s the first thing business owners should consider when determining if they can afford a loan.

“Really thinking through that cash-flow equation is like preventative medicine for your business,” said Jay DesMarteau, head of regional commercial specialty segments for TD Bank. “You can either wait until [your business] gets sick, or you can do things to prevent it from getting sick.”

One of the preventative measures DesMarteau recommends is to calculate cash flow at least quarterly. If business owners take that step, they may be able to optimize their cash flow before approaching potential lenders.

Having a plan and sticking to it is much more attractive than spontaneity in the finance world.

“Banks require that business owners have an organized, detailed and quantitative business plan in order to move forward with the loan process,” said David Goldin, CEO, president and founder of Capify, an alternative small business lender.

However, Goldin noted that it’s common for very small businesses to not have a formal business plan or any plan at all, for that matter. In these situations, he recommends that business owners at least forecast their future earnings before applying for a loan, so lenders will have an idea of your profitability.

You should also be prepared to explain your plan for the money you want to borrow.

“Lenders’ … biggest single complaint is that small business owners aren’t able to articulate very well how they’re going to use the capital that they’re looking for, how they’re going to make repayment and what impact they think [the loan] is going to have,” said Ty Kiisel, who writes about small business for online lender OnDeck.

According to Kiisel, your pitch to lenders doesn’t need to be eloquent, but it must be straightforward. At the bare minimum, loan applicants should be prepared to explain why the want a loan and how they plan to repay it.

When it comes to approaching potential lenders, business owners should have their act together. That means having all the paperwork you’ll need for your loan application on hand.

“One of the things that can be a problem when applying for a loan is if [business owners] don’t have the documentation that the bank will require [such as] back tax returns,” Steck said.

There are plenty of resources that business owners can refer to when putting together their loan applications. The Small Business Administration, for example, provides a highly detailed loan application checklist for borrowers. Using these resources can decrease your likelihood of coming across as disorganized or unprepared.

When it comes to making financial decisions for your business, lenders want to see that you’ve sought guidance from knowledgeable advisers.

“Accountants can be an important source of advice for small business owners. That’s why Bizfi has partnered with theNational Directory of Certified Public Accountants,” says Stephen Sheinbaum, CEO of alternative lender Bizfi. “But there are many other places to find good people to talk to, such as the Service Corps of Retired Executives (SCORE), a free mentoring service that is supported by the Small Business Administration.”

According to Sheinbaum, SCORE connects you with retired businesspeople with experience in your market.

“This is important because they will know about the kind of capital that is most important to people within your industry,” said Sheinbaum.

He also recommends that business owners get financial advice from business networking groups and conduct research on the websites of the leading alternative funders, since many have detailed resource sections for small businesses about the many kinds of available capital and the best ways to prepare for funding.

Too many business owners approach lenders with an apathetic attitude, Steck said. In other words, they simply don’t demonstrate why they, rather than someone else, are a good candidate for a loan.

“You have to exude a passion,” said Steck. “I’m going to do this, and I’m going to be the best in the whole wide world. You have to go into it with that sort of mentality, and a lot of [potential borrowers] don’t do that.”