Investile Dysfunction

Can You Say What Your Strategy Is? Surprisingly Few Can

We talk about strategy a lot in the business world.  What is our strategy?  How do we become more strategic?  What are our competitors' strategies?  When we don't know how to justify doing a project, we say it's strategic.

But a Harvard Business Review piece in their April 2008 journal entitled "Can You Say What Your Strategy Is?" rightfully asserts what we probably already knew.  Many people can't summarize their company's strategy in 35 words or less.  And that even if someone can, their colleagues may not put it in the same way.

The article states, "It's a dirty little secret: Most executives cannot articulat the objective, scope, and advantage of their business in a simple statement.  If they can't, neither can anyone else."

This is a big problem.  Most firms offer up nonsense like that given in the article of "maximizing shareholder wealth by exceeding customer expectations for _____ [insert product or service here] and providing opportunities for our employees to lead fulfilling lives while respecting the environment and the communities in which we operate."

This is not a strategic objective.  I'm not sure what it is except a waste of space to be honest because I'm not sure as an employee or manager I know what I'm supposed to do with this or how this might inspire me in any small way.

So the strategy as the authors rightfully assert is having an objective, scope and an advantage.  I'd encourage you to read the article as it has some interesting examples.  The area where I think organizations should spend even more time once they have a strategy is on the resource allocation that accompanies this strategy.  Ultimately, if your strategy says one thing but your allocation of resources doesn't match with that, your strategy is again just words on paper.  Resource allocation drives strategy.  This is why corporate portfolio management of the resource allocation process is so vital to executing strategy and realizing financial objectives.

The Strategic Finance Organization - More Whining and No Results.

The one thing that finance and IT organizations constantly are complaining and moaning about is their inability to focus on strategy or become strategic.  These aspirations are never really well articulated but being strategic or better "a partner to the business" seems to have become the rage so everyone is constantly pursuing this.  It's not a bad thing, but it doesn't seem everyone understands why they're doing this or how to do it.

And in line with this, CFO Magazine ran an article entitled "Are We Strategic Yet?" which describes a study by our friends at McKinsey which found that 72% of new CFOs wanted to spend time on corporate strategy and 45% on M&A/business development but instead spent a lot of time on FP&A/reporting/performance management (56%) and accounting/audit/compliance (42%).  Typically, I'd be skeptical of research like this because a strategy consulting firm, McKinsey, issued it so it would seem a bit self-serving.  But I speak at numerous conferences and "how do we become a more strategic partner?" is invariably a topic

For those who read CFO Magazine, it is customary they run an article describing this issue at least 2 or 3 times a year.  And this is not their fault.  It's just that CFOs and finance organizations continually complain about this but seem to do little to tackle the problem.  They seem to be afflicted with the disease that Rose Macaulay nicely articulated when she stated,

"It is a common delusion that you make things better by talking about them."

So what seems to be the problem?

• What the hell does strategy mean?  It sounds sexy to be strategic, but you were to ask CFOs and their finance organizations what it actually means, I suspect few would be able to articulate what this means.  I suspect many organizations and people across all functions would have problems articulating this.  So let's agree on a simple definition of strategy.  Strategy simply is a plan of action to achieve particular objectives.  Feel free to disagree with me on that definition, but as this is not a post about the definition of strategy so I'm being sufficiently expansive.
• Variance analysis is not strategic - Subtracting two numbers from each other and pointing to the resulting number as good or bad is not strategic.  Creating charts (no matter how pretty) which show a trend ("the bars are getting bigger so that is good") is not strategic.  These are things that can be done by a college kid or an Excel-savvy middle schooler.  If we go back to our definition of strategy, it is about achieving particular objectives.  This means the finance organization is strategic if they can impact decisions that help achieve these objectives by utilizing data and information.  Just parroting back #s in interesting presentation formats is not strategic unless it helps to enlighten on these objectives.  If it's just to look smart and busy, it's a waste of time.
• Let bean counters be bean counters - This may sound terrible at first blush because the term bean counter has gotten such a bad rap.  Basically, not everyone is "strategic".  What this does mean is that getting the numbers right and reconciling them and ensuring proper controls are in place has a lot of value - immense value actually.  And that the people who are good at those things may not be "strategic" nor do they need to be.  They need to make sure that invoices get paid and receivables collected and that people aren't stealing money from the corporations coffers.  These are critical functions but not strategic per se.  They're just required else the company ceases to exist.

If the finance organization wants to be strategic, at least in part, they should focus on utilizing the information they have to impact resource allocation decisions.  To see an article discussing how to do this (and stop whining about it), please click here.

Forget going after the big blockbuster acquisition - successful baseball teams also know organic growth is better

I'd recently written an article which appeared in Business Finance magazine's September 2007 issue titled "The Care and Feeding of Plus-Sized Portfolios".  (Click here to be taken to online article or to see a .pdf of the article as it appeared in the magazine, download the article.  Download business_finance_magazine_article_anand_sanwal_corporate_portfolio_management.pdf) 

In the article, I talk about the growth levers that organizations have at their disposal to grow.  Two primary growth levers are mergers & acquisitions (M&A) and organic growth.  While M&A is "sexier" and often potentially transformational in nature (or at least that is what we are told), it is risky and has a decidedly poor historical track record.  On the flipside, organic growth is less seemingly 'visionary' but much more reliable as a predictor of long-term revenue and net income growth as well as shareholder returns.

And it appears that this idea of organic growth being healthy doesn't apply only to corporations and financial metrics but also to baseball teams who wish to win more and get further into the post-season.  Friday, October 12th's Wall Street Journal contains an article titled "Baseball Promotes from Within: Teams with Homegrown Stars Outperform Rivals Staffed by Hired Guns" which demonstrates that three of the four remaining postseason teams, the Colorado Rockies, Arizona Diamondbacks and Cleveland Indians, have had significant contributions from players they "signed as amateurs, drafted, or trained in the minor leagues".  The Boston Red Sox are the only team in the post-season with lesser contribution from 'home-grown' players.  Developing and having contributions from these types of players is effectively organic growth for a baseball team. 

As a Yankees fan, this is obviously not ideal because the Yankees' boss, George Steinbrenner, obviously believes in acquiring mega-players as a means to be successful (A-Rod, Giambi, etc).  So in a sense, the Yankees and Red Sox are proponents of using the M&A lever.  Acquiring the big, hot star gets you press, supposedly shows your commitment to winning, etc and paints the picture of that one visible intervention which will hopefully save the day.  This is like M&A in the corporate world with its talk of synergies, strategic vision, etc. 

But its the organic growth as evidenced by this year's post-season teams and the likes of the Minnesota Twins, the Oakland As who've won using a similar strategy that seems to work especially for teams that don't have bottomless budgets to pay for the mega-stars.  Focusing on the development of talent and having players 'grow up' with each other and play together consistently over many years allows for teams who are budget constrained to compete even with their better funded peers. 

The value of prudent, well-constructed, organic growth with a long-term outlook appears to be significant irrespective of where you are competing - whether in the markets or the ballpark. 

Corporate Portfolio Management article featured in Business Finance Magazine

An article I'd written entitled "The Care and Feeding of Plus-Sized Portfolios" appears in the September 2007 issue of Business Finance Magazine.  Click here to be taken to online article.  To see a .pdf of the article as it appeared in the magazine, click the following link to download the article.  [Download business_finance_magazine_article_anand_sanwal_corporate_portfolio_management.pdf]  I look forward to hearing your comments & thoughts and hope you enjoy the article.

Costco's CEO, Jim Sinegal, doesn't let the tail wag the dog - a true long-term outlook

I read an interview with the CEO of Costco, Jim Sinegal, and found myself impressed with what seems like Mr Sinegal's truly long-term outlook and his commitment to investing in his company with this mindset. 

Summarized excerpts of the Wall Street Journal interview are below and are indicative of Mr. Sinegal's refreshingly long-term outlook.  When asked about balancing the needs of customers, employees and shareholders in the face of some sentiment that shareholders eel they come third in that equation, he responded, "That's not the case.  We want to obey the law, take care of our customers, take care of our people and respect our suppliers.  And we think that if we do those things pretty much in that order, we're going to reward shareholders."  Well said!  Any underlying business is about serving a customer need and if that is done in an economically sound manner (meaning you don't give away the product), the value to shareholders should result from these efforts.  The tail should not wag the dog.

When questioned about whether giving customers great deals hurts profits, Mr Sinegal responded, "There are all sorts of opportunities where you can try to sneak in a little more margin here and little more profitability there, but that's not what we're about.  When you start suggesting that it's not important to save the customer money on this because they'll never know the difference, you start to fool yourself.  The customer trusts us.  You don't want to give up on that type of reputation."  Bravo.

What do we have here?  A truly customer-oriented and employee-oriented executive.  While customer-centrism and employee-centrism (yes I make up words) are often talked about, this type of true focus on these parameters is refreshing and rare. 

The ultimate question you may be wondering, however, is do all these nice ideas around business by Mr. Sinegal actually work?  Per SmartMoney, Costco trades at a forward P/E ratio of nearly 24 which is at a premium to its peers.  Additionally, over a 5 year period, it was up 80+% while competitor BJs was up 40+% and Walmart (owner of Sam's Clubs) was actually down over that period.  So it looks like shareholder value is being created by Mr. Sinegal and his team at Costco through their focus on the constituents that enable business success - customers, employees and suppliers/partners.

Wedding budgets and why you should just say no to metrics (the bad ones)

I'd talked about the metrics zeitgeist in a recent post (click here) and saw a great piece by Carl Bialik aka the Numbers Guy in today's Wall Street Journal.  In short, Bialik did some research to show that the oft-quoted $27,000 - $30,000 cost of an average wedding is probably wrong.  The culprit is simply that most of the studies use the mean instead of the median.  Of course, there are some additional issues with these surveys caused by self-selection, e.g., the people who tend to respond to these surveys may be the type more inclined to spend more on their weddings.

So why am I talking about wedding costs and budgets in a corporate portfolio management blog?  Because this wonderfully illustrates how metrics get used incorrectly.  Metrics & data are only useful in a portfolio management effort or in any setting if they are right, and oftentimes, companies get so wrapped up in the act of measuring that they forget about the quality of the information going in and the resulting outputs that are generated. 

Let's take the wedding example and apply it to a corporate setting.  Let's say the $27,000 mean represents the average sales per customer for a software company.  Based on this information, the company decides that the sales team should be incentivized in a way that encourages them to go after sales greater than $27,000.  And let's assume that the mean was artificially inflated because of a single $1 million sale and median sales were actually closer to $13,000.  Now you've created incentives that are impossible for the sales team to hit.  This will probably result in them going after customers they can't get which will result in them ultimately getting demotivated and quitting which will ultimately result in the company going bankrupt. 

Ok, that was a bit dramatic, but the purpose of this exaggerated example is that because something is measured doesn't imply it has any predictive or useful value.  Worse yet, using this poorly measured metrics data can actually result in the making of decisions which destroy value - in stark contrast to their objectives.  Remember to just say no to bad metrics. 

Anyone out there with any interesting, funny bad metrics examples you've seen?