S T R A T E G Y N O T E
An attempt to create a ‘best practice’ model for the Strategy Process
The following note is a very short (about 6 pages) introduction to a model for the preparation / review of a business strategy. The note is based on input from many different thoughts and ideas in strategy, organization and organizational development and sales and marketing. This model takes the example of making a strategy in a ‘full’ enterprise that has all aspects from Research and Development over Production and Sales. Other business setup without e.g. R&D and/or production would need to make adoption to the 4 suggested main-strategies.
The Strategy model
Figure 1 (Strategy model)
This model suggests 3 steps:
- Analyze current state and situation
- Design the strategy
- Review the strategy and make corrections.
Step 2 and 3 will in the real world not be sequential but typically an iterative process where every part of the plan when formulated in step 2 are held up against the review elements to make sure that it makes sense.
In the analysis phase examines, various interrelated topics.
Start with stating the current definition of the Enterprise Mission and vision.
So what is the basic structure of the current business and thus the core processes as well as core areas where the company’s knowledge lies. This is the somewhat introspective inside- out consideration.
Then you analyse the development of society both nationally and internationally to consider the influence of economic development, legislative requirements, overall trends etc. This is the broader outside-in perspective.
Analysing market trends (or alternative markets) and projected requirements from customers.
Assess our competitors’ actions. What will they do to support and satisfy customers, and in what areas they will try to disempower the company (the weak sides?). Also assess competitors’ cost structure relative to the company cost base in order to assess competitiveness.
Other stakeholders influence the firm estimated. Including not least employees and shareholders, but it can also be suppliers, political conditions, etc.
All these are sub-analysis of the current situation and can be summarized in a generel SWOT analysis of company Strengths and Weaknesses as well as Opportunities and Threats.
Before you start the Strategy formulation you need to revaluate the current mission and vision of the company.
Mission defines the purpose of the existence of the company. It should give answer to the question: “Why do we exist?”
The mission is not how to implement the vision (that is the strategy) but defines in which scope the vision has to be developed. A vision has to be within scope of the enterprise mission.
Within the scope of the mission you have many possible visions. If that’s not the case the mission statement will be way too narrow. There could be many different actions and ways the company could change but you need to describe in which directions within the scope of the mission that you would like and expect the company to change within a certain period.
A vision outlines the overall structure and wishes of where we want the company to be sometime in the future. This should give answer to the question: “How will we look like and operate in X years?”
The vision defines the need for the strategy. A Strategy should give answer to the question: “How will we change our business and setup to achieve the Vision?”
When we have stated any changes to the current mission statement and thereby have a mission statement and we have defined a vision for where we will be in the future we have to define and design the strategy to how we come to this new vision of the future state.
Strategy as 4 main strategies
The model below is based on the premise of a manufacturing company. Is it a non-production enterprise, there is normally no need for a development and especially not a production strategy, and a service company should consider replacing the Development and production, and Procurement strategy with e.g a Staff and Skills strategy in the case where the essence of the company’s performance is more directly dependent on the employees’ skills and their employees interaction with the customers.
Based on the new / corrected conceptual framework of Mission and Vision a general Strategy should be formulated decomposed into 4 main strategies which are interdependent and influence each other:
-Equity versus debt ratio (Financial and cash-flow goals)
-Do we need more capital or can we execute the strategy by self-financing
Sales and Marketing Strategy:
- Marketing Strategy (Advertising and interaction goals)
- Actions on Market segments and Customers (Sales effort, Revenue and CM goals)
- Strategic alliances (Coorporation goals)
- Distribution channels (Sales channels and distribution goals)
- Effort and resources (Resource and effort goals)
R&D and Production Strategy:
- What will we develop and when (R&D goals)
- How will we produce and with what (Technology- and logistical goals)
- What will we produce in-house and what will we outsource (Technology goals)
- Which Suppliers will we use and with what quality level (Supply, Quality and Logistical goals)
- Strategic alliances (Suppliers and supply security goals)
The total strategy must give the broad guidelines for what the company must work to achieve. A form of guidelines, but also so detailed and specific that they can act as compass lines to management in the time to come, and there must also be set some timeline indications on when certain milestones of the individual strategy targets must be met.
Leavitt’s Diamond & Balanced Scorecard
A strategy has to be operationalized and specific in how to achieve the vision.
When you change the company strategy; re-formulates a strategy or setup new demands you must also consider how this will influense the company.
Leavitt describes a company in 4 connected components also known as the diamond model.
- Hierarchy, delegating, work descriptions
- Rules, e.g.
- Sales- development- and production processes
- Management processes e.g.
- Machienery (degree of automasation)
- Buldings and infrastructure
- Information systems
- Planning (MRP, Production planning)
- ERP (ERP, CRM e.g.)
- Know-how and knowledge
- Values and positions, e.g.
When the strategy has been described you have to consider if the current ’system setup’ of the company appropriately fulfills the needs of the strategy or you have to make changes in one or more ‘dimensions’
Kapland and Norton who developed the Balance Scorecard theory describe the company also in 4 dimensions but with different perspectives:
Learning and growth (somewhat like People and Structure dimensions from Leavitt)
Internal processes (somewhat like Tasks and Technology dimensions from Leavitt)
Whatever perspectives or dimensions you use you need to consider if you can achieve the designed strategy with the current organizational and system model used by the organization, or do we have to make changes to the organization? Can we reach the goals with our current technological platform or do we need to make capital investments and changes to the way we run and control the business? How does the new strategy influence our employees and can we with the current staff and mix of employees reach the goals – do we need to describe new demands and change the culture in the light of the new strategy? Are our current business processes optimized or de we need to implement changes or new processes? How will we serve the customers and other stakeholders to fulfill our strategy? Which financial goals do we need to reach and how shall we measure these to evaluate if the strategy will be successful? Will we need to acquire or buy other companies to reach the goals and how will we finance this within the scope of our current finance strategy.
Only when we have answers to these questions and questions like these and thereby a clear and detailed description of the strategy in the areas below – will we have the needed guidelines to achieve the vision:
Organizational changes / Learning and Growth (Time and miletones):
- Organizational layout (Org. Chart)
- Demands to Management style and Management culture
- Demands to managers professionally as well as psychologically
- Demands to employees knowledge, effort and attitude and culture
- Demands to employee mix and size
- Demands to positions/attitude (socially, psychologically and professionally)
Technological and process/business flow changes (Time and milestones):
- Technological platform, Production capacity, In- and outsourcing e.g.
- Quality handling, management and measurement
- Investment in equipment (resource demands)
- Demands and changes to information systems and IS Management
- Determination of new or changed processes and business flows
Approach to Customers and other Key stakeholders (Time and milestones):
- Market penetration of the strategy (marketing, sales force and sales effort e.g.)
- Distribution channelse, Logistical changes, e.g. (resource demands)
- Supplier relationships e.g.
When demands to changes in the company ”system setup” has been defined you often need to change existing policies like:
- Culture and spirit
- Policy of education
- Recruitement policy
- Procurement policy
- Sales- marketing policies (sales conditions, Customer evaluation e.g.)
- IT policy
Procedures and rules – Quality management
Policies can often be described in even more detail in the form of specific Standard Operating Procedures and rules. If the system model has changed and/or policies has changed then the written procedures and rules has to be updated too.
There needs to be specific goals with a plan with dates and milestones set to be able to have follow up on the strategy. This can be in much detail or it can be some defined projects that has to be executed to make sure that the current procedures and rules will be updated within the described and needed timeframe.
Budgets and goals – Balance Scorecard
The strategy can be described in some main budgets and financial statements and additional goals.
In way too many cases a company develops a strategy and afterwards the finance department has to ’calculate numbers’. As the strategy seldomly has detailed plans for the strategy this will way too often have to be made based on guesses and in worst case wishful thinking.
Many strategies has a big appendix with long columns of numbers with both Profit/Loss- and Balance and Cash Flow statements but without the needed deep and detailed link between these numbers and the described strategy.
In best case these budgets are made based on hard facts from the derived decisions and detailed knowledge from the strategy. This means that if financial goals shall be just approximate valid we need to have deep knowledge of:
How do we execute on revenue increases:
- With which specific new customers; with which specific new products to which specific new markets e.g.
- Which sales and marketing effort through which distribution- and sales channels and to which expenses.
- Which capacity will we need to execute revenue increases:
- Which investments will we need and how do we finance thise
- How shall the employee mix and educational level to be to execute on our capacity
- How does other capacity expenses expect to develop and why
- And so on….
As an alternative to dedicated strategy budgets you could develop a balance scorecard with definition of needed Critical Success Factors (also called CFS) and corresponding Key Performance Indicators (also called KPI’s) to follow up on the strategy. When we make a review of the Strategy Plan we also need to defined Strength and Weaknesses of the plan as well as a Financial and Risk assessment. While doing this you could also describe the CFS and determine how to measure this and define corresponding KPI’s in the process.
This can be done by designing a strategy map. It is out of scope of this note to describe the theory behind Balance Scorecard and the use of Strategy Maps. You can read more about this in different books from e.g. Robert S. Kaplan and David P. Norton.
One point where most companies fail (especially production companies) is creating the needed link between activity level (quantity sold and revenue) and the capacity need (production capacity). In many cases the company do not have a budget model that can calculate the derived capacity need based on the expected capacity (Sales budget derived into an investment- production capacity and staffing budgets).
How often has a company made detailed year-specific strategy budgets that have a 1:1 relationship with the yearly budget process. By this meaning that the strategy budgets are the actual goals for the company yearly planning cycle where the specific detailed year budget has to be equal to the strategy budget. If that is not the case the strategy budget is waste of time.
Way too often the strategy budgets are made every time you make a new 3-5 years plan and then these budgets are forgotten. Or they are just ‘adjusted’ to the real world reality when the future gets more present.
As a replacement of making page after page of expected detailed revenue, COGS and capacity expense budgets 3-5 years into the future it might be better to identify specific financial decisions as you know from the strategy that you want to follow up. This can be needed – and from the strategy decided – investments. It can be goals from revenue from expected new introduced products or revenue from specific new customers e.g.
It can also be non-financial indicators (KPI’s) from the Balance Scorecard theory but the most important is that the described goals from the strategy is something that you actually will measure and follow up on over the strategy period.
Plan review and Risk Management
This is a plan review specifying how customers and competitors are expected to react on the strategy (2 of the most important stakeholders for the company). However also a specification of other key stakeholders reactions.
Describe critical assumptions for the strategy execution and possibilities to prevent these and/or the possibility to identify a critical assumption as soon as possible.
Also techniques from Risk Management can be used. A dedicated coverage of strategic, tactical and operational risks with weighted probabilities and weighted influence on the company with specified actions to reduce these risks. Such preventive actions to reduce risks have to be balanced against the derived expenses of these actions with the probability and influence on the company.
Have a description of the Strength and Weaknesses of the strategy plan (weaknesses will often be part of the critical assumptions).
At last have a description of the financial sensitivity. Have critical assumptions described in terms of the financial impact (Financial Risk Management). All in all to make a judgment of critical areas that can influence the financial goals of the strategy. For example if a certain growth depends on the development of some specific products e.g. and what this has of financial impact if these assumptions will not be successful.
If critical assumptions or the financial sensitivity ends up with a none-acceptable risk analysis this should give the input to a new iteration in reformulating the strategy so that critical assumptions will be reduced and the financial sensitivity will be improved.
The specified model with three steps is as mentioned in the beginning of this note not always sequential.
Step 2 and 3 will in the real world not be sequential but typically an iterative process where every part of the plan when formulated in step 2 are held up against the review elements to make sure that it makes sense and not a process where the full strategy has been developed in step 2 before we make a review.
Note in PDF format: Stategy note