A global economic shutdown, unemployment rates rising fivefold in two months, unprecedented government economic stimulus, budgets trashed, earnings guidance withdrawn. How can strategy still be relevant in such an uncertain and volatile world?
Surely, carefully crafted long-term plans have little value anymore? However, before discarding strategy completely, let's delve deeper. Maybe the problem is not strategic planning itself but how the technique is used. As renowned strategic thinker and Harvard Business School professor Michael Porter commented: "'Strategy' is a word that gets used in so many ways with so many meanings that it can end up being meaningless."
In times of uncertainty, clarity becomes increasingly important, and strategic planning can be a powerful tool for bringing focus to an organisation by anticipating alternative scenarios and evaluating how an organisation should respond. A recent poll showed that organisations remain split on how exactly to change strategy, if at all (see the graphic, "COVID-19's Effect on Strategic Planning").
COVID-19's effect on strategic planning
How has the COVID-19 pandemic affected your organisation’s strategic plan?
Two major flaws in many strategic plans are that they (1) are overly optimistic and (2) lack a sound financial basis.
Frequently, strategies are based on unrealistic assumptions and may be wrong. All too often, strategic plans confidently project huge unmet customer demand, unprecedented market growth potential, numerous sources of competitive advantage, unparalleled leadership team skills, flawless execution capabilities, and either weak, incompetent, obsolete, or nonexistent competitors.
Second, strategies often lack financial credibility by failing to adequately address risk and uncertainty in projections for growth, profitability, and capital requirements or, worse, lack any numbers at all.
As organisations look to adapt to the new realities of doing business, two attributes will increasingly hallmark effective strategies: strategic resilience and financial realism.
The best strategies remain valid over time and are capable of adapting to ever-changing market realities (see the sidebar, "Examples of Strategic Resilience"). All too often, strategies represent an aspirational view of an organisation's vision unencumbered by reality. There is nothing wrong with such exercises; they encourage inspiration, innovation, and imagination. However, they are rarely executable. Effective strategic planning takes visionary thinking and translates it into a framework for action. In a 2002 book, Larry Bossidy, former CEO of Honeywell, described strategy as "a road map lightly filled in". Strategies provide guidance, but they also need to allow for flexibility to adapt.
A key element of strategic resilience is the incorporation of scenarios. Taking time to test the validity of strategies under different views of the future increases confidence and accelerates an organisation's ability to adapt in times of disruption, uncertainty, and volatility. One unfortunate result of the COVID-19 pandemic is that it brought into sharp focus a scenario that many had been discussing (but not acting upon) of reducing the reliance on China for medical equipment. Between 2010 and 2019, US imports of medical equipment from China rose 75%, according to US foreign trade data. Despite numerous calls for change, short-term economic benefits appeared to outweigh longer-term strategic risks. Effective scenario planning can help by evaluating the implications of different situations in the short and long term.
Modelling the impact of variability means that strategies can accommodate a re-prioritisation of tactics and actions to reflect changing circumstances and also adapt to changes in the pace of execution to take advantage of favourable trends or mitigate unfavourable ones. These two capabilities add resilience to strategy and provide management with flexibility to adapt as needed. Perhaps most important, such strategies can increase the confidence of major stakeholders such as investors, business partners, employees, and regulators.
The range of financial projections in strategic plans varies widely. Some look more like long-term budgets with detailed profit and loss accounts and balance sheets, while others are unencumbered by any numbers at all. The former provides the illusion of credibility, but it's a mirage. An organisation's predictive ability is simply not good enough to provide detailed financial projections over even very short periods. The latter reflects naivety or maybe arrogance that cool ideas alone are sufficient to enlist investors or secure funding for internal strategic projects. Credible strategies need to provide perspective on the potential investments required and likely returns that could be delivered but should do so in a rational and risk-weighted manner with clearly stated assumptions and confidence levels.
Financial realism is important because executing strategy requires investment. Sustained success demands that companies master the financial basics that provide the fuel for strategy execution. They should:
- Craft a compelling story to justify strategic projects and investments.
- Establish key financial measures of strategic success.
- Demonstrate and then execute on a credible path to profitability.
- Manage cash flows to ensure liquidity and solvency while pursuing growth.
Financial representation of a strategy is not an exact science, but it should provide a coherent financial story to accompany the strategic story. Assuming that the strategy embodies the attributes of resilience described earlier, the financial elements will include revenue expectations based upon market size, growth potential, and expected market share; margin expectations based upon projected startup and operating expenses; and capital investment needs and cash flows over a reasonable timeframe, typically five to ten years. However, the most important elements are that each projection needs to be described in the context of potential risks and uncertainties. A single forecast number implies accuracy where little exists, so clearly identifying risk factors and their possible financial impact adds to the confidence stakeholders will have in the resilience of the strategy.
Of course, risk is not always bad. Building resilience into strategy also allows organisations to take advantage of the positive as well as mitigate the negative. April 2000 was not a great time to be a dot-com company. An unprecedented five-year, fourfold increase in the value of the NASDAQ market in the US came to a crashing stop. By October 2002, the market had given up all its prior gains, and the landscape was littered with failed businesses. Yet one company navigated the chaos and emerged stronger, recording its first profit in 2001. Today, Amazon employs over 800,000 employees and is worth more than $1.5 trillion.
Strategic planning is not dead. By connecting strategic resilience to financial realism, leaders can continuously assess portfolio choices and operational realities in the light of changing circumstances and ensure actions are tied to positive financial outcomes. Through a blended process of innovative thinking, rational planning, and realistic financial modelling, organisations can create a living strategy that adapts to change while staying true to the mission and goals that make the organisation unique. In today's uncertain world, strategy:
- Increases flexibility rather than reduces it.
- Simplifies planning by sharpening focus.
- Remains relevant in bad times as well as good.
Examples of strategic resilience
As leaders look forward from a turbulent 2020, the value of understanding the resilience of strategies is clear.
Netflix moved from disrupting one business model (and putting the final nail in the coffin of Blockbuster) with its home DVD delivery service to establishing itself as the dominant player in the streaming market. Its core strategy of providing access to entertainment content by subscription remained unchanged.
Vanguard grew its assets under management from less than $56 billion in 1990 to over $6.2 trillion in January 2020 with a three-pronged strategy based on market-leading index funds, low costs, and investor ownership of the company.
American Express introduced its first charge card in 1958 largely as a defence against Diners Club, which threatened Amex's dominant position in the traveller's cheque market. With subsequent introductions of the Gold Card (1966) and Platinum Card (1984), the company developed a dominant position in the premium card segment while also mitigating the decline of the market for traveller's cheques. The challenge now is to remain relevant in a cardless world.
Consultant and author David A. J. Axson is a retired partner from Accenture, a co-founder of The Hackett Group, and former head of corporate planning at Bank of America. To comment on this article or to suggest an idea for another article, contact Neil Amato, an FM magazine senior editor, at Neil.Amato@aicpa-cima.com.