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Is your strategy working?

Jean Pousson discusses the importance of non-financial performance measurements, and the often overlooked value of people and information already available within companies.

How did you go bankrupt asked Bill?

Two ways replied Mike. Gradually and then suddenly!

E. Hemingway. The Sun Also Rises(1926)

The above quote epitomises the fact that companies very rarely fail suddenly. There is always a trail of evidence to suggest that all was not well but often these are ignored by Boards and executives who convince themselves that things will improve and that things can be turned around.

There are many reasons, of course, as to how and why executives miss it or do not diagnose the full severity of the problem. I will focus here on some strategic reasons:

Measure not just results but what drives results. The real drivers of growth and profitability are often not fully understood. Bottom line only analysis can be dangerous as it can mask emerging tensions. Clients often tell me that cash flow is the single biggest reason as to why businesses fail. Well, yes and no! A lack of cash precipitates insolvency, granted, but there is a deeper question here: Why is the cash flow negative? Once organisations (not to mention banks) really understand what is causing cash flow obstructions, only then can an intelligent diagnosis be made.

Its not just about the numbers, as crucial as numbers are. There are a host of qualitative, non-financial measurements that are equally crucial to an organisations well being e.g. customer retention, market share growth, competitor behaviour, innovation, rate of new products introduction, to name but a few. It is, therefore, imperative that these are factored into the overall review process. This implies, of course, that there is a regular review process of the planned strategy!

With this in mind here are a few questions/themes to be debated as part of this ongoing strategic review:

Is our business model still relevant?

Is our vision also still relevant?

Do we fully understand changes to the external environmental and how they affect us?

Are we are comfortable with the changes that are happening in our industry?

Are our competitors hurting us or not?

Are we conscious of existing competitors and possible new ones and have we mitigated accordingly?

Do we track (and act upon) the slightest change in customer behaviour?

Do we track not just the sales order pipeline but any subtle changes as well?

Are our margins under pressure, do we have the need to discount, could we actually increase our price?

Are our suppliers still happy with the existing credit arrangements?

Is our banking relationship(s) unchanged?

Is staff retention very good, do people leave here and why?

Do we validate our findings and views externally, e.g. do we have regular discussions with key stakeholders about industry movements and changes?

How often are these issues debated properly at Board meetings? What is the nature and extent of the strategic review discussions? Far too often this review is only financial (which needs to happen, of course) but it needs to be broadened. Another good exercise is to audit the past few Board meeting minutes and analyse the nature and intensity of subjects covered (and not covered!).

Non executive directors have a key role to play here in constantly kicking the tyres to ensure that the entire Board is alert to the above themes. Management layers, and beyond, also need to be educated to be sensitive to such key strategic success drivers. Regular workshops, if well planned and intelligently facilitated, can be a very valuable source of extracting the knowledge that exists within the organisation. It never ceases to amaze me how often executives and Boards do not tap the wealth of information that is harnessed within the organisation and fall in the Henry Ford paradigm. He is rumoured to have said:

Why is it that everytime I ask for a pair of hands a brain comes attached!