Strategic Execution Part 2: Building and Executing Strategy
In a previous blog post I discussed what strategy is and why it remains a critical requirement for success in meeting any company’s goal. In this post, I will discuss more in detail the “what” and “how” of successful strategy development and execution. Specifically, I will discuss the core elements of strategy through a reference process for developing and using strategy to achieve your goals. Implicit in this is that the actual process used by an individual company must be tuned for stage of corporate maturity, culture, and the nature of the market in which the company competes.
Strategy is a plan for an organization to achieve its goals. Successful strategy comes from first making a conscious decision about who you are and how you desire the market to perceive your products and services, identifying the realities of the situation and planning within those, and then articulating, managing, and evolving a strategic framework in order to execute. The purpose of a strategic plan is to align the team to execute a set of activities to reach a desired goal and not run out of resources or waste them. That desired goal should be one that allows the repetition of the strategic cycle. Meaning, it either generates sufficient cash flow to continue or reduces risk and/or creates value in a way to support the raising of capital. For this latter reason, the strategy cycle must be both a cyclical repetition as well as a roadmap for a journey. The elements of the cycle are very simple: Plan, Perform, Measure, and Correct; repeat.
First, the elements of strategy are based on providing answers to the following key questions in order for the organization to align:
Who are we?
How do we intend to be perceived to compete?
How do we intend to execute to:
Achieve that positioning?
Perform within our Limited Resources?
Sustain the business through funding and internal performance?
Determine when and how to exit?
How do we align all the stakeholders to our plan?
How do we manage execution of the plan?
How do we measure success or failure?
How do we know it’s time to change direction?
The reference method I will offer will be a thorough process appropriate for a growth phase company that has reached at least $5M to $50M annualized revenue and growing stage of maturity; there will be notable and very different levels of tailoring for companies both up and down the maturity spectrum which I will discuss in a later blog.
This will be necessarily a meaty blog post. I don’t recommend all of what is in this post as “your” process; understanding the entirety of a solid process can help readers understand what’s being accomplished, at what level of detail, and then better understand the basis of tailoring to your specific situation.
As a framework, the strategy development and execution cycle is shown in Figure 1. In this case, the cycle is annualized with quarterly tuning points. These timeframes are one of many levers for tuning the process.
Figure 1: Strategy Development and Execution Cycle
The left side of the diagram (circular components) describes the timing of the process. The implication is that the start of the process always goes into the annual strategy review cycle, and there are quarterly trigger points during the course of that annual cycle as well as performance or event triggers that can trigger a revisit of the strategy. The more linear central core of the process consists of the four process steps of strategy develop / tune (plan), strategy execution (perform), performance measurement (measure), and performance management (correct). There is an explicit context to the triggering state for what happens in those process steps with different levels of intensity and analysis / decision-making for different triggering states. This process doesn’t have an end, by design.
Strategy Development and Tuning
The process of Strategy Development and Tuning is shown in Figure 2. This is the general flow for a complete strategy development process. Each step is potentially tuned based on the triggering state and level of maturity. For example, even for entrepreneurial companies, Mission, Vision, and Values may only require a revisit once every few years. Many of the other steps may be a complete development from scratch or simply a revisiting to identify assumptions and conditions that have changed and precipitate downstream differences. It is critical to understand that the entire process, while seemingly linear, is also iterative. The imperative is to produce a coherent set of strategic outputs and any discovery of an incoherency in assumptions or constraints requires a revisit to previous steps; so tuning is inherent to the process even if the circumstance is a develop from scratch state. Because of this level of iteration, the usage of interdependent operational and financial models that allow flow-through of changes is ideal as much as possible.
It should be noted that this process should leverage work from previous strategy planning and execution cycles; these are noted specifically in the archive folders noted in the diagram:
Strategy Archive: Mission, Vision, Values, positioning statements, etc. from previous planning cycles.
Analysis Archive: All of the situation analysis documents used in the strategy development process should be developed as a routine matter to a depth appropriate to the corporate maturity level and then brought into the process. It isn’t unusual to develop an analysis as part of this process, but is inappropriate to be developing all of the analysis every time.
Corporate Development Model: This is the model referred to in a previous blog post. The basis of this is a reference model to what is important to be focusing on at this current time and in the near future in order to develop and position the company properly.
Operating Model: This is the collection of documents that outline the business model, operating plan, and detailed planning artifacts from previous planning and performance cycles.
Organizational Performance: This a performance archive for groups within the organization and the organization itself that is used to benchmark reasonability and cost for objectives and initiatives and can also be used as a basis for identifying measures gaps as well as setting the value of objectives.
Figure 2: Strategy Development and Tuning
The elements of this process can be further decomposed as described below. Please note that this topic is far too broad to do more than provide an overview and some basic guidelines in this blog post; I will revisit several of these topics in future blog posts for a deeper explanation and insights.
Mission, Vision, Values:
Mission, Vision, and Values is a set of principles and guidelines for the identity of the company. It is the underlying framework that guides stakeholders in the business to understand whether or not potential decisions are consistent. Mission is the purpose of the company. Vision is the shared conceptual description of the aspirational future state of the world or problem state should the company be “successful”. Values are the core values and principles that define the character and standards of behavior for the company. Mission, Vision, Values are the cornerstone of the business and a set of concepts that, once defined, shouldn’t change at all or only very slowly. The only exception to this is for companies in their seed / customer development phases. Here, the iterative process of finding a viable problem to solve for someone who will find it valuable can result in some changes, even very significant changes, in these founding principles.
Most companies will generate a Mission, Vision, Values statement as an exercise with a facilitator. Below are some guidelines on what make good Mission, Vision, Values statements from a variety of perspectives.
Values are the essential and enduring tenets of an organization. It should be a short set of simple value statements that can serve as guiding principles; meaning they actually have meaning when the team is potentially making a management decision. Good value statements do not require and should not be based on external justification, i.e. “what would our customers want us to say?” They should have intrinsic value to those inside the organization and offer meaning in making decisions about who is on the team and what activities and opportunities the company will pursue. For this reason, Values should also accurately reflect the values of the core team forming them rather than being aspirational.
Mission is the purpose of the company. It should be a succinct statement capturing the reason for the company’s existence beyond making a profit and generating corporate value. Succinct generally means a short sentence; it isn’t’ a tag line but an appropriate tag line can be generated from a good Mission statement with ease. A good way to look at Mission is what difference does the existence of this company make on the world? The corporate value or wealth created by the company is a measure of the company’s success in solving a worthwhile problem; it is solving the worthwhile problem that is the Mission. Mission should resonate strongly with the core team. Building any company requires a great deal of work, commitment, and sacrifice; a good Mission statement will keep the team on course through that adversity because it matters to you and them. As with values, a good Mission statement will provide a meaningful guide when making decisions about what is and is not an appropriate opportunity to pursue and who should and should not be on the team.
Vision is an exercise in developing a rich description for what success looks like. It allows the core team to develop and express a broader explanation of what they want to achieve. Its purpose is to provide sufficient elaboration for the entire core team to truly understand Mission and Values in way that supports decision making both by the core team and those interacting with the core team.
Mission, Vision, and Values are the guiding principles of the company’s direction and strategy. A clear identity of who you are as a company, what you are trying to accomplish, and what is important to you is extremely important as a tool for clearly setting and communicating identity and direction. While these are important principles, without which it would be impossible to perform the rest of the work; they are woefully insufficient as a strategy.
Situation Analysis is a broad term encompassing all the analyses required to understand the lay of the land sufficiently to make reasonable decisions about market, market positioning / perception, and creating a realistic, tangible strategic execution framework. What is sufficient in terms of analyses varies mostly by the maturity of the company and specific markets. There is no specific order to these as it is generally necessary to produce all of them to at least some degree of depth. Most companies will be forced to recognize that the analyses performed and generated here are necessarily imperfect. The resources and access available makes it impractical to optimize these items without impairing agility and staleness. Often, each data item in these analyses is an iteratively deeper understanding of the situation that drives downstream strategic thinking as well as further analysis. They simply make the corporate knowledge of what’s happening better than it was before, but never perfect. Finally, the amount of analysis identified in this stage can be significant. Much of this analysis can be performed and then update periodically and routinely. It is generally inappropriate to enter into the strategic planning process and have that be a stimulus for preparing these data items; they should be prepared on a repetitive cycle tailored to the data item, the dynamism in the market, and the stage of corporate development.
Worth noting is that when expanding into new geographies and regulatory jurisdictions, there can be substantial impact on the breadth and depth of analysis required in this step. Contrary to expanding into parallel market segments, such moves can involve entirely different industry dynamics, regulation, value propositions, and regulatory regimes that should all be folded into this analysis.
Areas that should be considered as part of the Situation Analysis are:
Market Analysis and Segmentation:
A Market analysis and segmentation is an assessment of the relevant larger market for the company and its products as well as the segmentation of that market into the specific niche or niches the company seeks to address. A market niche or sufficiently small segment is a unique subset of the market where the value levers and behavior around the problem being addressed by a specific product / service are approximately homogeneous. Meaning, simply, that if there are two customers in your segment that will react differently, perceive notably different value, respond to sales processes in fundamentally different ways, then the segmentation is not tight enough and needs further decomposition. It’s important to note that market segments or niches are tied to product / service offerings not the company in its entirety. The company’s market is the sum of the niches being addressed by the product / service mix being offered. For startups, the product / service is usually focused on a tight niche and therefore the product and the company’s market are one in the same. As companies mature, this difference becomes larger and larger.
There are two fundamental reasons market segmentation is extremely important. First, all positioning for a product / service is within the specific market niche chosen for that product / service. This is a choice and a defined environment for other decisions related to that product / service. So, having a true understanding of what drives customers in that niche / segment is critical to building a repeatable business in that segment. Second, the demographics of that niche / segment are important. The number of customers, the growth in the number of customers, the value per customer that can be generated are critical to understanding the business opportunity and prioritizing it against other potential opportunities as well as in understanding the financial / investment potential for the product / service and company.
An industry analysis is an analysis of the overall industry dynamics surrounding the chosen problem. The gold standard in industry analyses was put forth by famed Harvard Business School professor Michael Porter in his five forces analysis. Those forces are Threat of New Entry, Threat of Substitution, Supplier Power, Buyer Power, and Competitive Intensity or rivalry. Looking at the dynamics of each of these forces will help shape the landscape of competitive position of your company. Further, it can be very useful in identifying both the opportunities for transforming and disrupting industries as well as the threats to a company in the existing structure. This understanding can help identify and lead to quantifying value levers, potential disruptive strategic moves, and how each of these change due to a disruptive company’s effect on the industry. It should be understood that this type of analysis lays the groundwork for the deeper analysis of value levers and competition.
Product / Service Value Levers Analysis:
A value levers analysis looks at the facets of a product / service and how they are perceived by customers within the target market niche for value. The purpose of this analysis is to define the attributes of competition in the minds of the target customer. This analysis can be performed informally through business development conversations focused on problem-solution-customer assessment or through more formal methods. The more formal methods are generally based on multi-discriminant statistical analysis of potential buyer surveys and purchase patterns. In either event, the objective is to identify the broad set of perceptive attributes regarding the solution through its lifecycle and then synthesize this to identify the attributes that truly matter on which to compete.
These levers might include savings of use, fulfillment of functional requirements, ease of use, associated cost of use, commitment risk and risk elements of all types (fiduciary, liability, reputational…), compatibility, solution completeness, quality, prestige, and many others. This analysis defines the competitive landscape for the market niche. An additional benefit of this analysis is that through this analysis it is easier to identify deeper market segmentation; if the customer’s perception and behavior are different on what is truly a relevant value lever, then they likely belong in different segments.
Competitive analysis identifies and qualifies the performance of all known competitors. In order to understand competitive positioning, it is necessary to understand what the competitors in a given market are doing, how well they are doing it, and how they are evolving. It is also very useful to understand how the market is perceiving their positioning, to identify the key value levers and opportunities for discrimination. Input sources should include customers as well as the wide variety of other potential players involved such as investors, suppliers, sales channels, peer partners, and industry opinion sources (certification agencies, industry associations, consultants, etc.).
Substitute analysis is a look at the ways of solving a given industry problem, other than buying and using your service / product or the obvious competitor service / products. Substitute analysis is an excellent way to initially identify and understand value levers as well as benchmark performance levels along those value levers when first introducing disruption. This ability to quantify savings, convenience, and quality differential can be the differentiator in the sales and retention processes. As the market evolves, a continuous understanding can help the company understand changes and needed improvements to the performance of substitutes and how that can affect product / service positioning.
Disruption / New Entrant Analysis:
A disruption / new entrant analysis looks at the barriers to entry for a potential new entrant. The objective is to either to identify a new industry / market entry point or to identify a way to disrupt your own market position before a new entrant does. An additional key question to address with this analysis is why your competitors will not disrupt themselves. A five forces analysis can help identify these opportunities, along with a broader holistic perspective on an industry to identify places to skip stages, accelerate processes, or sidestep roadblocks but do so on an industry basis eliminating the need for current stages in the process or ways to perform those stages in radically more efficient ways. There are many ways to look at this; the most common way requires you to identify what assumptions drove the industry / problem space in which you’re working to be the way it currently is and ask if and how those assumptions have changed or could be changed. This type of thinking often enables a recognition of new technology applications, disintermediation opportunities, or opportunities to change processes. This type of analysis should be part of the ideation and evaluation process involved in customer development as well as an ongoing exercise to assist in identifying technology, practice standards, and financial advancements that enable these types of opportunities. One great challenge to produce impactful results with this type of analysis is the removal of cognitive biases that can grow when people are embedded in an industry for too long. It is for this reason that many disruptive companies benefit from both novices and tenured experts in a given industry to work together.
As a practical matter, this level of analysis is key to initial market entry, expanding and building the product portfolio, and defending the existing portfolio. Because these are challenges associated with different stages of corporate development, it may appear that these are entirely different processes; in reality they are simply different perspectives on the same assessment.
Value Realization Analysis:
A value realization analysis looks at the possible performance of the product / service along the dimensions of each quantifiable value lever as well as an objective assessment of the actual performance of the product / service. This analysis allows a better quantification of market positioning as well as helps to identify and quantify areas for potential improvement. While this may seem obvious, it is the foundation of a critical element of product portfolio management which is assessing whether the product has the capacity for traction, providing insights to the relative capacity for traction of multiple product opportunities, enabling a deeper understanding of the interdependence of products in the portfolio, quantifying product performance relative to competition, and focusing product changes.
Proof of Performance Analysis:
A final critical piece of analysis is in the proof of performance. Many products / services that rely on claims of performance to drive their sale and retention require a proof of performance. It is critical to assess the state of the proof of performance as part of this process in order to identify the viability of the proof; which typically relates to its initial credibility and how well it aligns to customer experience after the sale. Proof of performance is a critical component of the product / service and must be developed and refined as part of the competitive positioning of the product.
Corporate Development Analysis:
Corporate development analysis looks the current stage of corporate development and identifies near term priorities and mandates as a function of that stage. For Venture-Backed or Private-Equity backed companies, this includes looking at the corporate development model and where the company is currently located in that model. Is the company proving repeatable revenue, building sufficient value delivery and capture to justify transitioning to growth, or in a growth stage and working to hit growth and financial performance targets? What are the product portfolio opportunities in terms of critical capabilities and / or products and services? Where is the company and the investments of its investors in the fund lifecycle and what are the expectations regarding growth, EBITDA, and timing? Is it appropriate to drive for additional targeted capital to drive profitability, improve client retention, or drive growth, or is it appropriate to start preparing for an exit?
Strategy Statement Synthesis:
Creating a strategy statement is the step of determining the target positioning and supporting priorities for the company. This step generally requires a synthesis of all of the previously mentioned information, at least at a change / impact level of assessment. These decisions will then guide all downstream planning and execution activity. A typical strategy statement, in its final form, will also contain high level objectives and objective execution steps which are developed later in the process.
The syntax (purposefully very generic) of a classic strategy statement is: “Company will accomplish Medium Horizon Corporate Goal(s) by providing the High Level Discrimination Objective statement of Product / Service to Niche Customer Segment with market / product / service specific capabilities in solving mission based problem statement, by List of Key Functions and Capabilities to operationalize the Discrimination Objective.” This can also be expressed using positioning matrices such as those common to Blue Ocean Strategy methods.
Corporate goals should be high level enterprise wide goals relating to re Note that the setting of corporate goals is an explicitly iterative process with initial objectives stated as aspirational and then refined based on reasonability, funding, focus, timeframe, etc. Further, the specific content of the strategy statement will likely be iterated several times as the detailed plan is iterated.
In the earlier days of strategic formulation as a practice; the general practice was to declare a positioning based on cost, quality (fitness for purpose), and timeliness with a general recognition that any positioning cannot maximize all three simultaneously. This practical observation has proven true but also of limited utility. Subsequent thinking has shown that the positioning decision can and should be more nuanced and should be focused on the value levers identified in the product / service value levers analysis. An example of this could include the product / service attributes of price, quality, time, selection, and function, as well as the relationship attributes of service level and intimacy / service relationship, as well as Brand / Image. Note that in the latter case, the positioning can be much more precisely defined and that positioning can be more actionable as well. Positioning is simply an identification of attributes that matter and whether the company will focus on leading or parity in a particular attribute, relative to substitutes and competitors. While purposefully choosing to trail in an attribute might seem like an improper choice, there are circumstances where that is the right choice. If the attribute is on the list because it is a traditional attribute of competition in a particular problem space and the company is disruptive and is solving the problem differently, it is certainly possible that lagging is appropriate because the new way the problem is being solved structurally reduces or the value created overwhelms the impact of that attribute. Choosing to abandon a traditional attribute of competition should be done with caution and purpose, and should be monitored, but that doesn’t make it the wrong decision.
There are many good attribute sets out there that have been generated that can be selected and applied; I will address this in greater detail as well as the differences between product and corporate positioning / strategy in a subsequent blog post.
The second part of creating a strategy statement is development of the how, at a general principle level. The concept behind this step is to develop an agreed set of priorities to guide the operational design and subsequent implementation / execution phases. Having decided the attributes of competition, the positioning (leading, parity, or trailing with knowledge of what that means), and incorporating the knowledge of the product / service value performance, organizational capability, and corporate development state, a general set of priorities can be developed. The work of Kaplan and Norton, faculty at the Harvard Business School and progenitors of the balanced scorecard method, specifically in the development of strategy maps can help guide this activity. Strict adherence to this method is often only appropriate as companies pass the $100M revenue mark, however, the 4 lenses or perspectives in this method (financial, customer, internal, and learning and growth) can be very useful in ensuring an holistic review and principle development even in less complex organizations.
Pause and Contemplate:
One of the greatest challenges to successful strategic planning and execution is that it becomes entangled with the annual planning process. The net result can be that the actual strategy becomes "keep doing what your doing" and the exercise becomes entirely focused on Financial Planning and Analysis (FP&A). It's extremely important to complete strategy statement synthesis and then review it and let it sink in. FP&A or what I call Operational Design should follow and must be consistent, and that consistency can result in iterations back into the earlier stages.
Operational design is the act of taking the strategy statement and associated background information and developing a coherent, actionable plan. Like the situation analyses steps, there is no reason these steps cannot be completed in any desirable order or have elements that are completed outside or before the strategic planning process. The important aspect is that the plan be coherent and sufficiently complete to validate coherency. All companies benefit from agile organizational management (I will dive more deeply into how this process fits with agile corporate management in general in a future blog post). In keeping with the agile principle of progressive elaboration, planning should be done at a relatively high level and decomposed in time, with appropriate delegation of operational objectives as well as planning for change, research, and development initiatives. Coherency remains important and it should be expected that design changes in one area will impact others resulting in a need to iteratively tune sections to be both executable and coherent.
Areas that should be considered as part of Operational Design are:
Organization Design (Changes):
Organizational design requires an assessment of the operational and developmental work to be performed in the coming planning period, the talent available in the organization, and the organization structure as it currently exists in order to determine what structural and personnel changes are likely to be needed to complete the work successfully and efficiently.
For many organizations, the organization chart structure and its personnel are formed and remain static except for financially driven decisions based on cash shortages, growth, or performance issues. Even in these cases, the structure usually remains the same. However, it is critical during strategic planning to assess the organization for structure and then for capacity. New initiatives, evolving scope and objectives, changes in the expected performance levels, growth introducing span of control issues, and both organizational and personnel performance should all be evaluated and the organization restructured / resized as appropriate.
Market Segment Focus (Changes):
During strategic analysis and positioning, the company has consciously chosen the specific market niches in which it will compete. These may be additions or may include abandoning certain segments. Each of these changes should trigger an assessment of the fundamental nature of each of the segments being added or abandoned. That fundamental nature should include size, rate of growth, but also more importantly sales and marketing access channels and methods, norms within those segments, and any potential facilitators or blockers present in the segment. This information informs the downstream design activities of operational planning for revenue generation, product / service development, and supporting services. It also enables identification of resources, partnerships, and processes that needed to be added or may no longer be needed due to segment abandonment.
Revenue Generation Process Design (Changes):
Revenue generation refers to the marketing, sales, customer onboarding, and customer retention processes. An assessment of those processes and their level of success relative to productivity, cost of sales, churn, and customer lifetime value as well as the product / service positioning statements is an appropriate step. Further, segment entry and exit may trigger recognition of needed changes, or changes in the strategy statement. As a final element, some organizations would include business development / market exploration either in the revenue generation process or the product management processes. Both processed should be refined based on business development / market exploration objectives identified in the planning process.
Product / Service Roadmap Design (Changes):
When assessing and designing the product / service roadmap, there are three areas for evaluation: the process of developing and managing the roadmap, the process of introducing new products / services into the portfolio, and the roadmap itself. It is possible in certain levels of corporate development that these processes don’t and shouldn’t exist.
The process of developing and managing the roadmap starts with the customer development process and often the CEO in early stage companies, may evolve to a combination of the CEO as product manager and the revenue generation lead as the conduit to the market to identify needs; then evolve to product management, and business development teams, and user conferences, and any number of additional methods to improve this process.
Similarly, the process of managing the development and deployment of the product / service using the roadmap will evolve and is part of managing the roadmap. Once a company is sufficiently successful to start scaling based on a first product, building a growth engine often requires building the capacity to identify new market segments and new products / services which requires repeating a streamlined version of the customer development process.
In assessing the roadmap itself, the exercise often becomes one of reprioritizing and assessing feasibility on the roadmap against the strategy statement’s product / service positioning statements. This may identify additional resource needs, partnership needs, process change needs, and a wide variety of other potential changes. Fundamentally, most organizations benefit from agile product management and development. For this reason, the output of a roadmap assessment is generally a prioritized list of product / service concepts mapped broadly to development sprints for the product management and development teams. Those concepts should be at a sufficiently high level for the product team to manage the details of their development sprints and maintain broad alignment with sales and marketing expectations. I will discuss agile corporate and product management in a later blog post.
Support Process Design (Changes):
Support process design changes may be required based on either changes to product / service positioning, known performance, product / service changes, and/or market entry or exit. These changes should be consciously assessed and any needed process changes identified. It’s critical to fold in customer feedback on perceived quality and responsiveness into the planning for these process changes.
Risk Management Plan (Changes):
The company should maintain a risk management plan that identifies and plans for response to all major risks facing the company.
For identification, Delphi methods of risk identification are a good way to identify risks, but a set of categories can be helpful to trigger thinking in that process. The objective is to identify the material risks in a coherent (not gapping / not overlapping) way. Even in mature companies, this shouldn’t be overworked. The following is a non-exhaustive list of potential risk categories:
Market / Competitive Risk: this is the risk to the enterprise in loss of customers and / or loss of competitive positioning. It entails an honest assessment of depth of product / market fit within all of the individual market niches as well as the risk of new entrants / existing competitors altering the competitive landscape.
Product Liability: things that can go wrong with the product that affect customers, users, and bystanders. This should include any performance guarantees written into contracts.
General Liability: things that can go wrong associated with having employees, traveling, owning property, handling cash, and interacting with prospects, customers, and other stakeholders in the sales and marketing process.
Contractual Liability: things that can go wrong with poorly written contracts, crossed expectations, and other parties not honoring their obligations.
Cyber/security risks: things that can go wrong with employees or external bad actors breaching security, compromising customer, company, and/or partner information.
Governance and Professional liability: things that can go wrong with having a board of directors, officers, investors, and other parties reliant on the professional judgment of directors, officers, and other key professionals in the organization.
Miscellaneous liability: It’s always worth considering what facets of your business model are unique and engender unique risks.
After identifying the liabilities, there are two fundamental approaches. The most common is a qualitative assessment in which risks are rated by their likelihood and impact. Risk is the product of likelihood (probability 0 to 1) and impact (numerous systems). The second method, quantitative assessment is an advanced risk management concept only appropriate to much more complex situations than most companies will encounter (unless you run multi-billion dollar R&D intensive projects).
After assessment, each risk requires a decision on how to respond. Possible responses are avoidance, mitigation, and acceptance. A non-exhaustive list of examples of possible ways to implement these would include changing the product design, putting in protective clauses in contracts, investing in cyber-security testing and hardening, buying insurance, allocating risk budget and monitoring the risk.
A risk plan, when completed, gives the management team a few key tools to manage performance. First, it identifies hard actions that will be taken (contract changes, product changes, insurance purchases, etc.). Second it provides guidance for contractual or other high-likelihood liabilities. If a company has performance guarantees in their contract, then revenue should be recognized based on performance and acceptance as well as retirement of performance guarantees. Focused performance changes can mitigate these liabilities as well. In some cases, companies can identify long-standing errors in their contracts that introduce potential liabilities and need to set aside resources to address those liabilities as they may occur as well as to manage them into retirement as appropriate to the situation. Third, the overall risk picture provides a level of understanding of the likelihood of the plan performing as expected as well as items to be watched and responded to during performance measurement and management.
Financial planning is the act of designing the P&L statement based on organizational planning that has been completed and associated organizational performance commitments. Then planning the cash and balance sheet implications to provide the needed financial resources as well as support the necessary management and governance decisions required to fulfill fiduciary obligations. It is this portion of operational design that is the most common trigger for planning iteration cycles as the financial contradictions of planning are identified.
Initiatives and Organizational Planning / Costs:
All of the planning done to date will include a list of initiatives to be performed as projects or discrete tasks as well as organizational performance objectives for the coming period. For each of these, the performing teams will need to perform planning for these efforts.
In the case of initiatives, these should be planned as discrete projects or as cycles with an agile implementation framework with all of the appropriate planning artifacts for the complexity of the project and the company in its current state. This could be a simple scope, budget, schedule, and set of assumptions or a complete set of project planning artifacts. Most companies at the stage of growth relevant to the level of strategic planning noted herein will benefit from either integrating these projects into the product development cycle (for a SaaS company and projects relating to core operational capability enhancements) or from setting up a dedicated Project Management Office to plan, run, and operationalize the initiative project stream.
Organizational financial planning consists of each organization within the company flowing down objectives to the budgetary planning level, incorporating organizational design changes, as well as unit performance metrics and any change intended during the forthcoming planning period and developing draft organizational budgets. A good practice is to develop models that can be used to accelerate the tuning of the P&L for the variation in size and resources required as a function of revenue or company transaction units.
Financial Plan (P&L):
The financial plan should start with the profit and loss statement. During the course of planning, usage of a dynamic model is critical as the entire plan will require a great deal of iteration before reaching an acceptable state. There is a lot of material to cover in building financial models and organizing the chart of accounts and cost structure of the company; I will cover this material in a future blog post.
It’s important to build a revenue model based on a blend of actual opportunities identified with upside outliers filtered out, sales quotas and team structure, as well as extrapolation from past performance sales metrics. This combination of bottom’s up and top-down perspective will give the forecast a little more balance and reduce the errors in the forecast. It’s also important to remember that every sales forecast is wrong, the only question is by how much and in which direction; this is true for every complete financial model as well.
Costs should be developed from bottoms-up forecasting as well as top-down performance metric driven estimates in a similar fashion. Costs should be allocated to Cost of Goods Sold (COGS), Sales and Marketing (S&M), Research and Development (R&D), or General and Administrative (G&A). Each should be scalable as a function of sales units, customers, or revenue, or some internal driving metric. These relationships are part of benchmarking the performance of the organization and can provide tremendous insights into the organizations capabilities and opportunities.
The P&L model should result in a Gross Margin, EBITDA, and Net Income projection as well as inputs to the cash management plan, again in an integrated model that supports parameter changes rippling through the entire model.
Cash Management Plan:
The cash management plan is the statement of cash flows as well as the plan to address cash shortfalls or surpluses in the planning period. A cash flow statement is simply the company’s net income adjusted for non-cash transactions in the P&L statement as well as pure cash transactions associated with the balance sheet. The cash flow statement gives a view on the cash needs of the company. The cash management plan should include a cash forecast for the upcoming planning period; most companies plan for a minimum of 26 weeks or ½ year and update this plan at least weekly during performance.
The cash management plan touches on several governance philosophy elements that should be explicitly discussed and resolved. These relate to the cash implications of risk management as well as the cash implications to equity. The soundest way to manage risk is to manage performance reserves in an accurate and transparent way. However, institutional investors don’t put money into the company to sit and produce no value creation or to be wasted on initiatives that don’t produce a sound amount of value. Performance reserves represent the potential to not put good funds to sound use; and so any good cash management plan should also include an assessment of when funds can be released and productive ways to use those funds when the opportunity presents itself.
Funding Pursuit / Changes:
Having the cash flow forecast for the upcoming planning period, and it is recommended to maintain a longer term view and model on cash needs as well, serves as the basis for forecasting future capital needs and driving the capital raise process. This process should provide for early insight into capital raise needs and the planning of that activity or the tuning of planned activities in response to funding constraints along with operational criteria for managing the timing of activities and the possible switch to a constrained mode of operation.
Corporate Transaction Planning
Planning for corporate transactions is a final piece of operational design. There are three fundamental classes of corporate transactions that should be assessed, these are Capital Raise, acquisitions, and exits. While one could argue that everything prior to this could be strategic planning performed by the company executive team and approved by the board, this level of planning always requires a greater degree of socialization, approval, and / or origin with the board.
Forecast cash shortages will drive anticipated capital raises; these shortages should be identified well in advanced (longer than the strategic planning cycle), and planned for as part of the growth cadence of the enterprise. The level of planning to be performed should be fairly deep with regard to the amount of capital, likely vehicles, campaign approach, campaign costs, and other transaction costs not explicitly paid for in the transaction itself should be planned along with timing for the raise, all with low, high, and expected estimates along with criteria for restraining operating expenditures in the face of delays in funding or operating revenue / income.
Acquisitions, like capital raises, are significant campaigns to be planned at least at an operational level for the coming planning period. Individual transactions can often involve some level of financing and/or financial transaction and that can be individually planned as part of the transaction itself, but any cash anticipated to be needed as part of identifying, vetting, and negotiating forecast acquisitions should be set aside as part of this planning process. This should include attrition in acquisition opportunities.
Finally, Exit planning is an important part of finalizing operational design. Initial plans should be developed and updated as market conditions, investor timing and expectations evolve, and company performance plays out. Ideally, the board will approve and update or at least discuss an overall timeframe, conceptual target, exit valuation objectives, and other criteria that enable the board and executive team to have a good understanding of the objective exit; knowing full well that the company and board may entertain offers of acquisition on an ad hoc basis as well. Well before the company reaches the timeframe is reached to start shopping the company, the strategic plan should start to be tuned to emphasize stability in growth of revenue and/or profit, as applicable to market and company, along with other elements of risk reduction to a potential acquirer. This activity should also include purposeful activity to start building relationships with potential acquirers and facilitators well before the planned timing. Executing an exit is a campaign which should be planned in similar detail to capital raises and acquisitions.
Operational design concludes by integrating the planning that has been performed and repeating iterations until the entire package of strategy statement and operational design are mutually coherent and planned at a sufficient detail for the level of maturity of the company and the complexity of the forthcoming execution.
Objectives, Initiatives, and Measures Development
The final step in developing / tuning a strategy is the repackaging of the strategy statement and all of the associated plans into a set of meaningful objectives, initiatives, and measures for the company to execute. While it is very beneficial to involve more than the senior management in the previous steps, it truly becomes imperative to involve line managers in the following steps. The degree to which previous planning artifacts are shared in this process is a function of the company culture; however, there are usually strong dividends to sharing as much as possible with the exception of acquisitions and divestiture / exit activity that, in most cultures, are better held until closer to the transaction.
Objectives, initiatives, and measures are an expression of the operating plan for the company; they each represent different facets of that plan.
Objectives are the operating goals of the company as a whole as well as by organization within the company. They should be decomposed down to meaningful levels of granularity. For sufficiently complex organizations, the use of the strategy map and balanced scorecard can be an appropriate way to express these three items and to decompose objectives across operating units. In simple organizations, good rule of thumb is to decompose objectives down until each functional unit of the company has 3-5 objectives.
Initiatives are projects and organized activities that fall outside of day to day operations. The purpose of initiatives is to define organized activities whose purpose is to alter the way operations function and in so doing support the achievement of objectives. For example, a service delivery unit of the company has an objective to reduce the cost of unit performance by 10% over the next year. Initiatives to build a tool to administrate the process, another tool to automate components of the process, and a process redesign to incorporate these new tools are all expected to be required to drive the 10% reduction. The choice of whether to build an enterprise project management office, hire and deploy project managers in a more ad hoc manner, or to have line managers take on initiative management as part of their duties potentially with the help of project administrators is an company choice that should be driven by culture, change volume and intensity over time, and possibly other factors.
Measures are the third leg of the operational plan. The Measures plan should include what metrics will be reported at what frequency, how they will be defined, developed, measured, delivered, and used. In the absence of a good history of measurement, many organizations will require a measures standup / change initiative as part of the execution plan. Every plan should at least contemplate a measures update initiative. Good measures are driven by the objectives process and should often be stable over relatively long periods of time.
Wrapping it up
The company now has developed and/or updated its corporate strategy and the planning required to execute it. There is a now a body of strategic analysis that frames the assumptions upon which the strategy is based. A strategy statement that expresses what and how the company will perform. Then there are detailed operating plans for the product or service, all major functions, finance, strategic capital raise, acquisitions and divestitures, and finally a set of objectives, measures, and initiatives by which to operate. They have been developed, integrated, and made coherent with each other and with both internal and external stakeholders. It is the full context of this planning that will be used to guide activities over a planned period of time or until a pivot is indicated by performance deviations, exigent events, or the violation of assumptions and constraints.
It is worth recognizing a final criteria at this stage for a “good” strategic plan and that is simplicity. The likelihood of successful execution is significantly enhanced by an operating narrative that is simple and easy to understand to those who will manage and perform the plan. All of the steps in the strategic planning process are oriented around creating a high-level narrative, going into sufficient detail to truly plan the how, and finally to bring that plan back up to the level where the overall picture is understood as well as the clear objectives for each team. The detail is important for coherency, for clarity, for depth of understanding; but the simplicity is important for execution.
Implementing and Executing Strategy
The classic definition of implementing strategy is to make a firm decision regarding positioning and execution is what happens after. That definition is fine in a strict sense, but doesn’t account for the reality that things don’t happen because we decided that they should; they happen because we create and follow a process of execution. The following three steps, execution, measurement, and management, are the act of implementing. All three are required because blindly following a plan without regard for the results its producing is a recipe for disaster. Measurement and correction are a critical component of any successful implementation and they must be performed iteratively, both to account for performance deviations as well as to account for planned evolution of objectives.
A simple framework for execution is shown in Figure 3. I will go into deeper facets of execution, performance measurement, and performance management in a subsequent blog post.
Figure 3: Strategy Implementation and Execution
Executing strategy means to execute the plans developed to implement the strategy. Good planning decomposition from corporate to individual performer is a key precursor to successful execution; but this does not remove the need to present and socialize the plan at all levels of the organization. In fact, continued ongoing socialization of the key messages of the strategy is critical for successful execution. Further, it is rare for plans to be developed in which every stakeholder obtains precisely what they want in terms of goals and resources, and as execution proceeds the teams will need to perform work within their areas and coordinate work that crosses different areas to prevent the development of silos and ill-optimized processes. This will necessarily evolve deeper planning and tuning along with agile execution.
Performance measurement is the act of producing measures of performance for the execution of change on the business as well as for the operation of the business. These measures should be primarily, but not exclusively, objective. One or two subjective measures can help capture problems and benefits before they occur as well as help provide a backstop for the objective measures that become counterproductive in niche scenarios. There are several classic examples of this, but they generally involve optimizing a bonus-tied metric at the expense of several others; for example, hitting profitability numbers this quarter by under-investing in customer support and account management. In this case, the profit is achieved, but there will be a downstream spike in customer churn which clearly is more harmful than missing the profit number was beneficial; this can become more problematic as single-measure plans are adopted. This practice, more common in Private Equity vs. Venture Capital, yields hyper-focus by the executive team and the portfolio results of these funds demonstrate the efficacy of this method. A subjective measure, such as impairments to company reputation and future earnings, which subjectively measures the cross-purpose tradeoffs made by the executive team can be a background condition for corporate performance and help ensure clarity on the objectives.
Performance measurement is a process that occurs on a repetitive basis with measures defined for production and usage on a time basis from continuous / real-time to annually or possibly longer and everything in between. Most measures should be automated to the extent possible, but don’t let a lack of automation prevent the measurement. Some measures cannot be automated, they are subjective and opinion-based. Some will say these measures have no value because they cannot be objective; but I have seen them successfully used as the most accurate and most leading indicator of performance issues in several enterprises. Use them very sparingly and be mindful of their limitations.
The process of performance measurement should be one in which data is routinely collected by platforms and personal reporting, processed into appropriate metrics, and then made available to the entire organization. Culture may dictate that select metrics be restricted in their dissemination; for many organizations the more that is shared the better.
Performance management is the act of monitoring the plan and performance measures and making active, repetitive managerial decisions to course correct, steer performance, clear obstructions and roadblocks, and possibly trigger re-plan or plan adjustments. Performance management occurs at multiple levels and frequencies. I recommend a daily, weekly, and monthly cycle; with a quarterly cycle built into the strategic planning and implementation cycle at the level of maturity for the example organization in this post.
Daily performance management is primarily for coordination, alignment, and clearing of obstructions that are fundamentally organizationally driven or driven by misperceptions. A daily stand-up meeting for teams and their leads to coordinate change actions for the day, business processes actions that are out of the normal day to day, and any questions, concerns, or known / suspected issues are all appropriate for these daily meetings. Daily meetings should be short and exception driven. Ten to Fifteen minutes is an appropriate length. Issues and problems that come up in daily meetings can usually be resolved that day in the meeting or in a subsequent coordination; those that cannot should be deferred to the weekly meeting unless their urgency requires a more dedicated activity.
Weekly performance management is primarily to monitor performance and address ad hoc issues and concerns that are larger in scope or have more strategic implications. Thirty to Sixty minutes devoted to a systematic review of performance metrics, retuning of direction to adjust, and a prioritization of resources to address larger scale issues is an appropriate scale. As with the daily meetings, issues that require a team to solve them should be bounded if appropriate and a team tasked with solving the problem and reporting back; the objective is to keep performance management to the decision making rather than executing in order to preserve team efficiency.
Monthly performance management is primarily to monitor performance and drive course corrections, adjustments, and possibly re-plans. The monthly cycle becomes the principal cycle for top level performance management because of the monthly accounting cycle prevalent in most organizations. Because of this, most organizations must rely on more rapid, un-validated metrics between these cycles and use the monthly cycle to benchmark corporate performance. For most organizations and situations, this combined level of metrics measurement and performance management provides sufficient agility. There are exceptions and ways to get to more leading indicators while accepting greater risk in the reliability and stability of those indicators. The Monthly cycle is the most likely to trigger a re-plan or significant plan adjustments because of the depth of metrics, direct relevance to top level performance of those metrics, and to some extent natural cycles of human responsiveness. There is ample evidence that it is possible to measure deep metrics and make decisions much more often than monthly, but significant changes or sustainment of direction often requires a degree of comfort that the information being relied upon is sound or fully baked. For this reasons, monthly cycles can yield more confidence. The tradeoff in confidence is one way to look at making agile strategy, but a more reliable way to drive agility is to identify and drive using leading indicators and use the monthly financials as a check or validation on more rapidly made moves.
Quarterly and Annual performance management is also critical; so much so that they are explicitly part of the strategic development and tuning process. Deviations from objectives and plan are a key input to strategic plan tuning as well as periodic redevelopment of the strategic plan. In the interest of driving a team’s ability to forecast and predict performance and changes to performance, the feedback loop of quarterly and annual performance management is a critical driver. Interestingly, the convergence of accuracy of such forecasts is a function of the core team in its entirety and its collective experience which can only be accelerated by activity and performance benchmarking in a learning culture; a factor of human behavior well proven in project management and corporate performance.
All of these performance meetings have the capacity to raise issues that can drive a re-plan exercise. Such issues would include significant deviations in performance with an expectation that performance cannot be re-tuned, violations of assumptions and drivers of substantial strategy decisions, and any issue that represents an immediate substantive threat or opportunity to the business.
Real time performance management is an important part of driving operational performance, which is different than strategic performance. Most organizations will benefit from identifying real-time metrics and monitoring them to drive operational performance correction with self-correcting teams. An example might be a call center that uses maximum wait time of all calls queued to drive an escalation path to ensure no prospect or customer ever waits more than some threshold. Another example might use sales funnel metrics on dashboards for a sales team to help instill competition as well as identity situations requiring intervention or assistance by a peer or supervisor.
Strategy and Strategic Execution (including performance measurement and management) is a well-defined process that is well proven, but also can be tailored down or up to the specific state of the company. In its most robust form, it allows the company to understand its industry, markets, and competition in order to optimize competitive positioning and then requires robust planning to ensure coordinated execution to implement that positioning, achieve expected corporate performance, and satisfy all corporate stakeholders. It’s easy to see how scale, market spread (multiplicity of niches), and evolving investor expectations can drive this process to be overly risk averse and as a result sluggish. This carries its own perils, because it is equally easy to see how executing the process described in this blog could take significant resources; especially time. The challenge becomes how to strike this balance, streamline processes, take intelligent risks in the process and in the strategy itself, and achieve the level of agility appropriate to your level of corporate development.
However, what’s important to understand is that while agility is important, so is meeting expectations. Successfully building a rapidly growing business requires balancing the risk between insufficient agility and out of control execution and resource consumption. Most governance in this space expects a range of performance rather than a specific performance in order to provide the operating flexibility a team needs to manage this balance; this does not mean they don’t expect the team to perform or that they won’t or shouldn’t take action when performance doesn’t meet expectations. The well-tailored strategic planning process adapted from the reference process outlined in this blog is the most reliable means of addressing this challenge.
In subsequent blogs, I will offer some insights into tailoring to individual organizations and needed level of agility, some observations of common pitfalls and problems with the process that I’ve seen, and finally offer some cases studies on companies that have had both success and failure with strategic planning and execution.
For most companies, the usage of external parties to facilitate the strategic planning and execution process produces superior results. The process typically involves a great deal of information processing that isn’t core to running the business on a daily basis and a facilitator in planning sessions frees up the team to focus on the critical questions rather than the process and can inject highly productive objectivity into the discussion and decisions. If you would like to discuss where your company is in the evolution of strategic planning and execution or would like some assistance in setting up or performing this critical process, or just have a question please contact us.