Video Transcript:

"Welcome one and all. My name is Blair Cook, and I'm your coach for today's course on strategic management. Back in university my nickname was The General for the military prowess I displayed during the all night Risk tournaments we used to have. Whether that alone qualifies me to present this course I'll let you decide.

I have spent some time working with the corporate development department for a couple of billion dollar companies. I've also spent a number of years in the CFO seat for several other companies and several more years since then as a corporate director for a number of public companies. All to say that I have participated in my share of strategic planning discussions.

For those of you already at the executive level, I'm sure that you have similar experiences, and for you this course is reinforcing a framework and enabling you to better facilitate a robust discussion of strategy within your organization. For those of you aspiring to the CFO role, this course is intended to expose you to strategic management and build that competence in your professional repertoire.

There are so called strategic management experts and firms out there, whether it's Michael Porter of Harvard, or Jim Collins, the author of 'Good to Great,' or any one of the hundreds of websites you can find dedicated to this particular topic, so why learn this topic from the Finance Learning Academy?

Well, a couple of reasons. I'm not going to beat around the bush, I'm just going to tell you what you need to know, and if I can find someone who can explain it better than I then I will point you in their direction. Secondly, I'm going to provide practical advice, advice that you can actually use as opposed to the theories.

Lastly, I'm approaching this course from the CFO's point of view. Much of the work I do involves turning around companies, and I remember the guidance I first got from my boss shortly after I started working with him in his private equity firm. I had just started working on one of the investments in the food processing industry, and everyone at the investing company thought we had a strategy problem.

I was racking my brain trying to facilitate and develop a winning strategy for the company. My boss calls me up and says I think you're going down the wrong path. We may have strategy problems, but we have far bigger problems to deal with first.

This was a billion dollar company in terms of sales that was losing a few million dollars a year. The more product they sold the more money they lost. As it turns out he was right all along. Our number one priority was not developing a new strategy. We had far more fundamental execution type problems to deal with first. This company was so inefficient and there were so many poor decisions being made that the strategy was the least of their problems.

I spent the next year and a half just cleaning up the business by implementing your basic business processes that you would find in many modern companies today. After that year and a half the company had shed about a third of its business, yet it was making more money than it ever had in its entire history. We sold our position to a group of strategic buyers, tripling the value of that investment in the year and a half I was involved.

In this introductory lesson we're going to walk through the strategic management process at a high level, and in future lessons we'll drill into specific areas. Let's begin by talking about some of the elements of strategic thinking, because we can't have a civilized conversation about strategy if we don't understand it in the same way.

The word strategy is a very broad concept. It's almost like the word love. I love chocolate, and I love my kids, but I use love in both of these instances very differently. Strategy kind of works the same way. Your boss may come to you and say what's your strategy dealing with a difficult customer, and in the very next sentence say by the way what's our strategy for dealing with international competition.

The word strategy is liberally applied in a variety of circumstances. One dictionary definition suggests that strategy is a plan, a method, or a series of maneuvers for attaining a specific goal. I think this can work for us in this course, but let's recognize that strategy has layers to it. We will have some goals that may be very broad and articulated to provide direction to the entire organization and other goals which may be functional or personal goals with many layers in between.

Next, we have to deal with how strategy is developed. In an ideal world we would use insight to develop strategy based on our profound understanding of the business and the context in which it exists. The practical reality is that this approach is extremely rare and few companies have shown an ability to think about strategy in this way. One good example is Apple and Steve Jobs. He saw the world differently than most and made conscious strategic decisions to position the company to capitalize on those beliefs about its customers, even though on the surface it kind of flew in the face of conventional wisdom.

But, just because it's hard to set strategy in this way doesn't mean an organization should not attempt to gain this deeper level of understanding. Strategic management as an organizational process is a step towards gaining this level of insight.

A planning approach is the formalized process for developing strategy where a company works its way through strategic issues to determine the best course of action. Companies deal with very few of their strategic issues through a strategic planning process because these issues come up all the time and don't nicely dovetail with the annual strategic update process.

Companies may have an annual planning meeting or a strategic retreat. It's better than no planning at all, but it is a challenge to deal with something as complex as corporate strategy in one isolated event or the span of a couple of days because strategic decisions are required on a far more frequent basis.

A response approach is the most often used approach to developing strategy, and it's used to react to a situation. The downside of relying on this approach is that your strategic options narrow. They become more limited the longer that the company waits to identify and implement a response. It also requires an organization to constantly be operating in crisis management mode which can exhaust the organizational resources.

The reality is that if your company is generating revenue already then you've already got a strategy, and the starting point is to simply document the strategy you've already got. In fact, just accomplishing this much can yield significant benefits, because it enables the members of your organization to begin thinking strategically and directing resources in a way that helps accomplish those stated goals.

Having a documented strategy facilitates the right discussion, and this is so important. It has been studied in Fortune 500 companies and determined that a piddly 5% of employees understand the corporate strategy of their organization. Gosh, it's hard to accomplish a goal when 95% of your people that do the heavy lifting can't see the goal.

That's not the only ingredient for strategic thinking. In fact, to have strategic thinking we need to nurture three equally important elements. Our people need to see the goals and strategies, they need to believe in them, and they must have a desire to achieve them. Failure on any one of these will result in the failure to achieve the strategy.

For instance, a dreamer is someone who sees the strategy and believes it but is unable to achieve it. We need a commitment to act before the goal will be attained. A workaholic is someone who believes in the mission and works so hard to achieve but may not necessarily see or understand the specific goal to get there. In this situation we may have well intentioned people acting in a counterproductive way because they lack alignment.

Finally, people burn out when they see a goal, make strides to achieve it, but really don't believe in it. The key is to find the right mix of people, nurture the right environment to enable all three of these elements of strategic thinking to take root.

Strategy in this way is a call to arms, and passionate leaders communicate the strategy with their words, with their actions, and how they've aligned the organization to succeed. Strategic planning is similar and in many respects synonymous with strategic management. The planning aspect means a conscious allocation of resources in a way that best allows the organization to meet its objectives. Strategic management is the ongoing continuous activity of managing strategy.

You can think of strategic planning as kind of one revolution of the five phases of the strategic management process we're going to discuss later in this lesson. The strategic planning framework provides us with context for what we want to achieve with strategic management.

The current state documents where we are, and this requires a huge amount of research and analysis to get an accurate assessment. Many organizations fool themselves, so this requires a brutally honest assessment and some detailed analysis.

The future state is the fun stuff. It's the blue side planning which sees your organization dominating the market. The more specific the vision is the easier it is to prepare a gap analysis between the future state and the current state.

The strategic plan is the bridge between the two states. It takes the strategic decision, implements it, and ensures that it delivers on the desired result. Strategic planning will answer such questions as which customers or markets are we targeting, what is our value proposition, and what functions give our company competitive advantage.

With this framework in mind, let's review the five phases of strategic management, and keep in mind that strategic management entails a continuous cycling of these five steps. It's not a one time deal.

When it comes to mission, vision, and values, these terms are not well understood and often confused, so let's reach a common understanding. Mission statements define the purpose or the reason for the company's existence. There should be an element of measurement explicit in this statement. Notice how Newport News Shipbuilding emphasizes quality over profit. This sort of mission statement can last a very long time.

Values are integrally important in this process as they describe how the organization will achieve its desired outcome. On the other hand, current management has more of a hand in setting the vision statement. Think of the vision statement as a beacon for the organization to sail towards. Its words can be a rallying point for the members of the organization, so it should have an emotional feel to it that embodies both mission and values.

Mission statements and values don't change very often. They reside within the organization. Jim Collins argues that they are not something you choose rather you discover about your company. Strategies and objectives set plans, targets, and tactics for how the company will achieve mission and vision and are primarily dealt with in the later phases of the strategic management process.

Next, we have the current assessment. Before we can start making changes for tomorrow, we need to understand where we are today. It's tempting to want to get at change, but in the absence of adequate planning it's just not going to be as efficient or effective.

Planning requires documented evidence of the current state which includes a reality check. Again, Jim Collins call this the brutal facts of reality, and these brutal facts come from both an internal and an external assessment. The external environment impacts everything that happens in the organization and most certainly the company's competitive strategy. The rate of change in technology, political realms, legal and regulatory regimes, and sociocultural paradigms is constantly influencing the strategic direction of the company.

There are a number of strategic tools that the strategists bring to the table to ferret out the most important factors. In this course we will discuss performing a macro environment scan as well as an industry analysis, the purpose of which is to identify the factors that provide the key opportunities and the key threats to the company.

Internal analysis, on the other hand, is easier to prepare, because for the most part it's inward looking. However, don't limit your analysis of your own internal capabilities to just internal sources of evidence. You need to integrate external sources of evidence as well, such things as competitive benchmarking and external reviews of your performance to help size up your capabilities.

We will discuss analyzing the industry value chain, the corporate value chain, and our own functional resources to identify our strengths and weaknesses. This will help identify what we are good at and what we are not so good at.

A SWOT analysis is probably the most well known strategy tool and is used to combine our internal and external assessment to provide an indication of the areas where we should emphasize and those we should attempt to mitigate. You can use this matrix to get started with setting some generic strategies using what is called the TOWS matrix, which is a fancy way of saying that we should emphasize strategies that capitalize on the upper right of this diagram and minimize our exposure to the lower left of this matrix.

Which brings us to our evaluation of strategic alternatives. Here's where we need to find out which bridge best gets us to our future state. Strategy cascades through an organization. Corporate strategy sets an overall direction to the company. Business strategy determines our competitive position.

Functional strategy speaks to how we will execute our strategy at the department level all the way down to how we manage individuals, which could be through our own performance management system such such as by setting management by objectives, or MBOs, or by setting corporate policies and procedures to guide our people in a manner consistent with our higher level strategies. The lower levels of this pyramid speak to alignment and will have more to do with the implementation, which we'll look at next.

At this point we're mainly looking at the upper levels of the pyramid, and one approach to developing alternatives is to start with our TOWS analysis that we just spoke of and construct some strategic alternatives. Screening criteria help shake out the possible from the improbable strategies, and once you're left with a short list of directional strategies you can then move on to evaluating these strategies.

We will learn about how some companies have developed a recipe which is really just a list of guiding principles that are used to help set strategy. Jim Collins calls the recipe the SMAC in his book 'Great by Choice' which stands for specific, methodical, and consistent. This recipe describes what the company will and will not do to remain successful and brings about discipline and clarity in setting strategy.

Strategic alternatives need to be fully analyzed before you can pull the trigger. Scenario planning can help bring deeper understanding to each of the strategies. Different strategies have different risk profiles, and on the surface running a single set of numbers will not fully illuminate all the upside and downside scenarios associated with a particular strategic alternative. It behooves the CFO to do a little stress testing on the more significant strategies.

Scenario planning requires that a group of managers first brainstorm scenarios which might happen. This can be developed separate from the strategic alternatives. For instance, one scenario could be what would happen if a competitor discovers a new technology superior to our own. Another might be what happens if the government changes the regulatory environment, say, in the context of health care or the environment, where either of those are key external factors to the business. The team develops assumptions which get plugged into a financial model which enables the generation of pro forma financials, a risk profile, and a sensitivity analysis.

The modern CFO will have the skills to prepare these sorts of analysis. The CEO, the executive team, and ultimately the board of directors are left with a much more insightful perspective of each strategic alternative under a variety of conditions.

Now the hard work begins. Implementing strategy requires the alignment of the organization. It requires a strategic approach within each functional area, which in turn requires alignment all the way down to the base of our pyramid, the people.

My late grandfather was president of Abbott Laboratories, and I was fortunate to have him living nearby the university where I chose to study business. With all of his experience, I would've thought he would be able to have some sort of clairvoyant secret to being successful in the business world. All he kept on telling me was about the people, the people, which, for a student studying accounting, made no sense to me.

But, now, decades later, I get it. He was right all along. It is about the people. So few organizations get this right, so we'll spend a lesson identifying some of the roadblocks of strategic implementation and how to get by them.

Implementation requires consideration of organizational structure, putting the right people in the right positions, and establishing detailed plans to move the organization forward. Direction, alignment, fit, and, of course, people.

Finally, strategic management requires an active evaluation and control mechanism to kick in when progress diverges from plan. Let's keep in mind one of my favorite expressions as we go through this phase. 'I would rather be approximately correct than precisely wrong.' Companies produce gobs of data, but most of it doesn't matter or it's too costly to analyze, and it's hard sometimes for us to let that go.

As we establish an evaluation mechanism we need to determine what to measure, set standards around what is a tolerable deviation, and then begin measuring performance. It's easy to set a financial target as this is something we measure already, but that doesn't provide us with the whole story. The success of an organization does not rest solely on the financial results.

Sometimes financial results lead or lag strategic and tactical decision making. If we want to window dress the current performance, we all know that it's easy to cut discretionary spending on such things as research and development. We need to have a mix of measures that correlates with the progress towards our future state.

The balanced scorecard is probably the most common strategic tool established for evaluating performance. However, implementing a scorecard can consume vast quantities of organizational resources. Once again, keep in mind that we want to be just approximately correct. I'm fond of developing a deep understanding of the theory and implementing a light version of the tool, which is to say use the principles of the balanced scorecard to develop and measure a handful of meaningful metrics.

At the back end of the control mechanism is the evaluation process where either we are meeting the desired outcome or not. Where there's that shortfall we can address the root cause and take corrective action. Some corrective action is tweaking in nature. Other times it may bring into question the whole strategy, in which case we must go back to the beginning of our strategic management process and start all over again.

Which brings us all the way back to where we started. Strategic management is not a once a year thing. It's an ongoing and integral part of the CEO's role, and increasingly the CFO is also playing an important role in strategy development as it is the CFO that has the organization wide perspective and the suite of analytical tools to help the CEO and the board of directors make sound decisions.

That's all for this lesson, so until next time, don't stop until you get to the top, when you get to the top don't stop."

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