Recently, my firm was retained by a distressed debt investor to perform strategic reviews of an 11-company portfolio of distressed debt it was considering acquiring. Manufacturing, distribution, transportation and services were represented. Annual revenues ranged from $35 million to $400 million. Debt facilities were typical of the credits in an asset-based lender’s portfolio. The recent recession reduced revenues of all these companies and each was wrestling with changed market dynamics. Each three-day review focused on scrutinizing the strategy and business plan, opining on the adequacy of plans and suggesting adjustments. The process included analyses of background information as well as discussions with senior management.
Not surprisingly, the strategic planning processes were all over the board. Strategic plans ranged from nonexistent to an overly complex plan (prepared by a consulting firm) that appeared to be beyond the capabilities of the management team and the infrastructure. Two interesting observations regarding strategy emerged.
What is Strategy?
Strategy is far from uniformly defined. The word strategy is derived from the Greek word strategos. This word is a combination of the Greek words for army and to lead. A rough English translation is a military general. Hence, strategy has a military foundation. Up until the 20th century, when pioneers in business thinking began writing about business strategy, written works pertaining to strategy had a military association. Carl von Clausewitz’s 1757 book On War is particularly noteworthy.
For this article I asked several colleagues for their off-the-cuff definition of strategy.
In their own way, all of these definitions are appropriate. Using the combined wisdom of my colleagues, my definition of strategy for this article is: Strategy is the art of determining when and where to deploy or not to deploy resources and organizational energy to obtain a goal.
This definition appears to satisfy most situations where the word is used; including “a do-nothing strategy;” and in some situations purposely doing nothing or not following the crowd is a strategy. Maytag’s initial refusal to distribute its products through certain big-box retailers for fear of cheapening its brand is an example.
The Strategic Landscape
Noted management thinker Peter Drucker said, “The only thing we know about the future is that it will be different.” The world certainly changed since Drucker’s 1967 observation; and all facets of the economic order are continuing to change at an accelerating rate. The shelf life of winning strategies is much shorter than in the past. Today’s CEOs need to identify, assess and react appropriately to a plethora of social, economic and technological changes and, more importantly, they need to make a decision on how the dynamics will change in the planning horizon.
Meg Whitman, former CEO of eBay said: “Strategy used to be a once a year thing, now we look at strategy every two weeks.”
Executive managers must not only assess and anticipate changes with reasonable accuracy, but they must react quickly to determine where the market and its value drivers are heading and be there first with the right products and services. If not first, they need to be fast followers.
How Important is Strategy?
Lou Gerstner, recognized “savior” of IBM wrote: “It doesn’t matter what your strategy is, as long as you have one.” With respect to the talented Gerstner, he might have been a bit glib on this matter. Specific strategy does matter.
For example, we need only look at the most recent and rapid deterioration of Blockbuster to see what happens when management fails in the most important part of a CEO’s job description — develop and maintain a sustainable, winning strategy. Blockbuster was the king of home television movie viewing. In a relatively short time Netflix seemingly came out of nowhere with a new idea attuned to the marketplace and strategically outflanked and relegated Blockbuster to a survival mode.
Other well-known and once robust companies failed or declined because of changes in market dynamics and failure to timely adapt. Amazon blindsided Barnes & Noble to take leadership as the world’s largest bookseller and was the likely catalyst that drove Borders into bankruptcy, and oblivion. The Great Atlantic & Pacific Tea Company — once known as “America’s Food Store” — now languishes in bankruptcy while highly profitable upstart Whole Foods has become a “destination” food chain.
Wal-Mart literally kicked Sears Roebuck off the DOW. IBM (pre-Gerstner), once the reigning heavyweight champion of information technology, got caught flat-footed when it did not recognize that personal computers and workstations were a sunrise industry eroding the black-box magic of its mainframe computers. A bit more market insight and a lot less strategic arrogance might have served IBM well.
Bene Diagnoscitur Bene Curator (Good Diagnosis, Good Cure)
Sound strategies developed with keen market insight together with disciplined tactical execution are an explosive success combination. Starting business in 1973 as a traditional brick and mortar brokerage firm, Charles Schwab took quick advantage of deregulation of the securities industry in 1975 and captured market share from stalwart competitors and became, perhaps, the leading brokerage firm. Hundreds of other small, independent firms having the same opportunity fell by the wayside. Apple, led by Forbes’ “CEO of the Decade” Steve Jobs, developed strategies that created the market for its products and services while leaving competitors scrambling.
Is Strategic Planning Difficult?
There is an abundance of books, seminars, checklists and other material that guide strategy development, but possessing the insight and judgment to develop a winning strategy is an art. Like any art there are masters, journeymen and novices. The ability of strategic insight is not something you can readily teach. Strategy development is also a political process. Again, political skill is not an easy skill. Some leaders seem to flawlessly set the appropriate strategic direction and provide the leadership and political skills to obtain buy-in from all stakeholders. Ellen Kullman of Du Pont re-engineered the company into a nimble, strong worldwide competitor by establishing a strategy refocusing its large economic resources toward providing products and solutions addressing global issues.
Not all companies get it right. The Big Three of the American auto industry once had what seemed like unassailable market shares. For the American auto industry, change came — but only after great losses to the American economy and tremendous losses for the industries’ stakeholders.
Sears was once the nation’s dominant retailer. But, something happened. Things changed and what it was doing was not working anymore. It needed to change and it needed to be out front and ahead of the curve. Sears lost its dominant strategic position and was acquired by Kmart (now Sears Holdings), and it continues to try and find an identity in the marketplace.
The Culprits
Charles Darwin said, “It is neither the strong that survive nor the most intelligent, it is those who are most responsive to change.” Companies, like people, find it difficult to alter their mental models.
The Quintessential Essence of Strategic Thinking
For either a military conflict or competitive business, the quintessential essence of strategy is distilled to three, and only three, elements:
A Perspective on Best Practices for Strategic Planning
All organizations are different in terms of culture, current situation and core competencies. But there are certain key tenets of strategic planning basic to all organizations.
The Buck Stops Here
Each company is unique and there is no “one-size-fits-all” strategic planning process. The size, culture, market pressure and current situation are all different. But the basic concepts discussed in this article will enhance identification of strategic options and gain organizational-wide support for new strategies. This is particularly important if new ideas and strategies are a radical departure from current strategies.
Strategy development is a process — an artistic process and a political process. Strategic success comes to organizations that can adapt and change course as necessary. The final judgment of where an organization will allocate capital resources and organizational energy is the CEO’s litmus test; and the CEO stands alone in making that decision.
Ken Naglewski is a principal of Seabiscuit Partners, LLC, a provider of strategic advisory and other services to both healthy and financially distressed businesses as well as capital formation and investing in distressed situations. He has been a CEO, COO and CRO for several companies and a frequent speaker and author. He is a CPA, CIRA and CTP. M&A Advisor named him Turnaround Consultant of the Year for 2008. He can be reached at 615-491-7331, or by e-mail at [email protected].
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