Where strategy gets real

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A company’s budget shows what its strategy really is.

Geoff Wilson

Imagine a world where you have full view of all budgets and resource allocations in every organization you could possibly want. You could read any company’s press releases, strategic statements, and marketing collateral—and then immediately assess whether that company is doing anything special with its resource allocations to reflect its “special-ness.” What do you think you’d find?

Let’s take a topic like share buybacks. What if a company told you its strategy was to accelerate share buybacks when prices are high, and to slow them when prices are low? Would you call that company crazy? Of course. Nobody says that. Yet FactSet publishes this:

Here’s the CliffsNotes version of this chart: S&P 500 executives and boards execute vastly more share buybacks (blue bars) when share prices are high (purple line) than when they’re low. Though there are many explanations for this seemingly nonsensical reality (most importantly the timing of capital availability in the cycle), the fact remains that corporate leaders exhibit the exact same pro-cyclical bias that any investor on the street does. It turns out that manias for tulips, dot-com stocks, real estate, and share buybacks have this in common.

Now, suppose an honest CFO were to slip up and say “We’re going to budget to buy back shares when everybody is really excited about our stock because that’s when we are excited about it, too!” Would you be impressed with the company’s strategic acumen? No. You’d just have the truth.

The practical insight

Because executives, managers, and employees would be crazy to admit their biases and lack of certainty publicly, a deft analyst or owner has to find other ways to unveil strategic intent. Here’s one to live by:

An organization’s budget is the honest expression of its strategy.

It’s Occam’s razor for discerning strategic intent. More than words. More than magnificent manifestations of PowerPoint prowess. More than organization charts and stated goals. The budget is the message. It’s the narrative applied. Follow the money.

Corporate finance practitioners are reading to this point, nodding vigorously, and probably wondering why such a concept merits a full article. Here’s why: The vast majority of stakeholders in and around an organization place a lot of weight on the words and fancy marketing messages that come with strategy. All the statements of intent to “be the best at” this and “compete the hardest on” that accompanying a typical organization’s vision get delivered liberally.

Those minor messages are extremely important to align and encourage the organization. They are the audio of the strategy. However, the video of a strategy is an organization’s resource allocation. And any stakeholder—employees, board members, executives, owners, and sometimes investors—needs to discern strategy from it as a sort of check on the words. Just like the old Russian proverb: Trust, but verify.

A side note on results

Note that I don’t confuse an organization’s budget or resource allocation with its “results.” A company’s prospective budget or resource allocation is the expression of strategy. Results, on the other hand, come from the confluence of position, potential, competitive actions, regulatory changes, customer idiosyncrasies, fluctuations in weather and commodity prices, luck, happenstance, and any number of noisy and ambiguous factors.

Results are measures of performance, but not of a healthy (or even discernible) strategy. They can be spun into a hindsight strategy, but aren’t necessarily the results of a prospective strategy. In other words, organizations with bad or nonexistent strategies can deliver good results, but not for long. The key is to find executives who recognize when they’re lucky.

Results are real and provide for the present. They are a must have. Strategy, however, aligns resources for the future. It’s a must have, too.

Unpacking the insight

On one level, a budget is simply numbers. It’s not strategy. Saying that you’re going to grow earnings or tamp down costs or grow the revenue line through a budget does exactly that. It shows those things mathematically. It doesn’t establish how you intend to use the resources.

More importantly, a budget shows what you expect to achieve, but it doesn’t show the opportunity cost of that achievement. Strategy is about choices. A budget isn’t a choice. It’s math. It’s the scoreboard, not the game, and certainly not the playbook. Math isn’t strategy. But on the other hand, the math is the simplest view of an organization’s aims. In this basic view, budget is, in fact, strategy.

Let me rephrase that: A budget, and the actions it enables, is the most honest expression of strategy. Show me a company’s three-year plan and budget, and I’ll be able to articulate the company’s strategy to an 80/20 approximation—though it may not match what’s printed on the marquee.

The really interesting part is when you put the strategy and the budget together. Your strategy says you want to grow. OK, what’s your investment in growth? The budget shows that. Your strategy says you expect to be a superior marketer. OK, what’s your allocation to marketing spend? The budget shows that.

A leader who truly expects growth but cuts productive growth spend is suffering from cognitive dissonance. He’s living two lives, but only one can survive. One side of the argument will win.

And these days, with incentive structures being what they are, what wins? It’s often the spreadsheet. It’s the budget—the accounting—that wins.

How to apply this knowledge

All of this is easy if you see the resource allocation and statements of strategic intent and can make the comparisons. If you’re on the outside looking in, it can be tougher. Here are a few practical points.

To test strategy and budget alignment, consider the following hot spots:

  • Capital allocation: How is the company allocating its capital investment? Is the company in a mature market yet overspending on growth capital? Is the company pursuing a cost-driven strategy but starving assets of even minimal maintenance capital in order to drive earnings? These things can be discerned in most cases through even the highest-level financial reviews.
  • Overhead allocation: Does the company allocate overhead to the right places within its strategy? Is overhead allocated to administrative and risk management activities more than growth and renewal of the franchise? Is that what is supposed to happen?
  • Capability building/initiative spending: Can you find strong evidence of investment in capability building or renewal toward the stated strategic intent of an organization? If the organization is pursuing cost leadership, do you see evidence of investment in cost-leadership capabilities? Ditto for growth and innovation. Do you see it? Do they walk the talk?

Often, strategic discussions focus on the words of a strategy. Financial discussions frequently center on the math—forecast amounts of spend and investment vs. types.

In order to understand strategy applied, seek out the allocation of resources in the companies you own, serve, or work for.

Executives should use this sort of check on the strategies and budgets of their organizations. Avoid fooling others with and being fooled by clever narratives overlaying misaligned operations. Shoot for integrity.

Employees can use this as a test of whether the direction their organization is taking is actually the direction stated. That’s an important inkling when deciding where to ply one’s trade. They can vote with their feet. (Side note: Candidates can use this notion effectively as well. Does the company you’re interviewing with understand its resource allocations toward its aims vis-à-vis the competition? Does the audio match the video?)

Owners, board members, and investors simply need to ask the question and look for a satisfactory answer: What are the ways and means being applied to meet the ends being stated. They can also vote with their feet or, of course, with the stage hook.

The budget is an honest interpretation of strategy. It’s not the strategy, but it’s close. It’s Occam’s razor—the most direct path to strategic intent.

Follow the money.

What do you think?

Strategic Implications of Clark Griswold’s Turkey

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Clark Griswold’s turkey was an object of art on the outside, and a hollow mess on the inside. So are some strategic plans. Have the courage to call them what they are.

‘Tis the season. So, I figure…why not take advantage of it?

Remember that finely-crafted 1989 cinematic masterpiece, National Lampoon’s Christmas Vacation?

It provided us with such insightful and penetrating quotations as Clark Griswold’s “Hallelujah! Holy S#*@! Where’s the Tylenol?” It also gave us that indelible image of Randy Quaid as cousin Eddie poolside with his t-shirt tucked into a leopard print Speedo.

And, who can forget Eddie, the RV, and the storm sewer?

On a more serious note, the movie has a couple of meaningful lessons for leaders.

Yes, there’s the “Jelly of the Month Club” fiasco and the classic (and useful) quote by Clark’s boss about how things sometimes “look good on paper, but lose their luster when you see how it affects real folks.”

That’s a good one for all of us to ponder as we tweak our spreadsheets this Christmas season. But…

…I’m taking on the turkey.

Remember the turkey? It was beautiful…stunning even. Ask anyone who has labored near an oven, basting a roast turkey for hours on end, and they can tell you how difficult it is to achieve the golden brown visual perfection that is the Griswold’s turkey. See for yourself:

But then, the test.

Clark puts the knife and fork to it. And, well, click here if you don’t know the story.

It’s the letdown of letdowns–a finely tuned visual feast followed by the disgust of a dry, empty, cracked, steaming hole of a broken promise.

What are the leadership implications?

For those of us who are the cooks–the ones charged with compiling and crafting strategies, plans, visions, and ideas–the siren song of great visuals with no substance constantly beckons. We have the tools to create a symphony of perfectly prepared sights, sounds, and steam. We also have the pressure to perform and incentives to placate those we answer to, whether they are managers, executives, boards, or shareholders.

For those of us who are the carvers–those charged with reviewing such plans and possibly eating the cooking–such placating visuals can be blinding, especially if they confirm our desires.

In working with more than 30 large organizations and countless small ones as employee, consultant, investor, and executive, I have had the opportunity to witness and test countless executives’ abilities to cook up a plan, if you will.

A majority of the time, the cooking survives the knife and fork. It is grounded in facts, shaped to the reality of markets and constituencies, and staged thoughtfully. It is represented by people who know what they believe and can articulate it carefully.

But, every now and then, I’ve run across Griswold’s turkey. And, it’s not always obvious. Careful use of numbers, mindful (or at least artful) omission of realities, and tight stage management of the presentation all combine to create a golden brown shell of a vision or plan that anyone would want, supported by a scaffold of…nothing.

In those cases, two things became apparent (but, again, not always obvious..keep that in mind):

First, for the executives who knew that the plan was a, well, turkey; the immense focus of their time was on parrying the knife and fork. They delay, obfuscate, rotate the turkey five different ways, or just keep saying “it’s still in the oven.” They waste time. They aren’t all bad people, but they do tend to lack the courage to call it what it is. In some cases which one could consider unethical, they avoid examination of the underlying realities because they are playing a timing game due to misaligned incentives.

Second, for those who had to eat the cooking (that is, live with the choices of the first group)–the shareholders, boards, and true fiduciaries–the surprise of the broken promise leads to needs for hard decisions. They finally put their knife into the plan to carve it and eat it; and it turns into a dry, cracked shell. When the carvers finally do take action, people are fired and in the worst of cases investigated. Boards are turned over. Divisions or entire companies are sold or shut down. Shareholders, employees, communities, vendors and customers all lose.

I’m not necessarily talking about fraud, mind you, I’m talking about window dressing on a brick wall. For example: Griswold’s turkey could be the metaphor for the vast majority of companies founded and funded during the dot com era. They had beautiful plans with no reasonable path to profit. These were not (typically) fraudulent. They were, however, absolutely built on the back of willful blindness to reality peppered with really difficult incentive issues related to agency and timing.

What are we to do?

Step 1: Admit when you are looking at Griswold’s turkey. If the plan looks nice on the outside, but is a steaming mess of emptiness on the inside, be willing to call it out no matter where you sit. Have courage.

Step 2: Go to the knife and fork every now and then. For those of us who review strategic plans and are charged with poking around, be willing to poke with more than a finger. Ask the penetrating questions about the numbers, the dynamics, and the actions underlying the shiny shell of the plan. Learn to spot the obfuscation or honest ignorance that comes with Griswold’s turkey. Really think about the responses you get to your questions.

Step 3: Be careful as an executive or board member not to inadvertently provide incentive for others to bring you Griswold’s turkey by being soft, lazy, or simply too busy to inquire. Management claims to pursue a local market strategy but can’t name the markets, segments, or tailored approaches? Hmmmm… Maybe you’ve been too easy to fool or too comfortable with current performance.

Step 4: Be willing to slow down, start over or exit. So many instances of the Griswold’s turkey come from the need to show progress or a plan in the face of intense time pressure and expectations. It’s easier to polish up a PowerPoint and parry every question with “I’ll come back to you on that” than it is to know what you believe. If you are on the team, be willing to say when a plan isn’t ready. If you are reviewing the team, be willing to order them to go back to the clean sheet. If you are making strategic decisions, be willing to know when it’s time to stop cooking–to change leadership or exit.

These steps represent a critical aspect of leadership and a key learned skill: Calling a golden brown shell surrounding a hollow hot mess exactly what it is.

These particular turkeys are, as mentioned earlier, the letdown of letdowns. They are a visual tease. They lead to the disgust of a broken promise.

Learn to spot them, have the courage to avoid them, and role model the discipline to prevent them.

Hallelujah! Holy S#*@! Where’s the Tylenol?

Merry Christmas!

Energy Shocks Put a Premium on Foresight

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The current sea change in energy markets brings the need for foresight to the front stage.

 

Foresight feeds the foundation of strategy.  The ability to read and react to the likely future defines organizations and executives.

On November 25th, energy expert Daniel Yergin (writer of The Prize among many other interesting books and articles) appeared on CNBC to outline the impact of revolutionary changes in U.S. oil and gas production.  Here’s the Link. Video here.

The upshot?  The U.S. is becoming a bellwether energy producer…so much so that Russia and OPEC are losing sleep over how to handle the ocean of oil and gas that is slated to come from the U.S. in the next few years.

Subsequent to Yergen’s commentary–on Thanksgiving day–OPEC chose not to alter its production schedule.  This was a move to maintain share at the expense of price. The decision sent oil prices plummeting more than 10 percent on Friday.  Here is CNBC’s report on that.

So, what?  

These issues impact you, your organization, your city, state, and country.  Pick an affinity that you have–any affinity–and this news matters.

Imagine first a future where energy stays cheap. Imagine that the economics of the petrochemical supply chain are severely impacted by low prices.  Maybe the dynamics crush upstream commodity producers.  Maybe they enhance smart specialty producers who benefit from consumer spend and lower commodity costs.  However, lower energy prices directly impact players who depend on energy production, particularly in specific geographies. Laborers in geographies that lie on the high end of the cost curve might not enjoy this news; neither will suppliers to those work-forces–the ones that provide uniforms, tools, meals, and services like laundry and transportation. The more localized the impact, the worse it could be.

But every shock means opportunity.  So, meanwhile…

Imagine second a future where consumer and corporate disposable income is unlocked from the dungeon of costly energy.  Where an average family receives a dividend that amounts to real cash to spend, just because the world has become more efficient at extracting (and, yes, using) energy.   Imagine that the average manufacturer can also contemplate reinvestment of such gains.

Those two imaginary impacts of lower energy prices are strikingly significant to all companies, whether they play in the petrochemical space or not.   Now is the time to contemplate change (yes, 2011 was the time, but still, get on board now).

What does this mean for your end products?  How about for your capital projects? What about for your procurement targets and programs? Perhaps more importantly, what does this mean for your job?

The market-wide impact of energy costs is practically instantaneous.  In 2008, we saw a tremendous reallocation of production in the automotive industry due to sustained spikes in oil prices.  SUV and truck plants were closed, not just idled, as reality set in.  Demand for efficient vehicles spiked as well, spurred by some (perhaps spurious) legislation in that era.  Such corporate moves dwarf in relation to moves that consumers make as energy costs crowd out other spend categories.

What will this sort of change mean for your company or your career?  How do you sense and predict what different end states of the world look like, and how each one impacts your capital and expense allocation?

Think about the the future, and develop options for it.  Options are the foundation of strategy, and foresight feeds them.

What do you think? 

Strategy is Execution…And Vice Versa

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Overcoming the intellectual separation of strategy and execution by testing whether you’ve “packed for the journey” can unlock flexibility, creativity, and action.

 

At a conceptual level, the strategy to execution gap is real. I’ll leave it to the reader to search The Internet for “strategy to execution gap” and to then peruse the studies that show that execution matters…deeply.

But, with all due respect to the percentages derived from executive surveys and the implications they provide, separating strategy and execution in this way amounts to a waste of valuable time. The strategy vs. execution dichotomy is an overly convenient tool used to separate the thinkers from the doers. At its most dangerous, the strategy/execution split leads to recrimination vs. reconciliation—attack and defense vs. collaboration—when it (purposefully or accidentally) pits stakeholders against one another.

As strategic leaders, we must grasp that strategy encompasses execution. Execution is strategy. Strategy is, quite simply, knowing where to place the right kind of pressure on one’s environment to achieve a given set of objectives; but also—and this is important—how much pressure to place and how and when to trigger adjustments.

Noted military theorist Karl von Clausewitz referred to war as “merely the continuation of policy by other means.” War isn’t an end in itself, any more than our vaunted concept of “execution” is. With apologies to Clausewitz: Execution is merely the continuation of strategy.

So, when we accuse execution of derailing a good strategy, are we accusing instead our strategy as a whole? The best strategic plans hinge on a single, defining and definable question: Have we packed for the journey? Any organization’s strategy is evident in the resource and reactive decisions its leaders make on an ongoing basis. Because execution is the most honest expression of strategy (indeed, a more honest expression than any PowerPoint deck could ever be), it’s important that strategic plans encompass readiness for action and change.

As an executive who has formulated, tested, and implemented strategies across sectors and companies, I have used four practical questions to test for whether my teams and clients have “packed for the journey.” In any journey, we prepare to go the distance (enough food, fuel, water, rest, etc.) and we prepare for the unexpected (poncho, first aid kit, a bottle of pepto, etc.). Questions on resourcing and risk are fantastic acid tests for a given strategy because they move beyond a linear plan and force discussion on capability and flexibility. With that in mind, when evaluating a strategic plan, ask these questions:

1. What are the major “chunks” of activity needed to achieve the plan?

So, you want to climb Mount Everest. Okay. Got it. Where are your base camps going to be located? What is your supply chain going to look like? Where will you hide your oxygen bottles? In other words, have you defined the immediate “chunks” of resources and objectives that keep you on schedule to your strategic goals? The body of knowledge on effective intermediate term planning is immense, but shockingly untapped. Find or become an expert at hoshin kanri or its many offshoots (many organizations refer to hoshin planning, goal deployment, strategy deployment, policy deployment, or other terms for the same thing)–take a 5 year strategic plan and turn it into a one, 2, and 3 year plan. Define reality and required resourcing for the plan this way to mesh “strategy” and “execution.”

2. Do your resource allocations reflect the competitive reality of the situation?

Classical military theoreticians proposed that facing an opponent with twice your resources requires four times the quality of resources to merely achieve parity–your quality has to increase exponentially while their quantity advantage increases linearly.The so-called “Lanchester square law” applies conceptually in business, too; and it’s a scary proposition. In many business environments, quantity of customer touches can overcome quality of touch. An organizational plan that assumes twice the account penetration with half the sales personnel per customer of the next competitor needs to be tested for the personnel quality assumptions it implicitly contains. Likewise, a financial plan that reflects deployment of capital at ever increasing returns probably needs to be re-tested for the defensibility it implies.

We all (well, most of us) want extreme productivity and distinctive capabilities; and it’s easy to make that look good on paper. However, there is a tremendous difference between a lean approach to business vs. one that is merely cheap: Long term effectiveness. Test your strategy for effectiveness, not just a pretty model and the fool’s gold of unsustainable efficiency.

3. What are your pivotal assumptions?

Can you define the turning points of your strategy? For instance, do you know what your and your competitor’s strategies look like based on changes in regulations, demographics, demand, or the financing environment? Pivotal assumptions are the ones that, if flexed, cause you to take a significantly different course. Sometimes the most basic test of a strategy is whether the executive can name the 3 pivotal assumptions, in short sentences, and how changes in them cause changes in the strategy. Can you?

4. Will your strategy survive a punch in the mouth?

Former heavyweight boxing champion Mike Tyson’s contribution to the body of strategic knowledge is a great one. He famously stated “Everyone has a plan ’til they get punched in the mouth.” Is your plan built for speed and flexibility? Can it survive a shock? What are the trigger points for improvising? When will you improvise? Embracing uncertainty through scenario thinking will make you more nimble; and it will help ensure that when the “punch in the mouth” inevitably comes, you can improvise and carry on.

There you have it, 4 questions–2 on resourcing and 2 on risk–that help link the typical notion of “strategy” with the typical notion of “execution.” Remember: Execution is strategy. Artificially separating the two may feel tidy, but real strategic leadership is rarely tidy.

Now it’s your turn: How do YOU test your strategic thinking?