One of the reasons why many successful executives prefer not to get involved in developing strategies for their business is that they believe it involves unnecessary navel-gazing. These managers would much prefer to be getting on with their ‘real jobs’ than carrying out endless analysis and form-filling.
To be honest, I have some sympathy with their views. Too much effort on strategy is placed on analysis, and too much analysis is unfocused and far from insightful.
Done well, however, analysis can be used to challenge your ‘gut feel’ and give you the confidence to deliver more radical and customer-focused changes to your business. This means that the analysis should be sufficiently robust to ensure that you gain agreement across your executive team about your current position and direction, without dragging you into a spreadsheet nightmare or the creation of a myriad of reports that will never be read.
That said, relying solely on ‘gut feel’ is equally, if not more unhelpful. It can lead to groupthink and bad decisions. It also, in my experience, often leads to incremental changes when more bigger moves are required.
[And, before I share an approach that balances effective analysis with management judgement, let me add one more thing: ditch the SWOT. A friend of mine says that SWOT stands for Stupid Waste Of Time, not Strengths, Weaknesses, Opportunities and Threats. He’s right. All too often SWOT’S end up being long lists of brainstormed opinions, not facts, that often miss key issues and neglect to provide the necessary focus for action.]
Instead, I propose these six steps to develop actionable insights that will move your strategic thinking forward:
- Segment the business effectively. Most businesses are not homogenous entities but comprise several different businesses. Often, there are more segments than management realise. At one client, for instance, three divisions had been established, which formed the basis for operational management and strategy development. However, when I reviewed each of the divisions with the CEO and CFO, we realised that there were 15 distinct business segments, each with its own product categories, customer markets and competitor sets.
- Review the financial performance of each segment. Our next step was to identify which segments were making money and growing, and which were losing money. Analysing the business at the segment, rather than divisional level, can establish new, meaningful insights. We found, for instance, that 80% of the company’s total profit contribution was delivered by just 4 of the 15 segments. What’s more, these segments accounted for just 40% of total turnover, meaning that 11 segments, accounting for 60% of sales, delivered just 20% of profits. This was new news for management, giving them a different perspective on their business.
- Determine the attractiveness of the markets. For each segment, you should assess whether the market is attractive or not. Questions to answer include, (1) Is the market profitable and can an ‘average’ player make a reasonable return? (2) Is the market large or small, and is it likely to grow, decline or stagnate? and (3) What are the threats to the future of this market from new technologies, new entrants and/or substitute products? After answering these questions, you will be able to make an informed rating of each segment’s market.
- Consider your competitive positions. While understanding your markets is important, clarifying your competitive position is critical. Many business leaders chase large, growing markets, but it is more likely that you’ll deliver profits if you’re advantaged in a relatively unattractive market than if you are disadvantaged in an attractive market. So, how do you know if you’re advantaged? Here are some tell-tale signs that you can test for in each of your business segments: (1) You are #1 or #2 in the market; (2) You’re gaining market share; (3) Your profit margins are higher than your rivals; (3) Your customer satisfaction levels are higher than your competitors; (4) You’re able to justify price premiums without significantly affecting volume share; (5) You’re brand is perceived as strong and attractive.
- Assess your organizational capabilities and health. There is a strong relationship between capabilities and competitive position but understanding why you’re winning – or not – in each of your markets is critical to making effective investment decisions. Here are three questions you should be asking yourself: (1) What are the specific skills, capabilities and organizational assets (if any) that help your business succeed and stand out from its competitors? (2) Are these capabilities becoming more or less important to your customers, and stronger or weaker relative to your competitors? and (3) How well are you able to retain the people that are most important to developing and delivering these skills and capabilities?
- Review and agree your key issues and opportunities. Having done this work, you need to define and agree your priorities for action. Using the chart below, you can identify the top 3 issues and top 3 opportunities, for each of the four strategy perspectives. Think carefully about which are the most important and, if they were to be robustly addressed, would best drive your performance over the next few years. Set out a short-list of five or six issues you believe the business should focus on. For example, when I worked with the division of a household product company, the CEO and his team agreed that there were five critical issues and opportunities facing the business: (1) How to better exploit and grow performance in the DIY retail channel; (2) How to drive the quantity and quality of new product development; (3) How to radically reduce operating costs; (4) How to improve the capabilities and performance of the sales team; and (5) How to enter new, adjacent product categories
Following this approach to understanding your strategic position will take more time and effort than having a 1-hour discussion or brainstorming a SWOT assessment. The work requires you accessing the best data you have and, where the data isn’t available, making the best judgements and assumptions you can. But the benefits of this approach are that you will have a clearer, action-focused set of insights on which to build a strategy for growth that will work in the real world.