Putting Context Into Strategy

Few words in business are more widely used than the ubiquitous “strategy.” This convenient label may be attached to almost any collection of our ideas in order to impart gravitas to their meaning. And yet, so often, those strategies consist of little more than a set of goals or targets, a loose sense of our direction of travel, or — worse still — an expression of unsubstantiated hope.

It is surely time to tighten up the definition of such an important component of the business lexicon. A practical definition of strategy might be “a plan to achieve an objective.” Under this interpretation, it is clear that specifying the objective, or desired future state, is essential. However, the starting point, or current state, also needs to be clearly understood. If a strategy is a plan to get from “A” to “B,” it is surprising how little attention is often given to the true characteristics of Point A. You would not get very far using a map with this approach, and in business, the understanding of Point A requires considerably more than pinpointing your current physical location.

Imagine the following situation. A stranger approaches you with a map, asking you to explain the most effective way to get to his destination. You find your current location on the map and point out the roads that offer the most direct route. The stranger shakes his head and asks you to try again. You quickly spot your mistake; he obviously does not have a car. Your new plan involves a series of train connections. Another shake of the head. Thinking now that he may be a little short of funds, you ask him how much he wishes to spend on his journey. “Nothing at all,” is the reply. You eventually ask him to explain what he really has in mind, and his answer immediately clears up the mystery — he is leading a charity walk. The advice he needs from you is to show him the most attractive route for 30 walkers through remote countryside, avoiding the large towns and main roads.

In business, too, strategies can miss the mark because we have not fully understood the context.

A structured approach to strategy development

The five headings in Figure 1 encompass the ground that should be covered to develop a robust strategy.

Context

In business, context is vital. The long-term history of acquisitions, disposals, major initiatives, people movements and financial performance often contains valuable insights about the current state of the business and the reasons for change. Motivation and the proposed speed and direction of travel have a lot to do with history. Relating the performance of your and competitors’ businesses to the correct market segmentation and share can reveal a great deal about Point A that really matters in a strategic context. We generally find that the work involved with correctly characterizing this starting position can absorb up to 70% of the effort required to formulate strategy.

Objectives

In contrast, the definition of Point B can be relatively straightforward. The shareholders, board, CEO and senior management will generally have discussed the ambitions and expectations for development over at least the next five years. Simple objectives can be powerful: Doubling the size of the business, achieving a market-leading position, and raising margins to levels attained by competitors or by the business itself in the recent past are all valid goals. The more difficult task is to ensure that these objectives have taken into account both the context (as above) and the means available (see below).

Milestones

Detailed milestones and metrics associated with individual initiatives are essential in activating strategies (see L.E.K. Consulting’s Executive Insights on Value Activation), but you also need clear and simple mechanisms for measuring progress toward your objectives at the higher strategic level. How will you know when you have arrived at your destination? What metrics would reassure you that you are on track during the journey? If the objective itself is defined as a measurable target, setting milestones simply means deciding on the timing of progress along the way. The milestones for more qualitative objectives, such as “developing a reputation as a technology leader in our field,” generally require more thought. Without measurement, a strategy loses its power to engage.

Means

The means available to pursue a strategy often receive too little attention. What strategic assets do you possess? The only steel plant in the country? Oil or gas fields with the lowest cost of production? A set of prime retail locations in every major conurbation in the country? The majority of valuable slots at a congested hub airport? Strategic assets open up valuable opportunities not available to competitors, and thus they alter the range of options that can be pursued. They may also require investment to maintain or protect, which might limit alternative development paths.

John Kay, in his book The Foundations of Corporate Success1, postulates that many of the competencies that are truly sustainable tend to fall under one of three headings:

  • Architecture (internal and external architecture and networks)
  • Reputation (all the ways in which customers perceive added value)
  • Innovation (the ability to exploit innovation more or less continuously)

A thorough review of competences in these three areas will inform both the objectives set and the strategies to attain them.

Companies often make the claim that “people are our greatest asset,” while doing little to check the veracity of that statement, maintain the asset or improve the quality of the talent pool. More time is spent translating a strategy into financial projections than is spent attempting the more difficult task of forecasting skills shortages in the key areas of the business that will deliver the strategy (see L.E.K.’s Executive Insights on Skills Management).

Questions that need to be asked include:

  • How good is the senior management team responsible for delivering the strategy?
  • How well do they work together under pressure?
  • What should be their individual focus on developing leadership skills?
  • What capacity does the team have to deliver growth strategies beyond “business as usual”?

An important aspect of answering the “means” question is to work out how much financial firepower is available for strategic development. Capital is often available to fund value-creating strategies, but there are always practical constraints on the cash at your disposal. There is also no point in developing a strategy that pitches your company into a spending war against better-funded competitors.

Strategic choices

It should be possible from the preceding four steps to define your strategy as the high-level plan to move from a clear starting position to a measurable endpoint, taking into account the means that you have available and the nuances of context and history that will influence successful delivery.

We are not talking about detailed action plans; those come later during the activation phase. The strategy needs to define the overall architecture of the plan and the principles you intend to follow. To return to the example of the charity walkers, they will proceed on foot, using pathways that take in good scenery and using the shortest route that includes facilities such as cafes and pubs and a place to stay overnight.

Strategy is all about choices — coherent choices that fit into an overarching plan to reach an objective. We often use the diagram in Figure 2 to illustrate some of the headings that are important in creating a coherent business strategy. Not all of them need to be under consideration every time, but each of the choices made must be consistent with the overall strategy. As a result, the high-level plan must be in place before making the choices that are relevant to the strategy being created.

Your strategic choices need to be coherent; they must optimize the business model you adopt for the assets at your disposal and the strength of your management team, and make full use of your predictions for the external environment. A balanced focus on all these elements is vital.

Following the COMMS framework will allow you to address the relevant questions when formulating a strategy. The acronym itself is a reminder to communicate your strategy widely throughout your organization. Everyone needs to understand the plan, feel committed to it and know the part they will play in the delivery.

1. Kay, J. (2007) The Foundations of Corporate Success: How Business Strategies Add Value. Oxford: Oxford Paperbacks.

Accelerating Electrification: Critical Steps Toward Electric Vehicle Mass Adoption

Global investment in electric vehicles (EVs) has increased rapidly in recent years. A growing number of governments around the world are seeking to grow adoption rates, and an increasing number of car manufacturers are planning to produce greater volumes and models of EVs. Some analysts estimate over US$90 billion will be invested in electric vehicle technologies globally in the years ahead. 

In this Executive Insights, we investigate 12 countries globally, including Australia, to reveal that shifting consumer purchasing behavior in most countries will take more than investments in public charging infrastructure. It will require a fundamental shift in the cost competitiveness of electric vehicles compared with internal combustion engine vehicles.

Why Companies Are Using M&A to Transform Themselves, Not Just to Grow

A brick-and-mortar retailer buys an e-commerce platform. An internet technology company picks up a mobile phone manufacturer. A chain of pharmacies announces its intent to acquire a health insurer.

Today’s corporate tie-ups increasingly aim to transform the acquirer’s business rather than reinforce it. Why? Some point to major shifts in skill sets that companies need. Others note the diminishing number of attractive same-sector acquisition targets as industries consolidate and as investors search for ways to put their growing cash reserves to work.

But there’s more to it than that. The current cohort of acquisitions goes well beyond the typical defensive, synergy-driven, horizontal integration that marked previous M&A spurts. These new deals are taking parent companies in uncharted directions. This tells us businesses aren’t acquiring other businesses simply to expand what they’re already doing. They’re doing it because, strategically, they have to — if they want to survive over the medium to long term.

Though recent acquisitions may seem idiosyncratic, they all have in common the need to find new avenues for growth in mature markets or to deal with accelerating change. Let’s unpack some recent examples.

Capability upgrades. Technology, manufacturing, research and development, or human know-how — whatever the capability, acquisitions are a way to acquire it. Along this vein, Detroit-based General Motors acquired Silicon Valley startup Cruise Automation, which makes autonomous driving systems. While Cruise is a far cry from old-line auto manufacturing, GM saw in it an opportunity to advance its own capabilities in autonomous vehicles by acquiring talent and technology that would have taken too long to develop organically. With Cruise’s capabilities, GM is now a serious contender in the autonomous vehicle race against competitors such as Waymo.

Market breakthroughs. It can take years to build distribution networks or gain a foothold in a particular market. An acquisition, though, can accomplish both in relatively short order. PetSmart, for example, launched a historic bid to take over online pet supply retailer Chewy.com, surpassing in deal value Walmart’s prior-year acquisition of Jet.com. In one fell swoop, PetSmart — a traditional retailer with more than 1,500 physical locations — claimed a place among the fastest-growing segments of the increasingly dominant world of ecommerce. Chewy, for its part, gained a bulwark against established brick-and-mortar competitors, including those operating in one of retail’s bright spots: pet care services.

Reshaping the consumer experience. When it comes to seizing opportunities among underserved consumers, industry needn’t be a barrier. That’s why recent speculation about a Walmart-Humana deal raises so many possibilities. With the average Walmart customer skewing older, its ability to offer Humana’s Medicare Advantage product — the insurer’s biggest line of business — could further serve the needs of Walmart’s senior shoppers while meeting federal value-based requirements for healthcare. And with Walmart’s presence in rural markets, Humana might just open a door to healthcare in areas where hospitals increasingly are folding up shop.

As these cases show, contemporary acquisitions increasingly cross sector lines. They often extend and upend rather than consolidate markets. They also can open up vast new ecosystems. CVS’ planned acquisition of health insurer Aetna, for instance, is also a bid for the retail giant to enter an interconnected community ranging from digital health to provider networks to corporate customers.

Whatever the imperative, recent transactions suggest a growing belief among business leaders that many of the things considered essential to company performance — including technology, talent, customer bases, products and services — can be impossible to achieve unless they buy them outright.

Getting ahead of the risks

Still, these are very risky bets to make. For them to pay off, companies can’t assume that whatever they buy can be reshaped into something strategic. Any unknowns, from customer dynamics to the new organization’s value proposition against competitors, must be made known. How realistic is leadership’s vision for the acquisition? What role does the acquisition play in advancing a strategic agenda? What will it cost to make it all happen? With asset prices at record levels, careful due diligence is more critical than ever.

Business leaders also must consider the process they’ll use to capture sought-after strategic benefits once the acquisition closes. The tradition of absorbing target companies into the corporate parent is giving way to more nuanced approaches, including:

Preservation. This approach seeks to preserve the target’s organizational autonomy (because of skills, culture, geographic distance, etc., that need to be preserved) while the strategic benefits of the acquisition may be independent of the buyer’s business. This might be important, for instance, when a company seeking to enter a new market needs to keep the target’s focus on its own market. However, back-office functions might be integrated.

Symbiosis. A symbiotic integration starts as a preservation model except that there is a greater interdependence between the strategies of the two companies. For instance, GM would likely follow a symbiotic integration of Cruise in order to preserve how Cruise operates, but will need to integrate its capabilities into GM’s autonomous vehicle efforts.

Holding. A holding company keeps the acquired entity independent of the parent. No operational integration is necessary. Private equity firms are among those that take a holding approach with the companies they acquire, as the markets, skill sets, customers and channels for each portfolio company are likely very different.

As acquisitions become more unconventional and their stakes continue to rise, companies will find that their outcomes hinge on strong competencies in due diligence and post-merger integration.

No organization can remain the same. But the changes that modern companies face are happening too quickly for them to respond with the assets and resources they already have. In this environment, acquisitions — often daring ones — are a differentiating factor. As a result, they’ve become an ongoing responsibility among executive teams accountable to investors, customers, employees and their own exacting standards for success. The good news is that there’s an extensive body of knowledge around M&A best practices — and some novel approaches to capturing the value of a target without traditional post-merger integration. Firms should make the most of these to stay relevant during this period of historic upheaval.

Editor’s note: This article previously appeared in Harvard Business Review (HBR.org)

Why Companies Are Using M&A to Transform Themselves, Not Just to Grow was written by François Mallette and John Goddard, Partners in L.E.K. Consulting’s Private Equity practice. François is based in Boston and John is based in London. 

For more information, contact privateequity@lek.com
 

Spotlight on Oil and Gas: “Lower for Longer” No Longer!

Increasingly tight production/consumption dynamics in the oil market will drive higher oil prices in the near to midterm, signaling the start of the next investment upcycle for the industry. We base this forecast on the convergence of three major trends that have developed over the past few years.

  • Sustained high growth in global oil demand
  • Limited CapEx investment
  • Shrinking undeveloped Tier 1 acreage 

In this Executive Insights, we provide an analysis of these trends and discuss next steps for investors preparing for the coming upcycle. 

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Four Ways to Improve Capital Planning Effectiveness

The world is facing a significant transformation in how it looks at capital investments, adding uncertainty to the already challenging exercise of capital investment planning. Although these investments are increasingly relevant, it will be some time before capital spending globally returns to pre-2008 levels. This perplexing scenario has elevated the topic of capital planning effectiveness to high-priority status for large businesses.

In this Executive Insights, we examine the factors that are infusing the landscape with uncertainty despite strong liquidity. We also provide a recommended approach toward capital expenditure (CapEx) effectiveness that sustains itself in four key elements of the capital processes in any given organization: capital allocation, portfolio optimization, megaproject optimization and enablers.

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The Modern Utility as a Portfolio Manager

Many traditional utility organizations structure themselves according to assets or functions, which seems logical — after all, it is easy to see the company as comprising major assets and people. For a small utility with limited growth potential, this can often be the right approach. However, for larger, more complex utilities, this mindset potentially leaves value on the table. For these businesses, there is another way: They can reinvent themselves as portfolio managers of multiple (but discrete) lines of business that were otherwise hidden in the broader business. This approach provides sharper commercial focus and unlocks enormous latent potential.

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How Industrial Companies Can Capture More Share of Customer Wallet

In recent years, many industrial companies have expanded their product and service offerings, through both organic and M&A efforts. Companies within sub-sectors such as industrial equipment and engineered products, distribution, packaging, agricultural equipment and logistics are especially keen to take advantage of cross-selling and solution-selling opportunities. 

However, even with a broader portfolio of products and services, many industrial organizations are still struggling to capture greater share of their customers’ wallets. While it is easy to assume a broader product and service offering will naturally lead to higher sales, in practice this is often not the case.

L.E.K. Consulting’s research has uncovered four key sales challenges that industrial companies face when it comes to increasing their share of customers’ wallets, along with four examples of how some leading organizations have overcome them. What do all four have in common? They have connected their commercial data, people and sales efforts to routinely uncover customer insights and execute against them. 

In this Executive Insights, we delve into how industrial companies can raise their sales performance and drive more organic growth by taking a page from the playbooks of other leading organizations. Case studies include: EMC, General Electric and Grainger.

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Full Speed Forward: Game-Changing Electric Vehicles Era Coming Soon

Though claims that electric vehicles (EVs) will imminently and entirely replace traditional fuel vehicles (FVs) are premature, there is an industry consensus that substantial, ongoing EV development and significant, near-term EV adoption are inevitable. Under the current set of market conditions, L.E.K. Consulting predicts EV commercialization will produce three key sets of effects on the automobile industry, and L.E.K. has prepared preliminary response tactics that traditional FV manufacturers can employ in response to EV trends.

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Breaking Into the ‘Energy Internet’ Era in China: an Analysis of China’s Smart Grid Development

The integration of energy and information was first introduced as a concept nearly 10 years ago, and since then it has become desired for its cleaner and more efficient use of energy. Recent developments in China on smart grid development just might make this a reality. In this Executive Insights, L.E.K. Consulting sheds light on recent advancements in the energy internet and its potential for growth in China’s energy industry.

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