The strategy hierarchy

China just posted a 7% growth number which was higher than expected. The real amazing kicker is that it was for last quarter… Is your business even contemplating 7% growth per quarter or do you believe that the economic conditions and the world as it stands today is shaping a reality in which negative or no returns are acceptable?

 

You may argue that China has the benefit of an expanding population, strong control over resources and clear strategies to ensure they incentivise the correct behaviour for growth. For most businesses there is a massive market that has never consumed their product, direct control over the message that they send into the market and people that are willing to work to make a business work. It seems that the missing ingredient is thus a clear strategy to deploy this.

 

The goals and strategy portfolio of the business collectively describes where the business is going and it remains the single most important thing for a business to get right. There seems to continue to be a gap between strategy and execution – but without strategy – execution will just get your head chopped off.

 

So to understand strategy in the context of growth and development we have to look at the drivers that are important.

 

There are some primary drivers of business growth

  1. Expected investor returns – the bottom line
  2. Investment to meet future goals – capex for growth
  3. Operational renewal – capex for efficiency
  4. Investment in reserves – investment for sustainability
  5. Sustainable contribution to society – non revenue generating investment

 

One way to map your growth is to take a percentage for each of the above and assign a number to it. Add this as a total or as percentages and you get a growth rate. If you just look at it as a high level this easily implies that you need to get a 30%-50% annual return just to stay in business.

 

To find out how much your profit your investors expect is a simple calculation:

  • Take what your business got as a profit line last (financial) year
  • add what you could get investing in retail bonds (e.g 8%) – this is called the risk free rate.
  • add what the stock market did last year and minus the risk free rate (e.g. (e.g. 22% – 8% = 14%)
  • If your industry is particularly risky – then times the number you got before by 1.5 and if it is less risky you can get closer to 1.

 

This gives you the expected return on capital from an investor, which for a relatively stable business should be in the order of about 35%.

 

So you strategy needs to ask how you are going to achieve this on at least a quarterly basis. To get to 50% return annually you need to get at least 9-10% quarterly. And this excludes any planned growth.

 

So strategy essentially asks if you have the plans in place to achieve the necessary revenue and growth to not only reward investors for their capital – but also to sustain and increase the capacity of the business to do so in future.

 

What does get confusing for some businesses is what the difference is between a goal, a strategy, an objective, a result, a project, an operation, a task, a motivator, a driver and a business model or architecture. It then happens that goals are defined that are really strategies, or tasks and then we are surprised when the business does not improve and does not go where we intended. The phenomena of goal confusion force us to beg the question – where do we set our goals for success?

 

What also does not help is that there are so many demands on a corporate organisation to have policies and accountabilities for an ever increasing range of areas and initiatives without there always being clarity on how this fits into the goal process.

 

Very basically – are we here to run policies or are we here to achieve goals? We all understand that policies are a world onto themselves but yet they often undermine or support goals.

 

What would help is if there was a clear guide to understanding how it all works.

 

The easiest place to start would be to describe a goal mostly because we all have them. A goal is as simple as defining something that needs to get done.

 

So we may want to go to point A or do something or make 100 of a specific type of item. The goal that gets established should be S-M-A-R-T (Simple, Measurable, Attainable, Realistic and Time-bound). So the goal may become “For the Manufacturing Team to make 100 of Item X using Machine Y, for a cost of $ Z, before the end of January 2014 for delivery to sales.” This goal is clear because it says who will do it, how much, by when and answers other questions around what and how.

 

The key to goals is that you need to differentiate if they are objectives or key results. A very common approach that is used is called management by objectives, or Objectives and Key Results (OKR’s). The basic idea is that you set 3-5 objectives (goals) as a company, 3-5 objectives (goals) as a team and 3-5 objectives as an individual. The team objectives are linked the company objectives and a team may be responsible for one (or part) of the company objectives. The same counts for the individual.

 

To determine what you are actually going to do – the Key Results describes the specific initiatives that you will be taking to achieve your Key Results Areas. These are measured as on a scale of achievement. The Key Results are then the projects that you run for the quarter, the initiatives that you drive and the results that you deliver.

 

As a reality check – you have to ask yourself if these goals and results areas will achieve the anticipated return for your investors and this can be an interesting reality check for most strategies.

 

A good goal framework gets reviewed quarterly and objectives and key results only get carried forward if they continue to add value to the organisation. An interesting note is that increasingly companies are delinking goals from performance reviews. While this seems contradictory it is happening because performance is a more holistic review of the individual performing a job with a view towards enhancement – while goals are the “business of business”. A number of studies have shown that people tend to misrepresent their goals when it is linked to their compensation – so to solve the issue – the delinking of goals and performance seems to be working for large corporates. Make no mistake that you performance on your goals will still be reviewed when you apply for a promotion – but it is less focused on a quarterly performance scoring based on your goals, to determine your bonus and more on achieving the result for the business. What this also allows the business to do is to publish the goals of individuals and teams so that they can start working together and also know who is responsible for what.

 

Policies are usually set to capture past learning, to manage risk and to create predictable outcomes in routine areas. Policies must often be reviewed to determine if they are adding value to the business and it remains important to assess the real cost of a policy over time. Policy will very seldom feature in the objectives of a company.

 

The top level objectives comes from the strategy of the organisation and it is the 5 things that will give investors the expected return in this quarter and also looks at the things we will set-up for next quarter. So if you asked yourself what is the 20 things that is going to make your company money this year – and you go and check that you can make at least 30-35% out of each of these initiatives – you should be on a winning path in making the business move forward.

 

Conclusion

 

Goals can be tricky – because they often get set at the wrong level. This article has shown that if you link your goals to your investor, revenue and growth objectives that you can make the most out of your teams and individuals driving the results to get you to the end. Someone still needs to do the work and it is always important to remember that no amount of planning will substitute action. Having better and more focused goals will allow you to start getting there.