Crafting a Winning Strategy: What’s the Secret Sauce?

One of the key tasks of any Board in the private, not-for-profit or public sector is to create a strategy for their organisation. Strategy is inextricably linked to good governance and effective risk management. The UK Corporate Governance Code at C.1.2: “Directors should include in their annual report an explanation of the strategy for delivering the objectives of the company.” Strategy has been defined as “the direction and scope of an organisation over the long-term which achieves advantage in a changing environment through its configuration of resources and competencies, with the aim of fulfilling stakeholder expectations[1]”. For businesses, a winning strategy should provide a sustainable competitive advantage. For other types of organisation, the strategy provides a mechanism to seek an increased share of limited resources, with the aim of advancing a mission, whilst balancing the interests of different stakeholders.

What is an effective strategy?

Creating a successful strategy is not an easy task. It is completely different to operational management. It requires board members to set aside proper creative thinking time, question assumptions and develop a critical enquiring approach. It can’t be achieved by a solo actor working in an ivory tower: it requires contribution and buy-in from a wider group of leaders and senior managers. The statistics show that most boards do not get it right. Studies published by Harvard Business Review show that at least 70% of strategies fail. Some research has found that 85% of directors don’t know what their organisation’s source of competitive advantage is.  In his 2011 book, Good Strategy, Bad Strategy, Rumelt tells us that a winning strategy contains three elements: a diagnosis, which defines the nature of the challenge, a guiding policy to overcome the obstacles identified which builds on or creates some form of advantage and (iii) a set of coherent actions coordinated with each other to accomplish the guiding policy. Typically, insufficient time is spent on diagnosis, as managers rush to action; sometimes the actions are not coherent because of a lack of alignment.

Why do most strategies fail?

Rumelt identifies four hallmarks of bad strategy, which we can all recognise: the use of ‘fluff’ (gibberish and buzzwords masquerading as strategic concepts to give the impression of intellectual thinking!); failure to define the real challenge, mistaking a long list of aspirational goals for strategy (e.g. we will grow our revenue by 20%, we will delight our customers etc, without saying how); setting objectives which are just impracticable in the context of the organisation, or which fail to address critical weaknesses in resources and capabilities.

So how do we avoid falling into this trap? Here I offer a ten point plan from my experience which could be used to help develop a winning strategy.

  1. Start with why?

Simon Sinek has developed a whole business methodology around this question. We first need to understand the motive force behind the enterprise. Why are you in business, what is your core purpose and mission? Has this been explicitly captured and communicated to all your stakeholders? When did you last review it?

  1. Values matter more than ever

Identify what the values of the organisation are and how these reflect your culture (the beliefs, traditions and habits shared by your people). Capturing the values requires input from across the organisation.  Values can be used to set the ethical and legal boundaries for the activities you undertake and to set the emotional temperature of the organisation. However, it is no use articulating a charter if those at the top do not lead by example! Studies show that the Generation Y millennials and Generation Z among your customers and employees are particularly attuned to corporate values- ignore them at your peril.

  1. Assess your current position

Use a SWOT analysis to assess strengths, weaknesses, opportunities and threats facing the organisation. Strengths and weaknesses are normally internal factors, whilst opportunities and threats are external forces. Strengths might include specialist knowledge, a highly skilled workforce; weaknesses might include a lack of working capital or inefficient operating procedures. In looking at external forces, it is useful to employ the PESTEL analysis to identify the political, economic, sociological, environmental and legal factors that could, or do already, impact on your business environment. From this analysis, identify the top 3-5 critical success factors – the essential factors which the organisation must absolutely get right to succeed and keep these front of mind.

  1. Where else could you play?

Having identified your strengths and some opportunities, in which markets (existing, new or adjacent) could you operate? For example, if you were an enterprise with strengths in residential care for the elderly, could you move into caring for learning disabilities? What discontinuities could occur which could open up new avenues of opportunity for you?

  1. What is the structure of competition in your markets?

Use Michael Porter’s Five Forces model to assess the structure of competition in your chosen markets. Porter identifies 5 forces which influence market position:

(1) current competitive rivalry – if there is strong competition this will drive prices down and increase costs for businesses trying to compete

(2) Is there potential for entry of new competitors? How easy would it be for new competitors to emerge – are there factors under your control which could prevent or delay this, such as a well-defined brand identity, differentiated products or services, exclusive IP rights that you own?
(3) Power of the customer – the customer tends to have power if their purchasing power is concentrated (e.g. through buying frameworks), or if the product or service is seen as undifferentiated;
(4) Power of your suppliers – they may enjoy power over you because of high switching costs or because there are few alternatives;
(5) The threat of substitutes – are there other ways of solving the customer’s problem besides coming to you? Being alert to innovation that could be a complete game-changer is important. If competitive pressure is becoming too great, it may be time to move into more attractive markets where demand exceeds supply, margins are better and the pressure is manageable.

  1. What are your distinctive competencies and capabilities?

Your capabilities are derived from your people, financial capital, materials, technology, information and knowledge, buildings and intangibles such as brand, reputation, IP rights and leadership. Barney tells us that to provide real competitive advantage capabilities should ideally be valuable, rare, inimitable and non-substitutable. This allows you to differentiate your products and services from the competition.

  1. How do your activities create value for the customer?

A useful tool to examine the value added in each stage of your operations is Porter’s value chain. In essence, he divides an organisation’s activities into strategically relevant activities and supporting or ‘back office’ activities. In the strategically relevant activities, we find inbound logistics, operations, outbound logistics, marketing and sales and ‘after sales’ service. These labels can be adapted to suit the particular context.

For example, in a service environment, instead of inbound logistics, we may find customer enquiries, brochures, whitepapers etc. Operations would be the way projects are managed and delivered. In the supporting activities we find HR management, technology, procurement and the general infrastructure of the enterprise.

By taking each element, and forensically considering how it is performed and how it can be improved, you should be able to reduce cost or add more value for the customer and differentiate your offer. This is where ideas and innovations from front-line staff can really come to the fore. Do you have mechanisms to encourage and capture these ideas?

Having analysed the areas above, we should by now have a set of choices to consider. It is time to…

  1. Carry out a sense check

Applying the test formulated by Johnson et al, are the options suitable, feasible and acceptable? Suitability tests whether the strategy fits the vision and mission of the organisation. Does it leverage the strengths and minimise the weaknesses? Feasibility is concerned with whether the organisation has the right financial, human and information resources, culture and structure to pursue the strategy. Finally, acceptability tests whether the strategy fits with the risk appetite of the organisation and whether it is likely to find favour with your stakeholders, such as employees, suppliers and funders?

  1. Set Objectives

Having formulated the strategy, embody this in a set of concrete objectives which should be SMART objectives (specific, measurable, agreed, realistic and time-bound). Ensure the high level objectives cascade down to business units and individual performance goals across the organisation. Make sure there is clear ownership of and accountability for the agreed objectives.

  1. Align the organisation

The chosen strategy will have implications for every function in the organisation, including finance, operations, marketing, HR and technology Alignment is crucial to achieve success. It is no good setting high level objectives which are completely at odds with teams’ or individuals’ performance and remuneration criteria or which run counter to the existing culture of the organisation.

Once the plan is developed and resources are committed, be tough and persistent in applying it. Ensure there are consequences for not delivering. The methodology behind successful implementation will be the subject of a future piece.

Of course these tools and models alone do not give directors the right answer, but they do provide the means to have a better conversation, which leads on to the agreed answer. By using these techniques, you can create an effective planning process, build a realistic business direction for the future, and should greatly improve the chances for successful implementation of your strategy.

In Part 2:  how to implement your strategy successfully to differentiate your organisation from the competition.

[1] (Johnson, Scholes et al, 2011).

Mark Johnson is a legal and governance specialist with Elderflower Legal. He is a trusted advisor to SMEs, charities and social enterprises on strategy, managing risk and assuring legal compliance. elderflowerlegal.co.uk.

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Ten Top Tips for Effective Governance

How can you set up your governance systems to achieve results?

Corporate governance has received increased attention in recent years as a result of high-profile scandals involving abuse of corporate power and, in some cases, unlawful activity by corporate officers. Governance is all about the way the organisations are directed, controlled and held accountable to deliver their purpose over the long-term. The organisation’s practices and procedures should be organised so that the organisation achieves its mission and goals, whilst complying with the law and sound ethical practice.

Putting in place a well-defined and enforced governance structure can provide a structure which works for the benefit of everyone concerned, by ensuring that your organisation adheres to accepted ethical standards and best practices, as well as formal laws. However, it is important that the systems are proportionate to the size of the organisation and the risks it faces. We set out below our ten top tips for effective governance.

Positive benefits of good governance include:

  • People will trust your organisation (including members, service users, funders, suppliers and the public), leading to improved trading terms
  • The organisation will know where it is going
  • The board will be fully connected with members and wider stakeholders
  • Good and timely decisions will be made
  • The Board will be better able to identify and manage risks
  • The organisation will have greater resilience to cope with problems
  • The organisation should enjoy improved financial stability

In our experience, there are common areas that often cause difficulties for organisations. Here are our ten top tips for effective governance.

  1. Mistakes at the start

When setting up a new organisation it is important to have a clear shared view of the vision and mission for the organisation. It is important to plan ahead and bring your supporters with you. Think carefully about your strategy from the start and articulate the vision continually to all your stakeholders. (A stakeholder is any individual or group who depends on the organisation to fulfil their needs and on whom the organisation depends).

  1. Choose the right legal format and corporate structure

Think about what you want your organisation to achieve and choose the right format. Take professional advice and learn from what others have done. Don’t let the tail wag the dog. When selecting a legal format, form should follow function, structure follows strategy. First decide what you want to do, then choose the right structure which facilitates this. Don’t rush into setting up one particular format without understanding what the choices and implications are. It can be expensive to unravel the wrong choice. Professional advice is a sound investment.

  1. Clarity of roles

There may be many roles in a complex organisation. It is important to have clarity about the responsibilities of the Board, individual directors, officers and managers. Write down the key responsibilities and draw up a structure chart and scheme of delegation so that everyone knows who is responsible for what and who has the authority to take decisions. Role descriptions should be easy to understand and new joiners to the organisation should be offered an induction. Roles and responsibilities should be reviewed annually, perhaps as part of an individual appraisal.

  1. Poor Board performance

Board members may fail to perform effectively unless they have the right training and skills and a proper understanding of what their role is (in a documented role description). This can have a knock-on effect on the rest of the organisation, if it is not tackled effectively. There should be regular skills audits of the Board to ensure they are performing well. Group training session can be run to remind the Board of their role and continually improve their skills. A regular formal review of the Board’s effectiveness facilitated by an independent observer can be a useful tool for improvement

  1. Recruitment and succession planning

You need to attract good people onto your board with a wide range of skills. If you have skills gaps and vacancies this can lead to ineffective performance or lack of scrutiny. Cast the net wide in looking for new and diverse talent and plan ahead to refresh the Board at regular intervals. Proper training and induction should be provided to would-be recruits to the Board. Allow them to attend a few meetings as an observer before taking the plunge.

  1. Ineffective meetings

Regular meetings to enable a proper exchange of views are very important to good governance. In a fast world, where digital communication is becoming the norm, some of the nuances of physical meetings, body language and interaction can be lost. Meetings need to be properly run, with a clear agenda and board papers circulated in advance, at regular times and accessible venues. Attendees should not leave feeling unclear about what has been decided; concise minutes should be prepared and circulated promptly after the meeting. The Chair plays a vital role in running effective meetings, supported by a good company secretary.

  1. Dominant founders

Sometimes the original founder of the organisation, a long-serving Chief Executive or Chair may have undue power or influence. Sometimes they may take on too much responsibility and spread themselves too thin. It is important to document the roles and responsibilities of key officers, including the limits on any delegated authority to make decisions (e.g. financial limits on payments, requirements for second signature etc). It is a good idea to write into the constitution a requirement for certain appointments to be refreshed every few years.

  1. Mission drift

If an organisation starts to drift away from its core mission or principles, this can cause a sense of confusion and disengagement for board members, employees, members and customers. There could be a variety of reasons for this. Funding streams or contracts may encourage managers to move into new areas of activity. It is important for the Board to continually review whether the organisation is still fulfilling the objectives written into its constitution. The constitution may need to be reviewed and refreshed to cater for change and this will usually require the members to vote in favour of the change.

  1. Engagement with members and stakeholders

Members and stakeholders need to feel that their voice counts and need to be kept regularly informed about the organisation’s activities. The board must be accountable to and represent the interests of the membership and service users effectively, otherwise a division can arise. This relies on transparent rules and reporting lines, as well as effective regular communication by the Board to keep all stakeholders informed. Members’ meetings should be appealing and easy to attend – think about possible incentives to get people to attend. Cadburys used to give away free chocolate to shareholders who attended its AGM!

  1. Deal with conflict swiftly and decisively

Conflicts occur in most organisations from time to time. Unfortunately, disagreements can quickly escalate and cause rifts within the organisation as positions become entrenched. Conflicts are not always a bad thing- they can help to bring issues to the fore and lead to better debate. The Board, usually through the Chair, needs to deal with conflicts diplomatically, mediating between the different parties to achieve a positive outcome.

Mark Johnson is an experienced solicitor and company secretary helping charities, social enterprises and SME businesses to flourish. His company Elderflower Legal offers a range of support packages to help organisations with legal compliance, managing risk and good governance. For more resources check out elderflowerlegal.co.uk.

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An Ethics Code for Public Services?

Should private and third sector service providers be subject to the same ethical standards as public officials?

That is the view of the Committee on Standards in Public Life in a recent report. The report considers the scope of the public services market – around £187bn is now spent by the public sector on goods and services commissioned from external suppliers and the rate and scale of outsourcing of public services is increasing as austerity measures and demographic pressures increase. The landscape of commissioning and delivery is growing ever more complex as new hybrids like academy trusts, CCGs, staff-led mutuals and arms length companies take responsibility for services.

The Committee’s central finding is that the ethical standards for those operating in the public sector should now have application to all those delivering public services, whether they are private sector or voluntary sector providers.  Specifically, the Seven Principles of Public Life developed by the Nolan Committee should apply to them:

Selflessness – officials should act only in the public interest

Integrity – officials should not take decisions in order to gain material benefits for themselves

Objectivity – officials must take decisions fairly, impartially, without discrimination or bias

Accountability – officials must submit themselves to scrutiny

Openness – officials should act and take decisions in an open and transparent manner and not withhold information unless there are clear and lawful reasons for so doing

Honesty – officials should be truthful.

Leadership – officials should exhibit these behaviours themselves and actively promote them and challenge others’ non-compliance.

The Committee has recommended that the Cabinet Office puts in place an action plan to ensure these ethical principles are reflected in all procurement procedures (an assessment of the ethical code of suppliers and a certificate of compliance may be required); that contractual performance standards should reflect these principles and that ethical compliance should be embedded in training, induction and professional development among service providers.

The Committee was prompted to look into this issue on the back of recent high profile scandals involving large outsourcing companies, in particular problems with the Work programme and offender tagging contracts.

I don’t think anyone would disagree that high ethical standards are essential for anyone who wants to supply services funded by taxpayers’ money. The question is how best to implement this. There is a risk that the behaviour of a few miscreants spawns a whole new area of regulation and compliance for SMEs, charities and social enterprises, with an attendant cost.

If we look in detail at the 7 Principles, we find that some of them may be easier to apply to non-public sector bodies than others. ‘Honesty’ should be a given, leadership and accountability should not pose a problem. But what about ‘selflessness’, ‘objectivity’? An office holder in a private company (including a community interest company) owes a legal duty under the Companies Act 2006 to promote the success of the company (section 172) and to avoid conflicting interests (section 175); similarly, a charity trustee must always act in the best interests of the charity and its beneficiaries. What happens when the interests of the taxpayer conflict with those of the shareholder or the charity’s beneficiaries? Which duty should take precedence? How in practice will the office holder in the service provider be able to demonstrate the duty of integrity if he has received a bonus for delivering good contractual performance? Compliance with the duty of openness also raises some difficult questions: in a competitive market: some commercial information needs to be kept confidential to preserve the competitive dynamic. There are already separate moves afoot to try to extend the Freedom of Information Act to private and third sector organisations who are providing services in the public interest. This will require these bodies to put in place compliance systems with attendant costs. The lines between public and private functions are increasingly becoming blurred.

The Committee also refers to the need to bring in punitive measures and financial penalties for those who fail to adhere to high ethical standards. For these to be legally watertight, there would need to be legal certainty about their application and an appropriate evidential burden.

I don’t think anyone disputes the need to encourage high standards of ethical behaviour across all sectors – whether that be public, private or third sector. Indeed, post banking crisis, most business schools have placed a greater emphasis on ethics in their curriculum. Does a knee-jerk response to a handful of scandals merit a programme of reform of procurement, new contract clauses and a system of financial penalties? This will need to be carefully thought through if it is to avoid imposing new cost burdens on service providers at all levels.  The rush to impose a hasty solution risks being seen as a political cloak for ideological opposition to outsourcing or alternative delivery models in general. We await the new Government’s response to the report with interest.

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