One of the biggest pitfalls of any strategic direction is the realization when you’re in the middle of it, that it might not be working.
The current economic scenario has caused many companies to reconsider their current strategic direction and adjust the course. The question we’re going to explore today is:
How much adjustment should you make to your direction and how do I avoid the dreaded knee jerk reaction?
The key to this question comes back to the design of strategy, the ongoing evaluation of results and the identification of risks that could feasibly trigger adjustments.
In previous posts I’ve spoken to the difference between designing strategy and simply building a plan, as well as the key questions that need to be asked when designing a strategy that builds accountability and action. The next step in this process is to be bound by measurable and accountable key numbers.
The use of key numbers takes the strategic and tactical elements out of the subjective and into the objective by making the results as unambiguous as possible. There is no question that strategy must be built with adequate flexibility in mind so as to make the necessary adjustments when the results aren’t in line with expectations. The key becomes what triggers the adjustment.
Too often, you will see management make adjustments that are seemingly based on reaction to the environment or to a common trend in their business vertical. But when analyzed a little closer, the best managed companies will make predesigned adjustments based on criteria that are understood and have built in accountability.
With a properly designed strategy there is a recognition that the environment within which the strategic direction is designed can change, and often will. When considering risks to a strategic design, questions of market, economy, suppliers, regulation, customer health, key people, financial certainty, cash flow, systems and competition are only some of the areas the organization must consider. When defining the key numbers that link accountability and action, it is critical to show how a variance in the number can be linked to the risk and an action triggered.
Let’s look at this in a story that may connect to your business:
Anyone who has followed the oil and gas sector over the last year is well versed on possible environmental changes to a company strategy. Simply put, the change from $125 per barrel oil to as low as the high $30’s and averaging out at around $50 per barrel will definitely impact any company who’s strategy (rightly) takes into account cash flow linked to market price.
On top of the price impact there was massive increases in supplies and service costs over the last few years that reduced profitability of drilling, shale gas impacted the North American market as a whole and the green movement put a target on the back of most producers.
It would be easy say that volatility was the only true constant if you didn’t look that deep.
The reality is that when designing a strong and executable strategy there are areas that you can build out that are minimally impacted by massive volatility and the areas that are impacted can be built with triggers in areas of risk, like market pricing, to adjust the strategy.
Areas in operations can use industry metrics and KPIs to drive to the key numbers that are important. If you’re an oil and gas producer maybe it’s the administrative cost per barrel or the operations cost per barrel. If you’re a restaurant maybe it’s the food cost per plat or salaries be seat. If you’re a manufacturing plant maybe it’s the measurement of downtime in the process or measurement of wasted materials. And in the IT and ecommerce space there are conversion rates.
The bottom line is that a great strategy has a set of key numbers that need to be set as targets regardless of outside influence – in STRiDE these numbers live in the Operations and Finance areas of the One Pager.
That doesn’t change the fact that Growth, as an area of strategy that is usually very susceptible to external impact, can take over an organization if things aren’t going as planned. This is why the key numbers for this area must address cash flow, revenue per head, revenue per day, product profitability and marketing success. If you are managing by the numbers and have predefined the possible risks and the triggers that would bring about a change in the strategy, it all becomes a function of staying on strategy.
Check out STRiDE as a tool to build a strong strategy for your home business, small business or consultancy – learn to manage by key numbers and the outcome can always be called success.
To finding your STRiDE.
