New Zealand's companies must compete globally while operating on a scale that, in world terms, is small. This means our companies must work smart as well as hard. Success demands strategic management of high quality. But elaborate textbook approaches to strategic management just don't fit the New Zealand situation. How can we meet the globalisation challenge?
(This article was first published in The Independent Business Weekly.
If you use or quote from this material please attribute it to the author and publisher.)
PART 1: THE CHALLENGE
Everyone has a view on where New Zealand is today and our future prospects. A working consensus seems to be that the economic reform of the 1980's swept away the negative obstacles to a modern, successful economy. We created a platform for long-term success. But political rhetoric aside, most would agree that we haven't done enough of the positive things needed to make that long-term success happen.
We know that New Zealand spends a lot more than it earns. But awareness of our current account problems tends to stop at the total net deficit. Beneath this worrying total lurks a more chilling problem. In 1998/99, the net balance of interest, profits and dividends New Zealand paid to and from the rest of the world was minus $7.6bn. This net outflow exceeds the total deficit. It suggests that economically we are reverting to colony status, working hard but seeing the fruits of our labour flow overseas. At a national level, our strategic management looks seriously deficient - we may have had the strategy right, but we certainly haven't deployed it well.
There is no simple answer to our national strategic management problem. For too many, the seductive fantasy of government as leprechaun - creator of a magical pot of gold to be spent by those who capture him - lingers on. But the companies that we are relying on to compete globally and pull us away from national decline can't live by fantasies. How are they approaching strategic management? And what does this tell us about how we could improve performance at national level?
Background to the Research
As a contrast to business comment from Wellington and Auckland, we mainly selected interviewees involved with South Island companies. We also selected companies with differing characteristics: from 25 to hundreds of staff, business situations varying from innovators in new fields to mature companies in mature industries, and ownership structures that ranged from family ownership to public company subsidiaries to recent management buy-out. The majority were substantially involved with some form of manufacturing. Most respondents were exporters.
During 1999 we confidentially interviewed twenty-three general managers, owner/managers and directors. We worked from a questionnaire structured around five topic headings, but encouraged the discussion to flow freely. Our findings and initial responses were also discussed at three open meetings sponsored by professional bodies.
What We Found
As one would expect, a diverse group of companies and individuals provided varying responses. Both common themes and noteworthy differences emerged.
We first asked about the key strategic issues the company faced. We found that interviewees were most concerned with specific strategic issues in their industry. They responded to these mainly as individual entities, not collaboratively. Notably, most interviewees did not expect or want specific help from government. They felt that global competition was a reality but competitive advantage was attainable.
Many key principles of strategic management were understood and applied. "Niche" marketing approaches were prevalent. Almost every interviewee spontaneously explained how staff skills, motivation and communication were vital to success, at all levels of the business.
Thinking about technological change tended to be operationally focused. Relatively little was said about the strategic impacts of technological change and its interaction with globalisation. Awareness of the major changes to business behaviour likely to result from e-commerce was low.
Ownership issues had often tended to impede progress or divert management. For some, "unfocused" ownership by larger corporates or family shareholders had been a problem. In other cases, a shift to a more strategic approach had been required as a company grew and developed, as the "founder" retired or as ownership grew more dispersed or remote. Limited resources were a competitive concern for many but only a few companies were seeking external investment. Many interviewees spoke about the importance of senior managers thinking like owners, but fewer had taken steps to actually make those managers owners.
Opinion about the strategic roles of directors divided sharply. Some companies did not have or want a Board while others found the involvement of external directors highly valuable. This division did not appear to reflect size.
The differing roles of directors and managers were understood. There was consensus that directors should not be directly involved in operations but should be active in strategic development and review. However differing expectations about strategic management roles had sometimes led to a lack of added value from the Board. In particular, Boards had often been ineffective in sponsoring strategic change.
There was little interest in formal "governance". Strategic management was a practical problem that needed practical solutions. Maintaining a strategic perspective was not easy for owner/managers and executive directors. Clear, practical concepts and processes could help.
In most companies, staff input to strategic management (if any) was minor and centred on implementation. Companies that had involved a cross-section of staff in strategy found this useful. Most companies said communicating strategy through simple themes and actions was important to align activities and to achieve staff support.
We asked interviewees to outline how their companies thought about and developed strategy. All considered these processes important, with some saying they were increasingly critical to business success. However, a tactical/operational perspective appeared to drive "strategic" thinking and planning in many companies. Many managers were said to find "strategic management" forbidding or irrelevant to their roles. Independent directors and some owner/managers felt external directors could help companies manage more strategically.
The "annual retreat" was the core strategic management technique for most companies. However, the effectiveness of this technique in creating a strategic focus often appeared dubious. Most companies had a "strategic plan" but many did not regularly use it in any routine or rigorous way.
Because of our own professional interests and our work with the Institute of Directors, we were particularly interested in the role directors and consultants played in strategic management. We found that many companies did not much use or value these resources in their strategic management except perhaps in highly technical roles. This reflected both lack of interest and a lack of credible sources of input. A common view was that non-executive directors could in principle add much value, but the supply of good candidates was limited. Such a role was demanding, professionally and personally.
Problems arising from ownership and governance issues were prominent drivers - and sometimes diverters - of strategic management activity. Business concepts such as "founder as sole director" or "family company" tended to limit external inputs to strategic management. Conflicts of interest or owner over-ride were problems in some companies.
To test the difference strategic management made, we asked how each company's strategy was applied and what specific points of difference (from the past or from competitors) had resulted. Linkage between longer-term strategies and annual business plans tended to be weak. Non-financial measures of strategic deployment were not greatly used. Notably, companies that had clear and distinctive strategies could readily identify the specific points of differentiation that resulted and the value of those differentiators, while companies that appeared to have a more tactical and operational orientation could not.
Lastly, we asked interviewees about improvement opportunities. Most respondents felt they could improve their strategic management and governance and had specific ideas about how to do this. A number of respondents wanted to see "better" (and often younger) directors. Other common themes included more capital investment from external parties, greater freshness of view and ways to achieve greater real-world impact from a strategy.
PART 2: THE RESPONSE
The purpose of our work was to make strategic management more effective. Our conclusions therefore focused on directions for practical action by companies, Mendhurst or the Institute of Directors. Some conclusions also draw on Mendhurst's work with clients and public workshop participants.
Most fundamentally, successful entrepreneurs are strongly individual. Programmes based on standard management/governance models or collective action by "New Zealand Ltd" are likely to miss the boat. Strategic management support needs to be customised to individual companies and focus on the actual needs and wants companies and their managers have, not on what they "should be doing".
We found most companies do not value theory or complexity. They want strategic management advice and support to apply practicality and simplicity. There was support for a number of the tools we regularly use with clients and workshop participants:
Some of the other ideas that emerged suggested that issues we have worked on with individual clients in fact have wider relevance:
Other responses identified continuing or new development directions for bodies like the Institute of Directors or desirable changes across the wider community:
Implications for New Zealand
First, let's look at the national picture. It is easy to feel gloomy about New Zealand's strategic prospects. We have no natural advantages outside the declining agricultural sector. Globalisation is sucking out revenue, profits and key people. Our human resources and social energy seem disproportionately devoted to law and government, not business. Most fundamentally, we choose to ignore New Zealand's relative decline - we expect to live as well as North Americans or Europeans by earning only a fraction of their income and borrowing the difference. Are we on an inevitable path to a stagnating appendage of Australia?
No. "It is not the strongest species that survive, nor the most intelligent, but the ones most responsive to change" (Charles Darwin). Expressing this in economic terms, we might say that it is not the nations with the greatest natural resources that will thrive, nor those with the greatest wealth to draw on, but those that adapt best to their strategic environment.
Many features of New Zealand business that were once problems to solve have become opportunities to exploit. Technology is abolishing many tyrannies of time and distance. Economies of scale or accumulated experience no longer dominate competitiveness. A "niche" market too small for overseas companies to bother with can be immense for a New Zealand company employing a hundred staff.
Today, added value arises mainly from individual knowledge and personal creativity. These characteristics can flourish in a stimulating environment with lower population density and less daily hassle. As a smaller and more agile society with a tradition of practical innovation, we can excel at capturing the bubbles of value that emerge in a dynamic and open world economy.
Our study conclusions and our wider professional work suggest broad concepts New Zealand could apply at national level to compete more effectively. Collectively, these reject both excessively theoretical management (the dogma we've just escaped from) and government-led business development (the dogma we're about to return to). The prescription is practical and evolutionary:
Let's hope for some practical and effective strategic management to emerge at national level. In the meantime those who create the wealth must focus on improving their individual businesses.
PART 3: MAKING A REAL-WORLD DIFFERENCE
A recent study of strategic management practices identified a number of obstacles and improvement directions. How can individual companies apply these ideas?
Practical strategic management
Managers with hands-on responsibilities need to focus on results. They rightly reject processes that are unduly intellectual, require elaborate methodologies or generate a flood of documentation. Sadly, many approaches to strategic management do all of these things. Can we do better?
Terminology is the first barrier. Too often the term strategic is used as a synonym for important. Or it becomes a platitude - an empty phrase used to cover up a lack of thought. A useful working definition of strategy might be "long-term objectives and the general means of achieving them, as distinct from shorter-term tactics and day-to-day operations". In business, strategy is about understanding, shaping and managing the enterprise and its marketplace over the longer term. Successful strategic management combines strategic thinking - to develop a strategy - and deployment - using the strategy to make a difference to business outcomes.
Strategic thinking tries to answer questions like:
None of those questions have numerical answers. That's no accident. Numbers belong in business plans, not in strategic thinking. A "strategic plan" should be brief, distinctive and compelling. Questions and answers should be specific and lead to medium-term action points. To avoid waffle and jargon, perhaps avoid the "plan" altogether and prepare a simple statement of strategic intent.
Strategic deployment takes up the action points that emerge. It provides a direct link between the company's strategy and its operations. Business plans then have a dual role - to manage ongoing operations, and to ensure that the strategic action points happen.
Annual "strategic planning" often isn't helpful. A better approach might be comprehensive strategic thinking work every few years, with an annual process to note emerging issues, review strategic deployment and prepare business plans.
Working ON the Business, Not IN It
The study findings, and many other sources, identify the classic problem owner-managers face. Working hard IN a business creates an inside-out perspective. It's not easy to see the business as others - customers, competitors and advisers - might see it. And it's even harder to see how the business could be much different or better. There's just too much firefighting to do: the urgent overwhelms the important.
Working ON the business demands commitment to managing for the long-term and across the business as a whole. It's primarily about what to do, not how to do those things. And for the business to grow and develop, it's more important to facilitate the efforts of others than to do it yourself. This doesn't mean losing control, just a shift of focus from means to ends.
This principal/facilitator approach suits New Zealand well. It provides the best of both worlds: speedy decisions and strategic agility plus specialisation and critical mass. We can't afford the sluggishness of large, anonymous organisations and we can't compete globally as a collection of one-man bands.
Effective strategic management can help with the transition from firefighter to principal/facilitator. High-quality strategic thinking doesn't require a "corporate planning department". And smaller companies are well placed to deploy strategy in practical ways that make a difference.
Strategic Thinking: Simplicity and Clarity
The "science" of strategic planning evolved in a producer-driven and more predictable world. Today's business environment requires a different approach. But the ghost of strategic planning still haunts us, leading many people to see strategising as a complex intellectual procedure.
Let's exorcise that ghost. Strategic thinking is simple and practical. Anyone can do it. And there shouldn't be much paperwork involved.
That probably sounds too good to be true. That's because simple isn't the same as easy. Strategic thinking is still hard work that needs effective tools and stimulating processes. But avoid complexity - the enemy of good strategy.
Our one-day workshop for the Institute of Directors demonstrates that any company can, for a modest investment of time and effort, achieve solid and useful strategic thinking. It first outlines a number of strategic thinking principles and tools that are simple but not trivial. Then it provides a simple but realistic case study and asks participant groups to develop a strategy for that company.
Participants are able - in a short time - to outline and present a comprehensive response to the case study. They may deliver:
It would be possible - say over a further day - to extend the flip chart documentation that emerges into a short outline of strategic intent and a medium-term strategic action plan. Writing that up formally - if a company wanted to do that - might take one person a further few days.
Several key principles underlie this approach to strategy:
Strategic Deployment: Key Principles
Many businesses develop admirable strategies - and then fail to implement them. We've all seen businesses say one thing, but do another. Effective deployment is needed to make strategy real, first in the business plan and then in operations. Although details will be different in every business, a few key principles will be part of most deployment plans:
Modern strategic management needs one further element - sharing the business. The global economy is big and fast. Capable and creative people don't readily take orders any more. Many want to share the risks to share the return. A growing number prefer independence to employment. We won't develop many globally competitive businesses by starting in the garage and expecting one person to grow and run the whole show. Outsiders can bring new perspectives, ideas and capital to the business. But we shouldn't - and can't - stop entrepreneurs being strong-willed individuals.
PART 4: ADDING OUTSIDE-IN VALUE
Share the Business to Grow the Cake
A dynamic global economy demands more rapid rollout. External input is a way to add fresh value to make everyone better off - there's more wealth in sharing an elephant than in hoarding a mouse. But putting this concept into practice isn't easy.
Our study confirmed that every company is different and standard models of governance aren't much use. It's more sensible to think in terms of a range of approaches to external input, and choose "horses for courses".
Option 1 for the owner/manager is to do it all, relying on personal skills and knowledge. This often works for smaller businesses and occasionally succeeds for larger ones. For fiercely independent business principals, this is probably the only viable option. For others, it may be a preliminary stage.
Option 2 is to ask "friends" for advice. In this context "friends" includes staff, trade associates, personal contacts and the like. The cost will be low but the value added will depend on the skills and experience the "friends" have. This option will probably meet basic or early business needs, but not go much further. Most government assistance falls into this category.
Option 3 might be called "consult an architect" - one-off professional advice when re-thinking the big picture or planning a project outside the norm. Planning would proceed jointly, with implementation mostly done in-house. This option helps when a fresh view is important and funding is limited. Implementation may be at risk though.
Option 4 is to engage an adviser or mentor - someone who understands the company and can provide a different viewpoint from time to time. Many businesses use accountants or lawyers to add value in this way. This option may however fail when major change is needed. Advisers may bring a technical focus or narrow experience base to new situations they know little about. And time-based fees may mean advice is driven by cost, not quality or timeliness.
A fifth option is to outsource strategic projects. This doesn't mean turning the company over to outsiders. It means using specialist resources to collect information, support in-house projects or implement strategic deployment initiatives. As with any outsourcing, it's vital to establish a clear brief, retain high-level control and mostly stay out of the detail. Much can go right and much can go wrong - this option demands good judgement, investment-based thinking and mutual trust.
Option 6 is to build a strategic team. Any company that is no longer small must apply this option to some degree. Genuine commitment is important, because good people quickly see through token "teamwork". Realism is needed too - people who manage parts of the business well may struggle with wider topics. One useful approach is to draw ideas from two perspectives. An internal management team can aim to "think one level up", and one or two non-executive directors or consultants can contribute from their external perspective. At this stage sharing ownership becomes important - these contributors are likely to want a share of the value they create.
The most formal option might be called "strategic governance". Here the chief executive will work with a board that primarily comprises non-executive directors and stays out of routine management. A key principle is that the chief executive reports to the board, regardless of who owns the company. Partnerships, joint ventures, or capital backing are likely. So is staff or public ownership. This option creates huge new potential, but it also demands mature "power-sharing".
These options demonstrate that although consultants and directors both advise, they add value in different ways that should not be confused. To measure the value external input adds, we first need clear expectations.
A consultant works as a business partner or service provider. A client should expect to get (among other things):
A director is a different sort of adviser. The company would expect to get:
Circumstances vary. Some might suggest different benefits. But whatever benefits are sought, the same basic principles should apply:
What Sort of Directors?
What qualities should the directors involved with strategic governance have? This list combines some of my own thoughts with what we heard from clients and survey participants and others:
(We thank the Institute of Directors for encouraging our work and the busy people who gave their time so generously. The quality and frankness of the comments we received was impressive and refreshing.)