Strategic Management for NZ

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

National Issues
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

Conclusions
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:

• practical and jargon-free ways to apply strategic thinking
• low-cost techniques that enable staff to contribute ideas and "own" strategy
• fresher and more effective alternatives to the "annual retreat"
• processes that distinguish and link strategy and business planning
• specific competitive differentiators to make strategy meaningful
• deployment tools that clearly link strategy to operational change
• practical ways to "get outside the box" and stimulate innovation

Some of the other ideas that emerged suggested that issues we have worked on with individual clients in fact have wider relevance:

• "global partnering" principles that outline key priorities and do's and don'ts
• meaningful non-financial strategic measures that can be simply applied
• practical ways for those with multiple roles to "switch hats"
• "early adopter" and "innovative applier" positioning for new technology
• "niche marketing" principles, concepts and tools

Other responses identified continuing or new development directions for bodies like the Institute of Directors or desirable changes across the wider community:

• national competitive advantage should be defined in terms of "competing globally" by all NZ companies, not "exporting" by some. Companies that provide local goods and services in competition with importers or that service foreign-owned companies also contribute to national welfare.
• companies need more information on the impacts of globalisation, technology and new career paradigms on New Zealand's business eco-system and management resources. How information technology is fundamentally changing the way business is done and the specific problems and opportunities this creates for New Zealand companies are key topics.
• "good governance" concepts need to apply more closely to typical NZ business structures and to counter inaccurate or outdated perceptions of "Boards" and "directors". In particular a "value-adding" board needs to be characterised more by enterprise and strategic management and less by compliance and formal procedures. Case studies where real-life NZ boards have added real-world value would be useful.
• business owners are more likely to seek external input if they are clearer about when this might add most value and have ways to verify and measure the value external input adds. Distinguishing between local sources of advice that provide only initial or ongoing "basics" and local sources of advice that can improve strategic management is important.
• many boards lack specific disciplines and frameworks to measure Board and director performance. In particular they need to know how they can more effectively sponsor strategic change.
• director appointments often proceed along much more informal lines than employment recruitment. Disciplined appointment processes that emphasise personal matching and "suitability not availability" would make non-executive directorship a more structured business resource. Identification and qualification of younger independent directors who are attuned to technology and globalisation is important.
• owners and directors need simple and practical processes to guide them when shareholder dominance, conflicts of interest or personality factors might tend to skew management and governance. Individual mentoring of owners/managers by credible people who have "been there" could play an important role.
• Outside listed companies, ownership often gets bogged down in history and emotion. Disclosure rules designed for large companies hinder capital raising. Traditional share valuation measures based on "bricks and mortar" assets may not facilitate change. Companies need simpler mechanisms to facilitate ownership changes, particularly easier entry and exit for substantial shareholders.

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:

• maintain and extend things we are already good at - nothing radical
• position NZ as a smart "early adopter", good at practical innovation
• encourage local capital formation and win-win global investment
• remove obstacles that disproportionately impede business growth
• aim to grow companies to a viable but still personal size, say 50-200 staff
• keep life simple - avoid complex policies and overly theoretical "solutions"
• share our existing skills and experience more effectively
• seek out and listen to real-world global business experience
• favour technical and management skills that can generate new wealth
• document and apply management practices tuned to New Zealand

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:

• What differentiating features and competitive advantages can our company develop? How will we maintain and protect them?
• Which markets will we focus on? Which markets might we withdraw from?
• What sorts of products and services should we plan to be supplying five years from now?
• How will technological change affect the quality and price of our products?
• What innovations will customers value most? How can we develop and protect those?
• What competition might we face in future? How will we respond? Should we partner, and with whom?
• How can we best align the interests of owners, managers and staff?

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:

• An analysis of the industry environment and the company's competitive advantage based on Michael Porter's framework
• Prioritisation of the "three core strategies": product/service leadership, customer relationships and operational excellence
• A non-financial vision
• Value chain positioning of the company and its suppliers and customers
• Partner and competitor relationships
• Specific points of competitive differentiation to maintain or create

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:

• Freshness - stimulate people to think in new ways. Where a group has used strategic tools before, mix in some alternative frameworks that are new to them.
• Customisation - avoid "10 steps to success" methodologies that force thinking into a standard pattern. Choose tools that fit the needs of the company and its immediate situation.
• Choice - define strategy largely as what not to do. Too many companies dissipate their efforts, aiming to be all things to all people. A statement of strategic intent includes not just specific dos but also specific don'ts.
• Focus - invest time, money and effort in ways that closely reflect those dos and don'ts. Target deployment on the few critical factors that will count most.
• Differentiation - realise that platitudes and "me too" approaches will not create competitive advantage. Specify exactly where the business must beat the rest, where it must match competition and where just staying in touch is enough. Distinguish carefully between investments and costs.
• Management - recognise that management skill and capacity is likely to be the tightest constraint the business faces. Shape strategy accordingly.

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:

• Alignment - identify how each area of the business will apply the strategic focus and contribute to differentiation.
• People - develop skilled individuals and teams. Communicate and motivate in effective ways.
• Projects - apply project management techniques that pay attention to scope, integration and linkages as well as time/quality/cost.
• Measurement - apply high-value, low-overhead measures that are meaningful and that home in on strategic differentiators
• Leadership - ensure managers "walk the walk", not just "talk the talk".
• Innovation - presume today's differentiators will be copied. Develop new ones and apply continuous improvement to critical processes.
• Risk management - identify, monitor and counter risks. Focus on the potential showstoppers.

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 breadth of experience, gained from many companies and situations
• a perspective that is fresh, sound and objective
• an integrated approach (where needs may be unclear) or a very targeted one (if you already know just what is needed)
• competence in the work being done, and in related topics also
• perceptive questions
• thinking that generates specific new ideas
• focus on the medium-term: making a practical difference through specific actions

A director is a different sort of adviser. The company would expect to get:

• continuing business benefits from the director's external credibility and contacts
• an informed and balanced overview across the business as a whole
• challenging questions - perhaps the greatest service a non-specialist director can render
• technical expertise, if that is how the director is intended to add value (it may be better to use consultants for that)
• insistence on the business disciplines of planning, reporting, review and evaluation
• a dispassionate - almost clinical - view that can counterbalance internal bias
• focus on continuity and the long-term, including sensitive and highly personal issues like management development and succession

Circumstances vary. Some might suggest different benefits. But whatever benefits are sought, the same basic principles should apply:

• sharing strategic management should bring specific tangible benefits
• the benefits sought should be defined before engagement
• "performance appraisal" should be applied to consultants and directors

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:

• An individual focus on adding value. It was clear from our discussions that this message hasn't been universally applied.
• Relevance - industry or market skill, knowledge and contacts that can directly add value
• An active strategic perspective - It's not enough to respond to the board papers. Businesses that are operationally successful need independent challenge and creative thinking to go further.
• Balance - to optimise, not maximise. Too much focus on one function perspective like law, accounting, engineering, or marketing could unbalance a small board. In a medium-size business the greatest gains will probably come from redressing a management skill gap or some other deficiency, not from honing strengths.
• "Game not name" - businesses need venturers who can help them take risks. A governance focus on risk management should not lead to risk aversion.
• "Wired" - people who have a "feel" for where the world's going. This is more about attitudes and aptitudes than technical skills and knowledge. Some people can transfer their thinking to new contexts better than others.
• New-style management - the traditional business virtues of hierarchy, control, and experience have become less important. Directors need to add value in a framework of flexible roles, shifting structures, project concepts and constant re-invention.
• Still "growing and learning" - wisdom is valuable, but in a rapidly changing world wisdom that's not regularly refreshed does date! In a rapidly changing world the shelf life of experience is shorter.
• Succession - optimal tenure will differ with people and circumstances. But at some point the value of change exceeds that of continuity, and those closest to the issue may well be the last to see that.

(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.)