What are the obstacles for a Great Strategy

What is a great strategy

In this blog, we shall discuss on what constitutes a great strategy and what differentiates a great business strategy from a mediocre strategy.

A great strategy demonstrates that the final outcome is greater than the sum of the individual parts.

Successful companies that have outperformed their respective industry growth rates follow these principles which explains the reason for their continuing success.

Key tenets of a Great Strategy

In this current uncertain business environment, A successful strategy is defined as the application of limited resources, time, cost and capital towards those business activities which brings the greatest value addition.

Companies following this principle strictly have possess these characteristics.

Constantly review and monitor their business portfolio

  • Successful companies constantly review their business portfolio to validate whether they are the right business owners.
  • These companies acquire or invest in assets which helps them to operate in a high growth markets.
  • When the companies continue to operate on their existing portfolios, more effort and time is spent on improving the existing businesses which has lost demand in the market.By focusing on these low demand business, companies lose sight of the market conditions and the key themes that are in high demand from their customers.

More fluid business structures

  1. Great companies often like to bid for big ticket transformation deals where companies tend to bundle all their service offerings to a customer.
  • In order to achieve this, each of the business that provide these service offerings needs to collaborate with each other as they share the same customer, costs and final service.
  • Successful companies achieve this by having a fluid business structures where the managers collaborate with executives outside their org charts/reporting structure to achieve their target goals and objectives.

Build their strategy on “future back” approach against “past forward”

  • Successful companies do not build their strategy by looking at their historical data and then building short term forecasts based on the past data.
  • Great strategies are built by able to predict how the current business trends will evolve in future and then changing the strategy to take advantage of the future trends.
  • This characteristic makes companies to protect themselves from future disruption by providing products/services that align to the customers demand.

Not obsessed with P&L statement

  • Successful public companies are not obsessed with quarterly and annual results. Hence they do not focus all their efforts on increasing revenues or meet the earnings guidance.
  • A great strategy also takes into account the company existing capital structure and also if there is a need to change the cashflows timing and frequency.For instance, a company with a service business might take a radical decision to start a product business which completely changes the timing and cyclicality of the existing cashflows.

Leverage M&A as a means to achieve its strategy

  • M&A is a great success when it aligns to the firms growth strategy.
  • Successful companies do not acquire for the sake of acquisition or to expand their balance sheet.They have a well defined acquisition strategy which is executed to transform their existing business.
  • They have their own internal Business development team which is in charge of creating a pipeline that focus on the strategic themes as against relying on investment bankers.In this way, successful companies prevent overpaying for a target business and also have a capable integration team to successfully integrate the target business to achieve the requisite value.

Reallocate resources dynamically

  • Successful companies reallocate their limited resources towards those businesses which have high growth potential.
  • The allocation decision is based on the future potential of the businesses as against their past performance. There may be cases where a business may have achieved a high growth but may have a low demand in the future.In these cases, a successful strategy requires lesser allocation of resources for this business.This clarity in approach requires high conviction and courage from the leadership.

Trade off their Investments

  • A great strategy requires to reinvest the excess cash flows to those business which would give a highest IRR among the available options.
  • If the company does not see any such avenues, then it should return back the excess cashflows back to the shareholders.
  • This will result in higher shareholder value and also prevent the company to invest in a wrong business.

Account for uncertainty

  • Successful strategy is defined as one that account for uncertainty and have options that hedge against these uncertainties.
  • Great company decide on the target portfolio or strategy, but due to the uncertainty in current markets and political situation, these targets might change.Companies need to have an alternative when confronted with such risks.This would help the company not to regret on their strategy or choices.

Conclusion

  • A great strategy focuses on applying limited resources, efforts, time and capital toward those initiatives which gives highest value addition.
  • Successful companies have strategies that help it to choose the right assets or business portfolio at the given market situation.These assets are then operated by the right resources with the right skills.
  • Successful companies have strategies to improve the potential of their business portfolio with their unique parenting advantages in order to drive maximum value.
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