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Why Your Strategy is Flat

Posted by  Mike Huthwaite

What Does Your Strategy Look Like? 

Suppose you were asked to distill down your entire business strategy into a single graph or visualization, how would you choose to show it?  Would you be able to convey the critical strategic decisions that your business needs to consider in order to maximize shareholder value?  Would you be able to use that single visualization to speak to both your Board and Executive team?

Would it speak to the strength of your market?  Would it highlight your organization’s competitive advantages?  Would it identify why you need to make critical investments?  How much do you need to invest? Or would it tell you when to evolve your strategy or exit the market completely?

Does this sound like an impossible task?

When it comes to most organizations, I think the answer all-to-often a resounding YES.  That’s because most strategies are either too disjoined or worse…their strategy is actually flat.

What is a Flat Strategy?
In essence, Strategy is all about justifying growth over time. 

A flat strategy is a strategy that is based in large part on a single/constant growth rate.  Although it is often represented as a sloping linear line, if you plot growth (not value) on the vertical axis, a constant growth rate represents a flat horizontal line. 

 

A flat strategy is often the result of a company that lacks strategic awareness.  That’s true for multiple reasons.  Short-term focused organizations, companies that rely heavily on multiple comps and companies that treat their 5-year plan or LRP as a strategy creation exercise all tend to fall into the flat strategy trap.

This is because these techniques don’t take into account the entire life-cycle of the strategy.

What Does Strategy Really Looks Like for Most Organizations?
The truth is, it doesn’t matter if you are planning a strategy for a single product, a strategic business unit or an entire organization, the same rules apply.  You need to evaluate the life-cycle of the entire strategy.  In the marketing world, this term is often called a product life-cycle curve.  However, in Finance we commonly call it a J-Curve. 

It generally starts with an introduction or investment stage.  This stage is often dedicated to breaking down current market barriers and setting the stage for future competitive advantages.  Almost all introduction stages start with a negative growth because it often involves investing in constraints or bottlenecks in order to disrupt the current status quo. 

Once organizations start to gain market traction, they enter a Growth stage.  This stage is often where the focus is on gaining market share while simultaneously trying to figure out the potential market size. 

The Maturity stage is where organizations can more easily forecast future outcomes.  Significant growth becomes harder to find and can often result in paying dividends or engaging in share buy-backs to drive share price growth. 

Finally Decline stage is when organizations start to succumb to competition or innovation.  Incremental investments tend to make little sense and strategic decision all but dries up.  Businesses in this category are largely run on NOPAT (Net

Operating Profit After Tax).  There are very little incremental changes in the Balance Sheet in this stage. 

Evaluate Strategy in Phases Not Discrete Time Period
One of the key principles of the J-Curve is recognizing that we’re referring to time phases not static time periods.  This is a major departure from most forms of financial analysis. 

Generally, Finance is fixated on static time periods such as a one-year budget, an 18-month rolling forecast, or a 5-year plan. 

With the J-Curve approach, the focus shifts to recognizing where your strategy lies in the cycle and how long it will remain in that stage and any future remaining stages.

This approach feels much more liberating and it pushes aside short-term constraints that often keep organizations from focusing on the big picture. 

Is the J-Curve Right for My Organization?
The J-Curve is the backdrop for your strategic story, and it should be told no matter the size of your organization. 

For Startups, the story is often about getting to Minimum Viable Product (MVP).  This usually involves founders explaining how their limited funding and immense sweat equity have gotten them to a point where user traction is just about to take off, propelling them into a long-lived growth stage. 

For Growth companies, the story is often about speed and market potential.  How fast can they gain market share and how big the market opportunity will be. 

For larger enterprises, the story is often a little bit more challenging because the organization is often not a single J-Curve, but rather several different j-curves, all at different stages of maturity.  The key for large enterprises, is to manage these different j-curves like a portfolio.  When to continue to milk cash cows, when to invest in more growth stage businesses and when to divest or evolve strategies should be the key strategic decisions to focus on. 

As obvious as the j-curve sounds, this activity is often overlooked as it is crowded out by other short-term focused activities that rely on discrete time periods.   

Strategy is a Bet
The J-Curve approach makes a lot of sense when driving strategy, but a common criticism is that J-curves are difficult to predict with accuracy and often highly subjective. 

Yet, this is exactly why the J-curve is the most important strategic tool available to senior management.  That’s because Strategy is a bet.  You put your chips on the table and you hope your research, intuition and business expertise are correct. 

But you should never rely solely on your own assumptions.  You need to work with other subject matter experts to build the best strategy.  This requires discussion and debate around different opinions.  Influencing others and forming peer consensus is a critical strategic process. 

Furthermore, it also forces leadership to constantly examine their current assessment of the business (avoiding anchor bias). 

A company who believes they are in the growth stage and will likely be there for another 5 years should be routinely assessing whether they believe that statement to be true.  This is the best way to take a holistic approach to Strategy. 

Mike Huthwaite

Passionate advisor and thought leader in the area of Strategic Finance. A seasoned consultant with 20 years of experience, Mike has advised numerous mid-market and large multi-national organizations enhance their strategic planning capabilities.

Mike is an advocate for Cash Flow and Discounted Cash Flow (DCF) analytics. He is a regular speaker and blogger on the topics of uncertainty, Real Options (advanced scenario analysis) and various financial modeling technologies.