I’m occasionally asked during our SMU-SID Diploma in Directorship courses what should Boards of Directors focus on to assist Management consider strategy.
Here are seven questions that could be profitably used to focus discussion during a Board retreat or during a strategy meeting.
- How does the company plan to grow: through M&A, organically, or by driving new or existing products to new or existing markets?
The first and most straightforward question is to know the current strategy: What combination of these growth choices is your company currently committed to? Having presented their response to the Board, senior executives then determine the critical resources and capabilities required to execute the agreed strategy, and ensure resources are available and effectively deployed to deliver on the choices. Imagine your company has traditionally primarily manufactured its products in and served domestic markets. It now plans to grow by investing in new plants and selling in emerging markets. In this case, the CFO may want to make sure that capital is available at the right cost for these choices to be profitable, and that the company has processes and controls to ensure compliance with key regulations such as Foreign Corrupt Practices Act rules. The talent leader may want to develop talent systems, processes, and global assignment programs to create a sustained talent pipeline to support the globalization of the business. Knowing the current strategies helps the Board to focus on ensuring Management are able to deliver the critical capabilities required to successfully execute the strategy
2. What are the dominant constraints to your company’s profitable growth, and how can you encourage Management to overcome them?
It is striking how often the dominant constraint to profitable growth has nothing to do with an exogenous factor such as low external demand or the price of critical inputs. Instead most executives present to the Board what should be controllable factors internal to their company. It could be a complacent mindset or a belief such as “We already have the best product in the market,” or the lack of an innovative product pipeline, or organization silos leading to ineffective online or data-driven cross-selling and marketing to customers. Of course, some constraints are essentially impossible to overcome. For example, regulations in financial services impose new constraints on banks. Other than finding efficient ways to comply, executives cannot change an external regulatory constraint. By encouraging Management to determine the dominant constraint, the Board can focus senior executives to think through how they might individually or collectively trigger actions to overcome the constraint or work effectively with the constraint.
3. What is the greatest uncertainty the company faces, and what can Management do to resolve or navigate it?
Unlike dominant constraints, usually the greatest uncertainties are externally driven. Uncertainties could come in many flavours. For example, it may be demand or price uncertainties as confronted by many commodity producers. It may be legal uncertainty. Say, the company has potential asbestos liability because the chemical was formerly used in some products, and the uncertainty around that liability is constraining the company’s share price and keeping it from making aggressive growth plays. But what if the CFO and legal counsel collaborate and say, “Let’s figure out what it would cost to settle this potential litigation, and see, given our current cash flows and the low-rate environment, whether it’s worth that price to get rid of that uncertainty.” Occasionally an internal uncertainty centres on CEO or key executive succession.
Uncertainties can be costly in different ways. Your investments can be on the wrong side of an uncertain outcome or bet. Uncertainties can “freeze” decision-making. Executives can choose to resolve uncertainties in different ways. In some cases, they can gather information to resolve the uncertainty more quickly. In other cases, they can frame ways to mitigate the down side of an uncertainty through insurance or operational and financial hedging where feasible. Sometimes they can convert the uncertain to the certain by settling an issue (such as legal uncertainty). Another way to manage uncertainty and its downside is to structure projects as a series of real “call” or “put” options. In other words you invest in your projects in a way that lets new information resolving uncertainties guide your future choices.
4. What area of spend is there a lot of uncertainty about return?
A corollary to the dominant uncertainty is to look in each of the Companies areas of responsibility to identify the area of spend with the most uncertain gains. Usually this presents an opportunity for Management to identify ways of improving spending in that area, establishing greater discipline for returns and perhaps freeing up resources to be put in areas that will provide greater future gain. Typically, for most Boards the discussion centres around marketing, R&D, and IT systems spending.
5. What would we need to do to scale up or down substantially more profitably?
Many executives often frame the financial hope for their company to the Board as doubling revenues in the next five years or profitability by a greater amount. The Board could challenge executives to imagine that future state to be more than double their current size in revenues. Then ask if their existing systems, processes, and organization would be able to scale efficiently to support that new level of revenues and meet their profitability goals. Board members can ask Executives to imagine the company being half its current size, but being equally profitable as today, and how they would get there. This question should trigger consideration of whether the firm can scale or downsize profitably. If the firm sought to grow, for instance, through M&A, will the core systems be able to support the growth without major changes. Likewise, if profitability was to increase by restructuring the portfolio of businesses and divesting less profitable businesses, would the existing systems, processes, and organization model permit the divestiture without significant costs? It is easy to get trapped in the present scale and scope of a company. But thinking substantively beyond existing constraints and limits on alternate scale and scope scenarios can sometimes identify plays that create dramatically new strategic options for the future
6. What could disrupt your company and what can you do about it?
This is about envisioning a competitor move such as a merger or a new industry entrant that changes the nature of competition, or a new technology that dramatically changes product offerings. For example, as an automotive manufacturer, how will the merger of two large competitors or new technologies from electric cars to autonomous self-driving vehicles disrupt your company? Challenging a CFO, they could leverage financial planning and analysis capabilities to model out disruptive scenarios like competitor mergers and technology-enabled business models to frame potential responses to key scenarios. Challenging the R&D leader at the company, they may track conferences and PhD dissertations to identify promising new disruptive technology creators and work with HR to acquire the most promising talent and teams before your competitors. Scenario planning could help shape plausible responses to disruption or help you disrupt your industry through your own choices.
7. What should your company or your organization stop doing?
Over time, companies can accumulate underperforming business units that do not generate required returns or customers who are not profitable. In such situations, it may be best to dispose of low-performing units and free up capital and management resources to grow more high-potential businesses. Similarly, choosing not to serve unprofitable customers or to increase prices in their case may improve long-term returns. Functional areas can also accumulate routines and work that are no longer useful. Often, CFOs note that finance may be producing certain reports that few internal customers use and information that does not drive valuable decisions. Stopping old routines and work that are no longer relevant can free up resources for important things. Transitions are a good time to take stock and frame a “kill list” at the business and functional level. It can provide a roadmap for freeing up resources for more productive uses and actions to navigate adverse business conditions.