Business Inside Out by Martin Towers: Strategy can't be based entirely on jam tomorrow

It is the number one subject for which the board is held responsible. The main architect is the CEO who may inherit an existing strategy or have come up with a new one. Or come up with a new one that is, in fact, the old one re-packaged.

Ownership of the strategy becomes the collective responsibility of the board. There are some very expensive management consultants who will be delighted to assist, however, which means the CEO has to retain control before a strategic review expands exponentially out of control with fee to match. Commenting internally or externally that consultants have been brought in is not always a good move as people then wonder whose strategy this is.

The cynic can argue that all this strategy stuff is money for old rope and a strategy is obvious from what a company has been doing it for years.

But strategy matters. It’s vital to success in creating value. Or destroying it. So the person ultimately responsible, the CEO, could be fired if it all goes wrong. Even if the main issue is one of execution or external influences outside the CEO’s control and despite the strategy having been adopted for years.

One of the defence mechanisms the CEO and board can use is to set out the strategy in very broad terms such that it could encompass just about anything the company is associated with.

Read any PLC strategy statement and there is a strong whiff of this. Of course this is deliberate to retain flexibility. A major acquisition opportunity could arise opportunistically which if successful could lead to the re-writing of a narrowly defined strategy and negatively received by unsuspecting shareholders. Yet a woolly worded strategy statement will likely encompass the potential transaction, which of course until a period of time elapses, it is unknown whether this deal will happen and whether we need to think about singing a different tune.

In the end actual results determine whether a strategy is working or not. The share price may also give a clue. Jam tomorrow cannot go on for ever.

Strategy theory goes in cycles. The days of the conglomerate, diversification and not putting all the eggs in one basket are long gone for most. The result was often being not very good at anything much. The group lacked organic growth and could be punished by the market leading ultimately to a break- up.

The arrival of private equity and the activist shareholder has tended to focus the mind such that sticking to the knitting is what it is all about. Focus. What are we best at. Do it and stick to it. This is how economic value is created. Sheer absolute size is less important than strong margins and cash flow, which themselves stem from a laser-like focus on what we do best; and do it where there is most evidence of that. Turnover is vanity. Profit is sanity. Cash is reality, or just simply King.

Strategy is executed by people. The CEO needs to carry the organisation to the promised land.

This calls for communication and preferably a visible CEO who visits sites, carries out town hall meetings, uses the company newsletter and intranet to explain the strategy and why it will be successful, in motivating the teams to perform and deliver. And potentially save his bacon.

Martin Towers is the former finance director of Kelda Group, which was the parent company of Yorkshire Water, and former CEO of Spice PLC. He is now an early-stage business investor.