Seven Strategy Questions A Company Director Needs To Know

Use the answers to generate workable insights about the best strategies to pursue. Each question relates to an “implementation imperative” that is fundamental to business success:

1. “Who Is Your Primary Customer?”

Through most of its 50-year history, McDonald’s expanded by treating franchise owners and real-estate developers as its primary customer. When growth stagnated in 2003, the Company’s new CEO decided that paying restaurant patrons would become the “boss.”

His dramatic move shows the value of the first implementation imperative: “allocating resources to customers.”

Your firm can serve only one type of customer well. Designate resources to that customer’s satisfaction and well-being. Minimize the money, materials, and time you spend on products or services that don’t add direct value to your primary customer.

Don’t imagine that you have “multiple customers.” If you do, you’ll spread your resources too thin and lose focus on the customer who matters. Home Depot learned this the hard way when its leaders decided in the early 2000's to favor professional contractors; the chain suffered a huge loss in customer satisfaction as a result. It put its primary focus back on the home handyman, to try to regain the market share it lost to the Lowe’s chain.

Find your primary customer in the overlap of three factors: “perspective, capabilities and profit potential.”

• Perspective refers to your company’s unique raison d’être and its history, tradition and personality.
• Capabilities are resources at your disposal, including physical facilities, intellectual capital and financial assets.
• Assessing profit potential means looking at each possible alternative’s return on investment (ROI).

Identifying who is not a customer helps. For example, Mary Kay Cosmetics’ primary customer is the independent sales consultant, not the end-user of its makeup. Understand your primary clients’ values, needs, and preferences. Ensure that all employees know who they are, and allocate all resources to that end. When Victoria’s Secret lingerie brand is at acrossroads, its executives ask, “What would Victoria prefer?”

2. “How Do Core Values Prioritize Shareholders, Employees and Customers?”

The five “feel-good” core values – “integrity, teamwork, diversity, continuous improvement and personal accountability” – that most companies promulgate are a “recipe for underperformance.” The second implementation imperative – “prioritizing core values” – depends on being realistic about how your firm ranks customers, employees, and shareholders. Know where your loyalties lie when you make hard decisions about “how to create value and for whom.” Pharmaceutical giant Merck believes that putting customers first benefits its shareholders in the long run. Southwest Airlines favors its employees and ranks customers and shareholders second and third.

Johnson & Johnson’s four-paragraph credo offers an example of getting core values right. It specifies the company’s obligations first to the people who use its products, second to employees and communities, and finally to stockholders. This credo guides hard decisions, such as the company’s Tylenol recall in the US in the 1980s, and it defines employees’ level of responsibility. When analyzing problems, J&J executives often ask each other, “How do you square that with the credo?”

Test your firm’s core values the same way, not only in how you make decisions but also in how you promote and reward employees. When you reward bad behavior, you send as strong a message as you do when you reward good behavior.

3. “What Critical Performance Variables Are You Tracking?”

“Tracking performance goals” – the third implementation imperative – can mean the difference between success and failure. Many firms use various performance metrics to assess how well employees at all levels meet strategic goals and financial targets. Such “scorecards” draw mixed reviews from managers and staff, especially when they track 60 indicators. From five to nine performance metrics is a reasonable number; seven works.

People can generally remember facts in groups of seven: For example, US telephone numbers, days of the week, deadly sins, the colors of the rainbow, and so on. With a limited number of metrics, workers can focus on priorities and managers can monitor their efforts. Too many metrics restrict people and stifle experimentation and innovation.

A group of metrics can do more harm than good unless your company derives them from its strategic plan. You must be able to transform your metrics into a “theory of value creation” that your people understand, remember and practice.

For example, CEO Bill Marriott bases his theory of value creation on four critical measures that all of the workers in his 2,500 hotels understand: “associate satisfaction, guest satisfaction, revenue and revenue per available room.” Warren Buffett is fond of “inverting” problems to look at them from a different perspective.

Develop a list of factors that could make your strategy fail, negate those factors and track them as desirable qualities to encourage in your workers. “Embed” these factors in consequences that relate to personal accountability and performance rewards.

4. “What Strategic Boundaries Have You Set?”

“Controlling strategic risk” – the fourth implementation imperative – aligns with tracking performance metrics.

Prevent workers from spending time and resources on projects that don’t fit with the firm’s goals. Control strategic risk by defining clear boundaries that explain acceptable and unacceptable behavior. Stating boundaries in the negative is surprisingly effective. For example, consider the Ten Commandments; “thou shall not” statements define limits, so people can work without worrying whether an action isacceptable. Explain from the start which actions will get someone fired. Summarize yourboundaries on one page.

Protect your company from two kinds of risk: Start first with activities that could damage its reputation. For example, Walmart forbids executives to accept gifts, even a cup of coffee, from vendors. Google won’t tolerate violation of user trust in the integrity of its search results. The McKinsey consulting firm fires employees who disclose confidential client information. The second type of risk comes from activities that divert resources from your strategic goals and primary customer.

Be careful about “unbridled creativity and unfocused initiatives” that can sabotage your strategic path. Apple founder Steve Jobs knew it was better to say no to the many good ideas that might have diverted his focus from developing the iPod. Clarify where you draw your “line in the sand.”

5. “How Are You Generating Creative Tension?”

How well your company handles “spurring innovation” – the fifth implementation imperative – determines whether it will survive in the “impartial and unsympathetic” marketplace. All companies must innovate regularly. Those that don’t will lose customers to those that do. Many organizations encourage creativity, but few take the extra step of impelling it through the use of “hard-edge” techniques that might even cause discomfort.

To keep your managers and staff from succumbing to predictable habits and routines, deliberately put pressure on them to be as creative as possible in all they do. Use the first three of the following techniques to elicit the best from individual workers. Use the last four to encourage cross-unit innovation and cooperation:

• “Assigning stretch goals” – Bureaucracies often breed complacency. Toyota sets “nearly unattainable goals” to stimulate employee performance.

• “Ranking individuals” – High-innovation firms rank the performance of each employee and post those comparisons for all to see.

• “Ranking units” – Rank teams and units to energize in-house competition and rivalry.

• “Setting span of accountability greater than span of control” – Hold units responsible for metrics they don’t control. Forced cooperation can bring out improvements in strategic results.

• “Allocating costs” – Require each division and profit center to absorb its share of overhead costs, such as legal services and equipment purchases. This depicts their profitability more accurately and encourages collaborative expense reduction.

• “Creating cross-unit teams and task forces” – Help workers think outside the box by assigning them to part-time stints in “a second box.” You’ll jolt their routines, and both boxes will gain fresh perspectives.

• “Using matrix accountability” – Instigate cooperation by giving each manager two bosses – for example, a division head and a brand marketing head – and require the managers to resolve their conflicting interests.

6. “How Committed Are Your Employees to Helping Each Other?”

The corporate cultures of Southwest Airlines and the now-defunct energy giant Enron couldn’t have been more different. Enron’s leadership encouraged self-interest, while Southwest’s leadership continues to stress maintaining a cooperative working environment. How you handle the sixth imperative – “building commitment” – determines whether your strategic initiatives will succeed or succumb.

US military leaders rely on four factors to motivate people to reach group goals and to build commitment. Use these four qualities to build loyalty inside your business:

• “Pride in purpose” – When people are proud of their organization and its goals, they strive to ensure its success, including working with others to achieve it.

• “Identification with the group” – When it’s hard to join an elite organization, becoming a member immediately generates loyalty to the group. Make your hiring process more rigorous and selective.

• “Trust” – The Nucor Steel Minimill wanted workers to suggest cost-saving efficiencies. Rather than asking them to produce more work for the same pay, the company fosters sharing by passing along the savings from a good idea to the workers who conceived it.

• “Fairness” – Establishing equitable pay scales is easy. Removing perks, such as fancy offices and first-class travel, is harder but it engenders cooperative commitment.

Beware of horizontal disparities among workers who do the same job, as well as vertical inequities that disproportionately reward higher-level executives.

7. “What Strategic Uncertainties Keep You Awake at Night?”

“Today’s strategy won’t work tomorrow.” The final implementation imperative – “adapting to change” – is the most critical. Most companies adhere to old ways while dying – slowly or suddenly. You must worry about what happens tomorrow.

Your entire company must worry, too. Create an awareness of “strategic uncertainties” that could derail your current strategy or put you out of business. The best way to help employees adopt “healthy and productive” worry is to focus on the issues with them.

“Everyone watches what the boss watches.”

Select one “interactive control system” to monitor the external environment for events, circumstances, or trends that can affect your strategic plans. Use information systems interactively, such as a daily profit-and-loss statement, or a new-bookings report. Select a report that defines the uncertainties that worry you. Your system must attain four goals:

1) Include simple, clear information;

2) compel face-to-face discussion among managers;

3) focus on strategic uncertainties and

4) give rise to new plans of action.

Your regular review of corporate strategies should consistently address three questions: “What has changed?”, “Why?” and “What are you going to do about it?” Your answers, based on information gathered from like-minded, worry-oriented employees, will help you plan for contingencies. Cultivate a culture that shares bad news without repercussions. Encourage the organization to challenge “deeply held assumptions – even yours.”

The seven strategy questions will be most effective when you raise them in face-to-face encounters, provided you encourage participation throughout your company, limit discussion to what is right and not who is right, and remember to ask, “What are you going to do about it?”