Be wary of your company’s strategic decay

How confident are you that your company’s strategy is up to the task of delivering superior earnings over the next several years?

Does your company have a clear innovation strategy for introducing new products and services enough to ensure that revenue streams continue to flow and deliver consistent growth in corporate earnings and shareholder value?

During high tide, a rising sea will automatically lift all boats — including some that may not be seaworthy.

In the corporate world, an economic boom will spur corporate earnings and companies are able to deliver respectable shareholder returns despite the absence of any real business innovation.

A boom in tea and horticulture exports or tourism earnings may trigger off a country’s economic boom.

At micro level, a massive corporate restructuring such as that carried out by East African Breweries in the 1990s, which involved the closure of two production sites in Mombasa and Kisumu and the outsourcing of the entire transport fleet, can boost a company’s earnings considerably.

A massive inflow of funds from the Diaspora as foreign direct investment and an influx of investors eager to bet big on a resurgent economy such as those of Angola and Sudan, are factors that can influence the rate of a country’s economic growth, and send corporate earnings and equity prices soaring.

However, remember that trees do not grow as high as the sky.

Efficiency programmes eventually reach the point of diminishing returns.

Creative accounting such as that applied by Madoff, Enron and Worldcom cannot forever disguise a decaying business model or strategy.

If you watch the activities at the stock exchange keenly, you will find corporations that listed shares using prospectuses that promised heaven.

A few years down the line, those companies start to issue profit warnings.

A closer look at these companies reveals that some are local monopolies but they have not been effective in dealing decisively with competition.

Given the above scenerio, any company that hopes to outperform the average market earnings will have to make innovation an all-the-time, everywhere corporate competence.

Strategic menopause

The first quest for growth by CEOs whose companies are approaching strategic menopause is benchmarking or adopting best practices used by other companies.

Soon, you find your CEO attending the same trade shows and reading the same industry magazines month after month, year after year.

In the end, corporate strategies converge because everyone defines the industry in the same way, uses the same market segmentation criteria, sells through the same channels of distribution, adopts the same service policies and so on.

As a general rule, wealth creating champions possess highly differentiated strategies.

Yes they do have competitors, but they have unique capabilities, unique assets, unique value propositions and unique market positioning.

If strategy is not different, it is dead.

If your company’s revenue growth and return on investment are clustered around the industry average, know that its strategy is converging with those of other competitors in the industry.

If your company is perpetually experiencing a decline in profitability and management is blaming its dwindling fortunes on imports, globalisation and economic downturns, know that the company’s strategy has hit menopause.

If a company wishes to escape from the eventuality of diminishing returns, the first thing the CEO needs to do is to be honest and admit that the company’s current strategy is running out of steam.

Working harder to improve the efficiency of a worn-out strategy is ultimately futile.

Few CEOs will do this and the best thing for shareholders to do is to show them the door as they are not performing.

To create new wealth, a company must be willing to abandon its current strategy.

Before this, the excuses from management will almost certainly be the regulator’s fault; everyone is losing money; we are investing for the long term; and investors don’t understand our strategy.

What will it take for your company to reinvest itself?

Will it take a direct and immediate crisis?

In this 21st century, every company must become an opportunity seeking vessel, where the guiding principle is finding what is possible, not on what has already been accomplished.

The brutal honesty about reaching strategy menopause is the foundation for business innovation.

Business innovation is the ability to imagine and introduce new products and services that have the power to drastically change customer expectations or conceiving of new business models.

This is radical innovation whose central goal is the invention of new sources of competitive advantage.

Dr Francis Kalama Fondo is the deputy director, finance and administration at the Kenya Wildlife Service