Strategic management

Cranes 1

I have shelves laden with books about business unit and corporate strategy, journals containing articles on the subject, a selection of the reports and presentations on the projects on strategies for clients that I am most proud of, and a handful of texts by very smart people that address strategy from other perspectives such as politics and warfare. This section does not attempt to match this scope, but rather to draw out the implication of the Escondido Framework for the development and delivery of strategies in organisations. If the boundaries of all organisations are defined by their relationships with a series of external markets in the way that the model, what does this mean for the way in which their leaders should operate?

The backdrop has to be the purpose of the firm. As addressed in the section on organisational purpose, this is will reflect one of two underlying positions, that may or may not be aligned:

    • Long term survival of the organisations by establishing a viable position for the long term that simultaneously meets the needs of customers, employees, suppliers, host communities and governments, and suppliers of capital, by doing things that it does best, and getting better at them;
    • Whatever meets the personal values, lifestyle and wealth creation objectives of the controlling management group.

The Escondido Framework model of the firm highlights the importance of consideration of all the market interfaces in development of the strategy of the firm, or any other organisation, including the non-financially denominated ones. It implies adopting a marketing mindset towards all the marketplaces, and understanding how each may change over time, either widening or limiting the solution space for the organisation. It also implies understanding what may happen to competitors in each of these market places. Will other employers become more attractive to our workforce?   Will other customers provide a more attractive market to suppliers for the things we buy, rendering them more expensive for ourselves. Will other lobbyists competing for the sympathy of regulators and legislators raise with the battle for public opinion and secure changes that undermine our business model? Will others in our sector offer a more attractive prospect for investors seeking opportunities to invest in industry in which we play, or others will a comparable covenant or risk profile over the prospect for higher result in a discount on how our paper is valued. Of course, it also raises the issues about what do ourselves enhance the internal engine of the company to make it work better on a sustainable basis, thereby increase the solution space.

The framework also raises important issues about the place of M&A and diversification. Fundamentally, it suggests that the multi-business company is a discrete enterprise from the business units that it runs. This takes two forms, the case of the genuinely multi-business company whose activity is not intrinsically the value creation between the market interfaces, but the business of running multiple businesses, seeking to add value to them and in some cases trading them. The alternative is acquisition or diversification for the purpose of enhancing the enterprise itself: does it provide a solution for both acquirer and the acquired party in terms of either enhancing the internal operations and thereby increasing the available solution space between the market interfaces or does it change one or more of those market interfaces altogether in a way that increases the available solution space – for example by vertically integrating upstream or downstream, replacing interface with outside investors with an essentially hierarchical interface with a corporate centre that provides proxy investor market, or (at least in part) making the company appear a more attractive organisation to work in.

Most critically, the Escondido Framework points leaders in the direction of thinking about how to choose to position the company or organisation within the available solution space. In a one dimensional, entirely financially denominated world with undifferentiated products, labour, employment and consumer markets, this solution space is the potential profit (above the cost of capital), and in the longer term the retained profit that needn’t be paid out as dividend. The possibility of this arises because markets are imperfect (at the time of writing best demonstrated by the cash piles accumulated by Apple, Microsoft, Google, Cisco Systems and Oracle, currently $430 billion). In most firms the available is much smaller, and in the multi-dimensional view of the world that the Escondido Framework encourages it is not just about cash, but about the other currency including risk, reputation influence and loyalty. The question is what to do with the solution space, whether cash or otherwise – do you plough back into research & development; do you use to secure and lock in the best employees; do you use them to reduce prices to discourage entry into the market by new competitors; do you pour them into speculative new ventures; do you use them to secure possibly scarce upstream resources; do you direct them towards to corporate social responsibility schemes in the believe that they will create a positive halo in the market for public opinion (or as a cover for your own pet interests: perhaps sport of opera); or do you stick them in your own pocket – because by the time that the company might have benefited from them being invested strategically elsewhere you will be enjoying a comfortable retirement?

For more on this subject, click here.