August White Paper 1/2016: Find Your Center of Gravity - Four Cornerstones of Successful Strategy...

FIND YOUR CENTER OF GRAVITYFour cornerstones of successful strategy renewal

AUGUST WHITE PAPER: STRATEGY RENEWAL JANUARY 2016 2

Most Finnish companies today find that maintaining their advantage keeps getting harder. Long-successful strategies suddenly sputter and fail. New competitors emerge out of nowhere and transform an industry overnight – often destroying the whole sector’s profitability in the process. Even in long-sheltered markets, many once-solid companies now face rapid, nonlinear and disruptive change. Such brutal shifts can be disorienting. As the boxer Mike Tyson once noted, everybody has a plan until they get punched in the face. To regain their footing, many executives now seek not just to fine-tune their game plan but to develop a new way of doing business. They want to renew their strategy so they can not only meet today’s challenges but better position themselves to capture tomorrow’s opportunities. This isn’t easy, but it’s not impossible. As we have learned by assisting a number of clients faced with these challenges, a disciplined program of observation, introspection, and action can revitalize a company and prepare it for the next round.In this article we share a set of practical lessons from these engagements. Although every strategy renewal is different and the strategic challenges companies face are different, we believe that a successful strategy renewal always includes four key elements: a broad external view, a deep internal view, bold decisions, and cultural underscoring.These four cornerstones might sound simple, but they are not easy to master. They call for a balanced approach to strategy development that combines analytical methodologies with significant effort dedicated to intellectual – even philosophical – considerations. They depend on developing a deep understanding of the company’s defining characteristics. A company that doesn’t know itself can’t really know what it can become.

As the boxer Mike Tyson once noted, everybody has a plan until they get punched in the face.

Broad external view

Deep internal view

Bold decisions

Addressing also the soft and slow

• Understandthedirectionandpaceofchangeinrelevantenvironment• Distillthekeyemergingstrategiesandbusinessmodels• Developaviewofthemajoropportunitiesandthreatstobefaced

• Analyzetherelativeattractivenessofyourcurrentbusinesses• Definewhatittakestowinineachlineoftheoffering• Developadeepunderstandingofthecompany’s“centerofgravity”

• Translatethediagnosisintoboldchoices• Understandtheroleofthecurrent‘centerofgravity’intherenewal• Refocusthecompany’sresourcesonsetpriorities

• Buildneedednewcapabilitiesandleverageexistingstrengths• Acknowledgetheroleofleadershipandcultureindrivingchange• Ensurethatactionsbuildcoherentlyoneachother

1. Understand how the external environment is changing

2. Develop a realistic view on yourself

3. Move the big blocks and set priorities

4. Adjust culture and capabilities

Conclusion Conclude a target state and diagnose the magnitude of required change


Until they find themselves under pressure, executives often stick to ‘strategy updates’ that involve tweaking parts of their business plans annually, and adjusting their long-term financial projections on the fly. The core strategy may go unquestioned for years, even when a major shift in the external environment is clearly underway. To stay more aware of changes in the environment, management needs to broaden its traditional perspective and periodically challenge even its most fundamental assumptions about the business, the offering, and the customers.

CORNERSTONE 1UNDERSTAND HOW THE EXTERNAL ENVIRONMENT IS CHANGING

Core strategy may go unquestioned for years, even when a major shift in the external environment is clearly underway.

In addition to the evolving needs of customers (and customers’ customers), managers should watch out for potentially disruptive trends that could hurt their business. Taking a broader view early can give strategists more time to identify emerging pockets of value and find new ways to leverage what could be external threats as opportunities. We find that Finnish companies are getting better at conducting this kind of outside-in assessment. Today, even in industries considered mature and stable for decades, such as retail, consumer goods, and transportation, a number of companies conduct this kind of broad analysis as a standard part of their strategy work. Executives spend a significant amount of time and effort staying abreast of larger trends and reviewing case studies from different industries. Where many strategy exercises still fall short, however, is in generating a truly insightful synthesis based on this external view. At worst this out-side-in perspective ends up as a disconnected appendix to a lengthy strategy document. When leaders don’t make it a priority, an outside-in review can turn into a list of disparate trends followed by a superficial assessment of customer needs and obvious observations about direct competitors. Instead, executives should try to develop a concrete view of emerging business models and strategies – and their implications for the company playbook.

WHAT TO ADDRESS• Megatrendsandindustryspecifictrends

• Evolvingcustomerneeds• Changesinthecompetitivelandscape

WHAT TO AVOID• Failingtobroadentraditionalperspective

• Settlingonasuperficialsynthesiswhichremainsdisconnectedtodecisions


A second, related obstacle to renewal is an unrealistic, under-defined sense of the company’s strengths and weaknesses. A solid strategy depends on developing a deep understanding of a company’s defining characteristics, attractiveness of its different businesses, and key aspects of competition.To achieve this second goal, executives should take a critical view of the current state and historical journey of their company. In practice this requires engaging in both traditional forms of business analysis as well as considerations on less easily quantifiable topics.

CORNERSTONE 2DEVELOP A REALISTIC VIEW OF SELF

A strong strategy depends on a robust understanding of current business and what gives a company the ‘right to win’ in their markets

A strong strategy depends on a robust understanding of current businesses and what gives a company the ‘right to win’ in their markets. A classical portfolio assessment is a proven methodology to build this picture. (See case example, page 6)In addition to establishing a strong analytical understanding of a company’s current situation, a more philosophical view of the ‘inner self ’ of a compa-ny should also be developed. Only by accompanying the analytical view with less tangible but more in-depth assessment can a management team truly understand the magnitude of change it faces if it decides to pursue a significant renewal, and to ensure it builds on the inherent strengths of the organization. One concept that can help further clarify this matter is to identify the company’s ‘center of gravity’. The ‘center of gravity’, is a concept from physics adapted by Carl von Clausewitz, a 19th-century military strategist to describe vectors of power on the battlefield. It was von Clausewitz’s term for the focal point of a force’s strength – the point that gives the force enough unity to form an overarching structure. Every profitable company has one or more centers of gravity. Typically it lies where the resources are most concentrated, refers to the reason they are concentrated, and gives them purpose and direction. Commonly the ‘center of gravity’ is a capability, but this is by no means always the case. It can also be a geographic or marketing advantage.

WHAT TO ADDRESS• Robustnessofcurrentbusinessportfolio

• Competitiveedgeand‘righttowin’

• Definingcharacteristic:‘centerofgravity’

WHAT TO AVOID• Addressingonlyquantifiablefactors

• Sugarcoatingviewofyourself• Failingtoproduceatruediagnosis


To begin to understand your ‘center of gravity’ a good question to ask is “what truly unique resources and capabilities do we have?” When you’ve listed a number of them, then ask, “which of these is such that removing it from the equation would make this company completely different?” When working on strategy, the current ‘center of gravity’ must be identi-fied and understood as a basis for renewal. As a characteristic, capability, or locality, it can be a highly powerful enabler for a winning strategy and accomplishing the desired objectives. But equally, the current ‘center of gravity’ can be an obstruction and work against the desired objectives, in which case it will need to be changed. This is what makes ‘center of grav-ity’ such an essential concept in any renewal strategy: It is never neutral in relation to a company’s strategic objectives. (See case example, page 8)

Sum up the external and internal viewsNow the external and internal view need to be summed up in a compelling target state that combines a solid diagnosis on the need for renewal with a realistic assessment of how difficult achieving that target state might be. At this stage of the strategy renewal process, the management team needs a very concrete view of the main challenges and opportunities the business faces and a clear vision of the future. Without a persuasive conclusion shared by a management team, making the major decisions demanded by a strategy renewal and then acting on those decisions becomes difficult, if not impossible.

“Current ‘center of gravity’ can either be a highly powerful enabler for a winning strategy or a major obstacle – but never neutral in relation to a company’s strategic objectives.

We recently helped an international FMCG com-pany assess its business portfolio as part of its strategy renewal process. Building a solid fact-base to position each business area (and its offering) on the basis of its market attractiveness and its own segment rank enabled executives to define the roles and development priorities of different businesses (see illustration below). This fact-pack also helped the business units with their strategic planning as it yielded new insights about the busi-ness environment, including the market outlook and competitor performance.Examples of evaluation criteria for market attractiveness

• Market size, historical growth and future outlook

• Typical profitability levels in the market• Level of competition

Portfolio assessment in renewal context

CASE EXAMPLE 1

Examples of evaluation criteria for strength of own position

• Market share and its development• Own profitability relative to market• Own ability to drive/develop the market

Having a portfolio view based on shared and ac-cepted facts helped the group management and business unit management start a strategic dia-logue. Through this discussion, they defined the roles of different business areas (growth engine, cash engine, etc.) and identified key questions for each business unit’s strategic planning. In some cases, these questions related to identifying pock-ets of potentially profitable growth and in other cases, to divesting or streamlining certain slow-er-growing parts of the business.

Business portfolio assessment: business area-level summary on the left; on the right, each business area is broken down to its underlying businesses.

Explore for opportunities

Turnaround / exit

Invest for sustainable growth

Maintain or free capital

MAR

KET

ATT

RAC

TIVE

NES

S

OWN POSITIONWEAK STRONG WEAK STRONG

MAR

KET

ATT

RAC

TIVE

NES

S

OWN POSITION

LOW

HIG

H

BA 2

BA 1

BA 3 Segment 1S 2 S 5

S 3

S 4

Explore for opportunities

Turnaround / exit

Invest for sustainable growth

Maintain or free capital

BA 4

LOW

HIG

H

6AUGUST WHITE PAPER: STRATEGY RENEWAL JANUARY 2016


At this point, the diagnosis of the company’s situation must be translated into bold choices and clear priorities, including specific decisions on what the company will and won’t do in the future.With luck, the introspective and observational work of steps 1 and 2 will make the way forward crystal-clear. However, even when the path is clear, following through on this conclusion may not be easy. Logitech, for instance, recently made a dramatic decision to exit the sur-veillance camera business and a bunch of other legacy businesses with little future opportunity, and to stay in PC peripherals, mobility, and video conferencing. The new CEO launched a business portfolio review that revealed the future opportunities the company decided to pursue. One prioritized area of focus was PC peripherals, a big and profitable product segment still associated with attractive growth pockets. Given the category’s growth rate and Logitech’s current position, mobility was defined as the single biggest opportunity, a segment with room to grow.Often, the right answers are not obvious and decision can be difficult to execute – particularly the “no” decisions – whether that means sticking by a current business or building a new one. As resources are almost always constrained, a company must let go of something old before it creates some-thing new – or drop a new idea if it decides to reinvest in a legacy program.A right go/no go decision can do more for a company more quickly than any other single step. Unfortunately, it’s not a low-risk proposition: a wrong move can be fatal, and even the right move made too soon can have terrible consequences. The difference between amputation and pruning is often a matter of time, after all, and investors may be unwilling to wait for the board to be proven right. Plus, right or wrong, any decisive move typically creates enemies. It is no wonder, then, that few executives pursue bold decisions even after considerable analysis. As the economist John Maynard Keynes quipped, “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.” Of course, brave leadership becomes easier the clearer the management team’s diagnosis of the situation is and the better the understanding of the company itself and its industry. Often, companies proceed without much of a holistic view of themselves. Business unit management teams’ tunnel vision in setting priorities and focusing resources often shape development agendas without regard for the overall business portfolio. Companies often have exhaustive development agendas with programs and projects that all make sense individually but paralyze the delivery capability of the organization as a whole.

CORNERSTONE 3MOVE THE BIG BLOCKS AND SET PRIORITIES

As resources are almost always constrained, a company must let go of something old before it creates something new – or drop a new idea if it decides to reinvest in a legacy program.

WHAT TO ADDRESS• Implicationsofthe‘centerofgravity’

• Targetportfolioandvaluechainposition

• Optimalallocationofresources

WHAT TO AVOID• Failingtotakeconcretedecisionsbasedonthediagnosis

• Disregardingtheimportanceofsaying‘no’–tryingtofollowallattractivepaths

Building on center of gravity at ValioValio, a cooperative owned by 7000 dairy farmers, produces about 80% of Finland’s milk. It is a market leader in various key dairy product groups and a pioneer in innovative dairy products.When we looked for Valio’s center of gravity, it didn’t take long to see that it had less to do with its cows than its century-old emphasis on research. Valio’s management has always focused on R&D, and the company’s laboratory, once led by Artturi Ilmari Virtanen, a winner of the Nobel Price in Chemistry, is globally recognized for several leading innovations. Due to its focus and the unity and connectivity of key functions, Valio’s research efforts have succeeded even with limited resources compared to global competitors.The R&D function is well integrated with production and commer-cial operations, and Valio has also benefited from being a relatively compact company in a small homogenous country. All in all, this ‘center of gravity’ is clearly a source of strength that enables Valio to generate new innovative products that make it distinctive not just in Finland but world-wide.This insight helped Valio recognize that for future success it must build on this defining characteristic. As the company turns its gaze more strongly towards international expansion, the company’s next strategic challenge to solve is how to turn the center of gravity to serve this aspiration.

CASE EXAMPLE 2

8AUGUST WHITE PAPER: STRATEGY RENEWAL JANUARY 2016


In addition to bold choices and clear priorities, a successful strategy renewal requires developing the company from within by strengthening its strategic capabilities, leadership, and culture. Modifying these elements requires a systematic and long-term approach that includes both straightforward investments in new capabilities and talent as well as repetitive actions to shape important cultural characteristics.

CORNERSTONE 4ADJUST CULTURE AND CAPABILITIES

Pursuing changes in slower moving elements does not always require significant investments but rather a clear vision, patient consistent action and leading by example.

New strategic capabilities can be built organically to an extent, but devel-opment can often be accelerated by hiring or acquiring critical capabilities from industries that have been through the changes you see ahead in your own vertical. Building and buying are not the only options: leading com-panies are also ever more aware of the power of partnerships in this realm of capability development.The final, and usually slowest, part of renewal is a cultural shift. For example, companies making a transition from being product-focused to customer-focused, must typically make substantial changes not only in sales capabilities, but also in the company’s “inner self,” including lead-ership practices and culture. Gaining new perspectives by, for instance, hiring key people from more customer-focused industries, is useful but is usually not enough. When pursuing changes in slower moving elements such as company culture, the example that management sets is essential. This type of change does not always require significant investments but it does demand a clear vision of the company’s goal, constantly repeated communications, small, consistent actions, and lots of patience. Employees and customers need to see the strategy in every step you take.

WHAT TO ADDRESS• Strategiccapabilities• Leadershipstrength• Culturalgaps

WHAT TO AVOID• Apathinconsistentwiththediagnosis

• Focusingexclusivelytotangibleandeasilymeasurableissues


Finnish companies possess many important assets. We have fantastic, highly skilled employees. We make goods and services that are as good as any in the world, and in some fields, even better. We have brands with excellent reputations. But in this hyper-competitive world, good is no longer good enough. To be great – to maintain a competitive advantage – is likely to require a fresh view of your strategic plan and a strategy renewal program that will demand fundamental, probably difficult changes to the business portfolio, operational capabilities, and even the corporate culture.

CONCLUSION

Kai Koskinen is a partner at August and responsible of strategy offer-ing development. He has a long experience of strategy formulation and execution. He can be reached at [email protected] Ere is a partner at August. He has a long experience from strate-gy-driven transformations. He can be reached at [email protected]

Toni Mikkonen is a manager at August specializing in strategy and business planning related topics. He can be reached at [email protected]

About AugustAugust is a leading management consulting company in Finland. We ad-vise our clients on a broad range of topics, including Strategy and M&A, Operations, Sales and Marketing, and Organization. Our team of more than 20 professionals includes a strong mix of experienced seniors with an extensive background in consulting and young talents with outstanding academic records from top universities.

ABOUT THE AUTHORS

August White Paper 1/2016: Find Your Center of Gravity - Four Cornerstones of Successful Strategy...

Leadership & Management

Transcript of August White Paper 1/2016: Find Your Center of Gravity - Four Cornerstones of Successful Strategy...