How to move your business forward using the three drivers of strategy
Strategy coach and former CPA David Chavez gave an insightful presentation at our Alliott Group Worldwide Conference in Vancouver on how to get strategy into your firm and most importantly, how to take people with you on the journey.
In just over an hour, David Chavez explained the three core elements of strategy and how they drive strategy in a business.
Chavez explained that while it is sometimes fairly easy to see where you want to be in one year’s time, it is much more difficult when looking beyond three years. The other problem companies may have is employees running in the wrong direction if they don’t understand why the business’ leadership wants them to go in a different direction.
According to Chavez, the main reason for this is a lack of clarity - staff choose their path, not the path of the leadership.
Chavez talked about the need for the business to have a Big Hairy Audacious Goal (BHAG), i.e. a long-term goal (e.g. 10 years or further away) that the company is trying to accomplish.
Chavez outlined the first driver of strategy as core values:
Chavez explained that core values are rules of behaviour that everyone is expected to follow inside the business. There are four types of core values:
2. Permission to play
Chavez gave integrity as an example of this – these are the values we expect people in our business to have to even be in front of us.
3. Accidental core values
These are what you get when you don’t have core values.
Chavez cautioned that there should be a maximum of a handful of rules and that they must remain constant.
While the business' management may have their definition of integrity, commented Chavez, problems occur because staff have patterns or ‘habits’ which influence their interpretation of integrity.
"You need to break all the habits they bring into your company and teach them your definition of integrity. You also have to make the definition personal to people and make it so that it requires action and personal responsibility.”
Chavez referenced Zappos as a company that evaluates candidates from the start to see whether they treat people with respect and can therefore live one of their core values (‘Be humble’).
Typically, companies will grade people on numbers/KPIs and their soft skills and behaviour. However, Chavez pointed out that people need to be held accountable for their behaviour and that some staff are confused about how they are expected to behave and the core values they need to live by. In Chavez’ opinion, once these core values are understood, less time will need to be spent dealing with behaviour problems by mid-level management who can instead focus on meeting customers’ needs.
Chavez also commented that organisations should fire individuals who violate their core values ‘with intent’ as it is a sign they don’t care.
Organisations, according to Chavez, also “need to be prepared to take a financial hit when things go wrong – but by doing the right thing, the business will reap the rewards in the longer term.”
He added that the leaders of a business need to know the core values and use them regularly to correct or congratulate the right behaviour inside the business.
The second driver of a strategy should be a core purpose:
The Core Purpose or 'Why'
According to Chavez, this means “the difference you are making in the world and why you exist - employees need to know why they are there.”
However, Chavez commented that the purpose must be about more than just profit and should inspire change inside the business, ensure focus on the right things and drive staff to achieve it.
If we are trying to get to the BHAG, added Chavez, unless everyone knows why they are following a path, their motivation will be lost over time. It is a good idea, according to Chavez, to interview the company’s founder to get to the root of the business’ core purpose.
Chavez used San Diego based Sullivan Solar Power as an example of a business with a strong core purpose (“To change the way the world generates electricity”). It was pointed out that the owner is really focused on ‘revolution’ and ending electricity companies’ monopolies: “They don’t hire people if they don’t want to be part of the revolution,” commented Chavez.
Chavez then moved onto discuss the third element needed to accomplish a strategy:
The Big Hairy Audacious Goal (BHAG)
Once the core values are set, you need to determine your BHAG. Chavez described this as the top of the mountain you are trying to climb and said that it could be 10 or even 30 years away: “It challenges you to greatness.”
According to Chavez, the BHAG needs to consider:
- What you are deeply passionate about
- What drives your economic engine (your profit/X)
- What you can be the best in the world at, i.e. the brand promise for your clients.
For the BHAG core to exist, all three of these elements need to be present.
Chavez described setting a BHAG as a way to get clarity on where you want to go and what needs doing to get there. Using restaurant business Subway as an example, Chavez pointed out that their BHAG at one time was to be in 5,000 locations within 10 years:
“The management set this long-term goal and understood that they didn’t need to get good at just making sandwiches, but at large scale sourcing of high quality food products and at negotiating retail leases. However, they hit this BHAG in six and a half years and the BHAG has now been reset to 100,000 locations.”
Challenging conventional wisdom, Chavez gave his view that straight revenue goals do not drive behaviour inside a company very effectively: “The receptionist is not going to get excited about making the owners $50 million - that won't connect with this employee.”
Chavez emphasised the need to know the BHAG, otherwise you are executing against an unknown.
The second element of the BHAG is the Profit ‘X’.
Profit Per 'X' (Your Economic Engine)
Chavez described this as being either a product or service that drives the top line– it is about the cost drivers that are critical to the profit of the company and that you can control.
Profit Per X should be viewed, according to Chavez, as the overarching metric that rules the company. It is about profit not revenue. He added that too much time can be wasted on services that kill profitability and that you need to start measuring to find your Profit X and that it will help to focus on what is really important.
The third element of the BHAG is the brand promise:
Knowing what you can be the best in the world at starts, according to Chavez, by knowing your core customer. This person is a unique ‘individual’ with wants, needs and fears that drive their buying behaviour: “You do not sell to a business, you sell to an individual working there. This individual will have some common characteristics with other clients.”
Chavez recommended members should read ‘The Inside Advantage’ by Robert Bloom when figuring out who their core customer is. He commented that many businesses get it wrong when they first start up by failing to follow the approach taught in business schools which is to understand the market, then start marketing, and then finally, sell...
Chavez pointed out that if we don’t focus on our core customers, we could run blind and not see the customer segment that is in fact the most profitable one!
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Chavez mentioned the need to have multiple, connected and synergistic differentiators that can create barriers to entry for competitors. If connected together effectively, they will, according to Chavez, create a market advantage that competitors may not be able to compete with very effectively.
Chavez quoted renowned author Michael Porter, saying that businesses need to work out their differentiators including:
- A unique and valuable position
- The tradeoffs (i.e. what you cannot be good, but it does not matter)
- And how you create the fit.
However, circling back to the importance of people, Chavez cautioned that these methods only work if the right people with the right core values are hired and who can execute the business’ differentiators correctly: “If they don’t understand the core purpose and BHAG, they will not work hard to bring the differentiators to life.”
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