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Effective strategy: Fulcrum of value creation in firms

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In a research on how value is destroyed in a firm, four main factors were identified as responsible. They include financial which accounts for about 14 percent, hazard about 19 percent, operations about 27 percent and then strategy about 40 percent.

The research further shows that even though financials, operations and hazards are key factors that can cause value erosion in firms, their impacts can all be attributed to the (in)effectiveness of strategy. While this buttresses the importance of strategy, a key challenge or recurrent fundamental question is “Who Should Formulate the Strategy of a Firm?”

While it reads like a very simple question which I think it is, it is however highly misunderstood and wrongly answered across all industries in both public and private sectors in Nigeria. But what is strategy? There are many definitions, but a simple one is that Strategy is a set of plans to achieve the vision of an organisation. With this simple definition, the question then is who should formulate it? There are generally three approaches: Top-down, Bottom-up and Hybrid.

While top-down is the approach where the senior management and the board of directors formulate the strategy and cascade it down the line for execution, the bottom-up is somehow the opposite where the strategy is mainly formulated by the first line managers and their teams and then forwarded to the senior management and the board for input and approval. The hybrid approach is a mix of the two. It is where the strategy is formulated by both the senior management and the first line managers (with high input and consultation of all their team members). In this approach, the final approved strategy is achieved and agreed through rigorous back and forth between the senior management and the first line managers who effectively represent their teams through effective communication and consultation. It is an approach that somehow involves everybody, or everybody feels a sense of involvement including the cleaners, gardeners, security guards and cafeteria staff.

Of these three approaches, which one should organisations use to achieve sustainable and long-term value creation and possibly market capture?  Across organisations in all sectors in Nigeria, the one generally used is the Top-down approach.  But the problem with this approach is not only that it is the dominant one, it is the way it is understood and applied.

One is that strategy formulation is perceived as a task mainly for the CEO and his senior management team with the board involved mainly for rudimentary approval or sometimes involved in the formulation.

Using the top-down approach is arguably the reason why most organisations in Nigeria are characterised by in-effective management actions, increased cost and in-efficiency, fire-fighting and reduced morale, and loss of key staff and customer, business interruptions and failure, poorly motivated staff and below average organisational performances

Second is the way it is agreed and cascaded down. It is generally done with little or no input from the junior employees and even the first line managers.  A middle manager in one of the financial institutions described it as a watered-down military instruction of which his only contribution with his team is compliance to execute the strategy. Unsurprisingly, the financial institution downsized two times in one year! In a recent Gallup report, 30 percent of employees are likely to be searching for new positions while at work. While 39 percent of employers think that their top performers might likely leave, 32 percent of firms lost their top performers. To add salt to injury, 75 percent of employees who voluntarily leave their jobs did so because of their managers.  The question and one of the biggest challenges organisations face is how to engage with the ‘whole employee’. This is even worse in Nigeria where the level of employee engagement is only 12 percent with 65 percent of employees not engaged and 23 percent actively disengaged.

Using the top-down approach is arguably the reason why most organisations in Nigeria are characterised by in-effective management actions, increased cost and in-efficiency, fire-fighting and reduced morale, loss of key staff and customer, business interruptions and failure, poorly motivated staff and below average organisational performances. Moreover, in trying to resolve the above challenges, most Nigerian firms do not address the root causes. They focus on the symptoms and are seemingly incapable of properly identifying the root causes due to flawed mind-set that creates wrong corporate cultures.

A key cause of the above characteristics is the approach to strategy formulation and execution. If we recall that a formulated strategy is just a document that contains the plans of an organisation, the negative characteristics are unfortunately more observed not in the formulation of the strategy but in its execution especially when it fails.

What majority of Nigerian firms fail to realise is that you cannot properly execute what you did not formulate. Research reveals that 9 out of 10 firms always fail in their strategy execution. While only 5 percent of the workforce understands the strategy of their organisations, 85 percent of executive teams spend less than one hour per month discussing strategy. To properly execute therefore, you need to properly formulate. Of the three approaches to strategy formulation, the one with the highest possibility of resulting to effective execution is the hybrid approach. As it requires the involvement of everybody in the formulation of the strategy, it instigates a high sense of responsibility and ownership not only during the formulation process but also the execution.

When practiced and embedded as part of the culture of the organisation, it mutates into a kind of movement as every employee irrespective of status feels that his/her voice is heard, and the brain utilised.  The created sense of responsibility and ownership not only sustains a high level of interest and involvement, it also helps in the innovative mitigation of emergent risks (challenges and opportunities) common in strategy execution especially in a volatile business environment like Nigeria. In this scenario, just as the marketing director understands his/her contribution to the success of the organisation, so will the cleaners. Not only will they understand the contribution of clean environment to the success of the organisation, they will also be able to appreciate the need to be cost effective in their budgeting and recurrent expenditure given their involvement in strategy formulation and understanding of the need for cost minimisation in organisational growth and performance.

With the high sense of belonging created through a hybrid approach, the full creative and innovative capabilities of majority of the employees are unleashed to surmount all organisational challenges. If supported with a robust reward mechanisms and positive culture, the individual capabilities can be effectively galvanized to achieve sustainable growth and performance of the organisation through consistent value creation and market capture.

Dr. Ngwu is a Senior Lecturer in Strategy, Finance and Risk Management, Lagos Business School and a Member, Expert Network, World Economic Forum. E-mail- [email protected],