(0:00) You're building, you're measuring, you're learning, and you're adjusting. And you're doing this over and over and over again. And that's how companies can leverage strategy to drive incredible financial results.

(0:11) Welcome to Business Strategy, where we are documenting the best strategies and valuable lessons learned to build more profitable and iconic companies. Please share and enjoy.

(0:24) If you're running a business, I'm sure you can agree that creating clarity, alignment, and accountability with strategy across an organization is really hard to do. So I'm going to explain how strategy really works, and the four things that have helped me to create over a billion dollars in value for companies as I've turned them around and helped them to grow.

(0:42) My name is Steve Coughran. I'm the founder of Coltivar. And we're going to hop into number one here in just a minute. But I got to just tell you that I'm most excited about number four, because it's a framework that I wrote about in my second book called Outsizing. And it's helped me to create a tremendous amount of value in organizations.

(1:00) And you could take the same exact framework and apply it in your business as well. So let's go ahead and get into point number one, because each of these points build on each other. And when we get to number four, I'll share with you that framework.

(1:16) So number one with strategy, if you just remove all the academia and all the overcomplicated frameworks that exist out there, strategy boils down to this. Strategy is all about getting you focused on solving the number one constraint in your business that's preventing your organization from growing.

(1:32) Because think about it. There are so many possibilities out there. There are so many distractions, and strategy allows you to say no to some things and to stay super focused on the things that will really move the needle.

(1:46) Okay. That's what it comes down to. I'll talk about that in point number two here a little bit more, but I want you to understand that when it comes to strategy, it boils down to this from a financial perspective. If your strategy enables your company to produce a return on invested capital that's greater than your weighted average cost of capital.

(2:03) In other words, in simplistic terms, if your strategy enables your company to earn returns at a rate greater than your cost of capital, then you're creating value. Now, maybe return on invested capital isn't a metric that your company can use because you are a professional services firm or you're a tech company.

(2:21) There are some other businesses where ROIC doesn't work. You can use economic profit instead, but the principle is still the same. If you're generating more value than your cost of capital, then your business is going to grow and it's going to become worth more. This is where strategy and finance tie together.

(2:42) Strategy isn't about just creating a checklist and throwing mission and vision and values up on the board and saying, "Yay, we have a strategy." Strategy is all about defining where you're going to compete, how you're going to compete, how you're going to win, and then ultimately how you're going to drive greater value for your business.

(3:00) When we work with organizations, one of the first steps we do is we determine what is the current value of the business today, and then we compare that to the potential value of the business if they can eliminate certain constraints and unlock growth in value in their companies.

(3:12) So that's the first thing that I want to point out. Number two, strategy helps a company to identify its strategic problem. We spend a disproportionate amount of time helping companies to define their strategic problem because this follows the whole scientific method.

(3:30) Think about it. If you go back to science class, maybe you'll remember this, but you define a problem, right? And then you create a hypothesis, and this is what you think you can do in order to solve the problem, and then you go run experiments.

(3:45) Now, I'm simplifying things here, and I'm cutting out some steps, but that's essentially what we follow here at Coltivar is we help organizations to identify the biggest constraint or the obstacle that's holding them back from achieving their full potential.

(3:58) And then once that constraint is solved, guess what? Another constraint emerges. And then businesses that can follow a system in order to identify constraints, focus their initiatives on the right things, pursue the right actions, and then measure the results along the way.

(4:15) That's a little sneak peek into the framework. I'll get into that at number four. But companies that follow the system achieve tremendous results, okay? So that's what strategy comes down to is identifying the problem, staying laser-focused on that problem, eliminating everything else in between so the company can allocate all those resources to solving the constraint that's impacting the business.

(4:39) This requires a lot of discipline. Years ago, I was working with the CEO, and he was a great mentor of mine because he would constantly ask me, "What are you working on, Steve?" And then if it wasn't aligned with what the company was trying to achieve, he'd be like, "Okay, cut it, eliminate it."

(4:58) And I thought that was a great framework to follow, and that's what I help companies to do as well is to stay focused on the most important things. It's such a temptation for us leaders to be running businesses and to pursue B, C, and D quality tasks because we know how to do them, and it's fun to check things off, and we feel more accomplished.

(5:26) But if we're not focused on the most important tasks that are going to help us to overcome our strategic problem, we're going to be distracted, and we're not going to be solving constraints, and the constraint doesn't go away. It's not like you just ignore the constraint, and it goes away. It gets worse, and eventually, it can blow up your company.

(5:36) The third thing that's helped me with strategy and understanding how it really works is that there are two types of strategy. So when I'm working with companies, I don't do a one-time event and say, "Okay, we're one and done. You have a strategy."

(5:56) Okay, I'm off. I teach them a system because it's all about creating a strategy, and that's the intended strategy. That's the strategy you intend to pursue in the strategy room, behind closed doors, in that boardroom, whatever it may be.

(6:18) You have this intended strategy. It's on your strategy blueprint, and you're like, "Cool, we're good. Let's go execute." Then you go execute out in the real world, and guess what? An emergent strategy pops up because disruptions happen in the marketplace.

(6:34) Things change. Employees change. All these other variables contribute to these moving pieces and parts in your business, and an emergent strategy comes about, and that's not a bad thing. It's a good thing because if you just sit in the boardroom all day long, dreaming up of all the possibilities or all the scenarios that can happen, and you don't take action, that's a terrible thing.

(6:53) So you want to create an intended strategy. Then you want to go execute, and then follow the emergent strategy that comes up, and then make adjustments along the way. You're building, you're measuring, you're learning, and you're adjusting, and you're doing this over and over and over again, and that's how companies can leverage strategy to drive incredible financial results.

(7:06) And last but not least, I told you this is my favorite. This is a framework that I coined called IARs, which stands for Initiatives, Actions, and Results. So when you have identified your strategic problem, one of the next steps in the strategy process is to clearly identify what are the initiatives, the big, bold moves that you're going to be making over the next three to five years, right?

(7:34) Maybe a shorter time frame depending on your situation. Maybe you're a turnaround, and initiatives are a one-year time frame, but typically initiatives are larger in scope and longer in duration.

(7:45) You identify these initiatives that are going to help you to do four things. Number one, to overcome your strategic problem. Number two, to enhance the customer experience. Number three, foster innovation. And number four, build competitive advantages.

(7:57) If your initiatives don't help you to do any of those, it's probably the wrong initiative, right? So you define your initiatives. That's the I. Then you identify the actions you'll take, and actions are really just hypotheses.

(8:13) So going back to the scientific method, you're hypothesizing what steps you'll take in order to move the initiative forward. And really, the initiative is going to help you to overcome your problem, your constraint. So that's how this framework builds on each other.

(8:30) So actions, when it comes to setting actions in your company, I would challenge everybody who sets actions by asking them, what is the upside if you pursue this particular action? For example, it may be really tempting to redo the website because you think the website is really crummy, right?

(8:44) You don't like the color schemes, you want to rebrand, whatever it may be. I would ask, what's the upside? If you redo the website, is it going to create more leads, more conversion, more revenue? Is it going to reduce costs? Because now systems are integrated in the platform, what is it?

(8:54) And if the upside isn't great enough, or maybe there's a bigger upside over here, you may want to pursue that. I've seen too many companies focus on the wrong things, the wrong actions, and that really makes the difference between success and failure.

(9:08) So you have I for initiatives, A for actions, and the last part of the framework, the IAR framework, is R for results. This is where you set key measures in your business because what gets measured gets managed.

(9:22) So the results measure your company's ability to move your initiative forward. In other words, your key results are measuring your initiative. Remember, your initiatives are doing those four things and your actions are driving all of the behaviors forward.

(9:37) So that's how the IAR framework works. When I go into companies—and you can use this exact same framework in your business—you can create a strategy blueprint. You can get super focused and clear on your strategic problem.

(9:54) Then you can identify initiatives, actions, and results, and then go execute. And when you do this, it creates a tremendous amount of clarity for your team because your team's like, yep, we understand the problem. We understand the initiatives you're going to pursue.

(10:06) We know that these actions aren't going to waste your time, and they're going to lead to a huge upside for the business. Who doesn't like that? We don't like to waste your time. We like to focus on the things that are really going to move the needle.

(10:15) And then the results allow you to measure progress along the way. And when you do that, you are going to have greater clarity, greater alignment, and greater accountability because you're measuring what matters and you can hold people accountable to the things that you've defined.

(10:30) I could tell you in the past as a CEO, as a CFO, when I didn't follow this framework, we're all over the place and I'd get frustrated with my employees. And I'm like, yeah, no wonder why I'm so frustrated with my employees is because I lack specificity in my direction.

(10:45) I don't say exactly what does success look like? We have no means of measuring things. And we were all over the place with initiatives. We're pursuing like 60 initiatives, but they're really just tasks, right? Just actions. So we were confusing things, and it wasn't going super well.

(10:59) But then when I adopted this framework, I was able to turn around my company. I've applied it to hundreds of companies by turning around and helping them to grow their businesses and their enterprise value.

(11:08) And you can do the same exact thing in your organization. If you need help with any of this, you could always reach out and connect at Coltivar.com. I would love to talk strategy with you because I'm a nerd like that. And I just love business and I love turning around and growing companies.

(11:20) That's all I have for you for today. Until next time, take care of yourself. Cheers.