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CFOnordic : No 1 2010

Thomas Bk is a business PhD who works as a consultant for Valcon. In his view, strategy execution is overlooked by many companies in the customary budget and planning process. He contends that strategy should set the framework for budget and be provided with a separate support process so that budget does not steal focus from strategy. In this interview he describes his experiences with focused strategy execution.

Strategy execution without resources is an illusion

How did you start working with nance management and strategy execution?
I had previously worked nine years with Grundfos in a variety of roles, my last position being a strategic head of division. In the course of my employment, I was heavily involved particularly with the Balanced Scorecard, protability analysis and activity-based costing. After 2 months employment, I was offered a business PhD in protability management.

How did you subsequently become employed at Valcon?

After nine years with Grundfos, I was looking for broader use of my knowledge of nance management and strategy execution. Valcon is staffed by exceptionally knowledgeable and experienced people and also has some very interesting customers, and this gave me the opportunity to utilise my knowledge in a variety of contexts.

How does one get offered a business PhD?

Grundfos had an urgent requirement for customer protability analysis. The company was good at identifying which products it made money on but needed information about customer protability. My PhD project was therefore to construct a system that could provide this information. The offer arose during a dialogue with an associate professor at Aalborg University based on Grundfos practical needs.

What do you do at Valcon?

I primarily deal with nance management and strategy execution regarding both private and public organisations. Strategy execution is not necessarily a nance function task because it has to do with establishing a change that, over time, pulls the organisation in the same direction. Budget and planning is a framework and coordination task, whereas strategy execution is concerned with long-term organisational change. But there is or there should be a tie-up between budget and strategy execution,

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CFOnordic : No 1 2010

and it is this tie-up that I nd fascinating to work with.

What challenges do you see facing business right now?

In good times companies pursue short-term business opportunities and forget to think long-term. In bad times like the current economic recession they look for quick cost reductions, and in this situation too they forget to allocate resources for thinking longterm. Whatever the reason, neglecting the long-term perspective can have serious consequences for the companys livelihood. But in these times of great uncertainty in particular it is important to act out the companys strategy, and I see this as the major challenge. Many companies lose themselves in here and now efciencies and savings.

Thomas Bks useful advice on strategy execution

1. Top management should drive change and therefore strategy execution in particular 2. Management sets the goals and time frame; the employees are involved in how 3. Allocate resources and create time and focus to realise the strategy 4. Continuously communicate the desired direction 5. Get started!

Is there a tie-up between strategy and budget?

Yes, of course, thats the whole point. If you can create the same sense of responsibility in the strategy process as you see in the budget process there is a good chance that the company will go a long way with its strategy and achieve a position of market strength.

How can this tie-up be created?

Very often I see budget controlling strategy. It is absolutely imperative that the reverse should be the case. Strategy should set the direction for focus in budgeting that concerns growth areas, process improvements, development activities, etc. Many nance functions

are therefore discussing right now how they should change the budget process. They have seen how a budget can deviate radically due to collapse in external conditions. Many CFOs want to liberate strategy from the budget process and make sure that budget does not restrict limit the companys future competitiveness. The tie-up should instead be centred around the strategy-supporting activities. Budget and other management behaviour should be controlled by activities - not by the gures that were decided upon last year. 99 per cent of all companies have

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Strategy execution without resourses

CFOnordic : No 1 2010

a budget, but 80% of them do not create an active tie-up to strategy. Those that do are very often so focused on short-term results that they forget to follow up on strategy execution.

Can you give an example?

Virtually all companies dene a vision and set themselves goals. For example, a company might set itself the goal of achieving the biggest share of a market within a specic time horizon. The Board approves the managements plan and budget, and includes resources in the budget for strategic development activities intended to support growth. There is nothing wrong with that, but in its everyday operations the company will often neglect to separate the resources for strategic development from its base budget. What happens is that the same planning and follow-up process is used in two different disciplines with separate time horizons.

The rst year ends with revenue of 990 million DKK, which must be described as satisfactory. The whole company has fought to achieve this and everyone is happy. But if no one has worked purposefully with the resources allocated to strategic development activities the company will have difculty realising its vision for 2013 as it has lost a years development. The idea of allocating resources to strategy work is, of course, that this work will lead to a new platform for further company growth and realisation of long-term objectives. If the companys success is measured solely by the achievement of short-term (budgeted) goals and if there is shortage of resources, the necessary resources (usually in the form of time) will not be allocated and the strategic objective will therefore not be achieved.

Why?
I often nd that when a company prioritises its operating budget over its strategic goals, these goals are not receiving the necessary attention.

Why is this a problem?

Again, picture the company that wants to be biggest and sets itself a turnover target of, say, 1 billion DKK by 2010, 1.2 billion DKK by 2011 and 1.5 billion DKK by 2012. This is an ambitious goal of 50 per cent growth from 2010 to 2012.

What will the consequence be?

If we assume that the resources allocated to strategic development activities were

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CFOnordic : No 1 2010

inadequate and have additionally received very little attention in relation to followup and reporting, the consequence is very often that directors and management postpone the goal to the year after. Of course, this is disastrous if the companys competitiveness has been weakened during the period and competitors have had time to establish a stronger position. Added to this is the fact that a culture is created in the company focusing on shortterm goals. These goals are often more predictable and therefore do not challenge existing processes, competences and structures, something which is necessary to create strong company growth.

Doesnt running two change projects at the same time create challenges?
Yes, of course, but when it is the changes in the budget principles that are the starting point for our dialogue, this is not a problem because budget changes must be implemented relatively quickly. Strategy execution intended to change the company typically takes place, of course, over a longer period than a single budgetary year for instance three years, as in my previous example.

Why is postponing the strategic objective a problem?

Employees will begin asking whether it is at all worth while making extra effort to challenge existing frameworks in order to realise a demanding vision if reward is only given to those who achieve shortterm goals. Instead, company management must try to visualise its strategy so that it is relevant and has local ownership in all parts of the organisation. But management must prioritise and want this, and also separate follow-up on the budget and planning process from strategy execution.

What characterises companies that can link strategy and budget?

They can make a conscious choice and they are good at sticking to their decision to develop the company. If you know the book Good to Great by Jim Collins you may have read why some companies survive and others do not. Those that survive are companies which manage through competent employees to develop against the background of a well thoughtout strategy. The companies that develop from good to great are those that prioritise the strategy process and follow-up and have this high on the agenda throughout their organisation.

Are we back then to the companys choice of principles for a budget and planning model?
Yes, one could say that. One possibility is to establish two change projects. First of all the change in the budget process is a project in itself and demands considerable attention. But basically the purpose of a new budget process is to establish a link to the companys existing market conditions, customer behaviour etc. It is hard to reect this today in the typical budget model that determines the framework for 4 16 months ahead. A performance follow-up must be established which is relevant in relation to the companys conditions in the short term. Secondly, a new planning model will and must rmly anchor the strategy work and the execution model for the companys future development. Where budget and planning are techniques intended to ensure company coordination within existing structures within a one year horizon, strategy execution must support the long-term development of the company.

Basically, of course, you are talking about change is that a typical nance task?
Not obviously so, but as I started by saying, at Valcon we are seeing a substantial need for establishment of budget and control principles. Technique is one thing, maintaining the change over time is another. We wish to contribute to this, and so does the company too, of course. We therefore believe that planning and follow-up belong together with strategy and change processes.

What tendencies in strategy execution work are you seeing in companies?

There is no doubt that the economic downturn has challenged many companies, and companies are in doubt about the markets they thought they knew. This means they have doubts about their systems for measuring reactions and behaviour. A basis therefore exists, particularly now, for establishing a strategy execution setup which ensures that the learning in respect of market behaviour is instrumental in continuously adjusting the companys efforts. N

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