How to Become a Strategic Thinker

If you're running a business and you want to scale it profitably, but you don't want to run out of cash, and you also want to create value in the process, you have to know how strategic thinking works.

But there's a major problem and a massive disconnect when it comes to strategic thinking. You can't approach strategic thinking from an academic standpoint, or you can't listen to a guru who came up with some strategy framework, but they've never actually applied it in the real world.

Because strategy is super messy and business is very nuanced. So I'm going to explain to you how strategic thinking actually works. And the one ingredient that people always leave out, which leaves it totally ineffective.

Okay. So I'm going to show you, in other words, the exact process that I use when turning around and growing companies. And I've generated over a billion dollars in the process, in the trenches as a CEO, as a CFO, as an investor and an advisor to many more.

So I know it works and what doesn't work because trust me, I made a lot of mistakes with strategy. So let's go ahead and jump in. The first thing you need to know is that planning is not the same thing as strategy.

And even if you add the word strategic before planning, it doesn't make it strategy. Strategic planning is not strategy. Somewhere along the lines, somebody thought, okay, mission, vision, values, or SWOT, or seven S's, or rocks to get traction, whatever it may be, all these different frameworks.

They thought, okay, if we put it in a nice little box, package it up, sell it as a framework, we can make a bunch of money and confuse a ton of companies by giving them all these objectives and initiatives and goals and actions and tasks and rocks to overcome, right?

But this is not how strategy actually drives results. Strategy, on the other hand, is all about making a set of interrelated choices about your business's market focus and position, competitive behavior, and how it's ultimately going to win.

So you make one choice, which connects to this, this choice connects to that, this choice connects to this, and there's these other choices and opportunities that exist. And you have to say no, no, no, and make trade-offs because you have a certain amount of resources you have to allocate effectively to maximize your returns.

Okay. So when it comes to strategic thinking, hashtag real talk here, I think it's more about strategic doing. It's not like you're going to learn something or reprogram your brain and all of a sudden think, wow, now I know how to come up with new innovative ideas that's going to transform my business.

Instead, strategy is about a process. Okay. And I'm going to walk you through the process and how it works so you can start to understand how to become a more effective thinker, right? And it comes from doing.

So there's a framework that I put in place for a lot of companies and I follow a scientific method instead of a business method to driving results. Let me explain.

So first in our framework, we identify a strategic problem, which follows the scientific method. We start with the problem. This is the number one problem that's holding the company back from achieving its full potential and driving the financial results that it should be achieving, right?

So you have to get really good at identifying what the problem is, or in other words, what is the constraint that's holding the business back? Because at Coltivar, we operate under the theory of constraints.

Now, after you have the strategic problem identified, you have to start with your ideal customer profile because you have to understand what is the pain they're experiencing? What are the macro trends that are causing this pain? And how can you solve this pain for them in a unique manner compared to your competitors?

And this is where you start exploring options. And this is the framework for walking through strategic options. Okay.

So over here, we start with shared aspiration. In other words, what does winning look like? Not just for your company, but for your employees, for your customers, for your shareholders, for your vendors, for your community, et cetera.

You have to define what does winning look like and what does winning look like in the context of overcoming your strategic problem.

Next, you have to identify your market focus and position. In other words, what geographies are going to compete in? What stage of production? What type of customers are going to go after? What segments?

How are you going to position yourself in the market uniquely so you can solve your ICPs problems better than anybody else?

Then after you identify your market focus and position, you move down here to competitive behavior. And this starts with deciding which generic strategy you're going to pursue.

So if you follow Michael Porter, he's the grandfather of strategy is what I like to call him. And he came up with three generic strategies. You could pursue differentiation, cost leadership, or focus like niching down.

And then from there, you have to decide how are you going to organize your company? By divisions, what's the structure look like? What's your operating model? What technology are you going to use?

Ultimately, how are you going to compete in what's your competitive behavior look like? This is where people get it wrong. This next box. And this is the component of strategic thinking that nobody talks about.

I think it's because it involves the F word. This is resources and returns. You're like, that doesn't start with an F word.

It doesn't start with an F word, but it involves the F word, which is finance. Resources and returns requires you to look at this option and ask yourself, do we have the resources and capabilities to actually make this strategy work?

And can we generate returns that exceed our cost of capital? Okay. So this is the framework that I use over and over again.

And really what it looks like is this, you are exploring a variety of options using this framework here. So I'm drawing this multiple times. I'm taking this multiple times and you're evaluating different options and you're saying, okay, is it DPE?

This is the acronym I use. Is it desirable, practical and economical? And if it's not, I'll look at this option and say, it's desirable, but it's not practical. I'll eliminate that.

Or I'll say it's desirable. It's practical and it's economical. That's good. This one is desirable, practical, but not economical. Boom. I'll eliminate that.

And then I'll pursue this strategy. But then you pursue the strategy. You have an intended strategy and you go out there and execute, but along the way you realize things emerge.

That's your emergent strategy. So how do you actually execute and how do you put this into practice?

So what you do is we implement, I'll use a different color here. We'll get this rainbow bright here. We implement IARs, which stands for initiatives, actions, and results.

This is the framework we use to put in place a plan to execute the strategy. So remember, strategy is not strategic planning. Strategy is strategy. Planning is planning.

So we have a strategy here. We chose the strategy based on this framework. Then we execute by defining which initiatives are we going to pursue?

What actions are we going to go after? And then what results are we going to measure to know if we're on track?

So that's how it all works. Remember what I was saying? The scientific method is what we follow. You define a problem. You then create a hypothesis, which are your initiatives.

You're assuming these are the initiatives that will help you to overcome your problem. Then you run experiments. Those are your actions, right?

You're executing these actions to drive greater results, and you're making adjustments along the way as you learn. This is the framework right here that we follow. Okay.

So you have your strategy, you have your IARs, and then this is going back to this piece, this resources and returns. You ultimately have to measure cash flow.

And with cash flow, you're going to want to measure how much you're earning from a return on invested capital standpoint.

Because you have capital that you need to invest in the business to execute the strategy, and you want to evaluate the returns on that invested capital.

Because when your return on invested capital exceeds the cost of your capital, you're generating value. If your return on invested capital is below your cost capital, you're destroying value.

So this is where I think strategic thinking is flawed. Because people want a simple solution that somehow is going to transform their thinking. So they come up with the newest and latest and greatest ideas.

But guess what? The best ideas and the best innovation comes from doing, from going out there and executing.

So if you want to be good at strategic thinking, you have to be really good at strategic doing. And the only way to get good at strategic doing is understand how all this works and then have a system to go execute.

So I call this the financial operating system. And we implement this to companies all the time. And there are other tools that are associated with this that I won't get into in this video.

But what I want you to understand is that when you have a system to build a strategy, measure results, learn from those results, and then make adjustments, then you will be a better strategic thinker.

Because you'll know what to actually think through. But if you don't have a framework, then how are you going to become a better thinker?

So I've watched other videos that exist out there. And it's like, if you want to become a better strategic thinker, you need to meditate more, or you need to know the political environment more, or you need to have more research.

And sure, all those things are great. But if you don't know how strategy drives value in an organization, you're going to be coming up with a bunch of random things in a strategy session with your team.

But the ones that are really going to be making a difference in their businesses are those that are like, I know how this strategy drives results.

Because check this out, at the end of the day, you're trying to drive greater value in your business. And let's say this is your current value. And this is your potential value.

Right here, you have a gap. And you have to close this gap, right? And the only way to close this gap is to know what levers to pull to improve your business.

And let's say you have a tool as part of your operating system that I'm talking about here. And you have these KPIs that you're measuring, these key performance indicators that tie back to your strategy.

And you have your actual performance versus your target, right? So you have your numbers here going down the line, boom, boom, boom.

And let's just say this is your dashboard. This KPI is green, this is green. Let's just imagine this is yellow, it's really orange, but I don't have a yellow.

And you probably wouldn't be able to see it very well. Let's say these are orange. And let's say this is red.

When you have a tool like this, it's great. But what's even better is when you have a tool like this, and you can say, this right here, this KPI, I can influence this by pursuing these initiatives, these actions to get these results, going back to my IR framework.

And you know that you can improve this number right here by the same thing with your strategy.

And this is how strategy drives financial results and financial results move the strategy forward.

And this is where you become a super powerful and dangerous strategic thinker.

If you don't understand all this and you don't know how this works, then you're just going to be sitting in a meeting throwing out, like I said, random ideas that don't connect and they don't drive value.

So sure, it could be good in the short term, but if you want to be a strategic thinker, a top-notch strategic thinker, understand the relationship between strategy and finance and how those two things work together to drive greater value.

And this should get you started with thinking in the right direction.

All right. That's what I have. Take care. Cheers.