What Strategy Really Is

If you're running a business and you want to scale it and make it more valuable without running out of cash, you have to be crystal clear on how strategy works. But oh my gosh, people have made it so complicated. So in this video, I'm going to break strategy down very simply for you so you could apply it to your business.

I'm not going to come at it from an academic perspective. I'm coming at it from a CEO, CFO, and an investor's standpoint because I've applied this exact framework in multiple companies for over a decade to turn them around and to grow them generating over a billion dollars in value in the process. So let's go ahead and jump in.

I'm going to explain what strategy is and what strategy isn't. I'm going to provide you the exact framework that you could apply to your business and give you the next steps so you can be successful when it comes to strategy in your business. And most importantly, not just strategy design and development, but strategy execution.

I'm going to give you the full roadmap. So stick around until the very end. Let's kick things off by talking about what strategy is and what strategy isn't.

Now in most businesses, this is how they start strategy. They'll either come out of the gate with mission, vision, and values, or they may begin with SWOT as a framework. Now, mission, vision, and values, I don't want to poo-poo it.

I think it's fine as a starting point, but mission, vision, and values isn't enough to inform actual choices that will generate value. So a lot of companies, they'll do mission, vision, and values, and they'll get excited. They'll put it up on their website.

They'll create a one pager and they say, hurrah, let's throw a party. We have a strategy. But then when it comes to execution, people are like, what do we do next? How do we execute off this? So that's where mission, envision, and values is not strategy in itself.

It may be a start to strategy, but it's not strategy in its entirety. Next we have SWOT. This was invented, I think back in the fifties or the sixties.

It's still around, but essentially you have a facilitator and the facilitator stands in front of the class. Instead of in front of this group of people, I say class, but it could be a business, right? So you have all these people in a room and you start by listing out what are the company's strengths, right? And so everybody will raise their hand. And this is real easy.

Like we're the best at this. We're so strong with this. And then you're like, oh, great, great.

Now let's talk about our weaknesses. And oftentimes these weaknesses are incomplete or they're so biased because nobody wants to speak up in the room because the CEO's there. And then they're afraid of getting fired or not being promoted or not being buddies because they say something offensive.

So they list out a bunch of generic stuff and they're like, okay, great. We have our strengths, weaknesses. Let's move over here to our opportunities and our threats.

And they come up with this laundry list and they're like, all right, great. We have a strategy. And then once again, people are like, what do we do from here? Now, some companies will take this and they'll transform this into some other type of framework, which is like a laundry list of things.

I was talking to a CEO years ago. He was telling me about how they rented out a school auditorium. They invited all of their senior leaders to this strategy offsite.

And during this meeting, they listed out like 80 different initiatives that they were going to pursue one to 80. And then when I followed back up with them, I was like, how did that work out? He's like, yeah, we only did like three of them. Right.

But creating a laundry list of things to do in your business is not strategy. So I don't know what happened, but somewhere along the line, somebody thought, okay, planning is not sexy enough, right? This is kind of boring. This is for the nerds.

So they're like, how do we make it more sexy? So they added strategic in front of it as this buzzword. And all of a sudden this strategic planning thing became popularized among businesses. Now strategic planning leads with one of these methods.

Typically strategic planning is not strategy though. It's just creating this laundry list of things to do. But how do you know the things that you're listing out to do are even correct? What if they're misguided? Right.

So you have to start more high level. Now I've seen other frameworks out there too, that are like, okay, you got to take like rocks and you have like rocks and then you have this and you, you know, the rocks fill up a jar and then you have sand and blah, blah, blah. So you have like your initiatives and your rocks and your objectives and your goals.

And I'm like, oh my gosh, that is like so complicated. No wonder why business leaders struggle with execution. And I'd say two thirds of businesses can't even execute successfully on their strategies.

You may be wondering what makes Steve the expert on strategy. I've spent two decades of my life studying strategy. All right.

I'm a slow learner. I often joke that after high school, I spent eight years of my life getting my undergraduate in accounting and finance, my master's in accountancy. I went to work for Ernst & Young.

I got my CPA. Then I went and got my MBA from the Fuqua school of business at Duke university. I studied strategy abroad and that's all great, right? That's eight years of academia.

But then with Colt Bar, I've spent over a decade in my business, turning around and growing companies. And trust me at the beginning, my framework wasn't as strong. And over time I've refined my strategy framework into what works because I actually do this in businesses.

I've been a CFO of million and billion dollar companies. I've been a CEO of companies. I've been an investor in businesses as well.

And this is the exact framework that I use. And this is a very similar framework of what's used in private equity and venture capital and with hedge funds and investment banks across the world to create more value. All right.

So let me get into what this framework actually looks like. Now at Colt Bar, we follow the scientific method when it comes to strategy formulation and execution, which I'll explain versus a business approach because a business approach isn't rooted in science. It's just the newest theory, the latest flavor of the day.

And I've worked with so many companies and their leaders are so burnt out by their CEO because the CEO is constantly chasing the next shiny object. They read an article from an Ivy league school, right? And they're like, Oh, this is the way we got to do strategy. And then they shift gears and they whipsaw all their employees.

So don't do that. So let me just show you what works for me and what's worked for a ton of companies that I've applied this to. And then we'll go from there.

So when it comes to strategy, right? It starts with identifying a problem, right? This is the scientific method. So you identify a problem. Now we call this the strategic problem, right? This is the number one problem that is holding the company back from achieving its potential and realizing the financial results that it deserves.

Now, the key is, is to identify what this problem actually is. We spend a ton of time with business owners uncovering what this constraint actually is. And this can be really challenging because who wants to sit in a room with other executives and uncover why the business sucks, right? And it's not that they suck, but that's what it translates to in their minds.

So therefore these leaders, they struggle with this when they do these offsites on their own. That's why bringing somebody else in is super valuable because they can have an independent unbiased perspective on the company. If you don't get your strategic problem, right? Guess what? You're going to be solving the wrong problem.

Can you imagine that? You do your strategy offsite. You think you have a great plan, but the plan is focused on solving the wrong problem. That can be disheartening.

It could be absolutely devastating for your company as well. That's why we spend so much time upfront identifying the strategic problem. You notice, I don't say strategic problems.

I'm talking about the number one constraint that's holding the company back. Think of it like this. Gold Rat wrote a great book called The Goal.

If you haven't read The Goal, be sure to check that out. But in his book, he's talking about these boys that are going on this hiking trip. And I'll probably mess up some of these details here, but you can just follow along with me.

And they're going on this hike and in the back of the group, they have this kid who is really slow and he's creating this distance between the people that are moving faster. And what he's trying to convey through the story is that the business can only move as fast as its constraint. And in this example, this kid right here is the constraint because every time they get ahead, they have to pause and wait for him to catch up and then they can move again.

And then there's a gap that's created. There's slower throughput. There's inventory buildup.

There are a lot of issues that are created in the business from constraints. They have to wait till the constraint catches up and they move forward, et cetera. So in business, you're only going to grow until you hit this constraint.

Then you're going to stop growing. And when I was the CFO of this business, we hit the ceiling and we went in circles, right? We're trying to solve other problems. It wasn't until we solve this one constraint that we're able to break through and move to the next level.

And that's how business is. You're going to hit one constraint and then you're going to grow. You're going to hit the next constraint and then you solve that constraint and you grow.

That's where understanding your strategic problem, solving for this problem with your strategy is going to allow you to continue to grow and create value. So that's the first part. Then I'm going to draw this big box right here.

And at the center, I'm going to put the customer. The customer should be at the core of your strategy. This is your ICP, your ideal customer profile.

In other words, it's the avatar who understands your value proposition and they're willing to pay for it. You have to have your customer at the very center. I was doing the speaking engagement in this keynote for this company.

And I spent all day sitting with them, hearing them talk about their different strategies per division. Then at the very end, I was going to tie everything together throughout the entire day. None of the divisional leaders talked about their customer in their strategy presentation.

So when I stood up, I was like, where's the customer in all this, right? You have these strategies, but they're not centered around the customer and delivering value to the customer, solving the customer's problems. So that's what I put at the very core of our strategy framework, because we make it customer centric. All right.

Then I have four boxes here and I start with the shared aspiration because you have to define what does winning look like when it comes to your strategy. So you have your problem. And if you were to solve this problem, what would that look like? What would winning look like? Not just for your company, but for your employees, for your customers, for your stakeholders, for your vendors, for your community.

What is that shared aspiration? If you just define winning in terms of your business, once again, you're going to be in this box, right? And you're not going to encompass all these other shareholders or stakeholders in your business and your strategy will be weak. So you have to get this right here. Okay.

Once you define what winning looks like, you move over here to market focus and position. And this is where you're competing in the marketplace, including your distribution channels, your geographies, your stage of production, et cetera, right? This is where you're positioning your company to win, right? So this is really, really important to get right. Because if you don't get this right, you're going to be competing in a competitive marketplace and you will most likely struggle.

So market focus and position should be centered around the ICP, just like your shared aspiration should be centered around your ICP. See how they all point back to the center here at the core. Once you determine your market focus and position and how you're going to win, then you'll move on to the next box where we have competitive behavior.

This is how you're going to compete. This is your operating model. This is your organizational structure.

This is your generic strategy. Are you going after differentiation, cost leadership, after focus, after a niche, for example, this is how your company is going to compete in order to win in its market focus and position, right? So after you have this defined, you move over here to resources and returns. This is where most companies get it wrong.

They get really excited up here with the shared aspiration. They like to talk about the market focus and position, like, okay, this is great. We could expand across the nation.

We could go international. We can enter at this stage of production. We could vertically integrate.

They talk about all these things, get excited. They get down here to the competitive behavior and they are like, yep, let's go after differentiation. Let's reinvent the business model, be more innovative, adopt AI, whatever it may be.

And then they're like, okay, and we're done. All right. And this is where you have to dive deep into the resources and returns.

And sometimes you can't do this on the same day as the offsite. If you do it right, you'll come to the offsite with the model already built. That's what we do.

We have a model that we tie into the strategy framework. So we could plug numbers in, in real time and show people what is the return on invested capital based on the option they're deciding to pursue. So let me be more specific here.

In this stage, what you're going to do is you're going to build out a model, a financial model to determine your financial performance over a forecasted period. And you're also going to look at the business model compared to its continuing value, right? So you take the forecast period plus the continuing value, and you will arrive at a valuation for the business. And you'll be able to determine the return on invested capital or the projected return on invested capital rather.

And this is where you'll evaluate, does the return on invested capital for this option exceed your cost of capital by a big enough margin, which makes it desirable, practical, and economical. That's our DPE, desirable, practical, and economical, right? If it passed the desirable, practical, and economical test, then you move forward. But some strategic options, you're like, it's desirable, not super practical.

We don't have the team. We don't have the bandwidth. We don't have the cash.

We don't have the patents, whatever it is. So then you just crush it. Or some are desirable and practical, but then you get to the economical side and return on invested capital doesn't exceed the cost of capital.

And therefore, if you go after this option, you'll destroy value. All right. Now I may have lost you at this point because I started talking about some finance stuff, but this is the framework right here that we follow over and over again.

And maybe finance isn't your thing. That's fine. Just don't neglect this from the entire strategic approach.

Okay. Because when you neglect this, then you're just pursuing an option. Then later on, you find out that it was never going to generate a return on invested capital that exceeded your cost of capital.

So let me put some numbers to this. Let's say you do this evaluation and it's all going to be projections. So there's going to be a lot of assumptions built in, but let's say your return on invested capital is 22% when you build out this model and your cost of capital over here is 10%.

Well, this would be a thumbs up. So this is a star, right? Yay. Let's pursue it.

But what if your return on invested capital was instead of 22%, it was 8%. Well, right here, I could tell you that'd be a terrible strategy because you'd be destroying value. In other words, you're borrowing money at 10%.

You go out there, you execute this strategy, you run your business and you generate an 8% return. That'd be terrible. Who would ever do that? You'd never borrow money at 10% and only make 8% because you're losing 2% of value every single year.

So that's how strategy and finance tie together here. Now, I want to share a few more things with you here before I move on. So when you're doing strategy, what you'll ultimately do is it'll look like this in reality.

You have a few options and you'll have this framework, boom, boom, boom, boom, boom, boom. So you have option A, B and C. And like I said, the DPE, desirable, practical and economical test comes in. And you're like option A is desirable, practical and economical.

Okay, cool. Option B is desirable, but it's not practical. So that's going to be a loser.

And then option C is desirable, practical and economical. And you're like, okay, great. So we have A and C. What do we do? Well, you don't need to bet the whole farm on it.

You could go run experiments on A and C, right? And determine really quickly which option it is that you should really be pursuing. And sometimes you start running experiments on A and C and you find out that there's another option, which is D, right? And it could be a blend or it could be some variation thereof. Clayton Christensen, one of the godfathers of innovation talked about this years ago.

And one of his books where you put in place a strategy, you go out there and you execute, that's your intended strategy. But then once you start executing, you realize the flaws or the adjustments you need to make in your strategy. And that's your emergent strategy.

So don't get so caught up on making everything perfect in some strategic offsite. Instead, go through this process and then put it into place and then you'll figure out what's working and what's not. So let me show you how you can do this in your business so you can get strategy right.

Hopefully by now you can understand the development side of the strategy process. And remember the scientific method? We began with the problem. And let's just say this is our strategy right here.

We have our problem. We have our different things. The customer's in the center.

And here's our strategy, right? Remember strategy is not the same thing as a plan. The plan is going to then be executed through initiatives, actions, and results. Okay, so let me explain.

Initiatives do four things. Number one, they help you to overcome your strategic problem. They help you to enhance the customer experience.

They help you to foster innovation and they help you to build competitive advantages. Initiatives are usually, I'd say one to three years in duration. So an initiative is not recreate the website.

That's not an initiative. That's an action. The initiative is to strengthen the company's brand, which is a one to two year effort, right? For some companies.

So don't get confused on the initiative versus the action. So the initiative sits up top here and let's just say we want to strengthen our brand because one of the biggest strategic problems that we're experiencing is we're losing market share to competitors. And if we don't fix this market share problem, we're going to be out of business.

So one of the ways to fix our market share is strengthen our brand and the perception in the marketplace. So that's our initiative. Then we want to identify actions to take in order to advance this initiative.

Now, some companies they'll come up with random actions, but what I like to do is focus companies on the actions that will have the biggest payoff. In other words, what's the size of the prize of these actions? So for example, to strengthen the brand, you may say, okay, let's do a customer survey. Okay.

That may be a good thing. Let's redo our brand guide. Okay.

Let's create some videos. And when you look at these things here, you may realize that this customer survey may have a $50,000 payoff because if you can survey your customers and understand where they're churning, you can fix them and realize this upside. But then you may realize creating a video and putting it on the website may only have a $5,000 upside.

So it's like, okay, maybe you want to put this on hold for later. And you want to crush this first and then move on from there. Too many companies create an action list of like 50 things.

And it's like, just focus on five. I'd rather you have five actions and crush those actions and advance this initiative. Then do you have a bunch of random things that you're doing? Now you may be wondering, well, how do I measure whether or not this initiative and these actions are actually working? It's through your results.

You're going to identify what is the key result you want to achieve from this? So maybe to strengthen your brand, you want to take churn, your customer churn, your turnover of your customers. In other words, you want to take it from 20% what it is now down to 12. Right? So that's a key result, right? Or you may want to grow your revenue.

So revenue growth right now it's 3%. It's just stagnant. And you want to grow that to 15%.

Right? So these are the results that you're going to identify based on the initiatives and the actions you're pursuing. So let's tie it back to the scientific method and then we'll wrap up here. So the scientific method begins with a problem.

Then you have a hypothesis. Your hypothesis is this right here. You're hypothesizing what initiatives to pursue and what actions to go after to solve the problem, right? That's why the IAR framework works.

It's not complicated. It's easy to implement it in a business. And it's based on science, not just a bunch of business flavor of the day stuff.

So you create a hypothesis. You say, I think we need to strengthen our brand to overcome our problem. And these are the actions we're going to go do.

You go do the actions. Then guess what? You have your financials. If you're not generating more cashflow at the end of the day, if you're not achieving these key results, guess what? It's not working.

So you have to redo your actions or you have to revisit your initiatives and maybe your initiatives are wrong. So that comes through these experiments, right? So these are your experiments, your actions, you're running experiments by going out there and doing work, work that you think is going to have the biggest upside. And then you measure things.

And this is how strategy and finance come back together because you're executing your strategy. You're measuring your financial performance. And if these experiments aren't working, you come back to your hypothesis and you start again.

So here, after you do your experiments, you're going to adjust. And this is what I refer to as the build, measure, learn, and adjust method. You build a strategy, you measure your performance, you learn along the way and you make adjustments.

So you have a strategy that's actually creating value. Okay. So that's how strategy works very simply from someone who has done this for a lot of companies, both for million and billion dollar firms.

Like I said, in the role of a CEO, a CFO and an investor. And I hope you found a lot of value in this. What are your comments? What are your thoughts? Is this helpful? Is this easy to understand? Are there other topics that you want me to dive deeper into? I'd love for you to drop a comment because this will help me to understand what's top of mind for you.

Because my whole goal is to empower you to build a more successful company. If you ever want to talk about this in your business, you could always set up a free strategy call at Coltivar. So if you go to our website, check out the show notes down below, you'll find a link, go to our website.

You could book a call and we'd love to connect with you. All right. That's what I have.

Take care of yourself. Cheers.