Staffan Engstrom looks at when listed companies should switch strategy, and how they should avoid having to.
It was a surprise to many when Balfour Beatty, one of the UK’s great infrastructure companies, announced on 6 May its third profit warning in 18 months, the departure of the chief executive after just over a year in the job, and the proposed disposal of Parsons Brinckerhoff. All this amounted to a fundamental change in strategy, and resulted in a 20% drop in the share price in a single day.
Even large shareholders in a company like Balfour Beatty actually have only one main power, which is to either buy or sell their shares depending on how they feel about the company’s prospects. So if the company’s actions worry the shareholders – as in this case – then they try to sell their shares. As in any market, when there is an oversupply of something, then the price falls.
So the share price is a reflection of the company’s future as an investment, and shareholders typically form their views on whether to invest in a company based on:
- Its current performance in its markets,
- The credibility of its management team, and
- The quality of its future strategy.
The big surprise to me in the Balfour Beatty case was that having put the first two of these publicly into doubt through the announcements around the profit warning, the company decided to change its strategy as well. This leads us to the question of when should a company change its strategy, and when should it stick to the one that it has?
The simple answer to this question is that it should change strategy when the company’s board stops believing that the current strategy is working as well as it could or should.
The two-fold purpose of the strategy of a publicly listed company is:
- To clarify to everyone involved what it is that they are trying to do, so that the actions of the board, employees, suppliers and other stakeholders are coordinated.
- To provide a compelling investment case for shareholders regarding the future direction and success of the company.
"Changing a bad strategy can undermine the belief of investors in the company and its management with a consequent adverse impact on the company’s share price."
Since the share price of a listed company is directly related to that compelling investment case for the future, boards and CEOs continually find themselves under pressure to deliver more than the business is doing at the moment. This means finding new strategies and taking new risks. Of course, that strategy has to be delivered or the credibility of the management will be damaged… which will in turn affect the share price. In other words, there is a delicate balance to be achieved between ambition and implementation.
When a board starts to lose faith in the current strategy of the business, it faces a difficult conundrum. They still need to have a strategy that is compelling enough to deliver a bright future, but changing it raises the question of why the previous one was wrong. Changing a bad strategy can therefore undermine the belief of investors in the company and its management with a consequent adverse impact on the share price. For this reason, a board may decide that changing the CEO or finance director will help to restore investor confidence – even if they are actually quite good.
All of this means that the most valuable thing for a board to spend its time on upfront is in the creation and testing of the strategy for the business to make sure that it has the best possible chance of actually working … from the start. This means:
- Professionally considering the issues of how the company will win in the markets that it can effectively compete in.
- Really understanding customers’ needs and demands, especially when providing new products and services.
- Choosing how and where to compete, based on a solid understanding of what makes the company great versus the competition.
- Thoroughly planning implementation programmes, to ensure that they will work, and that the business has the skills and bandwidth to deliver.
“Leadership” is about much more than standing at the front of a crowd of followers and demanding blind obedience to the leader’s ideas. Leaders need to spend the time considering the big issues of how the business will succeed, engaging their people to get their best contribution to the plan, and their whole-hearted commitment to its success.
Staffan Engstrom BSc CEng FICE is a strategic development consultant who runs an independent consultancy working with construction and support services businesses to help them to accelerate growth, increase profitability and manage risk. He was formerly group strategy director and divisional managing director at Carillion and Tarmac Construction.
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Whilst Staffan Engstrom talks about having the right strategy, this is only a means to an end. A strategy is the grand, over-arching plan for achieving an objective, made up of a series of supporting plans in different areas of the business that support the aim in a co-ordinated manner and move you towards it. But you have to know what that objective is in the first place so that the effectiveness of the strategy has some reference point.
It’s not clear from Engstrom what Balfour Beatty’s objectives are: to grow their returns? Or to be dominant in certain fields of work? It’s the objective that needs to be clear to everyone in the business so that if things at any level don’t work out as envisaged , team, department or divisional plans can be changed or amended as necessary. The focus must be on maintaining progress towards the goal that has been set without heading off in some other direction that may appear attractive but which doesn’t help to further the aim. Without everyone knowing what you’re aiming for, it’s difficult to have a coherent plan of how to get there, or even to know when you’ve accomplished it
Derek Beaumont’s comment is no doubt valid; however any business, such as Balfour Beatty, would need to be at least slightly discrete in advertising their exact detailed strategy because others might consider those Balfour Beatty plans most helpful, adopt the same strategy and become competitors.
That would not be useful to the firm. After all business can be compared with war like activities between competing nations – dominance: one in the market and the other for power are comparable.
Unfortunately in any commercial enterprise there has to be some degree of smoke & mirrors, no matter how unfortunate that is; enterprises unlike governments, which should be and mostly fully transparent, save that of issues of security, have to take care. Indeed governments have to do the very same as businesses for their war plans: otherwise they will be so easily adopted by potential enemies. Just look what happened in WWII: the German’s adopted a French flexible-attack-plan, developed by a disgruntled French General, who was opposed to the fixed immoveable defences set by the French establishment. The Germans copied the disgruntled French General’s views: went around the ends of the Maginot Lines with a fast and flexible penetrating attack cutting off and illuminating it. A method, which one might consider as the tradition Napoleonic Imperial French fighting style; a style that even Lord Wellington admired albeit with fast cavalry.
So there we have it: openness is good in a general terms but never specific details so the real objective that Derek Beaumont wants may not be told, then we are left with only the commercial financial ones.