‘Just as valiant warriors face off against a morning field so, too, do companies engage in a life or death battle to survive, thrive, prosper. And one thing will predict time and again who will emerge the victor: strategy.’
No, this isn’t a pep talk for the corporate rank and file at boot camp, nor did a visionary management guru write it. It just happens to be the first paragraph of a special chapter on strategy in the 2002 annual report of Cable Design Technologies.
CDT is a leading US manufacturer of broadband network products that has recently gone through difficult times, with net income reduced in fiscal 2002 to a fifth of what it was in the previous year. So – at first sight – the company is right to play field marshal, touching on both strategy and ‘tactical maneuvers’ in its letter to shareholders, and enlarging on the subject in a special chapter.
But CDT’s 2003 report, which indicates a further decline in gross profit, is a lot more factual, as if the continuing crisis has rendered the company’s strategy obsolete. Haphazard rhetoric certainly doesn’t improve the company’s credibility with investors and rating agencies. When CDT made a $100 mn unsecured debt offering in July 2003, Moody’s rated the debentures at a mere ‘Ba3’.
High priority for investors
Strategy does have a potent impact on investment decisions, however. Investors and analysts surveyed by Ernst & Young ranked execution and quality of corporate strategy as first and third, respectively, in a list of the top ten most important non-financial measures.
Considering this, there is a remarkable discrepancy between disclosure expectations and what corporate reports actually deliver. Indeed, annual, quarterly and web reporting often tends to be factual rather than strategic, itemizing results and targets in a piecemeal way rather than providing a coherent narrative.
Take Citigroup, for example. The world’s mightiest bank in terms of market cap is remarkably reticent when it comes to strategy. Those browsing its 2002 report will find two full pages on community commitment, plus sizeable passages on the same subject in both the letter to shareholders and one of the business divisions reviews. On the subject of strategy, however, which is far more pertinent for shareholders, there is practically nothing. Those consulting the company’s quarterly reports and its web site are none the wiser, either.
Between paralysis…
Citigroup is by no means an isolated example. Many companies seem to suffer from strategic paralysis without analysis, as opposed to the usual paralysis-through-analysis. Most annual reports reveal a yawning gap between the fluffy visions and mission statements at the beginning and the hard financial data at the end. In fact they generally lack such strategic basics as market overview, industry influences, growth and diversification strategies.
Strategic paralysis is, of course, particularly poignant when a company is on a downward bend. For example, Nikon, the Japanese supplier of high-quality cameras and optical equipment, had a bad fiscal 2003, with losses higher than the year before, and no dividend paid.
The company obviously takes strategy seriously – among its managing directors is a chief officer of corporate strategy center supported by two assistant chief officers at director level. However, strategy is simply not tackled in Nikon’s report. The company makes quite a pitiful impression, apologizing about ‘harsh business conditions’ and appealing to shareholders and investors to understand the firm’s situation. But nothing is communicated about how Nikon intends to extract itself from its current misery.
…and proactive reporting
Sony is also rapidly becoming a classic failure case study. In the first quarter of the 2003 financial year, its profits declined by a staggering 98 percent and, months later, CEO Noboyuki Idei announced drastic restructuring including retrenchment to the tune of 20,000 jobs.
But in stark contrast to Nikon, Sony proactively addresses strategic issues. Its annual reports have consistently focused on existing structural deficiencies and technology development plans. The electronics giant is asking the financial community to be patient until 2006 when, on its 60th anniversary, Sony plans to reach a profit margin of 10 percent. Mitsubishi, Toyota and Honda are similarly strong on strategic plans.
So what exactly is strategy? The textbook definition is ‘the art of devising and employing a careful plan or process towards a goal’. Mike Guillaume, co-founder of e.com, a consultancy that reviews best practice from across the world, judges strategic quality on the basis of the following: Does a strategic vision pervade the report? Is there a progress report to enable the reader to assess the execution of strategic objectives? Are future short and long-term goals set out? Are implementation problems revealed?
Charting the way
Strategy blooms in unexpected places. Deutsche Post World Net (DPWN), an up-and-coming mail and logistics provider that competes with the likes of FedEx and UPS, is a model of strategic diligence. It has a large chapter on strategy in its 2002 annual report, covering such impressive facts as this: in twelve years, this formerly loss-making state-owned postal service quadrupled its revenues and successfully acquired companies like Danzas and DHL.
Building on this track record, DPWN is gunning for more, out to increase earnings to Ä3.1 bn ($3.9 bn) by 2005. And with a concrete income target on its strategic road map, the German company is out to eliminate what it considers a valuation discount on the stock market. To achieve this, it is launching DHL as an umbrella brand and, parallel to streamlining its product portfolio, the company is reorganizing its European network.
In fact, a broad range of German companies, from chemicals giant BASF to automotive supplier Continental, also focus on specific aspects of strategy – economies of scope in the case of BASF, and diversification at Continental.
The magnificent Canadians
Guillaume also lauds Canada as a strategic powerhouse, citing Bank of Montreal, Royal Bank of Canada and telecom companies like Bell Canada Enterprises and Telus. And the sheer volume and depth of information provided can be staggering. Canada’s second-largest telecom utility, Telus, is a model of strategic continuity. An entire chapter of its 2002 report is devoted to ‘a review of our performance against our six strategic imperatives that have consistently guided our actions since we embarked on our journey in 2000.’
This might seem smug but it is followed by an in-depth analysis of targets and results, and an impressively concrete roll call of targets for the next financial year: Ebitda, operating earnings and cash flow. Beyond that, this industry leader in western Canada sets qualitative targets in customer service and trade union relations. No wonder it has received nine reporting awards in succession from the Canadian Institute of Chartered Accountants.
Another star is Cameco, a uranium fuel supplier that substantiates its promise to excel in its core business with cogent arguments and convincing evidence. It also reports in almost gloomy detail on the ‘disappointments’ of the year. And, in typically Canadian fashion, it presents a table of targets, performance and next year’s targets, followed by an entire chapter on core competencies, conversion growth and vertical integration strategies.
The word ‘strategy’ derives from the Greek ‘strategos’, meaning generalship – indeed, the famous military scholar Basil Liddell Hart called it ‘the art of the general’. So CDT’s life-or-death battle rhetoric in its 2002 annual report is at least in sync with the origins of strategy. Intriguingly, a year later, the same company starts the report on a decidedly more philosophical note. It quotes a Welsh proverb: ‘Adversity brings knowledge, and knowledge, wisdom’. This could in fact be the right corporate wording for the post 9-11 era. Let’s hope that for CDT and other companies in similar predicaments wisdom ultimately leads to a coherent strategy.
