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When to change strategy and how to avoid having to (at short notice)

Posted on: June 20th, 2014 by Staffan Engstrom

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.

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.

This article was written by Staffan Engstrom and originally published on 17th June 2014 by Construction Manager.