Who owns strategy & risk in privately held middle market manufacturing firms?

Ed Marsh | Jul 28, 2017

business strategy planning is a contest between priorities and opportunity

Today is immediate...tomorrow can wait

In its recently published 2016-17 Private Company Governance Survey, the NACD confirmed with research several challenges that I see consistently in industrial manufacturing firms.

Business strategy planning, risk management and cyber security are generally disregarded among the pressing and urgent issues of today. And when companies do undertake their formal annual planning, even those with very sophisticated processes, the value is minimized because the default is almost always to start with today and plan in increments/tweaks from there.

During periods of stability that approach works acceptably, albeit with risk of opportunity costs and some competitive exposure.

However, during periods of disruption that often carries substantially elevated risk - similar to the incremental approach that many manufacturers took to the price, quality and lead-time disruptions of the 90s.

Research insights - strategy & risk

The survey data has a number of compelling/startling (depending on your perspective) insights. Drawn from 414 privately held companies, 42% of which were closely family held or owned by company founder, and 42% or which were lower and mid middle market ($10-250M), the research queried directors.

Key findings included:

  • Among the "five trends likely to have greatest effect on your company over the next 12 months" were: significant industry changes & business model disruptions
  • 55% said that "improving their engagement in strategy setting is critical"
  • cybersecurity risk is keeping directors on edge and prompting more active engagement with management
  • 61% are focused on improving quality of strategy related dialog with management over the next year
  • over the last 12 months boards have: pushed management for more strategy related information, discussed changing needs of customers, mapped capital allocation to strategic priorities, considered external factors impact on strategy, assessed competitive environment
  • board risk oversight fails to mention FCPA and GDPR exposure but recognizes that rapidly and unpredictably shifting customer preferences are a source of significant risk exposure

Boards stepping in where management is preoccupied

This is a disruption story.

Management is focused on running the business today.

But buyer preferences, both for products & services themselves, and business model, are changing in unpredictable ways. Risks are increasingly asymmetric - it used to be that the source and magnitude of risks was intuitive. that's no longer the case.

Boards seem to recognize that, and are stepping into the business strategy planning breach where management's daily priorities and shorter term focus are precluding substantive work on strategy and risk management for disruption. Both are important for sure - but the likeliest outcomes of this bifurcation are friction and dysfunction; between routine priorities and long-term issues, and between management and the board.

A path forward

In the linear world of manufacturing there's a natural inclination to think in terms of iterative vs. innovative change. The first step toward improved business strategy planning is to challenge that mindset, and to recognize that broad and intersecting perspectives will uncover both defensive imperatives AND offensive opportunities in disruption - while disregarding them would be temporarily more comfortable, but negligent.

The second step is to embed disruptive agitators from multiple disciplines (e.g. finance, engineering, marketing, sales) in an internal skunkworks.

And then companies will need to map operational decisions to strategy rather than plan once a year and operate daily.

The trick is getting there - and one important first step can be a Day of Disruption Discussion during board/management off-sites. Ideally there'd be a facilitated exploration of the situation and agreement on standing up the skunk works. The management and board would collectively adopt a clear purpose and guidelines for the team.

A follow on meeting, also facilitated, would bring the board, management and key team members together for a working session to demonstrate the board's commitment and to establish lines of communication.

And then the team would be regular presenters at board meetings, and accountable to quantify opportunities and risks - as well as demonstrate savings/growth realized as a result of their efforts. In other words a blue ocean effort, grounded in business reality.

The challenge of control

This naturally elevates the role of the board from a periodic rubber stamp. That's going to be unacceptable for some founders & families.

That's OK. Not all companies are destined to thrive. 

Those that are, however, will subsume egos to wisdom. And board composition will become an increasingly important differentiator. Where intersecting skills (global, digital, risk, finance, revenue growth, HR, IT) are combined thoughtfully to create a matrix of expertise, CEOs and senior management will find enriching insights and dialog.

Lower middle-market companies are no longer likely to thrive as lifestyle fiefdoms. Are you willing to make yourself accountable to a hot-shot board?

Want to start the strategy conversation in your company? This guide provides a question/discussion framework to launch the process.

strategy guide for manufacturers