It’s surprising how often CEOs and their boards make decisions that defy the three most important inputs that drive strategy creation:  

1/ Their own POV about the future of their industry based on informed strategic foresight,

2/ Their own intuition about what creates sustainable shareholder value based on the core activities the company should engage in,

3/ Their own understanding of the economics of the business based on minimal or optimized scale and scope.   

Every CEO is under constant pressure to deliver short-term profits, provide effective new structures for reorganization, and avoid oversimplification of their business model the pressure of which, when not monitored, can lure them into a negative downward spiral. To stop this spiral, CEOs and their boards need to analyze how value is being created by their existing output, before jumping into offering  more products or services. The simplistic drive to sell more products often pushes them down a wrong path. CEOS need to sit back and discuss these three key factors before making any new decisions, in order to ensure that their future offerings create real value and are in line with the existing business scale and scope. Only then can they have a holistic understanding of how value is being created and a comprehensive overview of how to push the business forward.  

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I am talking about long-term value creation and not short-term value optimization through financial engineering or asset reduction. Securitization, leverage, share repurchases, or spin-offs are about unlocking value and not creating value. Here, I mainly refer to creating value through innovation, including inventing a new industry or reinventing existing ones, with the intent to either achieve a high P/E multiple or cash positions. We should be well aware that high growth through strategic innovation is more desirable – even though it is potentially less sustainable – than high ROIC, as it can create a big return within a shorter period of time. Many CEOs and CFOs are putting too much attention on earnings per share (EPS) and even trying to make earnings more predictable; it is a waste of time. Volatility is the norm these days for most industries. Any attempt to improve earnings through reduction of discretionary expenditure, such as research and innovation, will actually end up jeopardizing long-term shareholder value. Instead, business executives should be focusing on finding new ways to change the economics of the business or increase revenue, resulting in better return on capital. Markets are far more accommodating to companies who are transparent about the trade off between short-term performance and longer-term value creation.

Good CEOs plan their time carefully. Instead of allowing day-to-day problems distract or hijack their agendas, or constantly changing their minds, they adhere to a core vision and execute it faithfully. They are the primary caretakers of the strategic vision that is based on an explicit foresight. It is not something they can delegate to CFOs or COOs. As such, CEOs and boards need to clearly articulate: their future (through strategic foresight), how the company is in the best position to capture these values in the longer term (through value creation activities), and what risks are involved, in addition to highlighting the potential pay-off. They should encourage innovation-driven value-oriented dialogues across the company, and even engage middle management for the discussions. Real innovation does not happen behind closed doors.

Image via flickr

Original Post: http://idr.is/encouraging-innovation-driven-dialogue-as-a-ceo/

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