Boardroom Fundamentals For A Digital Strategy

Koert Breebaart

Now that most companies are starting to rethink their business processes with the idea of digitization, a larger question pops-up: “Is our strategy still relevant? Can we be successful in the digital economy?” One great example of how rhetoric in boardrooms can help define relevance, competitiveness, and growth is Gen. Norman Schwarzkopf’s famous “Left Hook” strategy.

In August 1990, Iraq invaded Kuwait over a dispute on border disagreements, debt, and oil production. The United Nations immediately condemned the invasion, demanded withdrawal of Iraqi troops, and placed economic sanctions on Iraq. In this Operation Desert Shield, U.S. forces built up in the Saudi desert and Persian Gulf. On February 24, 1991, coalition forces liberated Kuwait with a decisive victory that took less than 100 hours to achieve.

As in boxing, Schwarzkopf’s Left Hook started with a right cross to divert the opponent, finishing with a devastating left hook punch. It is also a well-known war tactic, used by Hannibal, Caesar, and Napoleon over the past 2,000 years. This is one of the first war theories cadets at West Point Military Academy learn. So why were Saddam Hussein, then the president of Iraq, and a large part of the world so surprised by this strategy?

The U.S. Marine divisions advanced into Kuwait from the sea coast, creating the impression of an amphibious attack, drawing the Iraqi troops to the south, and weakening the other defense lines.

The Marines’ presence was concealing the real attack: a roughly 150-mile sweep west by U.S. Army ground forces into Iraq to cut off supply lines and the Iraqi troops retreat from Kuwait. This “left hook” caught the Iraqis completely by surprise and resulted in the surrender of large numbers of Republican Guard troops. Within 100 hours, the U.S. called for a ceasefire.

Boardroom strategies: General aim and process

Schwarzkopf’s strategy was designed to deceive and outwit the enemy. The same definition of strategy holds true in the corporate world. In Competitive Strategy, Michael Porter defines strategy as the “…broad formula for how a business is going to compete, what its goals should be, and what policies will be needed to carry out those goals.” In competitive markets, companies base their strategy on two pillars:

  1. Increase willingness to pay (WTP) – A strategy aimed to increase both unit price (P) and volume (u). Typically, this has two aspects. First there is what you sell: the attractiveness of product or service itself. In a digital economy, the attractiveness is largely defined by the network or ecosystem that your service is on. The success of most Silicon Valley unicorns like Uber, Airbnb, and Pinterest is based on their platforms. They let others create content and share profits. These platforms have the prospect of exponential growth. The second aspect is how you sell: differentiation by providing better customer experience than the competition. I describe this strategy in my book, 5 Steps to Customer Centricity.
  1. Decrease resource costs (RC) – A strategy aimed to bring the cost structure below that of the competition. For example, marginal costs (MC) can be reduced by driving out waste and fixed costs (F) by creating economies of scale.

If we combine these two pillars we have a profit-maximizing strategy. A formula for this would look like:

profit-maximizing strategy

The board wants to understand the long-term impact of such profit to the value of their company, so they also need to take time into consideration. As they are operating in a market where there is cost involved to obtain capital, there is the time value effect of money. Future profits are discounted typically with the Weighted Average Cost of Capital (r). The lower the discount factor r, the larger the area under the exponential curve.

Weighted Average Cost of Capital

Thus, a boardroom strategy to maximize total shareholder value of the product or service involves maximizing the Willingness-to-Pay (WTP), minimizing Resource Costs (RC), minimizing the Weighted Average Cost of Capital (WACC), and maximizing the period over which they sell. And, if a company is selling multiple products/segments in multiple countries, the total shareholder value is defined by the sum of the parts.

According to Professor Phil Parker from INSEAD, shareholders generally value business strategies that aim to:

shareholder value
  1. Generate revenue by selling as many units as possible (u) at high price (P)
  2. Reduce costs by lowering marginal costs (MU) and fixed costs (F)
  3. Grow the number of countries (i), segments (j), and products (k)
  4. Reduce the weighted average cost of capital (r) by restructuring debt and moving to countries with lower interest and tax rates
  5. Innovate to sustain profitability for a long period of time (T)

But how to build such a strategy? Jay Kim, professor at INSEAD, argues that a strategy is the outcome of a five-step process:

strategy is the outcome of a five-step process

“The strategic objective (1) in the corporate world is often a proxy for creating more profit. The execution (5) is a proxy for what the company is good at doing. So, the boundaries of the strategy should be quite clear in most cases. The crux in strategy definition lies in steps 2 to 4. If those are not done properly, the strategy is difficult to explain at the risk of unengaged and unaligned shareholders, partners, and employees, leading to suboptimal allocation of resources.”

This five-step process to create a strategy is not linear. It is highly iterative. Successful companies monitor the effectiveness of their strategy continuously and adjust course accordingly.

The Battle of the Somme

On 28 June 1914, the Archduke Franz Ferdinand of Austria was assassinated by a Yugoslav nationalist in Sarajevo. This set off a diplomatic crisis that, within weeks, led to a war of the Central Powers (Germany, Austria-Hungary, the Ottoman Empire, and Bulgaria) versus the rest of the world. Britain entered the war when Germany invaded Belgium. Gen. Douglas Haig was the mastermind behind the “big push” to break the German lines at the muddy banks of the river Somme and drive the Germans out of France. This turned out to be one of the most horrific, traumatizing (and futile) battles in history.

Haig’s strategy was to have a huge artillery bombardment to scatter German soldiers and destroy their trenches and the barbed wire that surrounded them, followed by an advance of British infantry to occupy the German trenches. That would then give passage to the cavalry, men on horses, to sweep northwards and attack the remaining German positions and “roll them up” from the south. Gen. Haig wasn’t afraid of German machine guns. He called them “a much overrated weapon” and said they would lose out to a classic cavalry charge.

The eight-day bombardment was the heaviest in history until then. The rumblings were at times audible in London. Haig promised his infantry victory: The bombardments had cut the wire and a No Man’s Land was created.

Haig was so convinced of success, he did not have a plan B. And the Germans were well-informed. They created dugouts underneath the ground in which they hid, safe from the artillery. And the barbed wire wasn’t cut. It became more tangled and thus impassable. London refused to take warnings from the frontline on the effectiveness of the bombardments. Instead London commanded its men to be silent about their observations.

The end of the bombardments was a few seconds later by whistles. The first of the 120,000 British soldiers rose from their trenches and started to walk in straight lines, as they were ordered, with no place to hide, straight into sight of the German machine guns. There was no way back. The Battle of the Somme was Hell on Earth. On that day, 20,000 British soldiers were massacred, 40,000 more injured. The strategy took two years to create. It was all over in 10 minutes.

How can you redefine and execute your strategy?

How does your organization manage feedback from the field? How courageous is your company when it comes to adjusting the strategy? Is there a plan B when your digital strategy is not working?

The stories on the liberation of Kuwait and battle of the Somme showcase that that the success of strategy lies in the execution. Technology companies like SAP know what it takes to execute. With over 300,000 customers worldwide, solutions for 25 industries and 12 line of businesses, SAP is the largest business applications provider in the world, with 98% of the top valued brands as customers. A full 76% of the world’s transactions are managed on SAP. Learn more about how SAP can help your successfully leverage digital transformation.

This blog post was inspired by a lecture on Strategy by INSEAD Business School: Professor Jay Kim, Jason Davis, and Phil Parker (INSEAD Singapore on Monday May 15, 2017).

Koert Breebaart

About Koert Breebaart

Koert Breebaart is the Digital Leader and Vice President for the Conglomerates Industry Business Unit at SAP (Asia-Pacific and Japan). He leads the industry through value management, customer co-innovation, digital transformation, and business process performance improvement programs by developing road maps, reimagining business models, and reducing costs with digital technologies. On top of his expertise, Koert is also a passionate writer who consistently pens his thoughts and experiences in articles. He is the author of the book “5 Steps to Customer Centricity,” and the Director of the short documentary “Social Entrepreneurs: New Heroes of the 21st Century.”