Ep. 46: Larry Serven - How to Execute Your Strategy for Long-term Value Creation

Larry's Resources:

1. Key Principles of Effective Financial Planning and Analysis: https://www.imanet.org/insights-and-trends/planning-and-analysis/key-principles-of-effective-financial-planning-and-analysis
2. The 12 Principles of Best Practice FP&A: https://sfmagazine.com/post-entry/november-2017-12-principles-of-best-practice-fpa/
3. The People Side of FP&A: https://sfmagazine.com/post-entry/july-2019-the-people-side-of-fpa/

FULL EPISODE TRANSCRIPT
Mitch: (00:05)

Welcome back to Count Me In, IMA's podcast about all things affecting the accounting and finance world. I'm your host Mitch Roshong. And today's conversation is between my co-host Adam Larson and our guest Larry Serven. Larry talked to Adam about strategy, execution, the role of the finance team, and creating long-term value and how companies can better align their strategy with their actions. So now here's episode 46 of count me in.

Adam: (00:36)

So, Larry, what is meant by strategy execution and why is it important for creating long-term value?

Larry: (00:43)

Well, you know, when you think about it, strategy execution is really about turning plans in a reality, making them happen. You know, actually doing what you said you were going to do. You know, I like to use analogies because you know, I personally find them helpful. So, I imagine I have a goal to lose 10 pounds. That's great. And I have a strategy and my strategy is to exercise more and eat less. That's a good strategy, you know, that's terrific. But what ultimately counts is whether or not I effectively execute that strategy in and lose the weight. Right? So personally, I would take a mediocre strategy that's been well executed over a great strategy, poorly executed, and I would do that any day of the week. And frankly, so will most investors. I started my career at Pepsi Cola international and that's a company that really prides itself on execution and they kind of have to the beverage industry is highly competitive and to survive you really need to be you know, you have to have a great strategy, but you also have to have world class execution. So, Pepsi actually paid a wall street firm to come in and determine the value of effective execution on the stock price. Now there's a whole back story to that I could go into if we had more time. But they concluded that predictability of earnings accounted for close to four points of the price earnings ratio. And that translates into about $50 billion in market cap. So, for Pepsi consistently executing strategy was worth about $50 billion. And since all the executives held stock in the company, you know, the value wasn't some abstraction. it was real money in your wallet. So, if you're a public company, then strategy execution is worth a whole lot. But you know, even if you're privately held, an effective strategy can be very valuable when meeting loan covenants, dealing with bankers. But I think even more to the point strategy execution means you're hitting your goals, achieving what you set out to achieve. And that's what every CEO and CFO wants. And it's, you know, what they get paid to do.

Adam: (03:16)

So of course, every company wants their strategy to be executed perfectly. But why do they typically fail?

Larry: (03:27)

Well, keep in mind the really four fundamental things necessary to execute a strategy assuming of course you have one to begin with. first people need to know what it is they need to do. Second, they need the proper resources to get it done. Third, they need some motivation to get them done. And finally, there needs to be transparency. Transparency in the goals and objectives, transparency and reporting, the actual results also transparency in the progress that's being made. So, for many organizations one or more, or sometimes all four of those fundamentals are missing. And you know that's obviously a problem or that's obviously a problem, but equally fundamental, there needs to be perfect alignment between all four, but more commonly they're disjointed. they all exist in some form, but they're not integrated in, they're not reinforcing. So, you know, for example the strategy calls for the company to focus on innovation to increase market share and revenue, but it never actually gets translated in concrete terms into an operating plan or the budget process. which is where the real allocation of resources happens. It doesn't actually reflect the strategy. You know, I had a CEO tell me you know, just last week about his frustration, you know, spending three days in an executive retreat that define the strategy and specific initiatives to execute it. He said, the session couldn't have gone any better. Everyone was really excited. You know, they had a real plan. But three months later when they were, you know, in the budgeting cycle, he was presented with a budget P and L and he has a seemingly very simple question where's the strategy and all this. And all he got was blank stares. People hadn't actually thought through what resources they needed to properly execute the strategic initiatives that they committed to, or in some cases they had, but it was done very quickly with the back of their left hand. And it wasn't worth the paper it was printed on and then, you know, you think about incentive compensation, you should be able to ask anyone what their goals are and see how they reflect the execution of the strategy. And I think we're going to be talking about a case study a little bit later on. And I think there's actually a good example there. But you know, for many companies you'd be hard pressed to see a clear line of sight between an individual's incentive comp and the strategy. You know, I could go on with, with other examples. But when you think about all four requirements being in place and actually well aligned, it's frankly not surprising that most companies struggle with strategy execution.

Adam: (06:35)

So, what if you're listening to this podcast and this is the first time you've heard these four elements mentioned at the same time and executing strategy, how would one go about identifying which one they're missing?

Larry: (06:46)

Oh, that is a great question. the practical advice here, and I'm big on practical advice, is map out today your processes from strategy, right through budgeting through the reporting of, of actuals your compensation. incentive compensation. We map it all out, put it down on paper, not the way you think it should exist in the future, but the way it actually exists today and those missing pieces of the puzzle, those disconnects are going to pop right off the page when you do that. So, the advice to get started is map it all out today and you're going to see where the disconnects are.

Adam: (07:37)

That's some great practical advice, Larry. So, what role does the CFO and FP&A have in general in general have in strategy execution?

Larry: (07:50)

Well, you know, what you think about it, a finances role is to co-create and then o...