A company’s financial reports can provide critical insights into its strategy — if you know where to look.
As part of our research on strategy for execution, we analyzed how large, publicly traded companies described their strategy in public documents. Our sample consisted of 494 companies included in the 2014 Standard & Poor’s 500 Index (S&P 500) that were still publicly traded at the end of 2015. (See our first article in the series, “Turning Strategy Into Results.”)
To identify a company’s strategic priorities, we examined its filings with the U.S. Securities and Exchange Commission and other formal communications to investors.
- For each of the 494 companies, we obtained the full text of the 2014 fiscal year Form 10-K report. To identify a company’s strategic priorities, we read through the description of the business in the 10-K (Part 1, Item 1) and management’s discussion of their operations (Part 2, Item 7). These are the two sections of a 10-K where management is most likely to discuss its strategy and corporate objectives. If we did not identify strategic priorities in either of these two sections, we searched through the entire document for any occurrence of the words “strategy,” “strategies,” or “strategic” and other terms (for example, “pillars,” “imperatives,” “focus”) that might indicate strategic priorities, and analyzed the surrounding text for occurrence of strategic priorities. We identified strategic priorities for 239 companies (48% of the 494 companies) in their 10-Ks.
- If we could not find strategic priorities in the 10-K, we obtained the full text of the company’s annual report and read the letter from the chairman and/or CEO and the report’s full text to see if it specified the company’s strategic priorities. We identified strategic priorities for 72 companies (15% of the companies) in their annual reports.
- For the remaining 183 companies, we searched the investor relations section of their websites for presentations to investors, transcripts of calls with analysts, and other official presentations of strategy for fiscal year 2014. We searched the document texts for discussions of strategy or its related terms and analyzed the surrounding text. We identified strategic priorities for an additional 40 companies (8%) in these documents.
- We could not identify strategic priorities for 143 companies (29%) in any of the data sources mentioned, either because the companies did not have strategic objectives or chose not to make them public.
We define strategic priorities as an explicit set of prioritized actions to execute strategy over the mid-term, and we used a five-pronged test to identify strategic priorities in the documents we reviewed. A set of objectives had to pass all five filters to qualify as strategic priorities.
- Explicit set. Rather than inferring strategic priorities from the text, we looked for cases where the company explicitly called out a set of objectives. A group of priorities was considered explicit if it was named. The most common names in our sample were strategies (96 companies), strategic priorities (35), strategic initiatives (14), and strategic objectives (10). A set of objectives was coded as explicit if it was broken out separately from the main body of the text, highlighted in bold or italics, or presented using bullet points or a numbered list. In a small number of cases, priorities were embedded in the body of the text, but we excluded these from our analysis to minimize subjectivity.
- Prioritized. A large company could have tens or hundreds of worthwhile financial, market, operational, human resources, social, and other goals. To qualify as strategic priorities, we looked for a small number of objectives (versus a long list of “strategic” factors) as evidence that managers had prioritized those goals. Of the 351 cases where we identified strategic priorities, 321 (91%) listed six or fewer objectives. We also coded a set of objectives as prioritized, regardless of the number, if the company labeled them with a term that denoted prioritization. Companies could signal prioritization through nouns (for example, priorities, pillars, imperatives, areas of focus) or modifiers (such as big 5, fundamental, key, major, core, primary) used to describe the set of objectives.
- Actions. The objectives are described using a verb (grow, improve, increase) or a gerund (achieving, cutting) to achieve an end. The presence of action distinguished strategic priorities from financial or market-share targets that provided no guidance on the actions that were required to achieve them. We excluded general descriptions of how a company operates (for example, lists of competitive strengths, broad business philosophy), industry trends, and risk factors that did not imply specific actions.
- To execute strategy. We coded priorities as strategic if they described how a company planned to execute its strategy. We coded a set of objectives as strategic if they included the term “strategy” or one of the variants of the term, or if they followed immediately after and referred to a separate and explicit description of the company’s strategy. The most common location for these discussions of strategy were in overview of business or management discussion sections of the 10-K or the Chairman’s letter in the annual report.
- Mid-term. Strategic priorities typically require a few years to achieve, and we saw them as distinct from quarterly or annual targets. We collected data on annual goals when available, but excluded them from our analysis.
We then classified the strategic priorities by topic. To ensure consistency in data quality, we limited our analysis to those objectives reported in a company’s 10-K or annual report, and identified 1,508 strategic priorities across 311 companies. To create our initial topics, we focused on four approaches to strategy: dominant logic, market positioning, resources and capabilities, and stakeholder theory. We reviewed the relevant literature to identify concepts commonly associated with each approach to strategy, such as customer intimacy and operational excellence (dominant logic), low price and differentiation (market positioning), brand and intellectual property (resource-based view of strategy), and regulatory compliance (stakeholder theory).1
We independently hand-coded 500 strategic priorities selected at random, adding new categories to accommodate strategic priorities that did not fit into the initial topic classes. The authors discussed and reconciled their coding to create an agreed-upon set of categories for subsequent coding, and added a few new categories as they classified the entire data set. In the end, there were 43 topics (including an “other” category) for nine strategic priorities that could not be otherwise classified. (See “Classification of Strategic Priorities by Topic.”) The authors independently hand coded the 1,508 strategic priorities, agreed on 1,409 (93%) of their classifications, and discussed and agreed to a classification for the remainder.
In addition to coding the content of the strategic priorities, we also assessed how well each company communicated its objectives. We created six binary variables to measure priorities on six elements of effective communication.
- Focused. Communicating a small number of priorities signals the importance of the priorities relative to other objectives and makes them easier to communicate and remember. A company received a score of 1 if it listed five or fewer strategic priorities and 0 if it listed six or more. Of the 311 companies we analyzed, 244 (78%) named five priorities or less.
- Explanation. In some cases, companies simply listed short phrases summarizing their strategic priorities without further explanation of what these objectives meant. Other companies elaborated on their headline objectives, and their explanations typically ranged between a sentence and a paragraph per strategic priority. A strategic priority receives a score of 1 if any explanation (regardless of length) is provided about the priority, and a score of 0 if no explanation is provided. Of the 1,508 strategic priorities we identified, 1,087 (72%) included an explanation.
- How to. Leaders can further clarify their objectives by providing examples of initiatives or programs that could help achieve the objective; 834 (55%) of the strategic priorities included concrete examples of steps the company has taken or could take in the future to achieve the goal.
- Why it matters. Executives can highlight the importance of their priorities by explaining why they are important to achieving their strategy. Several companies in our sample, for example, listed cost cutting as a priority and explained why cost reductions were critical to fund investments in innovative products or technologies; 661 (44%) of all priorities included some explanation of why the goals matter.
- Communicating progress. Companies can clarify their objectives by reviewing past progress. Priorities received a value of 1 if their description included quantitative measures of progress; 267 (18%) of goals included numerical measures of progress.
- Specifying targets. Companies can also make their priorities more tangible by committing to concrete targets to measure progress; 91 (6%) of the strategic priorities included quantitative targets.