Why is strategy such a source of angst? Primarily because of how and when strategy gets discussed. Most boards discuss strategy piecemeal over a series of meetings, often at the tail end of discussions. When longer meetings are devoted to the topic, one-way presentations of the strategy as a finished product usually dominate the meeting time. Then, when discussion ensues with what little time is left, there’s no clear train of thought, and seldom any closure.

Contrast that with the process that Progressive boards use not only to get full agreement on the strategy but also to help shape it. The best strategies are born from management’s analysis and creativity, coupled with the board’s incisive questioning and probing. The board should see the CEO and the top team present the strategy in their own words, then probe it, question it, and offer opinions on it. In-depth interactions with management strengthen the strategy and ensure that it is realistic. As the strategy is reshaped and improved, management and the board reach a common understanding of it. In the end, directors will wholeheartedly support it.

Getting alignment on strategy usually includes the following:

The essence of strategy is to describe what direction the business is going in: how the business will be positioned against competitors, why that positioning makes sense given the realities of the marketplace and of the broader external environment, how the business will grow, and what, in general terms, the company will do to deliver on the opportunities it is pursuing. Clarity, specificity, and succinctness in capturing the essence of the strategy are the sine qua non of meaningful dialogue about strategy.

Every strategy rests on a thorough view of the external context in which the company competes. That means the entire competitive landscape—the global economy, regulators, markets, suppliers, customers, consumers, competition, and any other external factors that might come into play. The strategy has to be informed by a point of view about where the external context is today—and how it is evolving.

The central piece of strategy is how the business will be positioned given the external context. That is, it must explain what the business is offering customers, how that offering is something customers really want and will pay for, and how it stands apart from other options inside or outside the industry.

For multibusiness companies, the strategy should explain the mix of businesses. What does that particular combination accomplish, and why does it produce more value than the businesses would if run as separate entities? How do the mix and its management compare with that of other multibusiness companies in the capital markets?

Discussions of strategy should focus on how the broad range of considerations fit together and not stall on the details of any one piece. Most companies will document their proposed strategies with voluminous statistical trends, extrapolations, and forecasts by experts. This data is useful, but it can become a time sink. Directors need to continually remind themselves and their peers to keep the discussion at a higher level: What alternatives were considered? Who are the competitors? What is their cost structure? How do they make money differently from us? What is our edge?

One question boards cannot overlook is: How will money be made with this strategy? The board cannot allow strategy to be divorced from the fundamentals of money making. Management can become enthralled with a strategy and swept away by just one financial target at the expense of others—“This merger will make us the largest company in the world,” for example—while ignoring the effect on the bottom line or the balance sheet. The board can prevent huge missteps by questioning how, with this strategy, the business will generate sufficient cash to meet its debt commitments and earn more than its cost of capital. If that result is unclear, the strategy may not be viable.

Equally important is: Does the company have the resources, not only financial but also human, to execute the strategy, and are they allocated appropriately? A change in strategy can require an entirely new skill set, or the withdrawal of resources from a business unit or a pet project. Does management have a plan to retrain the sales force from product to solutions selling, for instance, or to hire new people? Is it devoting sufficient resources to the growth areas and pulling the plug on others?

A host of other potentially important questions arise. Has management considered the full range of external factors? Has it made weak assumptions about how certain factors might trend, or failed to imagine how several factors might converge? For example, what might happen if debt is large, if the price of oil remains high, and if competitive dynamics prevent us from passing the increased costs on to customers? One director at a prominent company believes that the board’s input on the external environment is among its greatest contributions toward shaping the strategy.

Are key assumptions about the business valid? Will judgments about the value proposition to customers hold up? For example, the AOL-Time Warner merger was based partly on the assumption that bundling content and recycling it through multiple channels would be appealing to customers, thereby spurring higher revenues per dollar spent and generating substantial cash, a premise that was not met.

What is the competitive reaction likely to be? A move into a new market might awaken a sleeping giant. For example, when South African Breweries acquired Miller Brewing, dominant player Anheuser-Busch felt the hit and perked up; SABMiller and Anheuser-Busch are now playing an action-reaction chess game of strategy and tactics.

How will the capital markets value the strategic moves? In late 2000, Coca-Cola CEO Doug Daft proposed the purchase of Quaker Oats for its Gatorade sports drink, but the board opposed the deal, reportedly for financial reasons. Equity investors were likely to react negatively to the valuation. The Wall Street Journal quoted Coke director Warren Buffett saying, “Giving up 10.5 percent of the Coca-Cola Company was just too much for what we would get.”

Those are the types of questions that both sharpen the board’s understanding of strategy and sharpen the strategy itself. When the strategy becomes clear, so do the boundaries and areas of opportunity. An insurance company—and its board—knows whether or not it will move into broader financial services like equipment financing or high-net-worth personal wealth management; a bank—and its board—knows whether or not it will go into subprime loans. When an attractive acquisition comes along, the company and the board know whether to strike or pass it by.

That was precisely the case at GE. Months after an off-site during which the board and management became fully synchronized on GE’s strategy and management’s view of its external context, important opportunities arose for GE to separately acquire Amersham and Vivendi Universal. Directors were reminded of the external context and the strategy they had gone through in depth; they had already seen the very slides that now served to lay out the rationale for acquisitions. The board approved the decisions quickly and confidently. Several directors remarked that the context and broader strategy discussion allowed them to weigh in on those two defining decisions.

Strategy links to much of the rest of the board’s real work. It points to the tactics operating people must execute, and the metrics and compensation structures that measure and reward their progress. And it creates numerous opportunities for the board to add value.

In March 2004, the management team of PSS/World Medical, a $1.3 billion supplier of medical supplies, equipment, and pharmaceuticals, conducted an extended total immersion session to fully explain its strategy to directors and solicit their input. Competing in an industry with large, well-capitalized rivals, explains David Smith, CEO of PSS, it was critical for directors to buy into the long-term direction of the company. “When you are running a company—dealing with competition, legislation, customers, product recalls and labor concerns—the last thing you need to be worried about is whether your directors support your activities and what you’re trying to accomplish.”

But his desire to get the board involved ran deeper: “I saw them as a great resource, because these directors have done this stuff before. They have also seen mistakes or made mistakes themselves. So I wanted to get that brain trust involved in the process so it could challenge us, it could ask questions, it could put us through a vetting process to improve the content of our plan.”

PSS benefited tremendously. “The directors asked a lot of great questions,” Smith explains. “And they brought ideas that we hadn’t thought about.” Several directors have their ear to the ground in Washington, for example, and could tell the mood of the legislature. They pointed out several areas that could become problems in the future, and opened Smith’s eyes to the need for a backup plan. New legislation aimed at curbing the export of manufacturing jobs, one director pointed out, might make parts of the strategy obsolete, which the CEO would need to address swiftly.

Smith is convinced that the board’s intimate knowledge of the strategy will help the company move quickly in the future. “If I want to make an acquisition, I don’t have to explain why I want to make it; it fits right into the strategic plan,” he says. “If I make a move on an officer, I don’t have to explain why I made the move, because it’ll be clear where we’re not performing on the strategic plan or where we need a different core competency. So for a lot of the activity for the coming year, all I have to do is refer them back to the strategic plan.”

Some boards have begun to urge the CEO to hire a consulting firm to provide an independent evaluation of corporate strategy or the data behind it. There’s nothing wrong with using outside expertise, but ultimately the CEO must own the strategy, and the board must be responsible for ensuring that the strategy is sound. Directors have to trust their own instincts and collective judgments. The right approaches and mindset go a long way in giving directors who have not been engaged in the topic the confidence they need to add value in this area. Many a “dumb question” has saved a company.

Many boards’ strategy sessions fall short of providing high-quality immersion because of how they are designed and conducted. Opinion is just as fragmented after the session as it was before. What works best is to design a session that is more like a workshop than a stage show, to set aside a block of time—usually a day or two once or twice a year—and to ensure that ample time is reserved for open discussion and informal interactions. The social architecture can make or break the session.

There are many ways to hold a strategy session—a two-day retreat is often necessary for large, complex companies, while a four-hour discussion can work for a smaller company in only one business. Some companies reserve two hours of every other board meeting throughout the year to dissect various components of a company’s strategy. This approach, however, generally does not provide the total immersion possible in a longer session.

In the total immersion session, when it comes to content, three elements are essential. First, the board must have a clear understanding of management’s view of the external context. That could include changes in the economy, opportunities and threats, key markets in which growth is predicated, technological developments, news of competitors, mergers, or alliances in the industry, or changes in consumer behavior or distribution channels.

Intel’s board balked at a proposed acquisition of a telecom equipment maker, as Fortune magazine documented, “in large part because no one understood networking or telecom well enough even to know what questions to ask” (August 23, 2004, p. 74). The experience energized that board to expand its discussions of the external context going forward. Management must decide what is relevant, then present the information clearly and concisely, and in a way that reflects the CEO’s own insights.

In the summer of 2003, in a total immersion strategy session, GE CEO Jeff Immelt gave directors a clear picture of the company’s competitive landscape, including where the opportunities were and what issues were emerging. That discussion was a useful backdrop for key decisions that came up months later.

The second element of an immersion session is the strategy itself. Once the board understands the external context, the CEO and the top team should present their best thinking on the content of strategy. This presentation must be extremely clear and tight so directors can get the gist of it quickly. Management must use straight talk and do all it can to clarify strategy for the board. At one company, the management team had an hour’s worth of prepared comments on company strategy but spent about four hours on it as the team fielded questions along the way. Some directors find it useful to dissect another company’s strategy in the boardroom, as an exercise not only to better understand strategy in general but also to develop their skills in validating a strategy that is presented to them.

Usually the CEO takes the lead in presenting the strategy, but an alternative practice is emerging. Some chief executives who have been advised by a consulting firm have had the consultants help make the presentation. Generally speaking, that’s not a good idea. The board should hear the ideas presented in plain language, and in management’s own words.

Not all of management’s ideas need to be fully formed. There may be newer initiatives that management is still testing. It’s okay to present these during the strategy session, with the proper qualifier. CEO Smith did just that during PSS’s strategy off-site: “I told the board, ‘here are two initiatives that we need to do more work on before I can tell you what the outcome is going to be, or what I’m willing to commit to over the next three years. . . . In three months, I’m coming back to you with the outcomes of where these two items are.’”

Smith explains: “This is a social setting where it’s okay to challenge, it’s okay to question, and it’s okay to not know the answer.” That attitude helped make his company’s strategy session a success. As PSS Chair Johnson states, “The right environment is created by the openness of a CEO who is willing to make himself vulnerable.”

The third element of a successful strategy immersion session is the time and opportunity for the board to question and probe. Unless the strategy session is designed to encourage directors to react, contemplate, raise questions, and voice their hesitancies, the discussion will not deepen, and the whole session will be superficial and unsatisfying. Two principles must govern: informality and consensus. Everyone—the CEO, direct reports, other managers the CEO has invited to attend, and each and every board member—must feel uninhibited about challenging and responding to each other, but the focus must be on coalescing around a consensus.

Some CEOs and Chairs are very skilled at facilitation and can infuse the environment with the informality needed for rich dialogue. Other times, the lead director or another director may want to take the reins. If the process is particularly new, it might make sense to bring in an outside facilitator, someone with whom both the board and management are comfortable, who can ensure the dialogue is robust and the process is rich.

Informality and consensus are further enhanced through the use of breakout groups, an emerging best practice that can be built into any strategy immersion session.

Breakout groups are simple to orchestrate and profoundly useful as a means of reaching consensus on company strategy. The practice is to assign directors and managers to meet in small groups—two directors each with two managers—to discuss the strategy in more depth or to answer preassigned questions.

The value of breakout groups lies in the group dynamics. Small group dynamics are very different from large group dynamics. Small groups tend to have freer, more informal interaction, whereas large groups tend to be more formal. Having directors and managers meet in smaller groups lowers the threshold for directors to voice their thoughts and questions.

PSS set up a breakout discussion period following management’s overview of strategy. Two board members and two members of management sat at each table and discussed the same topics. The first topic was simply, What positives do you see in the plan? This not only allowed directors to focus on what they understood to be the positive aspects of the strategy but also gave management the chance to respond and explain further.

Other questions can prompt directors to probe deeper: What are we missing? What questions struck you as you listened to the strategic plan? And, Where is your discomfort?

Some two-day strategy immersion sessions block out the entire afternoon of the first day for small group discussions. Seating directors and managers at small tables in the evening allows informal conversations to continue.

The pairings in breakout groups should be carefully considered ahead of time. Mixing up the combinations of people prevents cliques from forming and gives directors the chance to get to know a wider range of managers.

When the breakout groups reconvene, as they must, participants are often highly energized and focused. That’s when the real breakthroughs often occur. The next step is to get the whole board to come to a consensus.

At two-day off-sites, directors are often charged up when they meet over breakfast on the second day. After sleeping on what they heard the preceding day, they come together with a heightened comfort level regarding the strategy and the management team. They also come together with nagging questions on specific elements of the strategy. In the end, directors must get those last few questions on the table, garner consensus on strategy, and provide feedback to management as to what assumptions need further testing, and what concerns are outstanding.

Sunday morning of one off-site, management moved quickly through findings and observations from the preceding day and gathered the directors around a single articulation of strategy. The strategy included expanding into an adjacent area for growth. The management team had experimented on a small scale and demonstrated its success. But one director asked a probing question: “What will it take to scale it up, and how will it affect the market dynamics when the company is operating at full scale in this segment?”

They clearly weren’t done yet. Another director asked, “What microsegment of the market is the competition likely not to touch?” The insights generated through the discussion that followed were again very helpful for the management team. Some questions couldn’t be answered on the spot but management pledged to get back to the board.

Getting to consensus is as much to make sure everyone is in agreement as it is to make sure the strategy is robust. Does the strategy make sense? Does it require modification? Directors will have different views on the risks and benefits inherent in the strategy. Here, the directors’ diverse experiences and specializations are a boon, enabling the group to kick around different ideas and come at the strategy from different angles. When the board discusses them as a group with management, opinion will typically coalesce around a few central ideas. The session must end with full agreement on those ideas and with take-aways and next steps for the board and for management. The board can follow up with shorter discussions in subsequent meetings.

Follow-up activities build on the strategy session. Management and the board together should use what they learned to revisit and rationalize the board’s Twelve-Month Agenda. Further, the common understanding of strategy should lead naturally into the definition of key metrics that become part of the information architecture. Having put the strategy through the wringer, directors and management should be able to identify the operational metrics—the leading indicators that signal the company’s future performance—as well as the few key metrics that track progress in implementing the strategy.

Committees must likewise follow through on their new understanding of strategy. The Compensation Committee, for example, should reexamine the compensation philosophy to make sure that its objectives are properly linked to the strategy. If the strategy is going in new directions, it could have implications for the Audit Committee as well, in setting controls and reporting standards, for example, with cross-border accounting. Even the composition of the Audit Committee may have to change. One large high-tech company projected that in ten years some 70–80 percent of its business would come from China and India. With that in mind, the board determined as a next step that the Audit Committee should recruit an executive with a background in China.

The idea of a strategy blueprint is to give directors information they can review and think about outside the boardroom as part of an ongoing effort to seek consensus on strategy. “It’s a very good idea for a CEO to send a strategy blueprint a few pages long to directors—before they discuss the strategy,” says Tyco’s Krol. “That way the board doesn’t get surprised by anything in a strategy immersion.”

In preparing a document that can be easily read and understood without verbal explanation, management is forced to be very specific, clear, and concise. And giving directors time to reflect on the ideas helps prevent those so-called knee-jerk reactions. This is an approach several companies have used with great success.

Elements of the blueprint are much the same as what management ideally presents during a strategy session. The blueprint should begin with a succinct review of the external context for the business. Next, the document must identify the building blocks of the strategy. These are, as mentioned earlier, the components of strategy the company must execute to achieve its financial targets over three to five years, or whatever time frame makes sense for that business. The blueprint must capture the essence of the strategy by answering questions in the six fundamental areas: how the business is positioned in the external context, what the performance goals are, what is distinctive about the business, how the business is adapting to the external context, how company resources are allocated, and what operating competencies are in place.

The document also should include the internal and external risk factors that management and the board must keep their eyes on. And finally, it should explain the connection between the specifics of the chosen strategy and the financial targets that express how the business makes money. An example of one company’s blueprint appears in Appendix A.

The CEO should distribute the blueprint and seek feedback on it before the board meets. One company’s review process worked well and has served as a model for several others. The management team wrote the blueprint and sent it to two directors: the lead director and the Chair of the Governance Committee. The CEO sat down separately with each of them to discuss three simple questions:

He spent two hours with each of the directors, responding to their thoughts and answering their questions until each was fully informed and satisfied about understanding the strategy and was convinced that it was the right way to go.

The document was then revised modestly and sent to the remaining directors, along with the same questions, by e-mail. Two weeks later, all replies had been received by the CEO and the two directors he had worked with, and a half-day board meeting was arranged. The lead director, who now understood the strategy thoroughly, took the role of facilitator and initiated dialogue over those three questions. A spirited exchange followed. The directors had all clearly read the blueprint and put a lot of thought into it. The questions were constructive and very deep.

Initially, the group was far from agreement on the strategy. Many different viewpoints emerged. Some were exploratory. One newer director, for example, introduced an idea to focus on a high-margin segment of the customer base. Over the course of the discussion the board decided to drop it. Other views had been heard before; board members politely reminded one director that they didn’t agree with his suggested positioning for an entirely different set of customers.

In the end, the only modification was to switch the priorities of two strategic building blocks. After the rigorous review of the strategy blueprint, the full board had reached the agreement on strategy that had previously eluded them. Follow-up with this company indicates that the strategy continues to have the board’s support and has been communicated to company employees and investors; management is energized to execute it.

In 2003, Kodak announced a three-year strategy to accelerate its shift into digital products. It recognized that the long-term ability of the company to compete would depend on embracing the dramatic change in consumer take-up of digital imaging. But how might the board know each quarter or each year whether the company was still on track to make its three-year transition?

Part of the expressed strategy involves an expansion into digital printers. The strategy has been controversial in the eyes of some investors, who believe that market is getting crowded. On the one hand is Hewlett-Packard, with its commanding market share and history of product innovation. On the other hand are low-price drivers like Dell, with high velocity and a low cost structure that is commoditizing the field. Other vendors such as Canon, Lexmark, and Epson have made competition fierce.

Kodak’s board needs to identify the strategic metrics that will indicate sufficient performance in printers today to achieve the financial results that the company laid out for 2006. For example, it could ask management to draw upon a third-party research firm to look at:

Over time, questions like these will provide insights into the customer experience, irrespective of quarter-by-quarter financial results. Other research might look into product quality or manufacturing efficiency to make sure the product line is competitive. If the results are negative compared to plan, the board has to ask management what it plans to do. If the results are positive, the board should support the strategy, even if financial performance is not yet where it was projected.

Every long-term strategy, even those that include strategic acquisitions or consolidation, has a set of short-term measures that can be used to determine if the strategy is on track. Is integration going as planned? One board has its management suggest in advance the appropriate metrics that will determine how well the process of integration is executed. This takes place before the acquisition is approved. And management follows through by tracking those metrics for the board.

A telecom firm trying to enter and establish the broadband segment of the business might track number of subscribers, revenue per subscriber, churn rate, or competitors’ pricing on a quarterly basis. If the company isn’t meeting the milestones, the board has to get management to define the root cause, including of course the possibility that the strategy is no longer viable.