In these tumultuous times, I lust for every bit of surety I can find. I search for rules, immutable truths, and superlatives. My motive is patently self-serving. Limiting my perspectives saves time. Nuance? Things to consider? Outliers and exceptions? Too squishy! Give me something concrete I can hold onto for dear life.
Here’s a superlative that has endured since I learned it in graduate school in 2005:
“All business failures result from using the wrong strategy, or executing right strategy the wrong way.”
If only I could find more like this one.
Over many years, I’ve experienced revenue craters fomented by bad decisions, misguided assumptions, and cruddy planning. I blame myself for some of them. That’s between us. Regardless, this trusty superlative worms its way into every aftermath I’ve analyzed. Thank you, Professor Todd.
When planning and executing strategy, companies must grapple with uncertainty. There’s no avoiding it. Executives must recognize what they don’t know, and make assumptions to fill the gaps. That requires a remarkable blend of intelligence, prescience, confidence, and courage. No wonder strategy development scares the bleep out of people. “Our current engineering, supply chain operations, and product planning are based on our expectation that 25 years from now, there will be a robust global market for long-range jetliners. Please pass the Maalox.”
Strategy is defined as a plan of action or policy designed to achieve a major or overall aim. Companies should develop strategies whenever any crucial resource or result is constrained or difficult to achieve. For most companies, that includes securing capital, innovating new products or services, hiring human talent, or capturing revenue. Similarly, strategies are instrumental for achieving objectives such as high customer satisfaction, customer success, and market share percentage. Stuff that every company wants, but there simply isn’t enough to go around. None of these outcomes can be left to chance, assuming, of course, that your goal is longevity.
Organizational vitality depends on sound strategy. Without strategy, the central mission of an organization – finding and capitalizing on opportunities – would depend on happenstance. A company without a strategy is like an untethered ship at sea without power, steering, or means for navigation. Unable to harness the forces of wind, tide, or other locomotion to go anywhere, the vessel just bobs around. Many businesses operate the same way, abdicating their outcomes to vicissitude. Que será, será. This is the mantra under which many companies operate, though it’s never used as braggadocio.
But how much does strategy matter? The Evergreen Project, conducted between 1986 and 1996, asked that question, and the study revealed that companies with a strategy performed better than those without. That seems obvious, but the study offered another insight by revealing the magnitude of benefits over time:
“Financially successful companies all had a clearly defined and well-articulated strategy. No exceptions. These companies outperformed the losing companies by a 945% to 62% margin in total return to shareholders, had a 415% to 83% advantage in sales, a 358% to 97% advantage in assets, a 326% to 22% advantage in operating income and a 5.45% to -8.52% advantage in return on invested capital,” wrote Rich Horwath in an article, Does Strategy Matter?
“While many companies have been able to survive without a clearly defined strategy in written form, a question looms: How much better could they be doing with a strategy? The 22% gain last year might seem impressive, unless of course it could have been a 65% gain with a solid strategy behind it.” Of course, Horwath can’t posit the answer, other than “A company or product or service can certainly survive without strategy, but it will never thrive.”
I agree. But even for companies that envision and execute strategy, there’s no such thing as certain survival. More Maalox.
When I taught an undergraduate class, Strategic Uses of IT, I used case studies, and asked my students questions to pique their strategic thinking. “What did [Company X] trade off when its executives decided to implement [name of project]” Many students were able to go well beyond connecting the dots. But some delivered a common response: “they traded off money.” While that’s technically correct, I was looking for deeper insight.
I followed the first question with, “when company X implemented this project, what didn’t – or couldn’t – they do as a direct consequence of that decision?” Examples: Providing customers high-touch luxury experiences trades off low-price leadership. Generating large profit margins sacrifices high inventory turnover. Offering extensive point-to-point airline routes precludes maintaining hub-and-spoke operations.
Over time, I learned that this strategy exercise can be vexing for students and seasoned executives alike. I also learned that when executives are vested in their strategy, the common response changes to “I don’t think we’re trading off anything.” Early-stage strategy ossification, happening before our eyes.
The trade-off concept is key to understanding strategy. When you can parse the answer into more than one outcome or consequence, you’re thinking strategically.
Key to executing better strategy is understanding its characteristics:
- Strategies are based on assumptions – e.g. existence of a customer need, economic forecast, availability of key operational or technological capability, continuation of a trend or trends
- Every strategy involves making trade-offs – “instead of pursuing [X], we will pursue [Y]”
- Strategies create potential weaknesses –Effective strategies provide strength, but choices not taken present future vulnerabilities. It’s important to recognize what they are.
- Strategies contain inherent risks and opportunities – By definition, the purpose of strategy is to capitalize on opportunities, and achieving them carries inherent risks.
- Strategic execution requires committing and consuming resources – including time, money, and/or physical and mental energy
While understanding the characteristics of strategy is an important first step for success, I’ve discovered through practice that effective strategies tend to . . .
- be original, and different from competing strategies.
- be capable of mutating and evolving. Strategies that can’t adapt to changing conditions risk becoming ineffective.
- identify and address consequential matters. Start by asking the right questions. One client told me that they wanted to direct their strategy toward “providing every user in the agency a suite of desktop applications software.” That vision didn’t overcome the “so what?” test. I recommended the organization ask a different question about the results they wanted, and focus effort on a more meaningful outcome.
- use sound assumptions. Many strategies are based on outsized or unrealistic estimates, or tenuous predictions.
- be clear and unambiguous. An example of one that’s not: Customer Obsession is an Employee Engagement Strategy, Too.
- be difficult to replicate. FedEx, Amazon, Zappos. These companies have been endlessly analyzed, and their strategies are well-known to competitors. But they are also complex, involving the entire company for execution, not just a department or two.
- be underpinned by sufficient risk capacity. Strategies are more likely to be successful when companies can sustain the risk of failures.
- minimize potential conflicts of interest.A colleague recently shared with me that his company developed a strategy that rewards Sales for capturing revenue, but penalizes Operations for failing to meet customer demand. I predict constant bickering until the strategy is scrapped.
Ethics and strategy – it’s complicated, but I’d be remiss if I didn’t address it. For society, business strategies can produce outcomes that are beneficial. The credo for Conscious Capitalism provides both inspiration and guidance:
“We believe that business is good because it creates value, it is ethical because it is based on voluntary exchange, it is noble because it can elevate our existence, and it is heroic because it lifts people out of poverty and creates prosperity.”
Contrast that lofty ideal with Theranos, a once high-flying startup which used strategy for nefarious purposes. Stakeholders were harmed. People likely died as a direct result of the company’s activities. For a time, the company’s strategy was considered effective, but now Theranos is defunct, leaving destruction and pain in its wake. Never assume an effective strategy is also kind and benevolent.
Ethics problems start when strategies give paramount importance to generating revenue and profit. Every year, I call out a new list of offenders in the Sales Ethics Hall of Shame award – a showcase for executives who believe the revenue-profit ends justify the means to achieve them.
Ethical strategies don’t occur by prescribing rules or steps, but by asking questions:
- Is the premise of the strategy good? This is a central question behind the ethics and efficacy of for-profit prisons. Does a business model that that depends on the incarceration of people for revenue and profit help society as much as it rewards the owners and investors of the company?
- Are the intentions of the strategy honest? Strategies that depend on customer coercion, opacity, and factual obfuscation are not ethical, and may be illegal.
- Does the strategy protect stakeholder interests? Put another way, does the strategy unfairly exploit stakeholder weaknesses, vulnerabilities, or information imbalances? Ethical strategies avoid these problems at the beginning, and include mechanisms for ensuring bad ethics and dishonesty don’t metastasize and harm employees, vendors, customers, and investors.
- Does the strategy reward – or penalize – employees who exercise sound moral judgment? Every company inducted into the Sales Ethics Hall of Shame has failed this question.
If we’ve learned anything from the Wells Fargo and VW scandals, protecting companies from calamitous risks requires answering these questions not just in the C-Suite, but by corporate boards. Especially by corporate boards.
Strategies are a progression, a continual work-in-progress. On November 8th, 2018, The Wall Street Journal reported these artifacts:
- “Ford is getting into the electric scooter business.”
- “Vice Media plans to shrink its workforce by as much as 15%.”
- “Google is gearing up for an expansion of its New York City real estate that could add space for more than 12,000 new workers.”
Each, representative that the companies have set their sights on goals necessary for survival or growth. And these objectives will evolve into new ones. With strategy, there is no “final triumph.” There are also no superlatives, rules, or immutable truths to ascribe. Is Vice Media’s plan to shrink its workforce the best strategy? It’s impossible to say. In the strategic analysis, all we can do is judge is whether it was effective at achieving the intended goal – and move on.