Hockey stick dreams, hairy back
reality
The ambitious hopes of
strategy forecasts tend to fail over and over again—producing an unfortunate
pattern you'll likely recognize. Here’s why it happens, and what to do about
it.
One of the most emblematic outputs of the
dreaded strategic-planning process is the “hockey stick” forecast – the line
that sails upwards on the graph after a brief early dip to account for up-front
investment. These hockey sticks, confidently presented by executives pitching
their new strategy, are easy to draw but they don’t score many goals.
What tends to happen in reality is that
the strategy fails to meet the bold aspirations and is replaced by a new one.
Over the years, the unrealised hockey-stick forecasts string together to
produce what is both one of the ugliest and most common charts in strategy: the
hairy back (yes, the chart below shows a real company’s performance).
Worse still, few companies check if their
longer-range forecasts came true. Instead, the hairy backs are shoved into the
dusty drawers of corporate history. Naturally – it can be hard to see your own
hairy back!
One wonders how so many smart,
well-intentioned people can get it so wrong time after time. Yet those familiar
with strategic planning will recognise that the process is fertile ground for
hairy backs to sprout. Here’s how it happens:
People start out being overly confident
and optimistic (like the 90% of drivers who tell pollsters they are above
average). Informed people are even more confident: as they gather data to
support their hypotheses, their conviction in their forecasts grows.
Such confidence tends to be rewarded. Who
ever got a promotion by putting forward a plan whose growth forecasts didn’t sail
upwards? We need an ambitious vision to inspire great performance, executives
tell themselves. Some, raised on a diet of self-help books, may even believe
that merely setting a “stretch goal” will motivate people to meet it, no matter
how unrealistic it may be.
Moreover, let’s remember that the
strategic-planning process is really a resource competition. Executives know
that all the others vying for their share of the capital-spending budget will put
forward hockey-stick plans – they’d be mad not to play along.
It is also remarkable how many of the
plans just make it over the funding threshold. Set the goal of
15% for internal rate of return and watch all those proposals magically sail
over the bar. After all, no one ever walks into the strategy room offering to
give back their capital budget because they have realised other business units
could use it better.
The strategic-planning process is really a
resource competition. All those vying for their share of the capital-spending
budget put forward hockey-stick plans – you’d be mad not to play along.
By the end of the first year, when the
strategy isn’t panning out as planned, our attribution bias usually kicks in.
The missed target is blamed on the most convenient cause available, which is
usually some one-off event (unseasonal weather, an IT outage, etc.).
Interestingly, such one-off occurrences seem to happen every year. The failure
dismissed, we double down and re-establish our goal. “We lost a year, but we’re
going to get back on track.” The next hair sprouts.
Rarely does anyone review last year’s
version of the five-year plan. More often than not, management just looks at
year one. The strategy process becomes merely the set-up for the real conversation:
my budget and KPIs for the coming
year.
Academics Daniel
Kahneman and Dan Lovallo captured these dynamics in a paper published almost 25 years ago, but their findings are just as relevant today. They
disentangled two seemingly opposing errors people make: being excessively bold
in making forecasts and excessively timid in making choices.
Why? Well, first, the tendency to make
bold forecasts leads to a “baseline” of forecasts that are too high. It’s all
too easy to click and drag a graph line in Excel to continue a trend without
paying heed to how hard it was to get to the current point on that trajectory.
Not only is the baseline too high, but the
plan is too small, failing to incorporate enough high-impact moves to truly
raise performance. It’s like bragging about doing a marathon but under-training
because you imagine yourself fitter than you actually are. Combine that with
competition for resources and you get a stifling level of corporate inertia:
resources don’t shift to where they can have the highest impact and the big
moves don’t happen.
It adds up to the fallacy that underlies
most strategies: “I will get better results next year by trying to do roughly
the same thing as last year but just a little bit better.” Hope and hot air
abound.
Is there anything you can do to avoid this
scenario? Here are four practical ideas.
1. Don’t
hide the hairy back in the bottom drawer.
Reconcile
previous plans with what actually happened and figure out why your team failed
to make the targets. Think like a private equity investor who has a five-year
time frame to make good on an investment, without the luxury of being able to
throw out the early years’ results and start over.
2. Calibrate
your results to the “outside view.”
Most
strategy processes rely on what Kahneman called the “inside view”: detailed
facts but limited to your specific situation. This inside view is a breeding
ground for all sorts of biases that subconsciously give more weight to facts
that back your view than the inconvenient ones that don’t. What you need is an
“outside view,” provided by looking at a larger class of similar companies in
similar situations and seeing how their strategies panned out. For example, a
plan projecting a 15% increase in revenue may seem reasonable until you
discover that only about 5% of large companies actually grow that fast over a
five-year period. Is it really reasonable to expect that your company will be
in that top 5%?
3. Build a
momentum case.
I
suggest that you throw out the baseline forecast and start by projecting what
would happen if management took their hands off the wheel and just let the ship
sail on its own momentum. Yes, this will usually be a downhill slope because
markets are competitive and you have to work very hard just to stay in the same
place. But you should face this reality so you know the real gap the plan must
address.
4. Focus
on moves, not promises.
In his
terrific book Good Strategy Bad Strategy, Richard Rumelt identifies
the confusion of goals with strategies as one of the biggest mistakes in the
corporate boardroom. Many strategic-planning processes are far more focused on
setting goals (with no tangible lever that management can control) rather than
crafting choices and moves to meet those goals (levers firmly in the control of
management). Spend more time on deciding what actions you will take, then rack
up the expected results. McKinsey’s turnaround experts force every goal to be
backed by a “bankable plan” – a series of “what by who by when” steps that can
link to the realization of value. Is your plan bankable?
http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-strategy-and-corporate-finance-blog/hockey-stick-dreams-hairy-back-reality?cid=other-eml-alt-mip-mck-oth-1703
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