Eight shifts that will take your strategy into high gear
PART
I
Developing a great strategy starts with
changing the dynamics in your strategy room. Here’s how.
Many strategy planning processes begin with a memo. Such missives lead managers to
spend months gathering inputs, mining data, scanning the marketplace for
opportunities and threats, and formulating responses. In the strategy meetings
that follow, the CEO leads discussions, executives jockey for resources, and a
strategy emerges that confidently projects future growth. The budget is set—and
then nothing much happens.
So much activity, so
little to show for it. Our book, Strategy Beyond the Hockey Stick (Wiley, February 2018), explores in depth the
social dynamics that undermine strategic dialogue and breed incrementalism. It
also underscores the real, and very challenging, odds of crafting strategies
that will lead to dramatic performance improvement. For example, over a decade,
only 8 percent of companies manage to jump from the middle of the pack—the
roughly 60 percent of the world’s largest corporations that barely eke out any
economic profit—to the top quintile, where almost all the economic profit
accrues. Underpinning many of those successful strategies, our research shows,
are big moves such as dramatic resource reallocation, disciplined M&A, and
radical productivity improvement.
We summarized many of
those core findings in a recent McKinsey Quarterly article. What we did not explore in depth
there were the practical steps executive teams can take to catalyze big,
trajectory-bending moves while mitigating the social side of strategy arising
from corporate politics, individual incentives, and human biases. Our research
and experience suggest that eight specific shifts can dramatically improve the
quality of your strategic dialogue, the choices you make, and the business
outcomes you experience. (A related diagnostic can
help you gauge where your company stands today.) These are moves that you can
start implementing Monday morning. Together, the eight shifts will enable you
to change what is happening in your strategy room—and eradicate memos like the
one above.
1. From annual planning to strategy as a journey
Messy, fast-changing
strategic uncertainties abound in today’s business environment. The yearly
planning cycle and the linear world of three- to five-year plans are a poor fit
with these dynamic realities. Instead, you need a rolling plan that you can
update as needed.
In our experience, the
best way to create such a plan is to hold regular strategy conversations with
your top team, perhaps as a fixed part of your monthly management meeting. To
make those check-ins productive, you should maintain a “live” list of the most
important strategic issues, a roster of planned big moves, and a pipeline of
initiatives for executing them. At each meeting, executives can update one
another on the state of the market, the expected impact on the business of
major initiatives underway, and whether it appears that the company’s planned
actions remain sufficient to move the performance needle. In this way, the
strategy process becomes a journey of regularly checking assumptions, verifying
whether the strategy needs refreshment, and exploring whether the context has
changed so much that an entirely new strategy is necessary.
To grasp what this
process looks like in action, consider the experience of a global bank whose competitive context dramatically changed
following the financial crisis. The CEO realized that both the bank’s strategy
and its approach to refining the strategy over time as conditions changed
needed revamping. He instituted biweekly meetings with the heads of the three
major lines of business to identify new sources of growth. After making a set
of “no regrets” moves (such as exiting some noncore businesses and focusing on
balance-sheet optimization), the bank’s strategy council devoted subsequent
meetings to confronting decisions whose timing and sequencing demanded close
evaluation of market conditions. The top team defined these choices as “issues
to be resolved,” regularly reviewed them, and developed a process for
surfacing, framing, and prioritizing the most time-sensitive strategic
challenges. In doing so, the team not only jump-started its new strategy but
launched an ongoing journey to refine it continually.
2. From getting to ‘yes’ to debating real alternatives
The goal of most
strategy discussions is to approve or reject a single proposal brought into the
room. Suggesting different options, or questioning the plan’s premise and
therefore whether it should even be under consideration, is often unwelcome.
Without such deeper reflection, though, you are less likely to make
hard-to-reverse choices about how to win—which is problematic, because those
choices are the essence of real strategy, and the planning process should be geared
to shining a spotlight on them.
The conversation
changes if you reframe it as a choice-making rather than a plan-making
exercise. To enable such discussion, build a strategy decision grid
encompassing the major axes of hard-to-reverse choices. Think of them as the
things the next management team will have to take as givens. Then, for each
dimension, describe three to five possible alternatives. The overall strategic
options will be a few coherent bundles of these choices. Focus your debate—and
your analysis—on the most difficult choices. One company we know recently
brought two very different plans into its strategy discussion: the first plan
assumed the present, low level of resourcing, and the second one represented a
“full potential” growth scenario, which necessitated dramatically higher
investment levels. The latter option was a new possibility resulting from a
positive demand shock. Alongside one another, the two plans stimulated vigorous
debate about the company’s road ahead and what its posture toward the business
should be.
If you want real
debate, you also need to calibrate your strategy. As we show in our book, the
odds of a strategy leading to dramatic performance improvement are knowable
based on analysis of your company’s starting endowment, the trends it is
riding, and the moves you are planning. If your odds are poor, you should
consider alternatives, which often will require making bigger moves than you
made in the past. Forcing discussion about real strategic alternatives—such as
different combinations of moves and scenarios with different levels of
resources and risk—help you move away from all-or-nothing choices, as well as
from those 150-page decks designed to numb the audience into saying “yes” to
the proposal.
Even a simple
calibration can stimulate debate about whether a strategy has a realistic
chance of getting you where you want to go. Consider the experience of a
consumer-goods client with $18 billion in revenue and the aspiration of
achieving double-digit growth. The company did a great deal of planning, and
the aspiration, which rested on a bottom-up aggregation of each business unit’s
plans, looked reasonable. However, publicly available information showed that
among industry peers within the same revenue range, only 10 percent generated
sustained, double-digit growth over ten years. The questions became: Is our
strategy better than 90 percent of our peers? Really? What makes us stand out,
even though we have performed like an average company over the prior five
years? These questions were uncomfortable but important, and they contributed
to a strategic reset for the company.
3. From ‘peanut butter’ to one-in-ten wins
It is nearly impossible
to make the big moves that successful strategies require if resources are
thinly spread across all businesses and operations. Our data show that you are
far more likely to achieve a major performance improvement when one or two
businesses break out than when every business improves in lockstep. You have to
identify those breakout opportunities as early as possible and feed them all
the resources they need.
Identifying those
winners is easier than you might think. If you were to ask your management team
to pick them, they would probably agree strongly on number one and maybe number
two—much less so on, say, numbers seven and eight. The difficulty starts when
discussion shifts to resource allocation. In fashion, movies, oil exploration,
and venture capital, people understand that it’s the one-in-ten win that
matters, but most other businesses do not have this “hit mentality.”
To stop spreading
resources too thinly, you and your management team need to focus on achieving a
few breakout wins and then work to identify those potential hits at a granular
level. Excessive aggregation and averaging into big profit centers can prevent
you from seeing the true variance of opportunity. One CEO we know had
traditionally framed strategy discussions around growth of 4 to 6 percent and
accordingly meted out resources to divisions. One year, he did a much more granular
analysis and realized that one geography—Russia—was growing at 30 percent. He
swamped the Russian operations with resources, created a more favorable
environment, and subsequently enjoyed even faster growth from that unit.
We’ve seen many senior
teams move away from “peanut buttering” by using some form of voting to pick
priorities. In some cases, that’s a secret ballot in envelopes. In others, CEOs
set up a matrix showing all the opportunity cells and let executives allocate
points to various initiatives by applying stickers to the matrix. Such a matrix
can help you look at the market in ways that are different from how your
organization is structured—which boosts the odds of achieving radical resource
shifts. One company, for example, recently decided to examine plans one level
down from the business unit and created a detailed curve of 50 or so specific,
investible opportunities. The result was a much bigger shift in resources to
the best opportunities.
4. From approving budgets to making big moves
The social side of
strategy often makes the three-year plan a cover for the real game: negotiating
year one, which becomes the budget. Managers tend to be interested in years two
and three but absolutely fascinated by year one, because that is where they live
and die. You need to put an end to the strategy conversation being little more
than the opening act to the budget.
One of the worst
culprits in these budget-driven discussions is the “base case”: some version of
a planned business case anchored in various (largely opaque) assumptions about
the context and the company strategy. The base case might obscure the view of
where the business actually stands, which could make it hard to see which
aspirations are realistic and, certainly, which strategic moves could deliver
on those aspirations.
A practical way to
avoid this trap is to build a proper “momentum case.” This is a simple version
of the future that presumes the business’s current performance will continue on
the same trajectory—the highly probable outcome absent any new actions. In this
way, you get a sense of how much impact your moves need to deliver to change
that trajectory.
It is also critical to
understand explicitly why your business is making money today. At a retail bank
in Australasia, for instance, the leaders wanted to expand into overseas
markets. The logic was, we are very successful, so we must be better operators
than our competitors. We will move into other markets, where the operations are
not nearly as efficient as in our home markets, and we will clean up. When the
team looked at how the bank really made money, however, the operating metrics
were unimpressive. The company’s success was largely due to its product
strategy: the bank had a big exposure to residential mortgages, for which demand
was very strong in Australia at the time. Another big source of profit was the
bank’s excellent record of picking branch locations. But those choices were
made by two people at the head office, so there was no reason to suspect that
they would be as successful in Indonesia or other new countries.
The bank gained these
insights by doing a “tear down” of its results. This is a crucial part of
sharpening the dialogue around big moves, and it is not that hard to do. Simply
take the business’s past performance and build a “bridge,” isolating the
different contributions that explain the changes. Most CFOs regularly do this
for factors such as foreign-exchange changes and inflation. The bridge we are
talking about considers a broader array of factors, such as average industry
performance and growth, the impact of submarket selection, and the effect of
M&A.
Armed with a thorough,
unbiased understanding of where your business stands and what has been driving
performance, you can focus on what it would take to change your trajectory.
Instead of asking for a target or a budget in the strategy meeting, ask for the
20 things each of your business leaders wants to do to produce a series of big
moves over the coming period. Then debate the moves rather than the numbers expected
to result from them. Why should we do this big move? Why shouldn’t we? How
different does the company look depending on what risk and resource thresholds
we set for it? Above all, talk about moves first, budgets second. Over time,
your managers will come to recognize that if they do not have any ideas for big
moves or cannot inspire confidence about their ability to pull off big moves,
they will lose resources accordingly.
By Chris Bradley, Martin Hirt, and Sven Smit
https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/eight-shifts-that-will-take-your-strategy-into-high-gear?cid=other-eml-ttn-mip-mck&hlkid=02a3b3736926422f9fbf589c3fbc0e22&hctky=1627601&hdpid=faa785ce-0d58-4a98-a399-dd4b1b578985
CONTINUES IN PART II
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