Saturday, January 26, 2019

MANAGEMENT SPECIAL ....Eight shifts that will take your strategy into high gear PART I


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 BradleyMartin 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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