Eight shifts that will take your strategy into high gear
PART
II
5. From budget inertia to liquid resources
The handover between
strategy and execution happens when the resources are made available to follow
through on the big moves you identify. Execution can then begin, and managers
can be held accountable.
To mobilize resources
and budgets, a company needs a certain level of resource liquidity. And you
have to start early—the date your fiscal year begins. That is when serious
productivity-improvement initiatives should be under way to free resources by
the time allocations are decided later in the year. Then you must hold onto
those freed resources so they will be available for reallocation, which
requires determination. As soon as an engineer has time, your R&D
organization will have creative new product ideas; the sales organization will
identify attractive new business opportunities as soon as a productivity
program has freed up part of the sales force. You need to be incredibly clear
about separating the initiatives that free up resources from the opportunities
to reinvest them if you hope to make big moves.
Another way to enable
resource reallocation is to create an “80 percent–based” budget: a variant on
zero-based budgets in which you make a certain sliver (say, 20 percent) of the
budget contestable every year, so money is forced into a pot that is available
for reallocation when the time comes. Yet another option is to place an
opportunity cost on resources that seem free but are not. You identify scarce
resources, such as shelf space for retailers, and make sure they are measured
and managed with the same rigor as conventional financial metrics, such as the
sales and gross margins for which many retail managers are held accountable.
This can be as simple as shifting to ratios (such as sales per square foot and
returns on inventory for a retailer) that encourage managers to cut back on
lower-value uses for those resources, thereby freeing them up for other
opportunities.
US conglomerate Danaher
strongly emphasizes resource liquidity and reallocation. Originally a
real-estate investment trust, the company now manages a portfolio of science,
technology, and manufacturing companies across the life sciences, diagnostics,
environmental and applied solutions, and dental industries. To avoid budget
inertia, senior management at the company spends half its time reviewing and
recutting the portfolio—much like private-equity firms do. The company even has
a name for its approach: the “Danaher Business System.” Under this approach,
which is based on the kaizen philosophy of continuous improvement, Danaher has
institutionalized the resource liquidity required to chase the best
opportunities at any point in time. It systematically identifies investment
opportunities, makes operational improvements to free up resources, and builds
new capabilities in the businesses it acquires. Over the past decade, the
company has dynamically pursued a range of M&A opportunities, organic
investments, and divestments—big moves that have helped the company increase
economic profits and total returns to shareholders.
6. From sandbagging to open risk portfolios
When business units
develop strategic plans, they often set targets that they can be sure of
reaching or exceeding. As you aggregate these plans on a corporate level, the
buffers add up to a pretty big sandbag. The mechanism of aggregating
business-unit strategies also explains why we see so few big moves proposed at
the corporate level: individual unit heads tend to view M&A initiatives and
other bold programs as too risky, so these moves never make the final list they
bring into the strategy room.
To make strides against
sandbagging, you need to manage risks and investments at the corporate level.
In our experience, a key to doing this effectively is replacing one integrated
strategy review with three sequential conversations that focus on the core
aspects of strategy: first, an improvement plan that frees up resources;
second, a growth plan that consumes resources; and third, a risk-management
plan that governs the portfolio.
This approach triggers
a number of shifts. People can lay out their growth plans without always having
to add caveats about eventualities that could hamper them. You could ask
everyone for growth or improvement plans, possibly insisting on certain levels
to make sure everyone is appropriately imaginative and aggressive. Only after
executives put their best ideas on the table do you even begin to discuss risk.
By letting business leaders make risk an explicit part of the discussion, you
change their perception that their heads alone will be on the block if the
strategic risk cannot be mitigated. They will share what they know of their
risks rather than hiding them in their plans—or not showing you an initiative
at all because they deem the personal risk to be too high.
Consider the experience
of a retailer whose traditional strategy approach was to roll up the plans of
each of its different brands. One year, the company instead racked up the full
set of about 60 investible opportunities and assessed them against one another,
regardless of the brand or business unit with which they were connected. The
dispersion between opportunities was striking. A portfolio-level view also led
to a different answer about the right risk/return threshold than had emerged
from assessments made earlier by individual divisional leaders. It turned out,
perhaps counterintuitively, that there was too much capital going to the
smaller businesses, while the biggest business had major, underfunded
opportunities.
7. From ‘you are your numbers’ to a holistic performance
view
Whatever shifts you
make, you cannot make them alone; you need to bring your team along. We often
see managers being pushed to accept “stretch targets”—with perhaps a 50 percent
chance of being achieved, what we would call a “P50” plan—only to have these
low, up-front probabilities ignored when it comes to the performance review at
year end. People know that they “are their numbers,” and they react accordingly
to attempts to set aggressive targets.
Bringing probabilities
to the fore can reset these dynamics. You need to have a sense of whether you
are looking at a P30, a P50, or a P95 plan if you hope to have a reasonable, ex
post conversation about whether the result was a “noble failure” or a
performance failure. You also need to dig down on what drove the outcomes.
Although you don’t want to punish noble failures, you don’t want to reward dumb
luck, either. Rather, you want to motivate true high quality of effort. At W.
L. Gore, maker of Gore-Tex, teams get data on performance and vote on whether
the team and its leader “did the right thing.” This vote is often closer to the
truth of what happened than the data itself.
Ultimately, you also
need a sense of shared ownership in the company’s fortunes and a clear
alignment of incentives to get the full commitment of your team to the big
moves you need to make. To deliver the message that people will not be punished
simply because a high-risk plan did not pan out, we suggest developing an
“unbalanced scorecard” for incentive plans that has two distinct halves. On the
left is a common set of rolling financials with a focus on two or three (such
as growth and return on investment) that connect to the economic-profit goals
of the division and enterprise. On the right is a set of strategic initiatives
that underpin the plan. The hard numbers on the left help establish a range for
incentives and rewards, and the strategic initiatives on the right can be a
“knockout” factor, with P50 plans getting treated more softly on failure than
P90 moves. In other words, the way you get the results matters as much as the
results themselves.
Playing as a team
counts here, too. The right thing to do at a portfolio level does not always
mean every individual “scoring the goal.” For example, it’s a good idea to have
fire stations strategically located throughout your city, but you don’t heap
rewards on the one fire station that happened to be near the big conflagration.
You look at the performance of the system as a whole. The urge to push
individual accountability can actually be counterproductive when it comes to
strategy, which is really a team sport.
8. From long-range planning to forcing the first step
We see it all the time:
big plans that excite leaders with grand visions of outcomes and industry
leadership. The problem is that there is no link to the actual big moves
required to achieve the vision—and, in particular, no link to the first step to
get the strategy under way. Most managers will listen to the visions, then
develop incremental plans that they deem doable. Often, those plans get the
company onto a path—but not one that reaches the vision or exploits the full
potential of the business.
That is why the first
step is crucial. After identifying your big moves, you must break them down
into what strategy professor Richard Rumelt calls “proximate goals”2 : missions that are realistically achievable
within a meaningful time frame—say, 6 to 12 months. Work back from the
destination and set the milestone markers at 6-month increments. Then test the
plan: Is what you need to do in the first 6 months actually possible? If the
first step isn’t doable, the rest of the plan is bunk. One insurance CEO worked
on a vision with his team that concluded there would be no paper in the
insurance business in ten years. But when he asked for the plan for the
upcoming year, paper consumption was set to increase. So, he asked, “To connect
to our vision, would it be viable to be flat in paper next year and go down in
the next?” Of course, the team had to say yes. By framing a first-step
question, the CEO forced the strategy.
Pursuing these shifts
should increase your chances of making big, strategic moves, which, in turn,
increases your likelihood of jumping from the middle tier into the elite ranks
of corporate performance. In fact, our research shows that making one or two
big moves more than doubles your odds (to 17 percent, from 8 percent) of
achieving such a performance leap. Making three moves boosts these odds to 47
percent.
But keep in mind that
the eight shifts are a package deal—if you don’t pursue all of them together,
you open the field to new social games—and that it takes a genuine intervention
to jolt your team into this new way of thinking. How? Here’s an idea: Create a
new strategy process that reserves ten days per year for top-team conversations
and introduce the shifts one meeting at a time. If things go wrong in a
meeting, they go wrong only in one place, and you can “course correct” for the
next conversation. And if you discover at the end of the ten days that you have
not been able to free up all the resources you feel are needed, that’s OK. Take
the resources you were able to free up by the end of this first planning cycle
and allocate them to the highest priorities that emerged from it. You will have
made progress, and, more importantly, your team will now understand what this
new process is all about. That is a first step in its own right, and if you
want to boost the odds of creating a market-beating strategy, it’s probably the
most valuable one you can take.
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
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