First of all, you gotta love the provocative title of this article from Roger Martin, ex-Dean of Rotman School of Management, University of Toronto here. Big. Lie. Hard to get past those two words. Big Lie.
Why is strategy (potentially) a scary thing?
Martin starts by making the seemingly simple point that strategy is about the future. Okay, so far so good, I am tracking. . Then he proceeds to remind us that the future is unpredictable – oh, sheesh, Covid-19. That seems really true.
So, how do business executives respond to this uncertainty? Strategic planning.
The natural reaction is to make the challenge less daunting by turning it into a problem that can be solved with tried and tested tools. The plan is typically supported with detailed spreadsheets that project costs and revenue quite far into the future. By the end of the process, everyone feels a lot less scared. – Martin
Strategic planning is common
Confession time. Yes, I was a strategic planner. It’s on my Linkedin resume, and frankly, I am fairly proud of the work we did. Learned a lot about how the business was run, and surely, we were better off with an annual operating plan and budget than without one. Yes, strategic plans have a purpose. No, it is not strategy.
What does strategic planning look like?
While it might vary from company to company, it probably doesn’t. It’s a fairly formulaic process of macro (tops down) economic research on the business cycle, end-user demand, competitive dynamics, corporate initiatives and micro (bottom up) revenue forecasts from sales and cost estimates from finance. In simple terms, it’s your collective best guess of the next 12 months.
The intention is noble. Get all the facts and forecasts possible, then roll them into a longer-term plan from which to run the business. It serves a few purposes:
- Allows the different business units to see each other’s plans
- Coordinates corporate strategy (what the HQ was planning)
- Creates budgets for capex, opex, recruiting
- Sets revenue and profitability targets which drive executive bonuses
- Finally, gives executives a sense of comfort and security about the future
Sounds good, what’s the problem?
1. Surprisingly, not a lot of strategy
Let’s start with the first step. Strategy is about creating a set of self-reinforcing activities which create a sustainable competitive advantage. It’s about creating massive value for your customers and getting some of that profit. Creating an economic moat. It’s about trade-offs. You can’t copy-cat your way to success.
Some potential questions to ask:
- What is our strategy? Can our employees articulate it?
- What’s our strategic positioning vs. our top 3 rivals? Prove it.
- What indicators do we track? What about leading indicators?
- How well do we know our customers’ preferences? Are they changing?
- Can a new entrant offer “less for less” and take our cheap customers?
- What’s the worst thing that could happen with our supplier base?
- What should we STOP doing?
If your strategic planning sessions have that kind of rigor, bravo. Usually, it’s not like that at all. Instead, it’s a little bit of kabuki theater where executives reiterate anecdotes about competitors and customers. Same ole, same ole.
[The traditional approach] . . . is a truly terrible way to make strategy. It may be an excellent way to cope with fear of the unknown, but fear and discomfort are an essential part of strategy making. In fact, if you are entirely comfortable with your strategy, there’s a strong chance it isn’t very good. – Martin
Let’s look at a oldie-goldie exercise, and how we might improve it. . .
SWOT. Yes, I admit it. I’ve done it, so have you. 2×2 grid with Strength, Weakness, Opportunities, Threats. Sadly, it’s typically created ad-hoc during a workshop with limited rigor, and even less follow-through. There is very little push-back among the workshop participants. It’s more of a choir than an idea fight club.
Quick tip: Try to dig-into the SWOT. . 1) what is the EBITDA implications of that threat/opportunity? 2) who’s the owner of that issue 3) How does that strength feed into our competitive advantage? Can we increase that? Is it an economic moat? 4) Weakness for whom? The entire corporation or a product line. 5) What are we deciding NOT TO DO?
So what does the unofficial process look like?
2. Incremental: What did we do last year?
It’s just human nature that a business executive does not want to be wrong. We are all a little risk-averse. It’s easy (and a bit lazy) to build off of last year’s plan. Also, we tend to think that next year will look like this year (lots of heuristics).
“Worse, actually choosing a strategy entails making decisions that explicitly cut off possibilities and options. An executive may well fear that getting those decisions wrong will wreck his or her career.” – Martin
So the default choice is to go through a series of excel-driven templates that build off of last year’s calcified assumptions. In defense of the thousands of companies that take this copy/paste + 3% approach to planning:
- The organizational G/L and cost centers are set up like this
- For a massively large corporation, how else do you plan to “herd the cats?”
- Some industries (e.g., utilities, insurance) may be really steady
- Pre-Covid 19, the US had stable economic conditions for 10+ years (interest rates low, inflation low, stock market positive); what could change?
- Wall Street (unrealistically) expects good visibility and smooth earnings
These are all ingredients to a cake that looks like planning, not strategy.
3. Sycophant: What’s the answer?
When I was a strategic planner, I was 29-32 years old, and I did not step outside of my lane. In fact, I aggressively worked backwards from the answer I felt the executives wanted. It’s natural to “seek to please” the client or the executive. No shame there. However, it is also NOT strong opinions, loosely held.
Yes, strategists and management consultants are paid to help clients and executives to bridge cross-functional mess and get to yes. However, we should also build up enough expertise, relational equity, courage, and heart to push our CEO/CFO/CMO/COO to think a bit deeper, and act more bravely.
Keep the strategy simple. Martin argues that strategy needs to focus on the customer (the ultimate arbiter of value) and ask two questions:
- Where to compete (corporate strategy); which customers?
- How to win (business unit strategy); how to create great value.
That’s what we should be asking, not “what’s the answer my boss/client wants.”
4. Internal negotiations
Ask anyone in charge of the strategic planning process (or for that matter – any company-wide, forecasting process), and they will tell you there are multiple rounds of internal negotiations on cost allocations, sales targets, and bonuses.
Too often – definitely in my experience, the strategic planning process is less about winning in the market, and more about organizing the internal departments and “getting alignment.”
So what?
Assigned this article to the strategy class for the first time, and the timing was eerily perfect. The global economy was systematically shut down and classes were moved to remote. Yes, the perfect plans in the syllabus were changed. In fact, every strategy group and strategic plan this year was 30-50% wrong.
Strategy involves a bet
Roger Martin is ex-Monitor, Michael Porter’s firm that got acquired by Deloitte. Martin argues that strategy is about placing a bet. It’s not about coming up with some perfect excel-model-Nirvana.
At its very best, therefore, strategy shortens the odds of a company’s bets. Managers must internalize that fact if they are not to be intimidated by the strategy-making process. Boards and regulators need to reinforce rather than undermine the notion that strategy involves a bet. – Martin
Strategy is a portfolio of call options
Read an article from Bain called, “Five Ways the Best Companies Close the Strategy-Execution Gap” here and it super resonated. The idea is that we live in a VUCA (volative, uncertain, complex, and ambiguous) world, and of course, our strategy will be imperfect. It’s a strategy, not a plan, remember?
So if you think of it like “call options”, you can invest a little bit here, and there, and wait and see. If the strategy starts to bud – invest more. If it starts to die – reassess and be willing to cut bait, and de-fund the venture.
Discovery-driven strategic planning
On this topic, also a huge fan of Rita Gunter McGrath’s (Columbia) article entiteld Discovery Driven Strategic Planning here. Very similar to the Bain idea that instead of putting together a 300+ page PowerPoint that you don’t look at through out the year, why not simplify it and make it easy to refer to, and marginally fund the ideas that work. Test, test, test. Jim Collins would approve.
What other thoughts do you have on strategic planning?