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December 11, 2012

2

Why Effective Strategy is So Rare

by Jeremy Arnone

The past post reviewed why getting strategy right is so important in generating sustainable growth.  For the small number of firms that look at strategy as competitive positioning, the long-term growth rates exceed more tactical or planning approaches to growth management.  This post will review why, despite clear evidence of the benefits of strategy, so little of what passes today for strategy is actually very good.  It will also explain why the organizations most focused on growth are the ones most resistant to strategy.

Why Is Good Strategy So Rare?

While almost all organizations say they have strategies, many don’t.  I used to think this was because organizations had limited or faulty data, or conducted poor analysis of the industry and competitors.  And to some extent, this remains true – failure to understand the internal and external environments limits growth options.  But the more I have worked in this field, the more I’ve come to appreciate the more subtle and pervasive obstacles to clear strategic thinking, and how challenging it is for companies to develop and maintain their strategies over time.  Some of these inhibitors are described below.

* Operational focus.  There’s no question that operational excellence – covering things like quality, productivity, and speed – can have a significant and immediate impact on an organization’s performance.  What makes this approach so popular is that it includes a series of best practices that are straightforward to replicate.  Michael Porter uses the concept of a Productivity Frontier to describe operational excellence; I’ve added some modifications below to show the dynamic nature of industry operational focus.

Screen Shot 2012-12-11 at 12.07.18 PM

There are two dimensions – customer value and price position.  Companies choose which operations to optimize – often based on perceived core competencies – providing operational focus.  As organizations approach operational optimization, competitive conflict intensifies, often resulting in mutually destructive competition where the customer wins at the expense of industry profit.  While productivity frontiers can shift out (via new technologies, for example), the operational focus sparked by Japan in the 1980s has decreased the distance between the average firm and their industry’s efficiency frontier.  So while there’s no doubt that operational excellence is a necessary condition for an organization to succeed, it is a mistake to count on past operational excellence to sustain tomorrow’s growth imperatives.

* Resources vs. resourcefulness.  Good strategy works by focusing energy and resources on one, or a very few, pivotal objectives whose accomplishment will lead to a cascade of favorable outcomes.  Organizations are often evaluated in terms of resources, when the proper perspective is resourcefulness.  Recently I met with an executive team to discuss their growth strategy.  They believed that an additional round of funding would be needed to ‘size-up’ the company in terms of headcount and capabilities, to be ready to seize new opportunities if they arose.  The rationale was, “If only we had more resources, we could be more strategic.”  Yet, it was apparent to me that the real issue wasn’t a lack of resources but a lack of focus, an inability to separate the good ideas from the bad, and too little thinking about how to leverage existing resources (versus the capacity to outlast rivals).  Showering these executives with more resources without a fundamental improvement in their ability to leverage resources is wasteful; they’ll be back, asking for more.

* Missing skill sets.  In most organizations, the executive team is responsible for laying out the strategic course and ensuring proper execution.  While excelling at the latter, most executives struggle with being strategic.  The skill sets that get managers to senior levels – problem solving, political acumen, drive, resource planning and allocation, department management – are largely irrelevant (or even counterproductive) to creating effective strategy.  Strategy involves creativity, something that is hard to quantify and measure, and thus not focused on by most executives.  Compounding matters, executive separation from the day-to-day details of the business impacts the quality of their strategic thought.  Effective strategists immerse themselves in the daily detail while being able to abstract the strategic messages from it.  They connect acting to thinking which in turn connects implementation to formulation.  They understand that we think in order to act, but we also act in order to think.  When there’s a disconnect between these two, the result is fuzzy thinking, which often leads to bad strategy.

* Failure to balance long- and short-term.  Many organizations struggle to reconcile and mutually support both short- and long-term goals.  Most companies allocate resources using tactical capital-budgeting mechanisms that stress easy- to quantify measures like cash flow or economic value add.  This means that strategic opportunities that defy easy or accurate measurement – longer-term projects, cross-departmental initiatives, brand new initiatives – often times won’t pass the review process and are deferred until next year, when additional analysis may justify them.

* The evolution of capital markets.  As the capital (and secondary) markets have evolved, they’ve become increasingly toxic for strategy.  The single-minded pursuit of shareholder value, measured over the short-term, has been enormously destructive for strategy and long-term value creation (see my post here).  Managers are chasing the wrong goal, spurred on in part by industry experts and analysts who push companies towards “competition to be the best,” where companies are exhorted to look like the current market favorite.  Good strategy does the opposite, creating tangible differences between an organization and its competitors.  While different is hard, and risky, it’s the only way to sustain long-term growth.

* False consensus.  People consistently overestimate the extent to which others share their views and beliefs, through things like confirmation bias, selective recall, and group-think.  I’ve been part of executive discussions where the CEO might say, “The executive team is 100% behind our strategy,” then have 1×1 conversations with key executives where it’s clear substantial differences of opinion remain unresolved.  Or hear, “I’ve only heard great things from our dealers and customers,” then conduct research that finds significant dissatisfaction.  Failure to confront and address disagreements honestly can lead to missing key strategic threats/opportunities or cause organizations to persist with doomed strategies.

So Why is Good Strategy Rare?

Strategy involves focus and, therefore, choice. And choice means setting aside some goals in favor of others.  Many organizations are unable to make these choices, coming up with lists of things to do based on what a variety of stakeholders would like to see accomplished.  I’ve seen lists of 100+ “strategies” cover every available surface in conference rooms.  Calling these strategies doesn’t change the fact that they’re really just things to do.  Typically by the end of the retreat, the daunting nature of so many “strategies” is acknowledged by adding the label “long-term” to the list.

The necessity of choice is what causes organizations most focused on growth to be the most resistant to strategy.  Trade-offs and limits give the appearance of constraining, not sustaining growth.  A conscious decision to limit competitive scope – be it through geographic, product line, customer, or other factors – may appear to place limits on an organization’s growth ambitions.  And indeed it may, in the short term.  But the alternative, trying to be everything to everybody, nearly always results in an erosion of competitive advantage with target customers and creates confusion and undermines organizational motivation and focus.

The widespread lack of strategy, and corresponding heavy operational focus, is driving competitive convergence, as benchmarking and imitation leaves competitors increasingly homogenous and industries racked by wars of attrition.  Industry consolidation continues to accelerate, as organizations, driven by performance pressures but lacking strategic vision, have no better ideas than to buy up rivals.  The competitors left standing are often those that outlasted the others, not companies with real advantages.  In which case, a strategy of finding undiscriminating investors may not be such a bad one after all.

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2 Comments Post a comment
  1. Dec 28 2012

    I acualtly found this more entertaining than James Joyce.

    Reply

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