‘Hope’ Is Not A Keen Business Strategy
As anyone who writes a book can attest, it’s both gratifying and nerve-racking to see how the ideas resonate with your readers. Since my colleagues and I wrote Strategy Beyond the Hockey Stick, we have been circling the globe discussing the research with the media, at conferences and, most importantly, with business leaders.
Perhaps the finding that generates the biggest reaction is just how uneven business performance is.
When people look at the Power Curve of economic profit, they’re struck by the steepness of the tails representing the world’s corporate over- and under-performers, and the broad middle where the rest resides, a flatland in which companies barely break even and from which they have only an 8% chance of rising over a decade.
As daunting as that number—and some others—may be, many executives are energized by the fact that those odds are not fixed. You can change them in your favor. I want to share with you how some of them are tilting their odds, as well as their insights that shed new light on some of our findings.
Do not waste a strong trend: A company with a struggling commodity business had been trying to sell it, with little success. Recently, however, a rapidly growing new industrial application for the commodity has emerged. Rather than sell the business, the company is now doubling down on it. The executive told us that our findings about the value of riding trends gave his team a jolt to move boldly in this new direction. “We knew we had to go deep, but the book helped us find the language to talk to the organization about why we have to go deep,” he said.
Reward noble failure: One CEO told us that making big bets on innovations necessary to change the company’s performance trajectory requires teams that are “almost irrationally mission-driven.” To foster that mindset, you need to reward success on corporate goals, not individual initiatives, many of which are bound to fail. “You don’t usually hear the stories about the many people who went off into the chaos and got eaten by the dragon,” he said. “Instead, you hear the stories of the people who faced the dragon and took the dragon’s gold.” His company makes sure not to punish those who dared nobly.
Revamp the approach to M&A: I’m surprised how many business leaders continue to believe that mergers and acquisitions destroy value. The research that produced this finding was based on widely announced, large deals, but smaller transactions (which often go unpublicized) can be a critical performance lever when applied consistently and as part of a broader strategy rather than opportunistic one-offs. Realizing the benefit of this programmatic M&A approach has led several executives I met to rethink their approach. One client decided that to make programmatic M&A work, the company needed a dedicated team to source and screen numerous targets, creating a pipeline from which it could draw one or two deals each year. You have to kiss a lot of frogs to find a few princes.
Check that your Big move is Big enough: The leader of a global technology company currently in the midst of making multi-billion investments in new products has keyed in on the benchmarks that determine whether a strategic initiative can really move the needle. “It makes me think a lot about making sure that we’re being aggressive enough,” the CEO said. The winner-takes-all dynamics that the Power Curve demonstrates have made him review the size of the company’s investments. “The rewards for winning are massively bigger than the cost of failure. That was the No. 1 thing I took away from the book,” he said. “We call it, ‘Be the tree.’ In any given industry now, you see a company that just puts everybody else in the shade.”
Tackle the challenge of sticky resources: This topic always comes up in my conversations with CEOs, because reallocation of resources at a portfolio level is one of the biggest hurdles in strategy: before you can apply money and people to the opportunities that can truly boost performance, you need to free them up. This requires the willingness to tolerate radical inequality—to say “no” to some businesses so can say “yes” to others. That, in turn, demands some uncomfortable conversations with your executives. “This is where the social side really comes in,” one chief executive observed. “It’s really hard to take resources away from powerful business unit heads, even when you’re the CEO, because you have to say, ‘Sorry, you’re either not getting enough return on that money, or your business isn’t as important as we thought it was when we allocated this money to you.’” Having data that backs up the rationale for such decisions makes the conversations easier, she noted. In fact, she has started designating some resources as “corporate assets”—for example, people who are so valuable to the company that their time is allocated based on corporate priorities.
Ensure the strategy room is like a kitchen with the right menu: During a recent symposium with board directors, one executive told me that boards need to strike a delicate balance between being in the kitchen and in the dining room. “Once you go into kitchen, you lose right to be a food critic,” he said, meaning that it can be dangerous for boards to get too involved in creating the strategy that they then need to dispassionately assess. Instead, he felt that boards can apply empirical benchmarks to make sure that the management’s kitchen puts the right strategy options on the menu, through the design of incentives, for example, or the identification of investable opportunities.
‘Hope’ is not a keen strategy: A CEO expressed her frustration with executives who ask to discuss potential challenges with their plans outside the harsh scrutiny of the strategy room. Most strategic plans look like hockey sticks, she says, “because hope springs eternal” that a projected “base case” will materialize. Now, when a business leader comes to her asking to take concerns “offline,” she insists on airing the issue with the full team. “If we’re not willing to have the tough conversations that have social implications, then we’re all wasting our time,” she said. “I tell my teams, ‘Hope is not a strategy.’”
By Chris Bradley
Paul Ebeling, Editor
Editor’s Note: Chris Bradley is a partner in the Sydney office McKinsey and co author of Strategy Beyond the Hockey Stick with Martin Hirt and Sven Smit. Mr. Bradley is of the developers of McKinsey’s “Ten Timeless Tests of Strategy,” Chris has worked on strategic transformations for organisations across Australia’s retail, mining, transportation, consumer-goods, and telecommunications sectors.
Latest posts by Paul Ebeling (see all)
- F1: Ferrari (NYSE:RACE); “The others are faster than us” - February 21, 2020
- “Deficit Not a Concern if Market Does Not React” - February 21, 2020
- President Trump’s Small-Business Approval Rating Hits All-Time High at 64% - February 21, 2020