Business leaders often discuss how to move their organisation forward – be it through expansion or acquistions into new markets. They start with optimism and excitement but then face various obstacles to progress. Read on for some insights from McKinsey on how to beat the odds based on their empirical study.
Strategy is a key element in business success but is an elusive to many business owners. Here, at last, is guidance on how to do it right.
Published by McKinsey & Company, Strategy Beyond the Hockey Stick gives a refreshing look at the ‘inside view’ of many of the world’s top companies and where they go wrong in the strategy process. The book examines the combination of both the data and social elements that drive business growth or decline. Unlike many other business books at present, it employs a rigorous, statistics-based method to its approach, something sorely missing from the business strategy book genre, with the bulk mostly relying on anecdotes and unfalsifiable claims about past success.
McKinsey, a company described by The Economist magazine as being the ‘high priests of management consulting’ are privy to information from some of the top executive minds globally, and of course this comes at a significant price tag. Whilst most startups are unlikely to afford such services, this book does provide valuable and most importantly practical insights they can utilise.
The social side of strategy
It is easy to get agreement on the broad strategy elements such as goals and objectives but the devil is in the budgeting. This is where the social side of strategy starts, as people move to protect their own budget allocation and reputations within the business. Although the CEO may have grand visions of a merger or acquisition (M&A) or large-scale resource reallocation, many of their lieutenants are self-interested. This leads to a situation where this year’s budget looks strangely like last years, with a few small tweaks. The book argues that intellectually it is relatively easy to pick the top 10 strategy elements that are most promising, but the problem is with finite resource allocation – where the social side of strategy takes a major role.
The authors of Strategy Beyond the Hockey Stick suggest that strategies should include some bold moves. A bold strategy requires bold changes to the budget – making way for new investment. And in almost every case that investment comes from cutting the budgets of other areas of the business. This is where the social side of strategy practice comes into play as people start to protect their ‘patch’. When an individual’s job security is on the line, bold visions are often shelved in favour of incremental progress.
Founders can arm themselves against this phenomenon by keeping a focused view on the available data and their overall vision. Moreover, having a small and agile team will keep things decentralised and protect against personal biases and politics. In terms of risk management, a reversion to last years budget can potentially be less of a risk as entrepreneurs are generally less cautious by nature – after all, people don’t get into startups not wanting to take risks.
Instead of making the big moves necessary to implement bold new strategies, many companies instead fall into traps that discourage change. These might include:
Bring in the Guru – Probably the most common solution to problems where the entire team is stuck and progress grinds to a halt. In theory, it makes sense to bring in an expert with specific industry experience to keep the cogs turning. This person is usually charismatic, optimistic and articulate. However, the authors argue, the statistics show this rarely leads to any long-term change. If outside subject matter experts are completely necessary, a best practice would be to offer them equity incentives as part of the payment structure to ensure their goals are properly aligned with the business.
The Inside View – Many board room meetings develop what seem like bullet proof ideas for new revenue lines or to resolve product and service friction. However, once implementation begins, unforeseen issues come up. Businesses convince themselves that they have the winning plan this year even though they continue doing essentially what they’ve always done. This isn’t a new phenomenon, and the authors don’t pretend it will be resolved entirely by this solution, but the statistics they gathered showed a strong business case for the ‘outside view’. What would an outside management team without inherent biases really think about this solution? Would they find the plan as compelling or would they notice blind spots the internal team can’t see? A very practical solution to a very real problem.
The Power Curve
- The ‘Power Curve’ represents the culmination of 6 years of empirical research conducted by the McKinsey team, and is a visual representation of the success, both in revenue and economic terms, of the world’s top companies. The authors observed that value accrues disproportionately to those at the top of the power curve as these companies were successfully able to pull ‘levers’ and make ‘big moves’ in their strategy practice. The 10 main performance indicators when predicting whether a company would move up the power curve were (not ranked according to importance);
- Size of the company – the larger the company, the more likely it can move up.
- Debt level – the less debt the company has, the more likely it can move up.
- Past investment in R&D – The higher the R&D spend relative to sales, the more likely it can move up.
- Industry trend – the most important factor. Being in an industry with a positive trajectory is the biggest predictor of whether a company will move up.
- Geographic trend – the more exposure to high growth markets globally, the more likely it can move up.
- Programmatic M&A – Organising a steady stream of deals, each costing less than 30% market cap, results in a higher likelihood it can move up.
- Dynamic allocation of resources – By allocating at least 50% CAPEX to promising business units over a decade will increase the likelihood of moving up.
- Strong capital expenditure – Typically those businesses that spend 1.7 times the industry mean will be towards the top of the curve.
- Strength of productivity program – Companies where improvements to productivity occur consistently faster than the competition, are more likely to be towards the top of the curve.
- Improvements in differentiation – Companies developing a sustainable cost advantage or charging premium prices because of their product or service, will be more likely towards the top of the curve.
This research may not directly apply to startups (especially the size factor), but it is worth reviewing when it comes to time to emulate the success of some of the world’s most successful companies. Would Uber and Airtasker have grown so exponentially had the gig economy not become vogue (of course you can make the argument that they are first movers).
- Finally, the book finishes by offering 8 best practice solutions to keep back of mind in the strategy process:
- Hold regular strategy dialogues instead of an annual meeting.
- Incorporate time to debate real alternatives, rather than simply making yes-or-no decisions.
- Allocate resources based on opportunity, rather than spreading evenly amongst all options (what they affectionately call the ‘peanut butter spread’ solution).
- Fund big moves that include tear downs of past results, rather than simply funding the first-year dip of the hockey stick.
- Challenge budget inertia by making 80% of the approved budget non contestable. This will restrict any subsequent haggling to the remaining 20%.
- Undermine ‘sandbagging’ by assigning risk scores to each proposed move.
- Incorporate probabilities of success while encouraging noble failures in pursuit of aggressive moves.
- Instead of focusing on the first year’s budget for a three- or five-year plan, focus on the first step, and then establish future performance metrics in six-month increments.
In all, it is a practical and refreshing perspective on the strategy process. Instead of relying on anecdotes, this book stands above its peers because of its ability to drive a compelling case for a rigorous and statistics based approach to the strategy conversation.