A lot of executives find strategy intimidating because it forces them to confront a future that is hard to predict. Deciding on a strategy means making decisions that explicitly cut off possibilities and options. Getting those decisions wrong can wreck a career.
As an executive you might be tempted to make the challenge less daunting by turning it into a problem that can be solved with tried and tested tools. Usually that means spending weeks or even months preparing a comprehensive plan for how the company will invest in order to achieve a target. Pick one: increased market share or a share in some new market. To show attention to detail the plan is typically supported with detailed spreadsheets projecting costs and revenue into the future. When it’s done, everyone feels less apprehensive.
While this might be an excellent way to cope with fear of the unknown, it is a really bad way to design strategy. Let’s be honest: if you are entirely comfortable with your strategy, there’s a strong chance it’s not a very good one. True strategy is about placing bets and making hard choices. The objective is not to eliminate risk but to increase the odds of success.
Good strategy is not the product of hours of careful research and modelling that leads to an inevitable conclusion. Strategy should be the result of a simple and rough-and-ready process of planning what it takes to achieve your goal. Then you assess whether it’s realistic to try this strategy. Remember, you are not doing your job if you are not extending beyond your comfort zone.
To avoid the comfort trap, you need to focus your energy on the key choices that influence revenue decision makers: your customers.
Mistaking planning for strategy is a common trap. Even board members, who are supposed to be keeping managers honest about strategy, fall into it. Keep in mind that board members are primarily current or former managers. Most find it safer to supervise planning than to encourage bold strategic choice. Even worse, a lot of investors are more interested in the short-term goals described in plans than in the long-term strategic goals. Analysts obsess over plans in order to assess whether companies can meet their quarterly goals.
The focus on planning leads automatically to cost-based thinking. Costs are great for planning – after all costs can be controlled. You can decide how many employees to hire, how many square feet of real estate to lease or how many machines to procure.
Costs are comfortable because they can be planned for with relative precision. This is an important and useful exercise. But the trouble is that planning-oriented managers tend to apply familiar, comfortable cost-side approaches to the revenue side as well. They treat revenue planning as virtually identical to cost planning. The result is often painstaking work building up revenue plans; salesperson by salesperson, product by product, channel by channel, region by region.
But when the planned revenue doesn’t show up, managers are lost.
Companies may fool themselves into thinking that revenue is under their control, but because it is neither predictable nor controllable, it turns planning, budgeting, and forecasting into a futile exercise.
Planning typically isn’t explicit about what the organisation chooses not to do and why. It does not question assumptions.
There is a lot of research about managers who over-estimate their ability to predict the future and plan for it in a precise and technocratic way. Managers should watch carefully for changes in their environment and make course corrections in their deliberate strategy accordingly. Sticking to a fixed strategy in the face of substantial changes in the competitive environment is dangerous.
However, managers commonly love the idea that a strategy emerges as events unfold. It seems to justify declaring the future so unpredictable and volatile that it doesn’t make sense to make strategy choices until the future becomes sufficiently clear. Then there is no need to make angst-ridden decisions about unknown and uncontrollable things.
If the future is too unpredictable and volatile to make strategic choices now, what would lead a manager to believe that it will become less so during a pandemic? The future is never predictable.
Where to from here? Keep the strategy statement simple.
Focus your energy on influencing revenue decision makers – your customers. They will decide to spend their money with your company if your value proposition is superior to competitors. Which specific customers do you target? And how do you persuade them? In other words, what is your ‘compelling value proposition’?
If a strategy is about just those two decisions, it doesn’t need long and tedious planning documents. There is no reason why a company’s strategy choices can’t be summarised in one page with simple words and concepts. Characterise the key choices as ‘where to play’ and ‘how to win’. This keeps the discussion grounded and makes managers more likely to engage with strategic challenges rather than retreat to their planning comfort zone.
Strategy is not about perfection.
Managers unconsciously feel that strategy should be nearly perfect. But given that strategy is primarily about revenue rather than cost, perfection is an impossible standard. At its very best, 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.
The only way to improve the hit rate of your strategic choices is to test the logic of your strategic approach. For your choices to make sense, what do you need to believe about customers, about the evolution of your industry, about competition, about your capabilities?
It is critical to write down the answers to those questions, because the human mind naturally rewrites history and will declare the world to have unfolded largely as was planned rather than recall how strategic bets were made and why. If the logic is recorded and then compared to real events, managers will be able to see quickly when and how the strategy is not producing the desired outcome and will be able to make necessary adjustments. As a bonus, by rigorously observing what works and what doesn’t, managers will improve their strategic decision making.
Susanne Sperber is Director, Strategy at Retorix.