Problems with strategy

Few strategy exercises even acknowledge the fundamentals outlined above, so it’s difficult to know where to start!  However there are several consistent patterns of suboptimal approaches to strategy that are best avoided.  They are:

1. The illusion of certainty – acting as if strategy were a fixed puzzle which has a correct answer that is capable of being worked out.
2. Obsession with the competition – focussing attention on a zero-sum fight with competitors rather than creating value for customers.
3. Internal politics – playing strategy as an internal political game rather than as an authentic search for business success.
4. Implementation – putting energy into coming up with good strategic ideas but neglecting the reality that an idea only has value if and when it is delivered.

1. The illusion of certainty

We all love an expert who can tell us the right thing to do. Strategy gurus have built enormously complex theories, and charge substantial fees, to develop strategies that offer the illusion of certainty.  The experts are guessing about the future too, but their guesses are dressed up in sufficient pseudo-science to convince you that their guesses will be accurate.  This theme of expert prediction backed up by pseudo-science crops up in many other places in life: astrology, investment management, and even economics.  In reality, the guesses made under the strategy banner are as poor as those made in other areas – in other words, they are consistently wide of the mark.

The most common approach to strategy consulting starts by analysing data. Data is solid and cuddly (especially in business), because it seems so certain. Anything derived from data analysis therefore feels comfortable and secure.  But all data is derived from the past, while strategy is concerned with the future.  As Nassim Nicholas Taleb describes in his books, just before Christmas the turkey has masses of solid data that demonstrates, with 100% certainty, that farmers provide food, lodgings and protection on a regular basis. But Christmas heralds a traumatic change that no intelligent turkey could ever have predicted.  Much of what passes as prediction consists of turkey-like extrapolation of the past without developing any understanding of the underlying motivations that generated the data.

As Woolworths, buggy-whip manufacturers, and the makers of the Blackberry cell-phone will agree, data is valid information about the past, but that doesn’t make it valid information about the future.  What is actually needed is an exercise based on understanding what customers might want to purchase in future.

Strategy theorists are also capable of misusing data in other ways – for example, by relying on what people say they will do, rather than on what they really do. Henry Ford remarked that if he had asked customers what they wanted they would have said “a faster horse”.  It’s far more scientific to go through a checklist of questions than observe what is really happening at the coalface and think hard about why it is happening.

Lessons from other industries are easily, and naively, transferred with no attempt to understand whether they are valid for customers in the target industry.  The parcel-delivery business has experienced a major boom in internet-driven business, yet for years has stubbornly attempted to impose processes that were designed for business customers (fixed office hours, someone always available to sign) on to personal customers.  Over decades, different supermarket chains have attempted to package financial services products into little boxes that can be bought at the checkout: they have failed every time.

2. Obsession with the competition

The other sin of classic strategy exercises is a focus on the competition instead of the people who might provide the profit – the customers.  There are several reasons for this, none of which have any relevance to sensible strategy.

An industry is defined by the activities of its current participants, so the craving for data also generates an obsession with the activities of the competition.  The greatest potential for a strategy is to tap into customer wants that have never been satisfied but, by definition, no tangible data about these exists. It is much easier to collect data on things that are currently happening in the market – so that is what is collected and analysed.

The obsession with current markets and competitors is heightened by a linguistic trap: military strategy is all about beating the enemy, so the word itself provides a tenuous subconscious rationale.  The marketplace is the battlefield and our competitors are the enemy.  This sloppy thinking is frequently reinforced by executive compensation that is based on relative performance against competitors.

The creation of wealth in a business is based primarily on accepting money for things that customers want, but “industry awards syndrome” encourages Executives and Boards to take most pride in being ahead of the peers they meet socially – irrespective of the fundamental merits of the strategy they are prosecuting.  It’s ironic that industry awards events continue to exist even while whole industries are dying.

So a paradox emerges from use of standard strategy tools: by focusing primarily on the current industry and its participants, they automatically inhibit the development of the best possible strategy for the future. This is strategy as followership, not leadership.

The activities of competitors are relevant,  but they are secondary.  Let us clarify their true role in the search for a strategy by considering them against the three key elements of sensible strategy outlined previously.

1. What people might buy.  Competitors provide an opportunity to experience a product or service, so have a role in shaping motivations.  For example, we might find flying on an aeroplane to be convenient but too expensive to use often – so we might buy something cheaper from elsewhere.  That is useful information, but it keeps us focussed on products and services that already exist, rather than seeking out new ones.
2. Our unique selling point (USP).  Once again, information about dissatisfaction with competitor offerings can provide some information.  But the most profound USP lies in having a product that the competition does not have at all.  Sony’s fortunes were based on the introduction of the Walkman, a product that customers didn’t realise that they wanted until it was launched.  The technology for computer tablets existed for years before the introduction of the iPad, which put the technology together with a laser-like focus on what customers might want. Even the best firms get this wrong sometimes: Sony’s Betamax videotape format was technically superior to VHS, but customers chose the latter.
3. Cost and pricing.  Too much focus on competitors (and a firm’s own history) can perpetuate an accepted wisdom about essential costs that isn’t necessarily valid.  The Nintendo Wii was a video game system built using components that were far cheaper than those of the Sony Playstation and Microsoft’s Xbox, generating a huge increase in profits per sale.  It was able to do so because it abandoned the perceived wisdom that cutting-edge technology was essential for video games, instead focusing on a new category of customers who wanted simple and sociable games.  Ryanair has been immensely successful in eliminating unnecessary costs despite being ridiculed for doing so by its competitors – and, sensibly, it has started to recognise where some of its cost-cutting may have displeased its customers (but continues to ignore its competitors).

The dangers of concentrating on competition are outlined vividly by W. Chan Kim and Renee Mauborgne in their book “Blue Ocean Strategy”.  They describe it as similar to the lunacy of swimming in shark-infested oceans, coloured red by the savagery of its participants.  Instead they recommend a structured search for ‘customer wants’ that have not yet been met by the market – blue oceans.  As we have seen, the classic approach to strategy generally assumes that a market is fixed and static – a red ocean assumption that excludes the possibility of market innovation. Blue Ocean Strategy™ seeks to develop innovative strategies from real opportunities that are excluded from the classic approach.

A useful and practical by-product of the Blue Ocean Strategy™ approach is the potential to identify existing costs that can be stripped out – costs that  don’t deliver anything that is genuinely valued by the customer.  Cost innovation is just as valid as product innovation.

3. Internal politics

Having a strategy is now the accepted norm inside business, so Boards and Executives are expected to have one.  As a result, strategy consultants have sometimes been hired to post-rationalise the current direction of the business by providing an impressive-looking pile of validating data (which, of course, is historic).  Even when the consultants set out with the intention to do something different, it’s difficult for them to oppose the wishes of the person who is paying them.  If the current direction happens to be sensible the exercise is simply a waste of money. Even if this the case, the potential for new strategic opportunities is being eliminated.

One-sided compensation plans for executives have been made famous by the activities of banks in recent years.  By one-sided we mean that the risks and rewards are not evenly balanced: the executive receives large bonuses for a successful strategy but little loss (if any) if it fails.  If the optimum strategy for a business generates modest bonuses, there is massive temptation to ditch it and go for a ‘bet the shop’ strategy which has the potential to pay off big bonuses – possibly at the risk of destroying the business.  Once such a strategy is chosen, it’s not usually difficult to find consultants to verify that it is the correct one.

Compensation plans can also penalise the introduction of any strategy at all.  One huge financial services company in the United States effectively paid bonuses to its chief executive on the basis of the current year’s cash flow.  That cash flow was primarily generated from products sold many years ago (i.e. by his predecessor), and any investment in implementation of a new strategy would have reduced it.

Politics extend beyond the boardroom, in the sense that the values and beliefs that pervade any business are a force for maintaining the status quo.  When a manager has become an expert in a particular product or service over a twenty year career, it is extremely difficult to ask them to abandon the comfort blanket and embrace unfamiliar subjects, even when it is clear that customers are less and less interested in what is being offered today.  The effect is most pronounced in industries (like life insurance, printed books, photographic film) where existing infrastructures perpetuate the existence of old products for some time.

Work within our existing competencies always feels safer than introducing new products and services that we are less familiar with.  The paradox is that this applies even when we are faced with a drastic decline in our current business and we have lots of evidence that alternatives would be preferred by customers.  Our current competencies make us strongly conservative.  Organisations highly influenced by professional training (e.g. medicine, the law, academia, the clergy) tend to be the most conservative because their professional qualifications – in effect, the right to work – are based on competencies designed for historic products and services.

So it’s hardly surprising that most firms have strategies that consist of “what we are doing today plus a little bit more”.  Blockbuster video rental, Kodak, and the whole UK car manufacturing industry provide evidence that it takes a lot to break out of what seems to be a comfortable place, even when the business is clearly dying.

That’s not to say that we should ignore competencies – it would be foolish to launch an ambitious strategy without ensuring that all the skills and experience required to support it will be available.  Building the right competencies, whether by developing them internally or by bringing them in from outside, is a key element of a sensible strategy.

4. Implementation

Implementation is crucial to the development of a credible strategy – which can easily be forgotten in the rush of enthusiasm for a new and exciting business direction.  Implementation needs to be considered at two stages:

1. As a final check on whether a proposed strategy is credible: no strategic concept is worth anything unless and until it can be made real.  Establishing this requires a top-slice planning exercise to determine whether or not the strategy can be implemented and, crucially, at what cost.
2. Actually delivering the strategy to the stage that it generates profit.  If the strategic shift is significant this will require new competencies implicit in the strategic design, as well as a great degree of skill in change management.  A degree of iteration between what is desired and what is possible is essential: throwing a precisely-designed strategy over the wall to an implementation team never works.

Although implementation is crucial it needs to be thought about at the right time: towards the later stages of strategy development.  An early and strong focus on what is possible is likely to reinforce current limiting beliefs about how to run the business, at the expense of what is attractive for the customer. On the other hand, when the strategy is determined first as a challenge for implementation, the human brain is capable of incredible ingenuity and pragmatism.