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By Morrey M. Ewing
WHAT WENT WRONG WITH STRATEGY:
xxxThe goal of strategy has always seemed appealing. It is to make a set of consistent choices that distinguish a business within its chosen markets, and so earn strong, sustainable profits. Why do companies struggle so hard in practice to create effective strategy?
xxxWhen many managers first learned what corporate strategy was, they sensed it was not for them. It always seemed to belong to someone else - the CEO, corporate planners, consultants, anyone but those whose job it was to carry out the strategy.
xxxWorse, early strategy was often unhelpful. It re-wrapped current wisdom and projected it forward. In an annual ritual, it took months to prepare, but then got shelved immediately. It rarely changed minds or behavior.
xxxSo strategy evolved into an arcane science whose mysteries only consulting wizards could unravel. From not worth knowing, it became unknowable, at least to mere insiders. This arrogance by experts made strategies hard to execute. Managers left out of a strategy's creation were unlikely to implement it well, or with conviction.
xxxThen came Vision. A useful notion filling a real need, it stretched a company's ideas about its strategy into a more distant future. It allowed CEOs to ask, "What ideal kind of company could we become?" It helped them express their company's purpose, in words that all could understand. Some visions stirred the imagination, and engaged employees in trying to bring about this future.
xxxRegrettably, like many popular ideas, Vision soon lost favor. Too often, the visions that emerged were either lofty or bland, with too little substance. Nor did they express or call for hard choices of direction. Employees found it difficult to connect their Monday morning priorities with the Vision Statement on the wall. Soon after, the cynics got busy. The gap between the vision's future ideal and the current reality was too easy a target. Without a link to strategic choices, guiding real changes in the business, visions lost credibility and their power to motivate.
xxxAt last, we are getting wiser. We understand that strategy must convey both a future ideal and hard-edged choices of which customers, products, and channels to pursue. We know strategy must distinguish a company in ways its customers will pay for. We know now that our strategies must both inspire and provide specific guidance. We also realize we must put strategy into the heads and hands of our managers. Only they have the insight and experience to build strategies that will work. Only they can bring a paper strategy to life, in how they run our businesses.
xxxMaking our managers into strategists seems easier said than done. How can we impart a strategic view and skills to those with no instinct for the bigger picture and no professional expertise? What methods would spur managers to make the most of what they know and discover what they need to know? How can they learn to create, execute and constantly renew robust competitive strategies?
A FEW, KEY PRINCIPLES:
From years of helping managers wrestle with strategy, a few, key answers emerged:
1. We said that strategy is about choices. These choices resolve which combination of customers, products and channels to emphasize, and which to avoid. They focus investments of time, energy and money. For a company to compete and win, its strategy must also set it apart from its rivals, in what it does, how or how well.
xxxJust being different is not enough, however. Such distinctions must earn a profit, because customers value them or they make the business more productive. Nor can these differences be fleeting - the company must sustain them.
xxxA business chooses to operate in several markets: to buy materials, sell products, recruit employees, or raise capital. In each chosen market, it must convey in both words and actions what consistent differences it brings and why they add value.
2. The strategies we most admire are usually very simple, readily understood and acted on by all employees. Few companies that win consistently, over time, rely on ‘brain surgeon’ experts to keep that edge. Even those that do seem to harness them to serve more basic strategies that all staff can learn and all customers appreciate.
xxx"For example, strategic differences visible to any Wal-Mart customer include large selection, low cost, and constant shelf replenishment. Supporting strategies to excel at logistics, retail data, and supplier management are also ones that many employees must know and follow. Complex algorithms to drive restocking do help, but few managers, employees or customers will ever care or need to know about them. Without simplicity, Wal-Mart’s strategy would be far less effective.
3. The best and least exploited insights for strategy come from managers close to the action. How do we know what differences our customers truly appreciate? Often, we rely on outside experts, using formal surveys, to learn about our markets. Still, these sources can fail to satisfy. Surveys only show what we know enough to ask and customers know enough to answer. Even then, they may say one thing, but do another. Managers who know their customers can be a leading source of insight as we search for useful differences that customers will actually value.
xxxHow can we choose differences that will yield an edge in productivity? Here, too, we often overlook the asset of our operating managers. Those who know, in-depth, how work gets done today typically know best which factors drive today's performance. Frequently, they have known for years what changes would decisively raise productivity, and where to get started.
xxx"By fully enlisting those managers in strategy, we give them the mandate and tools to make full use of what they know. Nor does this limit us to what they see within their current horizons. To expand and test their insights, we can expose them to new ideas, research and alternatives. Still, the strategy’s conclusions must come from them, for this mandate to be real.
4. Helping to create a strategy strengthens the ability to execute it. Operating managers are also the best choice to create strategy, because they must lead its execution. In making it happen, they will be better at understanding and supporting it, and reflecting it in their own behaviors. Implementation will more likely occur.
xxxMost of us admit that a brilliant strategy on paper is worthless unless it leads to action. Mike Davidson, a wise counselor of executives, goes further. "A Grade A strategy with Grade B execution," he says, "loses to the opposite, every time."
xxxThat sounds right, but why? One hotel chain offers top-drawer service to surprise and delight harried executives, all for a premium price. Sadly, they meet these expectations 70% of the time. Another group of inns serves traveling salespeople. For a standard price, their only points of difference are a wonderful mattress, a clean room, and a great cup of morning coffee. They fulfill their promises 99% of the time. In which business would you buy shares?
A MODEL FOR MANAGERS TO CREATE STRATEGY:
In principle, then, operating managers can become the best strategists. In practice, we must equip them for the job. True strategies, we said, are about choices. What simple model can we give them to lead them through the choices that they face?
xxxFortunately, no one has a monopoly on the right way to create strategy. The many models promoted by a host of firms and experts may use different diagrams and terms but cover similar ground. Nor does complexity add value here. The central choices of strategy are simple enough that any thoughtful person can debate them.
xxxWe use a model that divides those choices into two types. The first 'Participation Strategy' asks how a company will participate distinctively in its chosen markets:
xxxWho are the customers we will explicitly target, and what are their most important, unfulfilled needs that we will satisfy?
xxxWhat are the benefits we will offer to satisfy those customer needs? How will we provide those benefits in what family of products and services?
xxxHow will we deliver and communicate those benefits to our customers?
xxxA second set of choices 'Operating Strategy' addresses how a company can distinguish itself operationally to compete and win, given its participation choices:
xxxWhich distinctive capabilities must we build to deliver those benefits to those customers in those ways? What major initiatives will this require?
xxxCapabilities include the core skills and strengths a company must exploit and renew to meet its promises to customers. A company that wins through product innovation, e.g., must have an ongoing ability to invent and produce (or acquire) new products, then bring them to market faster than its rivals. Capabilities also re-align key management systems behind the strategy. A competitor stressing low price leadership must focus all internal controls on exposing and eliminating unproductive costs and making expense management a priority for everyone.
HOW TO INTEGRATE VISION INTO STRATEGY:
As an enduring statement of purpose, a vision should shape the strategies of the business as they change over many years. How and when to introduce a vision into strategy can depend on whose vision it is.
xxxSometimes, a vision is a statement that sets out where the CEO intends to lead the company. These executives see choosing and articulating a vision as one of their largest and exclusive roles. They believe that no one else has the perspective or mandate this task requires. In such a case, the only time for CEOs to declare their vision is at the start of any strategy creation effort. Their vision will define the distant horizon towards which the strategy must reach. In any choices that it makes, the vision also creates boundaries that those who build the strategy must live within.
xxxIn other companies, the CEO may engage a wider leadership group as visionaries. If they feel ready, they too could state their vision at the start, to shape their detailed choices of customers, products, channels, and capabilities. Managers doing this for the first time, however, may want to hold off on vision for a time. After debating their strategic choices, and learning more fully what is possible, they may create a richer, sharper, more compelling vision. Such a perspective takes time to develop.
GOING FURTHER - MANAGING STRATEGICALLY:
To get this far and stop would mean to go halfway. We need our operating managers not just to build the strategy, but to apply it in running the business. To harness strategy to the task of managing a company calls for two further tools ? hard performance measures and a strong financial model. These, too, pose choices we can frame as questions:
xxxHow well must we perform on which measures for our strategy to succeed?
xxxHow much profit should this strategy generate, derived from what sources, as shown by a financial model of the company’s future?
xxxMeasures and financial models both set targets or standards of performance. Strategic managers first apply them to test whether the strategy holds water. Later, they can use them to track their progress in executing the strategy and achieving its goals. Two benefits result: accountability for outcomes, and learning. These two work best when they work together.
xxxSuppose a company misses key targets highlighted in its strategy. If its leaders are strategic managers, they will strive mightily to learn from these results. Did they fail to implement the strategy fully, and if so, why? Did they do what they intended, but still fall short on their expected outcomes? Did key assumptions, on which their strategy relied, break down? How can they improve that strategy, revise their targets, or rethink their assumptions, to benefit by this experience? Even if they met every target, how could they go beyond this performance, the next time?
xxxWhen strategic learning is a ceaseless task engaging all managers, accountability becomes a fairer, more effective tool. We then place equal value on creating strategy that works, implementing it skillfully, and constantly making it better. We censure not human error, but complacency or a failure to learn from past mistakes.
THE FINAL HORIZON - STRATEGY RENEWAL:
This focus on learning supports the most valuable role that managers can play in strategy creation. On a continuing basis, we need our managers to challenge their strategy, renew and refresh it, and sooner than we think, replace it.
xxxStrategies, like automobiles, face the prospect of major depreciation from the moment when we 'turn the key'. Unlike automobiles, however, we can constantly renew a strategy through active use and constant improvement. We can reverse the process of depreciation.
xxxThe forces conducive to any strategy's decline are universal and relentless. Those strategies most successful at improving a company's profitability will in turn attract greater competition. Strategically thriving businesses also become self-satisfied. As profits multiply, cost and revenue disciplines can lose their urgency and force.
xxxNew conditions that call for entirely new strategies are also numerous. Changes in technology, customer attitudes, economic forecasts, or even weather can transform a wonderful strategy into an obsolete one.
xxxFinally, unlike a vision whose horizons may always recede before us, strategies have finite limits. As we complete each element of a strategy, we sow the seeds for the next one.
xxxSo we need our strategies to undergo periodic renewal - not formally, once a year, but as needed, as we progress. We must teach our managers to challenge their strategy and improve on it, even as they implement it. They must learn to see it as a living thing, whose care and feeding rests with its creators.
LAST WORDS:
Effective strategy, then, depends on giving and accepting responsibility. First, we must give our managers true responsibility for strategy. They are the ones best suited to create it, work with it, and keep it vital. We owe them the mandate and the simple tools they need to carry out this important task.
xxxOnce handed the torch, they must grasp it fully. No matter who finally approves their strategy, its future now belongs to them. They must be the ones to drive its execution, learn from it, and strive to make it better. They must be the first to see when to recreate the process, to begin the cycle all over again.
xxxIf you have any comments or questions for Morrey Ewing, he may be reached at: morrey@sympatico.ca
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