Have you tested your strategy lately? That's the question posed by Chris Bradley, Martin Hirt, and Sven Smit on the McKinsey Quarterly website.
The authors say the basic principles of a good strategy can often get obscured. Sometimes there is the distraction of pursuing the "next new thing".
In other instances, the true purpose of the strategy gets lost in "torrents of data, reams of analysis, and piles of documents that can be more distracting than enlightening".
WAY OF THINKING
Bradley, Hirt and Smit assert that strategy is a way of thinking rather than a procedural exercise or a set of frameworks.
In order to "stimulate that thinking and the dialogue that goes along with it", they have developed a set of tests for leaders to assess the strength of their strategies.
They explain: "The tests of a good strategy are timeless in nature. But the ability to pressure-test a strategy is especially timely now. The financial crisis of 2008 and the recession that followed made some strategies obsolete, revealed weaknesses in others, and forced many companies to confront choices and trade-offs they put off in boom years.
"At the same time, a shift toward shorter planning cycles and decentralised strategic decision making are increasing the utility of a common set of tests. All this makes today an ideal time to kick the tyres on your strategy."
1) Will your strategy beat the market? The authors say that good strategies emphasise difference versus your direct competitors, potential substitutes and potential entrants. To beat the market, your advantages must be "robust and responsive" against onrushing market forces.
They add: "Few companies, in our experience, ask themselves if they are beating the market – the pressures of 'just playing along' seem intense enough. But playing along can feel safer than it is. Weaker contenders win surprisingly often in war when they deploy a divergent strategy, and the same is true in business."
2) Does your strategy tap a true source of advantage? "Know your competitive advantage, and you've answered the question of why you make money," say Bradley, Hirt and Smit.
Competitive advantage comes from two main sources: positional advantages and special capabilities. The authors explain that the former are rooted in "structurally attractive markets" and favour incumbents because "they create an asymmetry between those inside and those outside high walls".
Special capabilities are "scarce resources whose possession confers unique benefits". They must be crucial to a company's profit and "exist in abundance within it while being scarce outside".
The authors observe: "Companies often err here by mistaking size for scale advantage or overestimating their ability to leverage capabilities across markets.
"They infer special capabilities from observed performance, often without considering other explanations (such as luck or positional advantage). Companies should test any claimed capability advantage vigorously before pinning their hopes on it."
3) Is your strategy granular about where to compete? Bradley, Hirt and Smit point out that the degree to which the market is segmented significantly influences resource allocation and thus the likelihood of success.
"Defining and understanding these segments correctly is one of the most practical things a company can do to improve its strategy," they say, advising that "companies should be shifting their attention greatly toward the 'where' and should strive to outposition competitors by regularly reallocating resources as opportunities shift within and between segments".
4) Does your strategy put you ahead of trends? Too many strategies are directed at preserving the status quo because they extrapolate from the previous three to five years, a timeframe "too brief to capture the true violence of market forces".
According to Bradley, Hirt and Smit, major market transitions are an ideal opportunity to rethink strategies and get ahead of the curve. They say strategists must take trend analysis seriously and "always look to the edges".
5) Does your strategy rest on privileged insights? These days data is easily accessible and can be assembled into detailed analysis relatively cheaply. But if you feel that represents an informed strategy, remember that your rivals can do exactly the same thing.
To develop proprietary insights, the authors advise that searching for problems can help get you started: "Create a shortlist of questions whose answers would have major implications for the company's strategy."
They also recommend collecting new data through field observations and research rather than recycling the industry reports that everyone else uses.
6) Does your strategy embrace uncertainty? Bradley, Hirt and Smit say: "A central challenge of strategy is that we have to make choices now, but the payoffs occur in a future environment we cannot fully know or control. A critical step in embracing uncertainty is to try to characterise exactly what variety of it you face – a surprisingly rare activity at many companies."
They add: "Rigorously understanding the uncertainty you face starts with listing the variables that would influence a strategic decision and prioritising them according to their impact.
"Focus early analysis on removing as much uncertainty as you can… Then apply tools such as scenario analysis to the remaining, irreducible uncertainty, which should be at the heart of your strategy."
7) Does your strategy balance commitment and flexibility? The more you commit, the less flexible you are and this tension represents one of the "core challenges of strategy".
A market-beating strategy focuses on a limited number of "crucial, high-commitment choices to be made now" while leaving enough flexibility for other choices to be made over the long term.
Aim for a three-pronged strategy comprising "big bets" (committed positions), "no-regrets moves" (which will pay off regardless) and "real options" (low-cost actions that you can commit to at a higher level if conditions warrant).
8) Is your strategy contaminated by bias? Fuzzy thinking can lead you to believe you have a market-beating strategy when you don't. Over-optimism, using arbitrary reference points, following the crowd and confirmation bias can all pollute your thinking. To "de-bias", develop multiple hypotheses and potential solutions. Specify objective decision-making criteria in advance and examine the possibility of being wrong.
9) Is there conviction to act on your strategy? Bradley, Hirt and Smit explain: "CEOs and boards should not be fooled by the warm glow they feel after a nice presentation by management. They must make sure that the whole team actually shares the new beliefs that support the strategy.
"The result of such an effort should be a support base of influencers who feel connected to the strategy and may even become evangelists for it."
10) Have you translated your strategy into an action plan? When implementing a new strategy you must clearly define what you are moving from and where you are moving to regarding the business model, the organisation and its capabilities.
Everyone needs to know what they should be doing and you must formulate a "detailed view of the shifts required to make the move, and ensure that processes and mechanisms, for which individual executives must be accountable, are in place to effect the changes".