Posts Tagged ‘McKinsey’

Why Strategy Is Still Worth A Business Owner’s Time

Sunday, January 23rd, 2011

1. Is strategic planning still worth doing?

A couple of months ago I asked our LinkedIn Group the question “Is the strategic planning process as we know it still relevant?” That was because I’d seen articles and blogs arguing that strategic planning;
• Uses tools which are no longer relevant or
• Is no longer worthwhile because everything changes so quickly now.

2. What do the big names think – and is that important?

So a question in the recent McKinsey Quarterly caught my eye. Asked “What’s the new thing in strategy?” the answer was “there’s always new stuff out there, and most of it’s not very good…… it’s probably better to be thorough about what we know is true.”

McKinsey is a thought leader on the topic of strategy. So the answer kicks the point about the tools no longer being relevant into touch doesn’t it?

Then last week I found an article containing 5 video clips from a presentation given by Jonathon Goodman of the Monitor Group – another authority on strategy. The title is “Why Strategy Matters, And Now More Than Ever”. And that, by itself, disposes of the question of whether strategic planning is no longer worthwhile.

You can argue that McKinsey and Monitor work with large corporations so what they say offers no benefit to smaller, privately owned companies.

But I disagree; after all we founded ProfitPATH to adapt the tools used by corporations for owner managed businesses. If what McKinsey and Monitor say about strategy makes sense, then it makes sense for everyone.

The difference between corporations and owner managed businesses lies in how to apply what they’re saying.

3. Three things for business owners to think about.

I’ve picked 3 quotes from Goodman’s presentation. Each one makes an important point that’s easy to overlook or ignore.

“Strategy is the filter to distinguish distractions from opportunities.” Monitor views strategy as the outcome of making an integrated set of choices about, for example the company’s goals; its target markets; how it will win (its value proposition, sources of competitive advantage etc.);and its capabilities.

For a strategy to be successful each choice must reinforce the others so that all of the pieces of the strategy are aligned. The strategy drives resource allocation and is the thing that connects all parts of the organization.

It makes sense to compare any new initiative which arises to the strategy. If the initiative supports the strategy, it really is an opportunity. If it doesn’t, it is simply a resource wasting distraction.

But how often do we miss applying this critical test as our eyes glaze over with excitement about the profits the new initiative can generate?

(ProfitPATH will shortly introduce a new service to help clients focus on opportunities and avoid distractions.)

“It is useful to produce different versions of the future and ask – what would it take to win?” Business owners can use trends which might emerge or events that could shock any aspect of the environment to create 2 or 3 different versions of the future.

Goodman suggests asking 3 questions about each version. Will our current strategy be effective? If not, what will it take to win? What is the difference between what it will take to win then and what it takes to win today?

“Being flexible is not a strategy.” Monitor argues that the changes in the business environment make developing a coherent strategy more important than ever.

Companies that have one can determine the areas in which they can be flexible e.g. by knowing where to seed opportunities for new products and markets and by building flexibility into capabilities so that they can be deployed in different ways.

But despite the emphasis being heaped on the need for flexibility it cannot, by itself, form the basis of a strategy.

4. Wrapping it up.

Strategy and strategic planning will always be critical to long term success and increasing the value of a company. The big guys can’t be right all of the time – after all who is? But their experience and resources have to be worth something.

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3 Ways To Test Your Strategy

Tuesday, January 18th, 2011

An article I read recently showcases 10 tests of a strategy that apply some of the best thinking that’s been done on the topic.  It was published in the McKinsey Quarterly and is called “Have You Tested Your Strategy Recently”. You have to register to read the full article but it’s worth it.

I want to focus on 3 of the tests which I think are particularly valid for business owners.

The first one asks the question – does your strategy put you ahead of trends? That new trends develop in any market is a fact. The issue is the length of time it takes for them to become apparent. A major technological breakthrough or a significant change in, e.g. the economy/demand or regulations/legislation can drive a rapid transition.

But most trends develop so slowly that business owners only react when their profits are affected. At that point it may be too late to respond effectively (think about the travel agents who ignored the rise of online competitors). The cost of missing a trend can be heavy, but seeing it early can pay off.

So how do you spot new trends? Keep an eye on customers who have been quick to adopt new products in the past. What are they doing? Think about the impact the new trends would have on your financial position – and the decisions you would make if you were certain they would happen. How do the results of those decisions compare with your current priorities?

The second test looks at how well your strategy deals with uncertainty. A challenge for business owners is to know which choices to make now, given that the outcomes will take place in a future they can’t control. The authors suggest breaking uncertainty into 4 levels.

The first gives a reasonably clear view of the future with a range of outcomes tight enough to support a firm decision. At level two, there are a number of identifiable outcomes for which a company should prepare. The possible outcomes in the third level aren’t specific but fall into a range resembling a probability distribution. And level four features total ambiguity, where even the distribution of outcomes is unknown.

Most companies assume they are facing either levels one or four while they are usually dealing with level two or three. The authors suggest quickly ruling out impossible outcomes and then looking for those which are either mutually supportive or which are unlikely because they undermine one another. A tool like scenario analysis can be applied – by the owner, management team or consultants like us – to the remainder.

The third test, asks if the strategy balances commitment and flexibility. Commitment and flexibility are opposites – if you’re very committed to a course of action you may have very little flexibility.

Making the best trade-off between them requires understanding that, of all of the decisions a business owner has to make, only strategic decisions result in commitment – through hard-to-reverse investments in long-lasting, company-specific assets.

But in this world of uncertainty, strategy is not only about where and how to compete, it’s also about when. Committing too early reduces flexibility, leaving it too late can allow competitors to gain advantage.

A market beating strategy will do 3 things. Take big bets, or make commitments aimed at gaining significant long-term competitive advantage; make no-regrets moves, which will pay off whatever happens; and maintain options, that involve relatively low costs now but which can be turned into a higher level of commitment as changing conditions warrant.

Why did I choose these 3 tests? Because they are, I think, the most relevant right now as a result of the fall-out from the financial crisis and recession and the hardest for business owners to deal with. (Although I was tempted by Test #8 – Is your strategy contaminated by bias?)

If you would like someone to talk the tests over with, drop me an e-mail or give me a call. I’d be happy to spend half an hour chewing them over with you

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