Management guru Peter Drucker famously said ‘culture eats strategy for breakfast’. A company can have the best strategy in place but if its culture does not support it, it can all come to naught.
Now along come three McKinsey strategists, who, in a new book that analyses data from hundreds of companies, conclude that CEOs often pay too little attention to the ‘social side of strategy’. Sven Smit, one of the authors of the book, Strategy beyond the Hockey Stick, along with Chris Bradley and Martin Hirt, says if CEOs don’t observe or address how people behave, or the social side, “you will not be able to unlock the big moves which we think is a good outcome of strategy.” Looking at data from many companies, the authors say that they found a manageable number of levers that explain more than 80 per cent of drift, up and down, in corporate performance. This data, they add, can help CEOs assess the odds of success of their company’s strategy before execution.
There are far more agendas in the strategy room than just developing a winning strategy, Smit says. There are egos and competing agendas to contend with. The plan may be to discuss a five-year strategy, but what really matters is the first year’s budget. Many managers try to secure resources for the coming year, while deferring tough choices as far as possible into the future. “One outcome of these dynamics is a hockey stick projection, which shows rapid future success after a dip in the following year’s budget,” says Smit, who is based in Amsterdam .
How managers operate actually overwhelms the strategy a company has drawn up. “People have egos, they don’t like to get a no; they want to get the best for their business even though some other business in a company has a better chance of succeeding. The process is clouded by self-interest and biases,” he explains.
To overcome this social side of strategy, Smit says there has to be continuous dialogue, rather than setting strategy in stone. “You need to purposefully insert things that change the structure of the dialogue,” he adds. CEOs should also encourage the debate of alternative proposals. “We know that 30 per cent of decisions are different when you debate alternatives than when you only debate one proposal. That’s a big deal, so you better debate them.”
The book is split into two major parts: first, is expansive empirical research over 2,400 companies furnishing insights that the authors say should inform strategic decision, moving beyond the typical frameworks in vogue today. The second is the social side of strategy as described above.
On the empirical research, the book introduces the idea of a power curve which studies the economic profit (i.e., returns over cost of capital) of the researched companies over a 15-year period. The power curve suggests that companies in the top quintile (20 per cent) of economic profit capture over 90 per cent of the total profit earned while companies in the bottom quintile suffer deep losses. The industry a company is in has a meaningful impact on its position in the power curve.
Companies in the middle three quintiles have a less than 10 per cent chance of moving to the top quintile, says the book. It goes on to identify key factors that contribute to an average company’s ability to move up the power curve and the key idea here is that big moves (not incremental moves) around five areas — capital re-allocation, M&A, productivity improvement, moves to differentiate and capital infusion — are most correlated to winning strategies.
According to the McKinsey strategists, CEOs should focus their resources on one or two businesses instead of spreading it like peanut butter on toast across 8-10 businesses. “You’re far more likely to make a major move up the power curve if one or two businesses break out. Spreading resources evenly gives too much to those businesses that are unlikely to succeed in a significant way while depriving the one or two that could turn into huge opportunities,” Smit explains. The social side of strategy, where managers come with their own agendas, can influence resource allocation which CEOs should resist.
Finally, Smit says corporates require eight big shifts in the way they prepare strategy in order to be assured of success. The shifts are: from annual planning to strategy as a journey; from saying “yes” to all plans to debating real alternatives; from a “peanut butter” approach of spreading resources to picking the 1-in-10s; from merely approving budgets to making “big moves”; from budget inertia to liquid resources; from sandbagging or risk-avoidance to open-risk portfolios; from “you are your numbers” to a holistic perspective on performance and, lastly, from long-range planning to forcing the first step.