Most companies do not have a strategy. There is consensus in management literature about this fact. Why do most executives fail their companies in the realm of strategy?
Let’s see what leading economists, managers and social scientists found out and what to do about it: Does a company really need a strategy?
Does a company really need a strategy?
Let’s start with a reality check: If most companies can survive without a strategy – do you really need one? According to Richard P. Rumelt, a leading thinker in strategy, given an existing, established company you do not require much genius to run it:
“…there will be many years during which profits will roll in almost regardless of how you arrange your business logic. Yes, there was inventive genius in the creation of these strategic resources, but profits from those resources can be sustained, for a time, without genius.”
(Richard P. Rumelt in”Good strategy – bad strategy”, see sources)
But is a strategy superfluous in the long run? To achieve a performance better that beats the market strategy is indispensable. To navigate a company through a volatile, uncertain, complex and ambiguous (VUCA) having a strategy is mandatory. To face the challenges of digitalization having a strategy is indispensable. Richard P. Rumelt: “A strategy is like a lever that magnifies force.”
A company without a strategy has “a place to stand” but certainly not a lever of any significant size.
CEO’s are seldom good in strategy
Running a company as an CEO is something which has specific skill requirements beyond the CEO’s initial background: Financial Acumen, Communications and Strategy. Other skills, like operational or functional expertise and leadership skills remain important, but are build in the previous phases of the CEO’s career.
If a CEO fails to display and develop financial or communication skills, these shortcomings will become visible quickly to the supervisory board and the CEO will be augmented by a strong CFO and communications department.
But her strategy skills are much harder to judge, as strategy takes time to unfold, requires deep insights – that the supervisory board might not have or spends time enough to gain them. Additionally, spotting a good strategy requires the ability of the board to judge what a good strategy is. This last point may be the biggest weakness, as strategic skills might not be a criteria to get into a board.
Just because CEO’s are talking about strategy all the time, does not mean that they have a clue what strategy is. Nearly all drivers tend to overrate their ability to drive a car – most people rate themselves as above average. Similar to CEOs: They talk so much about strategy, that they finally convince themselves they are good at it, by getting rid of their cognitive dissonances over time. The hierarchical system they are presiding over does not help them to find a realistic estimate of their strategic skill: As shown in the last post, criticism by subordinates is always rare, esp. in strategic matters.
Chris Ertel and Lisa K. Solomon in their 2014 book “Moments of Impact“, describe the constant self overrating of CEO’s in respect to their Strategy skills as the “Karaoke Curse”.
“Just because you sing a song repeatedly and gladly does not mean that it sounds good.”
Just because a manager talks a lot about strategy, does not mean he is good at it.
Six strategic thinking skills
What exactly is strategic thinking? Chris Ertel and Lisa K. Solomon deliver the following definition of key strategic thinking skills:
Make the experiment and think of an acquaintance of yours, someone in higher management, possibly CEO, but any level will do. And try to rate your ability. Any shortcomings? Do not despair, strategic thinking ability can be build over time.
Build strategic skill by experiences
Ellen F. Goldman, a professor of human and organization learning at George Washington University, has researched how strategic competence is build in managers. She concludes in her paper “Strategic Thinking at the top” that experience is needed to build great strategic thinkers. This experience needs to be build over years, but luckily the experience can be build already during upbringing or in management programs – before someone is promoted CEO.
Goldman distinguishes three different pathways to strategic thinking capability:
A. By upbringing:
Some people appear natural strategic thinkers, as their natural curiosity has driven them to read books, to go out and explore. Joel Kurtzman, author of “Common purpose: How great leaders get organizations to achieve the extraordinary” has noticed that reading, not just of business books, but also biographies (and some fiction, too), has formed many of the best managers. Curiosity is key.
Amazons Jeff Bezos, Tesla’s Elon Musk and Microsofts Bill Gates carve out weeks in their annual schedule to update their know-how and have time to reflect. Reading and Reflection is way to build strategic competence.
B. By participating in repeated rational planning exercises
Rational planning exercises require iterating from visioning the outcome, to sketching out what and how the vision is to be achieved and reflecting that in financial outcomes, e.g. creating and implementing business plans.
There are, however good and bad planning processes. MIT professor Henry Mintzberg (see sources) distinguishes overly analytical planning processes, which do not help to foster much of strategic insight from creative planning processes, that include analytical exercises but go beyond them.
C. By working and mastering ever more challenging tasks, with ever more complexity and ambiguity
In other words: By raising through the ranks, being tasked with entrepreneurial tasks and being promoted on merit. This is consistent with what two leading theorists Malcom Gladwell in “Outliers: The story of success” or Geoff Colvin in “Talent is overrated: What really seperates world class performers from everybody else” found out. According to Malcom Gladwell 10.000 hours of practice in early years breeds masterly performance – no matter in what skill.
Strategy is a skill, skills need to practiced deliberately
Judging the strategic skills of a manager is of extreme importance. On top of her achievements, the things the manager actually worked on should be scrutinized before hiring or assigning the wrong candidate to her – and the companies – doom.
Skill is not everything – it takes conviction and guts, too
But skill is not everything. Even if a manager is skilled in strategy, he might not want to use this skill, as it might hurt his interests. Take the example of a retail CEO who’s pay depends on revenue. He might know that his retail stores are loss making and he really needs to turn them around to produce a profit – before adding hundreds of more stores. Each new store pushes the company deeper and deeper into losses. But revenue is increased, and so is the managers pay. Practically, money flows from the pockets of the company (the principal) into the CEO’s (the agents) pockets. A rational strategy for the CEO – a blow to the company.
But even without selfish motives, it might be rational for a manager not to follow the best strategy for a company: Change is met with resistance from many quarters. The status quo is a mighty ally or adversary to any manager. It takes guts to turn the ship around and head for new horizons. No-one says is better then Machiavelli in “The Prince“, published 1513:
Nothing is more difficult to handle, more doubtful of success, nor more dangerous to manage, than to put oneself at the head of introducing new orders.
For the introducer has all those who benefit from the old orders as enemies, and he has lukewarm defenders in all those who might benefit from the new orders.
This lukewarmness arises partly from fear of adversaries – and partly from the incredulity of man
Both, skill and conviction is what it takes to set companies on a new course.
So if strategic skill is in short supply on board level and conviction might not be rationale: No wonder that most companies drift through time without taking decisive action.
These sources of strategic inaptitude gets companies to soldier on regardless of the challenge. Good luck to most traditional companies facing nimbler online rivals, who’s board have proven to embrace strategic thinking and who know that the choice not to disrupt your own business model leaves it in the hand of competitors to do it to you instead.
Did you experience any obvious example of strategic inaptitude? Feel free to share in the comments.