This blog was originally published in LinkedIn on December 22, 2022
This time of year, always reminds me of the many long days earlier in my career between October and December, working on the annual strategic meetings. As a member of a corporate strategy team, we all put long hours getting all the strategic plans together, presenting them, and finally getting agreement. As I moved to head teams, I worked on my team’s strategy and help my peers. Now that I’m in consulting, those days are somewhat behind me. Of course, nowadays many organizations have moved to agile strategic planning, so that process never ends.
From time to time, I’ve called myself a strategist which sounds made up. The reality is that for nearly every single role I’ve had in banking, whether heading operations or a program office, one of my main functions has always been strategy. The culmination of that was having the title of Chief Strategy Officer at Extractable / Finalytics.ai. Even now when I have a more proper consulting title at EPAM Systems, my thinking is focused on what I learned in business school and on every job ever since about strategy.
The Theory
The dictionary definition of strategy is “a plan of action or policy designed to achieve a major or overall aim.” Not all plans are equal. Many plans are based on nothing but what a leader thinks should happen or, worse yet, the plan is merely “keep doing what we have always done.” True strategy bases the plan on data and requires leadership to execute.
One of my favorite business school classes was the Business Strategy course. Throughout my career, I have gone back to the basics of strategy I learned in that class. Looking back, this single class has informed much of what I have done in my post business school career.
The central part of the course was a simulation. The class was broken into several teams. As we learned the basics of strategy, the teams met and made decisions about “our business.” We competed in the same market with each group.
The characteristics of the market were not shared with us. We were not told what we were selling. We were told that the only levers we had was our budget.
My team made two basic long-lasting decisions. First, we realized that being blind to market forces was not a normal situation. We were determined to research the market. Second, our research would dictate our strategy and we would stick to it long term.
There was no data given at all about the market no matter what we asked of our professor. We decided to interview the people that understood what worked and didn’t work. We talked to classmates who took the class before us.
Our research found that there were at least two winning strategies, lowest price, or highest price. Being in the middle was a sure way to lose. In our minds, we would have to choose to be Wal-Mart or Louis Vuitton.
After much discussion we decided, we were going to focus on providing the highest product we could. We would charge a premium for it.
We invested heavily in product research and development and marketing. We priced our product accordingly.
After the first round of simulation, we found out that there were two other groups that seemed to also be following our model. The other groups all priced their products low and spent almost no money on product but a lot on marketing.
The results were stark. The low-price companies had the highest sales and the highest income.
Our group met and we had a heated debate on what to do. Eventually, we agreed to maintain our direction.
After the second round, we saw that one of the high price groups had abandoned their model and were copying the low-price groups. Some of the low-price groups raised their prices a bit. The market leader was one of the low-price groups. We remained at the back or nearly the back of the market.
Our group noted an interesting thing, however. Our sales grew between the first two rounds by a larger percentage than the other teams. Yes, we still had a low number of sales, but this single metric allowed us to keep with our plan.
The third round was quite surprising. We were the only team that continued to have high prices. There was a battle by most other groups over the lowest price. The remaining groups lowered or increased their prices but were not keeping up with the pack. Again, our sales kept going up, but our market share remained low.
The next few rounds continued with three teams clearly fighting over lowest prices. We remained with a high price and even raised prices a bit. The rest of the teams started to show large losses.
After a few more rounds, it was clear there were two teams that were vying for market share with low prices. We remained the high price alternative and continued to invest more into product and marketing. The rest of the teams kept lowering and increasing prices seemingly with no strategy.
The result of the exercise was that one company earned most of the market with their low price. They had terrific profits. However, our team had the highest profit even though we only had a small piece of the market. The rest of the groups were either close to break even or had huge losses.
After the simulation, each group presented how we managed our companies. The two leading groups were the only ones that maintained their strategy throughout. Also, we were the only ones that “did research.” The other groups accused us of cheating for talking to our classmates.
Our professor disagreed. He had never told us that we couldn’t have conversations outside of the class. He told the class that most of the winning teams in the past had done something similar. He also noted that the groups that stayed with a strategy long term usually outperformed the rest.
Some “winning” groups changed direction early on but kept the strategy for most of the rounds. The groups that changed their minds every round always failed. Worse yet, the groups that had internal strife throughout were always the worst performers.
The Real World
As I began to work at a corporate strategy function, I noticed that reality tracked quite well with what I learned on this class. As part of an enterprise-wide function, I had a front row seat to the business units that were successful and those that weren’t. The more successful business units had leaders that trusted the data-based strategies we defined. They were also the ones that gave strategies time to develop. Finally, the business units that invested back in the business, particularly around product development, rose above the rest.
One of my early projects worked with a business unit that was dominant in the market. They were not the low-price provider. Their edge was based on the perception they were the preeminent provider. Just as my team in in business school, they were able to charge a premium. Unlike my team, they had the lion share of the business in most of their markets.
They struggled in a market where they were not the dominant player. This market had been the result of the acquisition of a smaller less known brand. The business unit executive applied the same strategy that worked for him in his main market. We did market research and quickly realized that the premium we charged elsewhere wasn’t warranted in this market. The market saw us as an expensive low value provider.
Our strategy for this market was reset to be focused on a niche. We had excellent capabilities around this niche and could charge a premium if positioned appropriately. At first, the local management pushed back against the positioning. They wanted to continue to be generalists. However, the results were proof that this wasn’t going to work. As we executed the niche play in the market, we began seeing small results. With time that niche grew, and the market became profitable. The business unit executives gave the market time to develop and were willing to have separate and different strategies for their two adjacent but different geographies.
At a separate business unit, we had an executive that felt threatened by having an enterprise-wide strategy function. He had had decades of experience with other competitors and was new to the firm. He pushed back on the strategy we defined. He knew "what worked and what didn’t, and no data geeks were going to tell him how to work." Our CEO stepped in and asked him to collaborate with us. He begrudgingly agreed. On our first meeting he laid down the law. We were outsiders that didn’t know the business. We could work with his lieutenants to come up with ideas, but it was up to him whether they would be instituted.
We worked with his team which wasn’t very welcoming to change either. The unit’s results were poor. The senior managers were tired of getting bad results and sub-par bonuses, but they all had the answers. Begrudgingly, the unit managers and our team defined a strategy focused on revamping the unit around deep knowledge of clients, which required a lot of client research.
We presented our preliminary plan to the executive. He was livid. He didn’t want to waste time trying to understand a business he knew very well. He invited us out and cut the meeting short.
For the next couple of quarters, the business unit continued to struggle. Several of his lieutenants left the company or moved to other units. Eventually, his organization was reorganized, and he was let go. The organization was aligned under the executive from the earlier example.
It took a lot of doing but the unit eventually refocused around specific niches. After two years, the unit was very profitable and only lagged its parent unit.
Strategy or Leadership
I am in total agreement with legendary management consultant Peter Drucker’s assertion that “culture eats strategy for breakfast.”
People misunderstand what this quote means. Drucker wasn’t saying that strategy is unimportant. He was saying that without the proper culture, strategy will fail.
In my experience, an organization’s culture isn’t just a thing that happens. Culture comes from an organization’s leaders and their willingness and ability to set, grow, reinforce, and live that culture. The main arbiter of a company’s culture is their CEO.
There are hundreds of examples of how an organization’s culture follows a CEO’s attitudes, from Steve Jobs driving a culture of fanatical detail over design in Apple to Jack Welch’s focus on efficiency over all else that eventually undid GE.
In my examples, these two leaders had different outlooks on the value of strategy. The more successful leader was willing to work with others, was open minded to data-based approaches, and was patient. The less successful leader knew everything and so did his lieutenants. Outsiders, even from within the company, couldn’t teach him anything. Data-based approaches couldn’t be better than his own judgement.
Conclusion
Leadership leads to a culture that can rally around a strategy or a set of strategies. Execution of strategy is often the more difficult part of the process, but it will fail if leadership stops leading and if culture doesn’t support it.
Too many organizations devolve into following what worked for others in the previous quarter or year. Others set a strategy but when it doesn’t work, they double down until it’s too late. Many others base their strategy on a leaders’ experience not realizing that markets change and evolve continually.
Ultimately, strategy is hard. It requires leadership, commitment, continuous monitoring, and sometimes luck.