You Can’t Succeed Without Taking A Calculated Risk

Published in UT San Diego, January 20, 2014

George W. Bush made the word “strategery” famous (with a nod to “SNL” and Will Ferrell). But the issue of strategic thinking is no joke. It is hard to do well, and the common thinking about it is wrong. At least that is what Roger Martin says in “The Big Lie of Strategic Planning,” an article in the January-February 2014 issue of the Harvard Business Review.

The traditional strategic plan has lots of spreadsheets and revenue and cost projections going out five years. It also has a nice vision statement and a hockey stick detailing market share, product launches, and geographic expansion and growth.

But a comfortable plan is no plan at all, says Martin. “True strategy is about placing bets and making hard choices. The objective is not to eliminate risk, but to increase the odds of success.” Strategic thinking should place the company “outside the comfort zone,” according to Martin, a professor and the former dean at the University of Toronto’s Rotman School of Management. He is a co-author (with A.G. Lafley) of “Playing to Win: How Strategy Really Works.”

The flaw is often letting resources dictate strategy. Most corporate plans are hung on the twin poles of revenue and cost, with no clear grasp of revenue. A company can manage costs but it cannot mandate revenue because customers drive revenue — and customers can be fickle and problematic.

Planning is not strategy. Planning hinges on cost-based thinking. But strategy is about what we should go after — recognizing we cannot go after everything. Finding and retaining customers is strategic. Planning is around items that a company can control. Strategy is around identifying risks and how to react to them. It is also about challenging assumptions.

Martin suggests that a company place customer satisfaction and market share ahead of finance and capacity. Without customers, you do not have a company. It sounds simple, but it is difficult to change how middle managers think. It is human nature to want to work with what you can control.

In the article, Martin points out that in the resourced-based view of strategic thinking, a firm’s competitive advantage “is the possession of valuable, rare, inimitable and non-substitutable capabilities.” But having capabilities in and of itself does not drive revenue. Customers are uncontrollable, so dealing with how to create more revenue is a more strategic way of thinking than the traditional finance model of trying to squeeze more profit from existing customers.

And so Martin provides three rules for strategic thinking. The first is “keep the strategy statement simple,” and a company must focus on customers, in particular, “where-to-play,” and second, which “specific” customers to target. Use a rifle, not a shotgun, and only hunt in a target-rich environment.

The second is: “Recognize that strategy is not about perfection.” When you think strategically, you are making a bet. It is an unknown, you do the best you can, but you cannot have it both ways. No double straddle. Pick a path, even though it has no certainty of success.

And the third is: “Make the logic explicit.” You have to say, we believe something about our customer and we are going to make a bet based on what we think we know. And we are going to tell our team that explicit assumption. You need to write it down, so that you can really go back and look at history and not rewrite it to comfort the executive team.

Martin says that strategy is what “compels customers to give the company revenue.” Of course, you need to factor in lots of other issues like margin and cost and timing. But his big idea — and I agree with it — is a simple one. If you have a strategy and you feel comfortable about it, then you probably do not have a good strategy. Uncertainty is inherent in the concept of strategy, and continual observation of events in real-time, forces a company to continually modify its strategy.

Rule No. 12

An entrepreneur needs to not only tolerate ambiguity; he needs to embrace it.

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