STAY FOCUSED ON FUNDAMENTALS
All markets go through a life cycle from infancy to maturity. How long it takes and the specific opportunities and pitfalls along the way vary. As markets evolve, the only thing for sure is that the challenges will shift and the success factors will change. While the particulars of markets and competition vary from one business to another, there are common patterns as they go through that maturing.
There are predictable shifts in the key issues, market dynamics, and competitive success factors they will face along the way. The competitors that anticipate those changes and prepare to meet them ahead of time are the most likely to achieve long term success. This snippet is the first of several which suggests ways to operate strategically on two levels simultaneously: one based on a pragmatic, execution-oriented strategy for near term success (The Strategic Framework), and the other based on a broader and often longer term perspective on actions needed now to be prepared for future changes in market and competitive challenges.(The Strategic Roadmap)
PRESSURE ON TACTICS
This requires keeping an eye on the forest without getting lost in the trees. That isn’t as easy as it may sound. Building a strong and profitable position, especially in a fast-changing and rapidly growing market, requires tremendous concentration on the many “in your face” challenges. As the market expands competition gets increasingly intense and the market gets more complex. Even greater focus is needed within their market and competitive landscape to be successful. It steadily becomes more difficult to increase market share and meet new windows of market opportunity before completion. This puts a growing priority on fast and effective implementation of key programs. The results are more emphasis on tactics. Attention is diverted from a continual reexamination of strategy fundamentals, so important in a fast changing environment. The result is strategic myopia.
OBSOLETE SUCCESS FORMULAS
This problem isn’t limited to high growth businesses. It is perhaps even more seductive to fall into the strategic myopia trap in mature, slower growing, and well-established industries. In such markets, companies tend to become complacent, following old success formulas and accepting long established conventional wisdom. More and more emphasis is put on executing “known” success formulas better than the competition. Unfortunately, the best target is a slow moving one. The longer and better established the conventional wisdom, the more vulnerable it is to an innovate attack. “Stability” is often just the calm before the storm. Lulled by their conventional views, traditional competitors are likely to be unprepared to respond quickly to such an attack, often becoming “also-rans”, still fighting the last war.
WALL STREET’S EXPECTATIONS
Furthermore, Wall Street and the business press tend to foster the myth of a market’s immortality, looking for and rewarding strong, predictable, and endless revenue and earnings growth, coupled with a compelling “story” about opportunities. They tend to have a perpetual motion view of industries and companies: when it’s going up it will go up forever; and when it’s going down it will go down forever. Hiccups from this pattern can drop a company from a “strong buy” to “death watch”. And the executives that meet such expectations are the ones at the top of the bonus and promotion roster in their companies.
Some boards exacerbate this problem in the way they set their incentive programs for senior management. While strategic issues and goals are usually reviewed, actual rewards are often heavily based, directly and indirectly, on the easy-to-measure and financially-oriented criteria for success: earnings, eps, stock price, ROI, and so on. The problem is that those simply provide a view of the present and not what’s happening under the surfact that will determine the future. And it’s easy to manipulate with short term actions where the long term consequences will not be obvious, at least to a board meeting periodically. A recent study reported that
So the pressure is unrelenting for high growth and increasing short term profitability. Accordingly, most managers have 6 simple objectives:
- Short term growth in revenues and profits.
- Short term growth in revenues and profits.
- Short term growth in revenues and profits, and of course accomplishing this while
- Driving the stock price higher, and
- Generating gobs of cash to invest, and
- Increasing long term growth and earnings potential.
But those who do try to broaden their perspective don’t find it easy. Efforts to broaden and extend their horizons frequently add little value. It’s easy to “blue sky” the big picture, but tough to define it in relevant terms and to link it back to decisions needed now. Many attempts get lost in “Big Picturitis”, with vague and un-actionable conclusions such as “we are a leisure company”.
Those that try to postulate the future with “long term” or “scenario” planning” to avoid strategic myopia have an equally difficult challenge. They often raise more questions than they answer. Even insights that emerge, are often left without any practical “so whats”. One top executive concluded: “We have not succeeded in answering all of our problems. Indeed we have not fully answered any of them. The answers we have found have only led to a whole new set of questions. In some ways we feel we are as confused as ever, but we think we are confused on a much higher level about more important things.”
So one day you wake up and realize you’re fighting the last war. Like the lobster that stays comfortable in the water as the pot slowly heats up, it’s too late when he realizes he’s boiling.
With so many factors fostering strategic myopia, it’s no surprise that so many companies fail to accurately recognize and address fundamental changes and their implications early. It’s tough to avoid tunnel vision, and few do.
REFOCUS ON ACTIONABLE FUNDAMENTALS
Unfortunately, it takes more than keeping your perspective for continued strategic success. Perspective itself isn’t actionable. That’s where even good big picture views usually fall short. The need to be translated into current “so what’s” and actions. That requires:
- Developing an objective and pragmatic vision of industry fundamentals, how they are changing, and their implication for your competitive position.
- Defining what planning and actions are needed now to deal with or get prepared for these shifts.
- Incorporating these factors into today’s competitive strategy.
So where do you start to develop this actionable big picture? How and where has it been successfully done?
Diverse companies tend to have stronger challenges keeping perspective. Many get similar forecasts from vastly different businesses or product lines in their planning process. It is tough to do a top down evaluation of individual plans without getting “lost in the trees” sifting through the numbers and details.
GE was early in recognizing the need for an analytical framework that would help allocate resources between its many diverse businesses. It also wanted an approach to “peel the onion” on a business’ plans to determine whether they were consistent with, and adequately addressed, its’ market and competitive opportunities. Most importantly, the objective was not just to define the big picture of the opportunities, but to determine the resulting strategic priorities for a business and the key parameters for managing the business.
The author was part of a McKinsey team brought in to work with a GE Business Group to develop a practical approach to accomplish those objectives. The team recognized the key was going back to basics. It conducted a tough-minded assessment of the attractiveness of a business’ industry in terms of its growth and profit potential and competitive factors influencing growing a profitable business. It then evaluated their competitive strengths relative to competitors on those industry success factors. Each assessment was tailored to the specific business. It went way beyond the overly simplistic “market growth/market share” approach popular at the time.
POSITIONS SUGGEST DIFFERENT IN CHALLENGES AND PRIORITIES
Comparing industry attractiveness versus competitive strength resulted in a matrix of 9 categories of opportunities with distinctive differences in strategic priorities for action. At a macro level, each of the 9 strategic categories have predictable and different challenges and issues that need to be addressed.
These boiled down to 3 broader categories reflecting differences in the primary goals for managing a business in the successive phases of its life cycle: Invest for Growth, Invest selectively for Earnings, and Harvest/Divest for Cash.
This proved to be a practical way to identify strategic priorities within a business and differentiate them between very dissimilar products or businesses. It also provided criteria for “validity testing” their strategic plans and budgets for consistency with the implications of its position in the 9 basic strategic categories. A high attractiveness/low strength example of applying this approach can be found in the Strategic Perspective “ Dominate Your Home Courts .”
GE later used its’ Canadian company as a microcosm of GE to apply this approach across all its businesses.
The value of this approach is not in the cosmetics of the matrix. The critical ingredients a tough-minded look at the attractiveness of the industry fundamentals in terms of continued growth and profit potential, compared to your competitive strengths on the success factors to capitalize on that potential. The most important benefit of this approach is that it forces a business to face changes in the larger picture early. Properly applied, it illuminates the underlying strategic issues facing a business. It highlights their implications for action now, hopefully before opportunities are lost or negative impacts have taken hold. Therefore this “back to basics” approach has been widely used and has led to many improvements in strategies and plans as well as major changes in commitments. But it’s essential to keep the view of hard realities, so it’s important to reassess these fundamentals regularly. Like the sunrise, changes in the basics don’t wait for you.
PROVEN AND SIMPLE BASICS
Someone expecting a very sophisticated and erudite solution might find this approach rather pedestrian. If all this seems very simple, that was the whole point. The best solutions are usually straightforward. They can be understood and they can be implemented. Like anything of course, the devil is in the details of how well you do it. Poor analysis can lead to bad conclusions. Bad conclusions can lead to big mistakes.
Someone looking for the “latest” management technique will also be disappointed. However, the most effective approaches are often “back to basics”. This approach is tried and true. Such approaches stand the test of time.
This ongoing reassessment of market attractiveness and competitive strengths helps maintain an actionable perspective on a business’ near term environment and help avoid strategic myopia. However, it is also important to look further over the horizon and across existing competitive boundaries. That’s often an even more difficult challenge.
UNDERSTAND YOUR INDUSTRY’S EVOLUTION
Fortunately, the market and competitive issues impacting an industry as it evolves through its life cycle are similar and predictable. Anticipating, analyzing, and taking action on these potential changes early can make the difference between long term success, mediocrity, or failure. The trick is to know what to look for and how to take action in a timely way.
In this regard, it’s still helpful to step back to the broader view of an industry’s fundamental phases of evolution and how the core strategic priorities for a business shift in each phase – Invest for Growth, Manage Selectively for Earnings, and Harvest/Divest for Cash. Each has its own unique patterns and success factors. However, the growth phase of a business is especially difficult to manage and strategize. This is particularly true in a technology-based business, where the growth phase is often as tumultuous as a basketball game in perpetual overtime and fundamentals are blurred by the melee. .
Therefore we’ve taken a closer look the core issues arising during in the growth phase of a business. This has led to separating it into four sub-phases to help manage through their different issues and rapidly changing success factors. They are:
- The Threshold Phase
- The Create Phase
- The Leverage Success Phase
- The Revitalize Phase
Each of these phases have distinct opportunities, challenges, and pitfalls. They have predictable issues that should be addressed early. They provide a foundation to avoid Strategic Myopia. Most importantly, understanding them will help you make the right decisions at the right time to navigate successfully through the market and competitive challenges you’ll face.
We’ll discuss these phases and their implications further in subsequent Snippets..