What do McKinsey, BCG, and Bain all have in common? Other than being the employer of choice for hundreds of thousands of CIBs, they are also strategy consulting firms.
It's their focus on strategy that separates them from KPMG (operations and finance), Accenture (IT consulting primarily) and numerous other firms.
Given this focus on strategy is such a key differentiator; I'm surprised how infrequently I'm asked just what is strategy?
I'll start by saying most everyone think they know what strategy is (including most MBAs and nearly all of your senior clients).
Yet surprisingly, very few companies ACTUALLY have a good strategy.
This has always puzzled me.
Similarly, I find that few people give much thought to their own personal career strategy -- including some MBB consultants!
How can there be so much focus on strategy in business school, so much focus on strategy firms in recruiting, and so much focus on strategic plans in corporate, and yet most companies have pretty crappy strategies?
Let's unravel this question today - first for corporate strategy, second for career strategy.
If you ask a client, they'll say a strategy is the annual presentation they most give to the CEO or give to the board of directors. This is logistically true, but hardly a sufficient definition.
If you ask a grumpy client, he'll say it's the document we're paying your firm $2 million to help us write. Often true, but again, not exactly a sufficient definition.
The best definition I've come across comes from India. It's a definition that former Chairman of Infosys (the IT services giant), Narayana Murthy, used in his last shareholder letter before retiring.
"Strategy is about ensuring sustained differentiation in a changing environment for better net income margins. Differentiation without better net income margins is meaningless.
In my opinion operating margins and earnings before taxes depreciation and amortization (EBITDA) are not appropriate measures. In fact the best measure of differentiation is the per capita free cash flow generated."
Let's look at this definition line by line so you can grasp exactly what this means.
Translated it means:
Figuring out some way for a business to be DIFFERENT from competitors in an ongoing way, despite the customers and competitors constantly changing, such that for every $1 in sales the business generates, the company keeps higher % of the $1 compared to other companies in the industry.
So the key points here are:
2) Despite constant external change
3) Higher profit percentage
This seems like a reasonable definition, yet despite its simplicity very few companies are able to achieve this - particularly over long periods of time.
When a large firm generates average profit margins, with average sales growth, it’s a sign it lacks an effective strategy. Often with very large companies, the main reason they are so big often has a lot to do with mass and momentum.
The hard part is being different, and staying different, to the point the company earns more in profit per dollar of revenue than competing firms.
Now for the more financially minded, let's get into some finance jargon. Murthy goes on to say that operating margins, or EBITDA, are not good financial metrics to measure the effectiveness of a strategy.
Before I explain why, let me define some terms.
Operating margins refers to [sales - operating costs] / sales
Keep in mind anytime you see the word "margin" it refers to a "metric" that is expressed as "percentage of sales"
So operating margin or more specifically operating profit margin, is operating profit expressed as a percentage of sales.
The reason operating profit margin is a less than ideal metric is because it specifically excludes taxes and interest expenses.
So if you had a business that generate 20% operating profit margins, but required $10 billion in loans to run, it's quite possible the business's strategy is poor even though it's operating profit margin % is pretty high.
EBITDA is another similar profit metric. It is an absolute metric expressed in $ dollars (or local currency). It stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.
Like operating profit margin, it excludes the cost of financing from its calculations (along with some accounting non-cash costs not worth getting into).
Okay, enough of the financial terminology lesson for today.
Now let’s get down to the real issue.
Why do most companies have crappy strategies despite strategy being taught at every business school globally, the existence of a multi-billon dollar strategy consulting industry led by MBB and the fact that every executive in a major company in the world develops a strategic plan (usually in October if they are using the calendar year for their financial planning schedule)?
There are two reasons:
1) It's HARD to come up with a good strategy
2) It's even HARDER to actually DO THE WORK needed to pull off the strategy
One of the prevailing thoughts, especially amongst very young consultants, is that clients are dumb.
We are smart.
Clients are dumb.
Evidence: They do dumb things that are so obvious they shouldn't be doing.
If you wonder why some clients resent consultants, it’s precisely because of this attitude.
So the first realization you have is sure it's easy to spot the dumb mistakes, but it’s hard to figure what to do that's better.
Now with great analysis and insight, it is possible to come up with a better strategy. It's not easy, but it can be done.
Then you run into problem #2 -- getting the client to actually DO what you recommend.
At the start of my career, I thought #1 was harder than #2 -- coming up with the good ideas was harder than implementing. The former took brains and insight, the latter "merely" hard work.
Much later in my career, I completely changed my mind on this -- you know once I was the guy in charge of operations and getting things done. It is ridiculously hard to execute.
My kids remind me of this. I have 3 girls, and my goal in life is to get them to take their dishes to the sink after they eat. This is not a complex behavior. They are physically and intellectually capable of doing it.
I have seen them do it before. I know it's possible... yet the NEVER do it without being asked in some cases multiple times. It is just not their HABIT... yet. But I am working on it!
Now in my business I have all these ambitious goals, many of which I have been hitting. In my personal life, I have one goal and only one goal for this month – to get my kids to take the damn dishes to the sink!
It will take me the whole month of constant reinforcing EVERY MEAL of EVERY day to pull this off. I will pull it off, because well, I'm more determined then they are on this (they just don't know it yet!)
NOW imagine instead of kids you have employees... and instead of 3 you have 100,000 employees. And lets further imagine that you need these employees (all 100,000 of them) to change their daily habit in some way.
Maybe the strategy is to move up market to serve a more affluent customer segment by having all the employees focus on being nicer to customers rather than trying to spend as little time as possible with them (to save costs).
Sounds simple on paper... Duh... of course, you want to give high-end customers better service.
But getting 100,000 people to do this is NOT easy. They are so used to doing it a different way. It is a big undertaking.
In fact most undertakings like this fail or are only marginally successful.
THIS is why many companies in practice don't have great strategies (even if they have great ones on paper).
Another example was when Steve Jobs took over Apple a few years ago--at a time when the company was 90 days from being broke and shut down.
The strategic insight, which by now I've hopefully drilled into your memories, is to segment and isolate the problem (and inversely the opportunity).
When he re-joined Apple, Steve jobs did exactly that with the Apple R&D department. He looked at the 200 product development projects and determined that the most potential came from 4 -- Only FOUR -- products.
So he thought, what I've by now hopefully taught you to think, we most focus on THOSE four products. This is a simple strategic insight.
Now comes the hard part. He decided to cancel the 196 other projects and fire nearly everyone working on them.
Let’s make a few simplifying assumptions. Imagine the R&D department at Apple had 2,000 people. In his first week or so as CEO, Steve Jobs fired 1,960 of the engineers.
He did all of this in like FIVE days. Because guess what, there was only 85 days until Apple would disappear forever.
Trust me, most people I know would not have either the insight or the guts to do that.
Strategy = Focus
Focus = Conscious (and often extreme) Resource Allocation
What were those products?
One of the four was the iPod... which became the starting point for the iPhone (mostly because Jobs was concerned smart phones would eventually be a substitute for the iPod so built the iPhone to cannibalize iPod sales preemptively).
And the rest is history.
Apple HAD (and has) a strategy. It is SO obvious they do.
Can you say the same about HP? Dell? Sony?
Seeing what it took to pull it off hopefully gives you a better appreciation for why other companies don't, in practice, have much of a strategy.
So how does all of this apply to you and your career?
It does so in a few ways.
1) I've already written at length about having a personal competitive advantage in your career. When you are playing to your strengths, passions, or talents (if not all three), you have an edge over the competition. For every hour worked, you get more quantity of output or you produce higher quality results.
I like to think that I'm a pretty clear thinker and explainer. This is my relative advantage. By comparison, I'm a lousy artist or creative designer. You do not want me design fashion items or anything that needs to look nice. I'm not good at it.
Fortunately, I know this about myself and pretty much restrict my career options and business decisions to opportunities where my strength is useful and relevant, and my weakness is irrelevant. Hence I am not a designer.
2) A strategy on paper, without WORK in the real world, is irrelevant.
Ultimately, you can tell if a strategy is being implemented when resource allocation is dramatically changed. Resources = people, time, energy or attention span. It applies to groups of people as well as a single person.
For example, one of the strategic career principles I very much believe in is the idea of continually improving your skills.
Nobody ever disagrees with this idea on paper. I mean come on... when is improving your skills a bad idea right?
Yet, what percent of people actually invest the time to do the WORK needed to improve your skills?
Given the choice between going out to a party, seeing a movie, taking a trip vs. working to improve your skills, how many people will do the latter?
As it turns out, only a few…
It is these few that often, in practice, have a clearly visible strategic career plan. Quite often it’s the other group that, over time, doesn't accomplish as much as they wish they could have.
Now early in a career, the visible signs and results from doing the right strategic things aren't very obvious. Like many strategic choices, often there is no short-term benefit, only benefits that accrue in the long term.
But equally common is there are definite short-term costs - time, energy, money, focus, attention span, etc.
It doesn't mean you shouldn't do them, but it does mean you may not see a pay off for some time.
To use a case interview example (and you could apply this principle to any career field), I routinely tell CIBs that to be at the maximum case interview performance level that your natural talent allows it takes 100 hours of preparation and practice.
My suggestion has been to allocate 50% of the time learning the right approach between Case Interview Secrets and Look Over My Shoulder®, and the rest of the time practicing with a Case Interview Partner.
Yet most people don't follow this relatively proven approach. They don't put in the time or they use some flawed Frankenstein approach (integrating ideas from 5 different sources with conflicting view points)
Again, strategy on paper is easy. Actually DOING it is hard.
So the question to consider for your own career, both now and in the future, is to decide if you're going to take the extra effort in your career that others typically don't.
Remember. It's easy to do the extra work when the benefit is immediate. It is much harder to do it when the benefit is delayed. It is this delayed gratification that causes many people to NOT put in the work -- and thereby not get the results they seek.
And to tie this idea back to one I've written about previously...
NOW you know WHY it's useful to pursue a career path where you:
1) Have a natural competitive advantage (even if it's small, but expandable, for now)
2) Do something you like doing.
If you don't enjoy it, you won't put in the time --- and your competition that IS putting in the time will surpass you to greater and greater degrees with each passing year.
If you pursue a career path that ignores your natural talents, and forces you to rely on your weaknesses, even if you do put in the same time as everyone else--you will still fall further and further behind each year.
The sweet spot is to:
1) Find what you're good at doing
2) Find what you like doing
(hopefully get #1 and #2 to be the same thing)
3) Work your *ss off
4) Take the most proven path you can find to success
Optional: If you want to be financially well off (in addition to being happy) make sure #1 and #2 involves doing something the marketplace values (so they'll pay you well for it).
It is NOT necessary to pursue the highest paying career, particularly at the expense of doing things you stink at and hate--because the approach ends up backfiring anyways.
But if you do what you like, are good at it, and get paid well enough to earn a decent living, trust me that is pretty damn good life... and one quite worth aiming for.
This approach to career strategy is a good one… but we now know a good strategy on paper is useless unless you do the WORK to make true in real life…
…and that decision is up to you.