Strategy: Why Most Companies (and People) Stink At It

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:

1) Differentiation

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!

Sigh... One more set of dishes "forgotten" by my 8 year old

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.

Guess what?

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.

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33 comments… add one
  • Demid Jul 26, 2012, 8:46 am

    Victor,

    I can’t thank you enough for this article and the other one that ties into this one – your recent article about income vs. assets and the types of assets your career should generate. This is really essential knowledge, and it’s a shame this is not more widely recognized.

    Thanks very much,

    Demid

  • B Jul 11, 2012, 12:35 am

    Excellent Article Victor!

    It is no coincidence that most of the great CEOs are adamant about:

    1. People first, strategy second.

    2. Linking the strategy to the people and operations processes through rigorous questioning, appraisal, and reward systems.

    B

  • Will Jul 7, 2012, 6:29 pm

    Interesting post, and it goes along with what I read a few months ago when I read Strengthsfinder 2.0 (and took the test).

    Part of my frustration is I’ve spent so much time bouncing around trying to figure out what no. 1 and no. 2 are. (what I’m good at and what I like to do)

    My strongest subject in school my whole life was math. In elementary school we had this math class in 4th grade where you could learn at your own pace and if you passed the test, you moved up. I moved up alarmingly quick, out of 44 students I was no. 2 in the class (always one subject behind this one girl though – oh, I despised her for that) But, actually, the fact that she stayed ahead of me was good, because the competition kept me focused and driven. It was something I felt I was the best at and couldn’t believe somebody else was beating me – but due to that competition – her and I were head and shoulders above the rest of the class – nobody else was even close. By the end of 4th grade we were both learning Algebra (a subject usually reserved for 8th grade students).

    I remember that story distinctly because it stands out so much and not everybody likes math, but I always did.

    I went on to be perfect on the Math section of the SAT and get into the top University in my state – and get a full scholarship…. but here’s where things went a bit awry, I suppose:
    I started off majoring in Civil Engineering – because everybody in family pushed me to go into Engineering. I wanted to major in Business, but my parents convinced that a Business degree was a bad idea since I had already gotten into the top Engineering school in the region.

    I hated Civil Engineering – it was so boring. It was about bridges and structural things that I didn’t really care about. I skipped classes and tried to start my own business in something I did enjoy – and considered and planned to drop out of school once the business became profitable – but it never did.

    At this point, I had a C average because I wasn’t buying textbooks and rarely going to class (not a grand idea in Engineering) and the $20K I had invested in my own business (all my money) was gone – so I bounced around majors and settled on something I could graduate in the quickest with little effort – just to get the degree. (I couldn’t transfer into the Business school anymore because my GPA was too low to meet their requirements).

    By my Senior year, some friends and I were running a fairly successful business on eBay – but it wasn’t sustainable and we all knew it – so I looked for ways to invest my money. I started trading stocks and options and really studying Finance in my spare time. I started to write a Finance blog and even got noticed by Forbes… I was able to use my blog and an unpaid internship I did under a stock-broker as a way to break into trading – getting hired by a local firm upon graduation.

    But, this was 2008… and we had a really good year at the firm, we all made money, made bonuses… and then 2009 and 2010 sucked. I wasn’t making any money, nothing was working, the company was downsizing – so I quit without knowing what I wanted to do.

    Decided to go back to school and knew I could score in the 95th percentile on either the LSAT or GMAT. And, although I was top of my class in my Business Law course in Undergrad and really enjoying it (one of my few A’s in undergrad, interestingly enough THAT professor gave out the lowest GPA in the whole business school!), I just couldn’t see myself doing 3 years in law school…. so I took the GMAT, found the test fairly easy – scored a 740 – and decided to pursue accounting – because I’ve always thought Accounting was REALLY easy (and nobody else seems to think so).

    So, I enrolled full-time at a local University to take some courses in preparation for applying for Master’s in Accountancy programs. Made Dean’s List (because Accounting is easy), but still couldn’t get into the Master’s in Accountancy programs I applied to or the accounting internships I interviewed for because of the sore that is my undergrad GPA.

    I applied to one MBA program just because they called me the day the application was due and asked me if I was still interested.

    I got into the MBA program.

    They offered me a scholarship and I found the program interesting, so I enrolled and called up HR of one of the accounting firms I interviewed with for an accounting internship and told them I was now doing an MBA and was interested in doing an internship in consulting.

    I did this without knowing anything about consulting, but they called me back the next day and hired me. (For the record, I knew a partner at the firm – that’s a big reason why I got in so easily). So, I started a day after the rest of the intern class – but it was a paid internship – and things went well – I got put on more projects than the other consulting interns and was even the only one invited to come out to a client site.

    I used that experience to run on and become the Vice President of my Consulting Club at my MBA program – a program that’s top 30/40 US by ranking publications – BUT consulting firms don’t recruit here.

    So, here I am at a point where I’ll have to network my way in – but I’m still trying to figure out what my actual strengths are and how to differentiate myself. Even saying that something like Math is a strength I fear is a bit problematic considering my undergrad degree has nothing to do with Math (Therefore, there’s TONS of people who have SEEN a lot more math that me).

    • Victor Cheng Jul 7, 2012, 7:02 pm

      Will,

      The introspection process is not always a smooth one. One question to ask yourself is for everything you’ve found easy or where you did well, WHY was it easy or WHY did you do well?

      For example, you said that you’ve always done well at math…. But WHY was math easy?

      For me, in high school I had perfect grades in math and the science. Yet, I didn’t really like them that much – though I could have been an engineer and briefly considered it, I realized I didn’t like it.

      But many years later, I realized that it was the logic and linear thinking aspects of math and science that I liked – though not that particular manifestation of it.

      So for you, WHY is accounting easy? WHY is math easy? For and roles or internships or frankly any opportunity where you did well, WHY did you do well?

      If y can define the skill, the circumstance or situation where you did well, you can better isolate your strengths.

      Also with each passing year, you get more data about yourself and the question gets easier and easier to answer. So if the answer doesn’t come immediately, which is typical, forget about it do a period of time and revisit he question again later.

      Victor

      • Will Jul 11, 2012, 10:45 am

        Victor,

        Thanks for the response, and of course for the site, emails, book, and all of the info and advice you churn out here regularly. It really is helpful.

        I think your comment “I realized that it was the logic and linear thinking aspects of math and science that I liked – though not that particular manifestation of it.”
        Is similar to my experiences.

        I think this is a good point and I think that it is a logical structure of thinking that I have enjoyed… more so than “math”. For the record even in math, I didn’t really enjoy geometry because our teacher made us memorize a bunch of theorems and postulates. I still did well in geometry, but didn’t like that particular part of.. (I liked the more algebraic parts).

        I do think this is an important distinction to make and I thank you for pointing it out, as I mentioned in my comment, I’ve always done well at accounting – but to classify accounting as “math” is a bit of misnomer – accounting includes only elementary-level math at best, but it is a logical structure for the way a business keeps track of finances – whether for investors or tax reasons, or whatever.

        Other courses I’ve really excelled in like Business Law or Business Strategy also didn’t include much, if any “math”, but they did revolve around a logical thought process. Coincidentally, my Business Law and my Strategy professors are my favorite professors from both undergrad and MBA respectively. (They were also the most logical…. and you could follow their logic so well).

        To sum it up, I would say that throughout my “school career” (which at this point just gives me a lot more data points than my professional career does), I would say there are general two-types of classes:
        – those that require memorization
        – those that require logical thinking/problem-solving

        I’m much weaker at and never really enjoyed the former (“memorizing things”), but I’m exceptional at the later… the logical thinking/problem-solving type of courses.

        I can usually sum-up a problem-solving course with one sentence.. and often do, when people ask for my help/tutoring on something.
        For math that sentence is probably just “don’t give up” or “does that make sense?”
        For accounting, it’s simply “think of how a business works”
        For the GMAT Quant section – “don’t do math; try to do as little math as possible”
        And for case interviews, to steal it from your book, I’d say “start with a hypothesis/issues tree”.

        Ha.. that just crossed my mind right now while typing this, but I now realize that’s why I prefer your case method approach to any of the others I’ve read… you stress building hypotheses and issue trees over memorizing frameworks – which is what I would much rather do anyway!

        Thanks again!

        Will

        • Victor Cheng Jul 11, 2012, 12:13 pm

          Will,

          Your line of introspective reasoning is heading in the right direction. I would also conclude you probably don’t want to be an artist or work in any right brain oriented professions.

          So you’ve identified this linear reasoning thing as one thing you like. Now go back and consider the hobbies and interests you’ve had in your whole life to determine what you like or enjoy doing. What did you do as a kid to play? Why did you do it? What do your family and early childhood friends remember most about you as a child? Anything different vs other kids?

          This line of thinking will help narrow down and build greater self awareness of what you like… Which you ideally want to combine with what you’re good at.

          Victor

          • Will Aug 1, 2012, 1:30 pm

            Thanks for the point about going back and looking into childhood hobbies as well. I think, rather instinctively, I tend to look at courses in school and projects/events in the workplace to collect my data points for this kind of introspective process.

            Good thoughts on delving deeper. Will do that.

  • Victor Cheng Jul 5, 2012, 11:40 pm

    Lyna,

    Me too! It’s definitely not too late. The problem with improving your weaknesses is they rarely become exceptional. But if you take what you’re already very good at and develop it, it’s comparatively much easier to become exceptional at SOMETHING.

    Good luck,
    Victor

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