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!
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.
33 thoughts on “Strategy: Why Most Companies (and People) Stink At It”
This is another tremendously insightful email from Victor. I was wondering if he can elaborate on how someone realizes what she/he’s good at early in her/his career. I think it’s more of a long, rocky process than a magical AHA moment that happens some years into your career. I’m afraid that knowing the key factors that help you gain a competitive advantage is just 50% of the story. Even finding the things that you really, really like seems to be not so obvious. Most people are quicker to point out the things they don’t like than the things that they like. I guess you would have to spend some years (5, 10?) trying things out to get to that point where you can accurately (and honestly!) say what you’re good at and what you are passionate about. But is there a systematic way to get to that point? I wish Victor can tell us a bit more about his experience.
Jorge,
Early in your career it’s not necessarily Ah Ha moment, though in almost every case I’ve seem the signs were there in someone’s 20’s – but often not context to realize it at the time.
For example, and this may sound ridiculous, it turns out I’m half decent at consulting. But, I never realized that until after I had left McKinsey for nearly a decade. It was only then I realized, the I was really good at consulting and like it…. Only I didn’t like the McKinsey lifestyle and type of client (e.g., traveling a lot and working its big, often slow companies). So I came back to consulting, but more in a coaching capacity to CEO’s and only with smaller, faster, more innovative companies… So Inc 500 as opposed to Fortune 500.
While my discovery was an Ah Ha moment mid career, the data was all there early in my career.
So to some extent if you happen to be in your 20’s, the key thing is to be LOOKING for indicators from others as to what you’re good at and not good at.
For example, some people despite lots of practice and time invested, do not do well in the case interview – in fact they do horribly. The wisest ones consider why they aren’t performing well. Some of them tell me, Victor you know all those insights and logical linear relationships you keep tell me about in cases, I just don’t see them… ever. My brain just doesn’t work that way. I jump creatively to other ideas, I see all kinds of opportunities, but my ideas come to me “laterally / out of order” (using consulting terminology) and i just can’t force it to think linearly.
The usual initial reaction is disappointment, but my reaction is that this discovery – though not intended – is actually a good thing. It allows the person to focus in a different, better suited direction, while the switching cost is low.
I see people who figure this stuff out 5 or 10 years later, and it’s so much harder to switch then. I have a friend Ho is like this. She is not a psychologist with a masters or phd. She did not discover she wanted to be a psychologist until the year after she graduated form Harvard Business School. THAT is a pretty expensive way to figure out want to be a psychologist.
In terms of what you like, that is a much easier question to figure out. The hard part is to get an honest answer from yourself. Most people supresses or have people around them (parents, peer group norms) supress their thoughts around what they like especially if at first glance it is “not practical”, “you can’t make a living doing that”, etc…
Often the internal pre-judgment is editing the thought process SO aggressively, most people have a hard time answering this question.
The easiest mental shift is to do the following,
I will describe a situation and DO NOT THINK about your answer. Just SAY (or write down) your immediate GUT ANSWER.
Ready?
Here’s the situation:
If you had all the money in the world (and never had to pay another bill), what you do with your time?
I went though a process about 5 years ago where I was forced to answer this question and I realized my answer was that I would teach about business and help others improve their businesses… particularly small business.
It is what I am doing today, but it was most definitely what I was doing 6 years ago. I get SO much more satisfaction out of my career today and SO much happier doing something aligned with what I’ve come to appreciate as my life purpose.
And, though I was willing to take a pay cut to be happier, and did temporarily for about 2 years, I’m actually financially much better off than where I was 6 years ago… Mostly because work now doesn’t feel like work, and since I’m harnessing my natural competitive advantages (which I was NOT doing 6 years ago), my output per hour worked is extremely high, so work is not as time consuming, more fun, and more reward both psychologically and financially (due to living life aligned to a sense of purpose and the productivity advantage harnessing one’s competive advantage skill sets).
Finally, this is an introspective process. The key to introspection is to actually THINK about it in the back of your mind and revisit the topic, even if briefly, every quarter or so (as you have more data from others and a better understanding of yourself).
You may not come up with anything the first time around, but if you ask yourself this question for 15 minutes 4 times a year for your whole career, you will eventually figure it out… Mostly because you are actively looking for it.
It also helps to ask other people who know you well the questions above. So ask a friend hey, if won the lottery, what do you think I would spend my time doing (after the initially)? Hey, what do you think my talents and gifts are? What do I do or what traits do I have that are unusual compared to others?
These are the right questions to ask. Just keep asking them of yourself and others, and look for market signald of both, and eventually you will see a convergence of answers.
Victor
“If you had all the money in the world (and never had to pay another bill), what you do with your time?”
While in general I think this is great advice—to direct your career towards your answer to this question—it can throw people like me for a loop when the answer has little or no financial reward. For me personally, I would want to spend my days recording and playing music, but the financial risk/reward ratio for this pursuit is hardly in my favor, especially as the father of two young children. Many other artists struggle with this same dilemma.
Now I realize yours is not a blog for artists. My desire to earn my keep has driven me to build on my other, less musical, strengths, which include a phd in org behavior, business experience and savvy—hence my presence on this site (and deep appreciation for your books and materials).
I just don’t believe the destination is necessarily located in the union of one’s passions (such as becoming a CFO for an art museum if one loves both finance and painting). There’s a radical qualitative difference between producing art and the business of art – many would argue such pursuits are antithetical.
My own response to this dilemma—a work in progress to be sure—has been to craft a life where I exercise my financially-lucrative skills during a shortened work-week, leaving more free time for music and my family.
Max,
My advice isn’t to find what you love and do only that, but to have it be a major factor in your decision making. Relaxing the constraint of financial reality allows people true desires to come out — most people don’t even know the answer to that questions because it’s been beaten out of them that they aren’t supposed to want to do that.
BUT, once you know it, you can find ways to get closer to it. Your approach to music on the weekends, higher paying shorter regular work week is one such example.
If one like to play in the day time for example, one could do other work (regular) jobs time shifted to later in the day.
If playing music is the #1 passion, then perhaps being around music (in other roles in the music industry) is an option for others.
There are many possibilities.
While most people don’t hit the target exactly in the bullseye, if they never define the bullseye they don’t even get remotely close. And often getting closer, but perhaps now all the way there yet, improves life satisfaction for some considerably with tradeoffs that are small or acceptable.
By the way on a side note – this thread has been a very interesting discussion all the way around.
-Victor
Would you say the lack of strategy at large companies is partially because shareholders tend to chase growth as opposed to profits? Michael Porter “Growth is the enemy of strategy”. Yet in the long run shareholders would be better off with low growth but consistent profits rather than high but unprofitable growth. Myopia?
And what about cases like Southwest Airlines? Their strategy is pretty tied to being small. I would love for them to stay at a consistent size and be profitable forever, but they seem to be pushed to grow, even if it means going into airports/markets that erode their operational edge.
Nick – Yes I think the drive for growth for growth sake is one contributing factor… especially in the US. It is just assumed you HAVE to grow… and they usually mean sales.
If you read Charlie Munger (Warren Buffet’s partner) he talks about ecology and how in nature you see some species survive by occupying a very small niche.
The example that comes to mind are the small sea creatures that eat the scraps of food stuck in between a whale’s teeth (or something like that)… they survive because the whale needs their teeth flossed and nobody else is willing to compete for those resources. Munger likes to invest in those kinds of businesses as it comparatively easier to build a competitive advantage, they’re profitable, and if purchased at a good price a good investment.
Applied to careers, my cousin as a Masters degree in Geological Physics — which I guess is the physics inside the earth. She got this degree 30 years ago. She was one of the last people to get the degree, because nobody else offers such a program anymore. And it turns out the only job where this degree is useful is in finding OIL. So she basically looks for billions of dollars in oil for Chevron and never gets fired despite mergers and layouts, because well there’s like only one of her and Chevron really, really needs to find more oil.
I think SW is interesting because if you strive too much for sales growth, you erode your competitive advantage which means two things: 1) you erode your margins, and 2) your erode the sustainability of whatever margins you do get. So the pattern is more sales initially, lower margins, then shrinking sales (as you exit markets you can’t win), and then you’re no where. No core customer segment you dominate. No competitive advantage anymore. No brand distinction. Then you become… well a General Motors. (Ouch! Okay that was a little harsh, but probably true).
Thanks for the response and awesome site materials!
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Hi Victor,
Your are spot on when it comes to convincing thousands of people to implement changes. It is especially difficult since it’s also difficult for a single individual to make those changes! I think this goes to show how good consultants and coaches can support the process efficiently.
Very nice message , conveyed with great personal examples and examples relevant to those who are building their career now. The last part was very very meaningful.
Thanks Victor.
Wonderful article! Great Insights! Thanks Victor!
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Wow. This is wonderful. Have not read a better post than this for long. Thank You!
It’s funny how life works. I’ve been putting some extra time into improving myself in a few facets of my life both professionally and personally. So far I have gotten minimal instant returns for my efforts like you mention Victor, but just reading this article has reassured me that I have set a great habit and strategy for my career and life. You could say that it was a sign (if you believe in that kind of thing; I certainly do) Thank you for putting this out there. You’ve definitely moved one aspiring strategy consultant.
Indeed, Matt! The consistent energy and effort you put into improving your life is just as important as the vision you have for it. I applaud you for your efforts!
Nice article Victor!!!
I have been using a slight variation of “the sweet spot” and is based on what I heard from “Tina Seelig at Stanford”. It goes like, there are 3 elements that are required to be successful. A fine balance (sweet spot) amongst these elements will make anyone happy and successful. The elements are:
1) Passion
2) Skills
3) Market for those skills
Well if we have the right balance of all the 3 elements, it’s all good. But the resource allocation by nature to everyone is not uniform and fair. So what can we do about it ?
It is best explained with an example. Imagine you are passionate to sign and want to become a rock star. we all know that there is an amazing market for money, fame etc. But the question arises do I have the skills required to be a singer ?
Imagine that you can’t sing (i cant for sure)… So now what I can do to pursue my passion ? I can take lessons to upgrade my skills ? I know no training can help me to be singer :). Well then there is another option to explore, we can look at the “value chain” in music industry and develop skills in part of that value chain. I could learn to play an instrument, or become a talent manager or work with studios or blah blah blah… There are various roles in the value chain where you can acquire skills and still be successful (whatever you define success to be, fame, money, world peace, better parent etc.)
Also make sure that you don’t get carried away with “passion” which has little or no market… If you have a passion for painting, and you have great skills…. Make sure you end up working at a place that can support your lifestyle ( street artist vs. Hollywood special effects artist)…
Regards,
Raj
Raj,
Thanks for sharing. Great examples. On the passion front, I think a reasonable compromise is in some fields to pursue a role that’s 20% less passion, but 80% more marketable isn’t a bad deal.
For example, one of my readers has degrees in finance and art history. So she’s thinking should I be a starving artist, go into investment banking or consulting.
The line of thinking I suggested was why not striving to be a CFO of an art museum or something similar in the art world?
-Victor