Hard Work Can’t Outpace Bad Strategy

Episode #304 Hard Work Can’t Outpace Bad Strategy

STRATEGY ISN’T AN ANNUAL EVENT

There are many things that can go wrong between when we utter the words, “Let’s develop our corporate strategy” and the words, “How did we perform this year?”

I get a lot of questions about the strategy process, and one thing has become really obvious to me — very few people realize how many moving parts there are… not just in developing a sound strategy, but also in setting up the environment for successful execution of that strategy.

One of the biggest problems with strategy is that we tend to see it as a process— an annual ritual to be conducted, rather than a culture and mindset that requires senior leadership focus, 24 x 7 x 365.

Without this continuing focus, leadership teams can easily fall into the more obvious traps for young players… like investing resources to grow a product that doesn’t earn its cost of capital.

But there are many more potential problems that conspire to derail your strategy well after the board has signed off on it. Problems like:

• Not using a zero base to develop your work program;
• Not truly understanding the drivers that create the greatest value; and
• Allowing people to simply continue the activity that they’re most comfortable with.

In this newsletter, you’ll learn why – as important as it is to understand – the theory of strategy is necessary, but not sufficient. I also reveal a new concept that I haven’t spoken about anywhere else: the productivity v efficiency multiplier!

DON’T JUST REPEAT!

Strategy is really about finding ways to create more value for your organization – how do you know when you’re doing the right things? It’s very easy to utter the words, “Come on, team, create me some value. We’re only going to do the things that deliver real value.“

But the implementation of that is way harder than it sounds, and it’s much more sophisticated than just saying, “Okie-dokie, go and get me some value! “

It requires a constant focus on long-term strategic value drivers, which can be incredibly difficult, especially when trying to balance this with daily activities and issues.

Almost every organization I’ve come across sees strategy as an event. They have an annual planning process. The senior management team does some background work, produces a draft strategy, and then takes that to the Board for a workshop or other development exercise.

At the end of that process, they come back and say, “Ta-da! Here’s our new strategy.” This might just be a refresh of the existing strategy, because strategies normally have a time horizon of three to five years.

In a refresh situation it’s often a case of, “Here we go again.” And the strategy is used as a guide for developing each team’s operating plans for the coming year. Unfortunately, unless you use a zero-base approach, you are always going to have difficulty matching the strategy to the work program.

By “zero-base approach”, I mean starting with a blank sheet of paper. Most budgeting processes are probably the enemy of good strategic planning. Leaders simply take what their teams did last year, extend the work that’s already underway, and throw some new work on top of that. Often, that work won’t be done properly, because there aren’t resources to do it.

The problem is that we tend to repeat the same mistakes, and allocate the same resources inefficiently, because we don’t focus on the value coming out the back end. People get really comfortable doing the same thing over and over, knowing that they have predictability and consistency in their jobs, and it’s hard to break out of that.

APPLYING THE SIMPLICITY AND FOCUS PRINCIPLE

The best executed strategies employ the principle of simplicity and focus. This implies that each leader understands what the most important things are, and they are constantly asking themselves, “How can I best apply the resources that I have at my disposal? How can I apply them to get the maximum output, the most valuable results, and the greatest value I can deliver on our strategic roadmap?”

Unless you really understand what value is, and it’s both well-defined and constantly communicated, you’ll always get sucked into busy work. As more and more work comes onto your plate, it’s very easy to keep saying “Yes”… until, of course, you get to the point where you have to say, “I can’t take on anymore.“

Without a clear strategic focus, and a solid understanding of where the greatest value is derived, you don’t have a basis for working out which things to drop or put on the back burner, because you haven’t got clarity on the relative value between the different work items that are being completed.

VALUE MULTIPLIERS

The value multiplier concept comes from the fact that not all things are equal. There are some things that are going to deliver extraordinary value and some things that aren’t. This is all about “bang for buck!”.

One of the subtleties, though, is that sometimes you will be undertaking some incredibly repetitive tasks that seem mundane and low in value delivery, but they contribute to a higher-order piece of work that actually generates a lot of value.

Imagine if you’re producing products that require a high level of technical expertise in engineering. There will be elements to that production that are boring, mundane, and seemingly require low levels of skill to produce. However, at the same time they might be critical in the production of the eventual product, which attracts high customer demand.

Your customers may be willing to pay a lot of money for a product that feels as though it has been built from one or more seemingly low-value inputs.

This demands that you don’t just understand the value output, but all the elements that contribute to that result. This is normally a good guide for where you should apply your resources.

THE PRODUCTIVE X EFFECTIVE MULTIPLIER

There two key factors that determine how well you can deliver on your company’s strategy:

1. Are we working on the right things? In other words, if we apply our resources to these work items, will that give us the outcome our strategy envisages?
2. How productive are we? This comes down to leadership – it’s all about focusing people on doing things the right way, the best they can.

When I think about the relative power of being both productive and effective, I think about it in percentage terms. Could we ever be 100% productive and 100% effective? Probably not. But we have to aspire to be as close as we can.

Let’s say we’ve got our team really humming. They’re working really well, they’re achieving goals, they’re stretching themselves individually and collectively. We might get to a state where they are 85% or 90% productive, when compared to their maximum potential output.

By the same token, let’s look at what we’re doing. Is the work program allowing us to work on the things that create maximum value? If it’s not, all that good, productive work might only be 40% effective, compared to the case where the same resources were being applied to the work that would deliver exactly what the strategy prescribed.

In this example, if we were 40% effective and 90% productive, we multiply those together. We’d only be delivering at 36% of our potential overall output, the ultimate best-case scenario.

If we could increase our effectiveness to get it to 70% instead of 40%, it would massively increase our overall delivery, against our potential. 70% effectiveness x 90% productivity would lift us to 63% of our potential overall output.

Of course, that’s still a far cry from 100%, but it just shows that by improving either of those levers that ultimately drive value, you can raise the standard of output and results that you achieve by an order of magnitude – it can absolutely change the way your team delivers.

If you were to ask me what most organizations do on average at a team level, I’d say they’re probably no more than 60% to 65% productive and probably no more than 60% effective. So, on average, that would represent, say, 35% of potential overall output.

That provides a massive value opportunity, if you can get a sharper focus on what your people are doing, and/or to lead them to do it more productively.

In simple terms, a better strategy that achieves greater traction with the company’s key value drivers will have a significant impact on your bottom line results… equally, better leadership that taps into the dormant capacity in your team will completely change the team’s capacity to deliver that value!

WHAT IS HIGH-PERFORMANCE STRATEGY?

One of the greatest inhibitors to developing a high-performance strategy is that – and I hesitate to say this – most leaders don’t understand what strategy is and how to use it.

Although companies often bring in consultants, they don’t necessarily illuminate the situation any more. They bring in a bunch of boilerplate PowerPoint decks, and then shoehorn your business into the models they’ve already got to develop a strategy. It looks great on glossy paper and PowerPoint slides, and the board may be very happy when you present it to them.

But then, more often than not, you go away and do the same as you did last year!

This is a never-ending cycle. So, when it comes to developing a high-performance strategy, you’ve really got to break out of this cycle to understand the value drivers in your own organization.

I’ve seen this gap play out in so many different contexts in the last 30 years, and I eventually figured that the value/strategy gap really needs filling, if leaders are to perform at their best.

When we set up our business Your CEO Mentor in 2018, the first thing we did was to address the critical gap in leadership capability with our flagship program, Leadership Beyond the Theory. That program has now completely changed the way thousands of leaders around the world approach their roles.

Now that we’ve established that as the global gold standard in leadership development, we’re doing the same for strategy. In conjunction with Andrew MacDonald, the best strategy guru I’ve ever come across, we’re developing Strategy Beyond the Theory.

This handles the other side of the Productive x Effective multiplier. The leadership element focuses on how to lift your people’s productive effort, and the strategy element will massively lift the effectiveness of that effort.

A lot of organizations say, “We have to grow.” Yet, surprisingly, they’ll grow in a way that destroys long-term value, because that growth isn’t profitable. If you simply focus on growing sales volume, you can get into a lot of trouble.

A product that doesn’t produce sufficient returns to cover the company’s cost of capital is unprofitable, no matter how much of it you sell. Revenue is all about ego. As the old saying goes: revenue is vanity… profit is sanity… and cash flow is reality! Just ask any small business owner.

CONNECTING STRATEGY TO VALUE

Product strategy is the value engine of any business. If you have products that meet a customer need, that you can actually deliver in a way that gives the customers the features and benefits they want for the right price, then you’re going to do okay.

But it all starts at the product level. And when I say the word “product”, I mean goods and services. If you have a services-based business, that’s your product.

To fully understand the profitability and value equation, you need to have the right strategy for every product you offer. If you have multiple products, you also have to optimize those moving parts.

You need to make sure you’re investing appropriately in each product to maximize the overall profitability of your business. You need to know the difference in relative terms, and you need to be ruthless about where to put your resources.

Many leaders get emotionally attached to certain things. For example, when they’ve had an idea about a new product or they have a bias against an existing product, they’ll make decisions that aren’t purely rational because of those biases. So, it’s really important that we take a dispassionate look at which products drive value for different target customer markets.

MAINTAINING FOCUS

Let’s assume, for a moment, that you can set all this up to achieve maximum value. How do you actually maintain that focus throughout the year? As I said, the strategy sounds logical when it’s presented to the Board, and everyone walks out of the room happy. But how can you really make sure that that strategy is maintained throughout the year, and it’s not just something that’s forgotten about after the first quarter?

Once the strategy is approved, it’s further deconstructed into tactical plans and operating plans. The tactical plan might be the three-year window where you say, for example, “Okay, to achieve these growth targets, we may have to look at some small company acquisitions during that time.” The tactical plan provides a mud map for how you might reach your strategic growth targets.

But when it comes to the day-to-day stuff, the connection between the strategy and the work immediate program is often tenuous.

The strategy comes down from on high, then people have to plan within their budgets… and they want to do the work that they like doing… and they want to keep doing the work that’s already underway. Their objective is slightly misaligned with the strategy. Instead of working out how to best deliver the value that is encapsulated in the strategy, they instead look for ways to shoehorn the initiatives that are already being done to meet the strategic objectives.

Let’s say, for example, that one of my current tasks is to build a new software product for our customers in underground mining. I’m going to create a new product for them. Then the powers that be hand down their annual edict, saying “Right, our strategy is to get out of software development and pivot towards services because we think there’s more margin for us in servicing our existing customers.“

If I actually want to continue my software development initiative (because I’m committed to it; and I’m in love with it; and I want to see it continue), then all I need to say is, “This fits into the strategic objective of moving to a service model for our existing customers. But we can’t do that unless we develop this new app.“

There’s always a way to force-fit the things that you’re doing to make it look like it’s part of the company’s strategic platform. Everyone does it, to some extent. They disguise their work program to make it seem as though it’s strategically aligned, when it may very well not be. They don’t do it because they’re bad people. It’s just that people will ultimately find a way to do what they want to do, and they may see value very differently at the level they operate at, than a board or a CEO might see from the very top of the organization.

WHY CAN’T HARD WORK OVERCOME POOR STRATEGY?

We need to have a great strategy. We don’t want to be squandering our scarce resources on things that aren’t really moving the value creation needle. How do we make sure that we’re not just working hard, but that we are executing on a sound strategy?

Developing the right strategy is the first step, and most organizations don’t do that properly. It has to be very heavily data-driven. This requires a deep understanding of who your customers are, what their current and future needs are, and what your historic performance tells you about your capacity to deliver on this.

It’s rare that we’re dealing with brand new market-entry products when we consider strategy. You’re normally talking about existing products. Developing the right strategy isn’t about the PowerPoint decks – it’s about understanding the data and knowing intimately what is going to satisfy your customer at the right price, and at the right risk level. So that has to dominate your strategic thinking and dialogue.

Once you’ve done that to the point that you’re reasonably happy, it takes a few passes to get it right. Strategy is iterative, and the biggest impediment to great strategy comes after the strategic planning process has been completed and signed off!

It’s really important that you’re constantly scanning the horizon, because things change all the time. You’re not in a static environment. You’ll find that, as you change the way you do things strategically, your competitors most likely are going to respond. You have to work out what you’re going to do when your competitors – how will you fight back.

Business doesn’t happen in a vacuum – it’s not a static environment. There are a lot of moving parts, and people respond differently to different stimuli. So it’s important to bear that in mind, and to have constant vigilance. The assumptions you made in the strategic planning process may be wildly different in 3, 6, or 9 months’ time.

Once again, assuming you have a robust strategy, and you’re paying attention to shifts in the competitive environment, you have to be incredibly diligent about ripping through your work program, whenever you have the opportunity.

By far the best opportunity to shape the work program comes up once a year, when you cast your work program, operating plans, and KPIs for the coming year. In conducting this process, you have to be ruthless about making sure that you’re only doing the things that serve the strategy. Otherwise, your team will be working on all sorts of stuff that isn’t helpful.

My favorite Peter Drucker quote is purpose-built for this exact scenario: “The greatest waste of organizational resources is doing really, really well the things that you should not be doing at all.“

HOW CAN YOU “LEARN” STRATEGY?

Strategy, like many other business disciplines, needs to be fit for purpose. If you’re running a small business with just a couple of people, you need a strategy. If you are leading in a massive global multinational business, you need a strategy. But those strategies would be designed using a very different approach, which is fit for purpose.

The benchmark for strategy is normally some type of management qualification, like an MBA. Studying an MBA is incredibly valuable, but when it comes to the types of organizational dynamics I’m discussing in this newsletter, I would consider it to be necessary, not sufficient.

I respect the MBA qualification enormously (I have one myself, from a high-quality business school). By the same token, they will only teach you the theory of strategy. Practical strategy that you can apply, is as rare as practical leadership tools.

There’s so much leadership content, information, and knowledge out there, most of which is like eating an air sandwich… it feels satisfying at the time, but it lacks any practical substance. We created Leadership Beyond the Theory to fill this gap with practical tools, methods, and strategies.

Strategy development and execution is no different. There are clearly some classic books that I would encourage you to read:

• Michael Porter’s Competitive Strategy
• Clay Christensen’s The Innovator’s Dilemma
• Chan Kim’s Blue Ocean Strategy

There are also a huge assortment of podcast episodes. One of my favorites is an HBR Ideacast episode by Clay Christensen The ‘Jobs to Be Done’ Theory of Innovation. It’s just so clever.

Those resources are super useful to help you to think through what competition is, and how you might address that competition. But I think ultimately you can read a lot of stuff and be none the wiser.

Hiring expensive strategy consultants doesn’t quite get you there either because you are effectively outsourcing something that is absolutely core to your business.

The first thing is to understand the fundamentals of how strategy drives business performance. If you can understand business performance, then you’re in a position to get going. But, even then there’s a whole issue around terminology. When we use terms and expressions in the world of strategy, like in many areas, not everyone in the room takes the same meaning from it, or understands it the same way.

And because the people in the room are usually quite senior, they don’t want to expose any potential lack of understanding in this area – the senior leadership pantomime is alive and well, and many people still believe their own bullsh!t.

If you’re in a smaller business where perhaps you are resource-constrained, then you’ve got to know this stuff yourself. You can’t just bring in McKinsey and pay them a few hundred thousand bucks a week to help you develop your strategy. You’ve got to work out how to do it yourself.

So, knowing what to do and how to do it, we have produced a bunch of content in our 300+ podcast episodes, many of which will be useful here.

When we release Strategy Beyond the Theory later this year, we want it to be to strategy what Leadership Beyond the Theory was to leaders.

If you’re interested in getting on the waitlist, just go to Strategy Beyond the Theory, and you’ll be one of the first to know when we open that program, which is incredibly exciting.

HOW STRATEGY, VALUE, AND HARD WORK ALIGN

Always begin with value – it’s the centerpiece of everything. But how do you know if you are genuinely delivering value? The productivity x efficiency multiplier is a great mental model for thinking about where you are in terms of the ultimate potential that could be achieved.

Of course, you still need to employ the excellence over perfection principle. Nothing ever gets to 100%, so don’t chase it… but it’s just good to know how effective and efficient the things are that you’re doing, and how productive the team is in doing them.

But, because the strategy process that most organizations undertake is quite ineffective in delivering value, a lot of the hard work that their good people put in is wasted – it simply doesn’t get traction in moving the company towards its ultimate goal.

The only way to improve the outlook is to ensure leadership and strategy work hand in hand.