Sunday, July 29, 2007

Strategy Without Numbers

With the rise of the internet, the concept of bartering is making a comeback. Rather than using money to buy things, companies are offering up goods and services to swap for other people’s goods and services. There are a number of web sites which help consolidate all of the bartering, including sites like the Freedom Barter Exchange (

There are reports out there claiming that this phenomenon is growing rapidly. One web site claimed that barter sales increased from $40 million in 1991 to over $20 billion in 2000. Of course, that raised a question in my mind. If no money is changing hands, how can you precisely determine the dollar value of what is going on?

If we go back to the days before money, I can imagine that it was more difficult to do any kind of transaction. For example, what if you had extra sheep to offer and you wanted to buy lumber and the one who had lumber did not want any sheep? I would suspect that there was a much longer conversation before any deal could get done.

I suppose that is why the word “barter” in the English language has morphed into a new meaning for haggling over a price, even though currency is eventually used in the transaction.

A large part of the language of business is spoken in currency. We describe businesses in terms of their sales and their profits, using the local currency. However, what would happen, if like in the story above, we were living in a time without money?

I suspect a similar result would happen. Discussions would tend to get longer and more involved, because you couldn’t use the short-cut of currency.

Great strategy is a result of great discussion. If we get too focused on numbers, we may end up short-cutting the discussion. In the process we will end up with a less robust (and less powerful strategy).

Communication typically revolves around a combination of three tools: words, pictures and numbers. In many companies, strategic communication can become dominated by numbers. We may state our goals numerically, like:

- 10% annual sales growth (or profit growth)
- 12% return on equity (or capital or investment)
- A doubling of market share, from 15% to 30%.

There are a lot of problems if your communication focus is dominated by numbers:

1) Numbers provide no insight into how they are to be achieved
2) Numbers focus on accuracy rather than action
3) Numbers tend to narrow the time horizon
4) The “Right” numbers can be achieved for the “Wrong” reasons

This is why is it highly recommended that your strategic planning cycle avoid numbers as much as possible. It should be entirely divorced from the annual budgeting cycle. To quote an article by McKinsey & Co. from 2002, “The best-practice companies we surveyed organized two clearly demarcated meetings: a full day on strategy with each business unit and a shorter meeting, at a different time of year, to set financial targets.”

How much do numbers dominate your strategy meetings? How much would your meetings have to change if you were told you had to do strategy without numbers? Trust me, it can be done. I’ve seen it and as McKinsey pointed out, it is essential is you want to be like the best practice companies.

If you need more convincing, I will discuss in more detail the four problems with having strategy dominated by numbers as mentioned above.

1) Numbers provide no insight into how they are to be achieved
Numbers can be very abstract. They may present some ideals, but that doesn’t mean that they provide any insight. For example, I might have a goal to be 2 feet taller, but that doesn’t mean that I have any idea of how to become two feet taller. Similarly, I say I have a goal to create profits of $10 million, but that doesn’t mean I know how to create those profits. Maybe the goal should be $5 million or $20 million. Until I determine what actions are best for my company, I have no idea what is right or how to get there.

This is a phenomenon I refer to as the Scoreboard versus the Clipboard. You can yell at the numbers on the scoreboard at a basketball game all you want, but it doesn’t change the score. Scores are changed by focusing on the clipboard, where you draw up the activity you want to achieve.

In the same way, if your strategic planning process obsesses on the numerical financials, it can be like yelling at the scoreboard. Instead, strategic discussions should focus on the clipboard, the actions you want to accomplish. To get a focus on the clipboard, you need to severely restrict the urge at your planning meetings to obsess on the scoreboard. For more on this topic see my blog “Scoreboards Vs. Clipboards.”

2) Numbers focus on accuracy rather than action
Strategic planning meetings only last for a relatively short period of time. There is not enough time so that you can waste it in endless discussions over the precision of various numbers. The more time spent arguing about numbers, the less time available to talk about actions—what needs to get done and how to do it. For most strategic discussions, what you really need as a foundation is not a precise number. After all, we are talking about the future. Nobody knows the precise answer anyway. What you need is just enough accuracy to ensure that the strategy is moving in the right general direction. You adjust along the way as information comes in over time.

Trying to get it all precise up front presumes you know more than you really do. Putting an extra decimal point on a guess does not make it any more accurate. It is still a guess. In my experience, the most you typically need to know about trends is the following:

a) Direction – Is the trend going up (getting bigger) or going down (getting smaller)?
b) Magnitude – Is it moving up or down a lot or a little?
c) Speed – Is the trend happening quickly or slowly?

This is usually all you need to know to get the conversation on track to determine what needs to get done. Any more just wastes time. For more on this subject, see my blog “What’s a Few Seconds Among Friends.”

3) Numbers tend to narrow the time horizon
In general, numbers tend to shorten the time horizon of a discussion. If annual budgets are directly connected and part of the strategy cycle, I can assure you that annual budgets will tend to dominate the discussion. This focuses the discussion only one year out. Budgets are important, but they need to be done at a separate time, so that the strategy discussion will look further out.

Numbers can also tend to focus a company to spend too much time looking backwards, since most of the numbers we have are recording events which have already happened. Spending too much time looking backwards is like trying to drive down the freeway by only looking in the rear view mirror.

Yes, we need to understand where we came from to help us know where we are to go, but again, I don’t think a lot of precision will change the discussion all that much. Past direction, magnitude and speed should suffice.

4) The “Right” numbers can be achieved for the “Wrong” reasons
There are multiple ways to hit a high profit number, and many of these ways may run contrary to good strategy:

a) Once can stop investing in the company and take all the money out in profits now. Eventually, a lack of investment will kill a company, just as a lack of nourishment will kill a person.

b) One can significantly increase the price of what you sell and/or significantly decrease the quality of what you sell by cutting corners. This might fool customers for awhile, but eventually they will figure it out and abandon you.

If the focus is only on a numerical end rather than a particular action, or means, then it is likely that some will try to “hit their numbers” by doing things that will destroy a strategy. It has been my experience that if you focus on doing the right things, the right numbers will come. But if you focus just on getting the right numbers, often you do the wrong things, and eventually you will not be able to get the numbers.

That is why one should try, as much as possible, to do strategy without numbers.

Strategic planning works best when it is liberated from a focus on numbers. By eliminating numbers, the conversation shifts to discussion trends and actions. By getting our arms around trends and numbers, we will have stronger direction on what needs to get done and how to do it. And this leads to greater long term success. The annual discussion of numbers should take place at a different point in the calendar.

There’s the old saying that people tend to focus on that for which they are held accountable. You are more likely to create success if accountability focuses on strategic actions rather than abstract numbers.

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