Wednesday, September 3, 2008

Analogy #204: Wrong-Way Sally

Sally needed to drive from Chicago to Los Angeles. Because this was an important trip, Sally wanted to drive to Los Angeles as efficiently and cost-effectively as possible. Therefore, she prepared well.

First, she did research to determine the most appropriate automobile for her journey, taking into account practicality and fuel efficiency. Then, Sally did research to determine where the best place to purchase this automobile was.

Once she had purchased the automobile, Sally had the car looked over by a mechanic and got a tune up. She knew this would make the car more efficient and less likely to break down on the journey.

Then Sally got in the car in Chicago and started heading east. Unfortunately, her destination—Los Angeles—is west of Chicago, not east. As a result, this efficient, well-purchased, well-tuned, practical automobile never reached its destination. It just wandered aimlessly along the east coast of the US.

Sally spent a lot of time trying to optimize the execution of her trip. She wanted to have the most practical, efficient and cost effective journey possible. The only problem was that she pointed her car in the wrong direction. By going in the wrong direction, Sally negated all of the preparation work that went into that process.

An efficiently run car that is hopelessly going in the wrong direction ceases to be efficient. The trip becomes a waste of time and money. It would have been far more efficient for Sally to have overpaid for a gas-guzzling, run down old car, provided it was able to get her to Los Angeles.

This same principle applies to businesses. A business can focus on all sorts of executional efficiencies, but then apply them to a strategy which takes them nowhere. Getting nowhere more efficiently is not much to brag about.

An efficiently-run bad strategy is worthless. Unless you first have a viable and desirable strategy, a focus on execution is a waste of time.

The principle here is that strategy is more important than execution. This principle was once again brought to light in the September 2008 issue of the Harvard Business Review. In the article “Seven Ways to Fail Big,” authors Paul Carroll and Chunka Mui discussed their research into business failures. They examined 750 business blunders to determine what caused them. What they concluded was that most of these failures were due to wrong strategy, not poor execution.

In other words, most business failures are like the failure of Sally—not pointing the company in the right direction. Even flawless execution would not have saved the majority of these 750 failures, because they were executing the wrong thing.

Strategy is about making choices. If you make the wrong choice, then the execution becomes meaningless. By contrast, if you make the right choices, you may be able to win even if your execution has a number of flaws in it.

You’ve probably heard that old quote from General Patton, “A good plan, violently executed now, is better than a perfect plan next week.” This may make one believe that execution is more important than strategy. However, even Patton understood that first and foremost, the strategy must be good.

Unfortunately, Carroll and Mui found that, quite often, companies have strategies which are bad. Now the executives involved in these 750 failures were not stupid. They did not intentionally choose a bad course. They were deceived into believing that a bad strategy was good.

So what causes such deception? In my experience, it is a combination of assumptions and egos. Our egos tend to make us place an unrealistic positive spin on the assumptions. And when your assumptions are wrong, your conclusions are wrong. Wrong conclusions lead to wrong strategies.

Key areas where our assumptions can become distorted relate to:

1. Potential Benefits
Strategies to acquire or diversify or whatever tend to have assumptions about the benefits they will bring to the totality of the business. These benefits may go under various names, like “synergies” or “economies of scale” or “elimination of redundancies” or “cross-selling opportunities” or “a leveraging of competencies” or “a platform for future growth” and so on. If you assume the wrong levels of benefits, you will make the wrong strategic choice. And trust me, the actual benefits rarely come close to the assumed benefits.

2. Potential Costs
Costs include time, money and people. Not only may integration take more time, money and people than assumed, but integration may not even be possible given issues such as corporate cultures, government regulations, and incompatible business models.

3. Evolution of Marketplace
Strategies take place over a span of time. Markets evolve over time. How a market looks at the time when strategies are being developed is not how a market will look when the strategy is up and running. If you make the wrong assumptions about how a market will evolve, then you will likely have designed a strategy inappropriate for what environment really exists.

Some of the key assumptions which evolve over time include assumptions about future pricing/cost structure, how many companies will copy your strategy, which technologies/platforms will win, how fast the current paradigm will last before becoming obsolete, unintended long-term consequences to near-term actions, and so on.

Finally, it should be noted that the best strategy for the decision-maker may not be the same as the best strategy for the company. For example, a resume that says “I kept a company from making a bunch of stupid mistakes by doing nothing” doesn’t sound as impressive as “I was put in charge of implementing a major initiative (even if it failed).” This creates a bias to act, even if the action is wrong for the company.

And if the action fails, it is in the best interest of the decision-maker to blame someone else. Therefore, there is a bias to blame the implementers (bad execution) rather than blame the decision-maker (I chose the wrong strategy). As a result, we don’t learn from our mistakes and continue to make poor decisions.

The solution?

1. Spend more time vetting your assumptions. If Sally had spent less time worrying about the car (execution) and more time worrying about where she was driving (strategic assumptions), she would have been better off. In order to separate ego from assumptions, get people without a vested interest in the project to evaluate the assumptions.

2. Do scenario planning to discover what happens to the viability of your strategy if your assumptions are off a bit.

3. Determine which assumptions are most critical to success and then monitor them well during implementation. That way you can get an early warning of potential problems and perhaps change course before it is too late.

Although execution is important, strategy is more important. Choosing the right strategy requires laying aside your ego and scrutinizing your assumptions. There’s usually quite a gap between “best case” scenario and “most likely” scenario. If the strategy only “works” if the best case scenario occurs, then you probably have a bad strategy.

Final Thoughts
On a job interview, I was asked what I thought would be the best approach to creating strategy. In keeping with the thrust of this blog, I said that the ideal strategy is one where the value proposition is so unique and so compelling that no amount of incompetency would be strong enough to keep you from succeeding. The interviewer then told me that he put a very high priority on getting the execution right. Not surprisingly, I did not get the job.

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