Thursday, November 10, 2016

Why Most Strategies Fail: Reason #1

This week, I saw a blog by the Cascade strategy software company entitled “The 5 Reasons Why 70% of Strategies Fail.” You can read it here.

The title lured me in. However, after reading the article, I was completely dissatisfied. I so fundamentally disagreed with almost everything said in the blog that I wanted to write back as to why I felt the blog totally missed the point.

However, because we approach strategy in such fundamentally different ways, I couldn’t find any common ground from which to start. It was as if we were from different planets speaking a different language.

Therefore, I will just write my own set of blogs on why I think most strategies fail. It boils down to three things. I will devote a separate blog to each reason.

For a strategy to succeed, it must succeed in the external marketplace. It is out in the world, where the customers and the competition are, that you have to win acceptance. If the consumers vote for your competition, you lose—no matter what internal goals you have achieved. Too much internal strategic focus at the expense of external focus misses the point and often leads to failure.

The Most Important Question
Therefore, strategy needs to start in the external world by asking this question: Do you have a reason why customers should naturally prefer you over the competition? In prior blogs (here and here) and in a book, I referred to this as The Most Important Question.

There are three key concepts in this question. The first is the idea of “preference.” A good strategy provides a reason to be preferred by a meaningful segment of the population. This means that you perceived as providing a superior solution to an important problem faced by the customer—a solution worth choosing over other alternatives. Does the foundation of your strategy start with a compelling reason for being preferred by the external marketplace? Do you even know what problem your offering is even trying to solve and what others are doing to solve that same problem?

The second key concept in this question is “natural.” A natural preference is a preference rooted in the attributes of the value proposition. It is not artificially added on top. It is naturally embedded in who you are and what you offer. If you do not have a natural reason to be preferred, then you will be perceived as offering a commodity—no better than anyone else; no reason to be chosen over the others.

In the world of commodities, you cannot create preference naturally. Instead, you have to add incentives—or what I like to call bribes—in order to create artificial preference. These bribes can be lower prices, free add-ons, or other gimmicks to create the excitement that your commodity offering cannot do on its own. The problem with these bribes is that they suck the profitability out of your offering. And since competition can usually copy these external bribes, you end up in a downward spiral to bankruptcy.

So, if you have to resort to bribes to create preference, you strategy is a failure from the very beginning.

The cell phone networks in the US are a perfect example of this. The top firms (Sprint, AT&T, and Verizon) have not done a very good job of creating a natural preference for their network over the alternatives. To many, they are pretty much the same commodity, offering similar phones, similar coverage and similar services. The fact that there is so much switching between the firms indicates a lack of reason for preference.

Since there is little natural preference, these mobile network firms use a lot of bribery tactics to win customers, such as with price incentives and free features. These bribes often have only a temporary impact on preference, since the others copy the incentives. The only long-term impact is a reduction to profitability potential. Without the profits, long term success is threatened.

This is why AT&T is trying to buy up all the content companies. It is an attempt to create a natural preference rather than a preference via bribes.

One way to know if you have created naturel preference is to ask the market if your offering would be missed if removed from the marketplace. If alternatives work so well that you are not missed, then you have built a strategy that has no reason to succeed, no matter how well it is executed. I dare say that most companies fail because they never created a strategy that gave the market a reason to want you to succeed.

The third key concept in the most important question is “consumers.” It doesn’t matter whether or not I like my product. It doesn’t matter if independent testing says my product is superior. What matters is the consumer perception of my product. Theirs is the only opinion that matters. Strategies succeed or fail in the mind of the customer. How much of your strategic plan is focused on the mind of the consumer?

The Rise of the CMO
In my opinion, the beginning of the demise in the prominence of strategy was when businesses created the position of Chief Marketing Officer (CMO). The CMO was given responsibility for the external marketplace factors. It was snatched away from strategists. This created a number of disastrous outcomes.
  1. It forced strategists to only work in the realm of internals—things like financial outcomes, project management and maintenance of the metrics of performance measurement. These are all a waste of time if your strategy is not rightly rooted in building natural preference in the marketplace. So the strategists could no longer control the key to strategic success.
  2. CMOs really only have significant influence over bribes, like pricing and advertising and consumer gimmicks. They really don’t have much influence over how the company fundamentally functions in order to create a natural preference. Therefore, instead of focusing on natural preference, CMOs turned the company’s focus towards bribery. This ruins the essence of strategic success.
  3. Although CMOs have lofty job descriptions with long-term goals, if you look at what most of them spend the majority of their time on, it is short-term advertising. Short-term advertising so consumes their schedule that they never get around to giving the long term marketplace the attention it needs. Because traditional strategists were almost exclusively long-term oriented, they were able to do a better job of making sure the long-term strategy could overcome short-term concerns (more on this when we get to the blog on reason #3 for why strategies fail).

Warning Signs that Your Strategy is on a Path to Failure
So, one of the first places I would check to see if your strategy is likely to fail is the balance in the strategy between internal and external orientation. If your strategy (and the process behind it) has too much of an internal focus, your strategy will probably fail. By contrast, winning strategies tend to be far more externally focused on the marketplace.

Here are some clues that your strategy is too internal:

First, are most of your strategic goals focused on “What’s in it for me?” or are they focused on “What’s in it for my targeted consumer group?” “What’s in it for me” goals are things like:

1.      Profitability Goals
2.      Growth Goals
3.      Shareholder Return Goals

These all may be nice things, but they are outcomes, not strategies. They do not tell you how to achieve them. There are lots of ways to increase profits or growth in the short term that will destroy a company in the long-term. In fact, often the fastest way to achieve internal goals in the near term is to screw your customers and give them no reason to prefer you over the long term.

As a general rule, if you get the external marketplace issues right, the internals tend to take care of themselves. However, if you only look at the internals, there is no guarantee that the externals will survive. A lack of external orientation in your goals often leads to failure.

A second warning sign is how you are measuring success: Are you mostly measuring what is going on inside your buildings or are you measuring what is going on in the minds of your customer?   Keep in mind that the perfect internal execution of a strategy which is seen as irrelevant in the mind of the customer is a waste of time and a certain path to failure. So measure what really matters.

Look at your KPIs (Key Performance Indicators). Are they mostly measuring internal achievements or external marketplace achievements?  Unless your strategy is making an impact on the marketplace, your strategy is worthless. Therefore, load up on KPIs that measure what’s happening out in the market where results really matter the most.

A third warning sign is to look at what your strategists focus on. Are they mostly focused on internal issues like financials or project management or KPI management? Again, these are nice things, but they are not the essence of what makes a strategy successful. Successful strategies put a company in a position where they can win in the marketplace.  If that is not job #1 for your strategists, then why should you expect to ever win in the marketplace?

I could say more on KPIs, but I will save that for the next blog, which will focus on the second reason why most strategies fail.

Depending on which study you look at, somewhere between 60% and 90% of strategies fail. If we don’t address the deep-seated reasons why strategies fail, we will not be able to raise the percentage of strategic successes. I believe that there are three major reasons why strategies fail and my reasons do not always agree with conventional wisdom. The first reason I believe most strategies fail is because the strategic effort is too focused on internal issues. Real success occurs when a company is properly positioned to win in the external marketplace. This requires a strategy that is perceived by the customer as providing a superior solution to one of their problems in a natural way. If these external concerns are not met, then all the internal manipulations are a waste of time. So, if you want to have a successful strategy, put the emphasis on the issues which have the largest bearing on success. These start with getting the externals right.

I am not trying to imply that the internals do not matter at all. They do matter…just not as much as the externals. We will be addressing the internal issues more in failure reasons #2 and #3 (the next two blogs).

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