McKinsey: Testing your strategy

By | February 27, 2017

McKinsey, in a 2011 article entitled Have Your Tested Your Strategy Lately?, makes the very valid point that executives and leaders too often treat strategy as a ” procedural exercise or set of frameworks”, rather than a way of thinking through problems. Amen.

McKinsey’s advice is to not look for the newest strategy fad or business guru, but instead take your strategy, and stress test it. Amen.

Too often, we need to apply what we already know. Keep it simple and consistent – rather than piling more stuff in your head. Simple analogy.  We all know what makes us fat (too many calories and not enough exercise) – and yet 50%+ Americans are considered obese. Yes, it requires your head, heart and hands.

Most companies’ strategies pass fewer than 4 of the 10 tests. In true McKinsey style, they applied a lot of rigor to what seems like a qualitative exercise. They ran it by 700 strategists and 2,100+ executives; they found that most company strategies pass fewer than 4 of the 10 tests. Fascinating, and kind of not surprising.

1. Will your strategy beat the market? This is the main question. Is your company able to harness some competitive advantage – economic moat – which allows it to create and keep more value than competitors? Think of Porter’s classic 5 forces framework; everyone (suppliers, buyers, substitutes) can eat away at your profits. What is keeping your share of profits safe?

Markets drive reversion to the mean. This chart is sobering. From 2001-2009, the top and bottom quintile of company performance (measured in ROIC) are converging; the great gets worse, and the worst are getting better. Clearly, operational efficiency is not strategy.

2. Does your strategy tap a true source of advantage? Without getting into a mini-course on strategy theory, the few key questions to consider:

  • Do you have a positional advantage in your industry?
  • Do you have control over valuable resources (e.g., patents)?
  • Have you bundled activities together so it’s hard for your competition to mimic you?

3. Is your strategy granular about where to compete? In marketing we learn about STP (segment / target / position), but McKinsey argues that companies do not segment enough. They urge you too think deeply about customer, geographic, and product-using segments. In a separate article called the Granularity of Growth, McKinsey notes that companies need to “de-average” their approach to different markets.  Clearly the days of mass-market are dead.

4. Does your strategy put you ahead of trends? Self-explanatory.

5. Does your strategy rest on privileged insights?  This is a fancy way of saying do you have unique information, data, analysis, and insights? There is a sea of data, but that’s the obvious field that all competitors look through.  Find out what is happening at the edges of the industry and try to pick up the weak “signals” buried with the noise.  They suggest rigorous brainstorming on what key questions could dramatically disrupt, change, challenge your business.  This leads to the next question. . .

6. Does your strategy embrace uncertainty? In this VUCA (volatile, uncertain, complex, ambiguous) world, you cannot predict anything with certainty. That said, is it a binary – I know, I don’t know? What are the shades or gray? McKinsey characterizes 4 levels in blue font below:

Level one offers a reasonably clear view of the future: a range of outcomes tight enough to support a firm decision. At level two, there are a number of identifiable outcomes for which a company should prepare. At level three, the possible outcomes are represented not by a set of points but by a range that can be understood as a probability distribution. Level four features total ambiguity, where even the distribution of outcomes is unknown.

7. Does your strategy balance commitment and flexibility?  While reading, I had no idea how McKinsey would answer this one – but love the simplicity of this statement:

A market-beating strategy will focus on just a few crucial, high-commitment choices to be made now, while leaving flexibility for other such choices to be made over time.

Major on the majors, minor on the minors. Like the idea of really focusing, worrying, analyzes, fretting, stewing over the most important decisions and committing. For the other details (the other branches of the fishbone diagram, or lower-level issues), you can flexibly respond and stay opportunistic. Get the big things right.

8. Is your strategy contaminated by bias? Without further reading, the answer is yes. McKinsey goes through a list of potential biases – all things we learned in Bschool – over-optimism, anchoring, loss aversion, confirmation bias, herding, and champion biases. Yikes, what is in our heads can often work against us.

9. Is there conviction to act on your strategy? For me, this is perhaps the biggest fail of most corporations. They don’t stick to 1 strategy long-enough to really know whether it works or not.

10. Have you translated your strategy into an action plan? Self-explanatory.

Long lists are hard to remember or internalize. Therefore, I put together this grouping which fits my worldview – it takes your head, heart, and hands to solve problems.

Head (intellectually): Do you have a true advantage based on unique insights, that are anticipating future trends and embracing ambiguity?

Heart (passion, drive, founder’s mentality): Are you committed to your plan, yet flexible enough to make adjustments?  Are you “wed” to old strategy that is not working?

Hands (implementation, change management): Are you really mapping this strategy out so it is easy to implement and delight the (employee and the) customer?

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3 thoughts on “McKinsey: Testing your strategy

  1. Steven Choi

    Great article. One thing I think seems to be missing is if you are engaging your workforce in this strategy. In a room of MBAs, CEOs, and other executives, all the data, trends, expert opinion, and debate make sense. But turning around and then telling people that they need to change, without involving them in the strategy can make strategies get stuck.

    Reply
    1. consultantsmindadmin Post author

      Completely agree. There is a false separation between strategy and implementation; it takes consistent, year-over-year leadership, communication and trust-building to move an organization. It is much more than a fancy powerpoint and analysis. Agreed. It is hard.

      Reply
    2. Miryan Nogueira

      Absolutely Steven!
      Executives often ignore the “power of engagement”. It appears that there is a certain jealousy, like if in involving people they would take credit away or make the process unnecessarily longer, but that’s exactly the contrary. By including people in strategy, the chances of success are much more likely.

      Reply

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