Good strategy isn’t easy. Yet we know vastly more today than we did even a year ago about how corporate strategies should be crafted and implemented. In this video, McKinsey principal Chris Bradley and director Angus Dawson trace the evolution of strategic thinking in recent years; outline a thorough, action-oriented approach executives can adopt; and discuss strategy’s next frontiers. What follows is an edited transcript of their remarks.
Angus Dawson: Strategy is still a relatively young discipline. It emerged in academia in the ’60s and went into corporations in a mainstream way in the ’70s. And so if you look back 10 or 15 years, we’ve probably doubled the sheer stock of experience in doing strategy work in corporations over that time period. And in doing that, I think we’ve got an incredibly rich source of insights into what it actually takes to do great strategy.
If I look back 10 or 15 years, when I was a younger consultant doing strategy work, what you did when you started a piece of strategy work was you’d look for a framework. And someone like McKinsey had a whole library of wonderful, powerful frameworks. But you’d hope that you would kind of pick the right things off the menu and apply them in the right way and keep your fingers crossed that you’d therefore get to a great answer. I think it’s changed now.
Chris Bradley: I think what’s happened is we’ve layered on top of that in a few ways. The first one is empirics—common math applied to common data with common wisdom. And I think we’ve got ways now of understanding the laws of physics, so to speak, for strategy, but also bringing a lot more analytical rigor into strategy in very, very important ways.
Another layer is bringing psychology and adult learning into strategy and realizing that strategy’s not just about what’s written on the paper but about the thinking and feeling processes of the leaders of the company. Another layer, which we’re adding now, is to bring a cohesive method on top of the frameworks and the latest theory and actually get down to the realization that, just like operating a plant takes a lot of experience, a lot of diligence, and a lot of hard work, the same goes for strategy.
Our strategy method
Angus Dawson: It starts with a belief that you need to “diagnose.” You need to form a point of view on why you make money. Then you need to form a point of view on the future, what we call “forecast.” You then need to come up with some genuine options as to what you might do to create value. We call that “search.”
You’ve got to then choose a strategy, and often a real choice requires you to have a choice between alternatives. And then finally you have to commit. And this last piece of committing to strategy is what we call “finishing the strategy.” We find that, with a lot of our clients, one of the sins is leaving the strategy unfinished.
A strategy’s unfinished until you’ve been able to roll back the future into tangible, proximate goals, until you can communicate it very clearly to convey the real magic of what has to change for people, and until resources have been shifted. One of my colleagues often says, “I don’t want to read your strategy plan. I want to see what’s shifted in your budget. Then I’ll tell you what your strategy is.”
Making change happen
Angus Dawson: Often with our clients, a good meeting is defined as a tidy meeting when people said what they were meant to say, it all went to plan, we stuck to the agenda, and everyone signed off. Big strategic calls don’t happen like that. We have to actually think of designing a social process such that people can really grapple with the big ideas and come to grips with changing deeply held biases about what the company should do in the future.
Because in the end, it’s a year or two away when the big calls will happen, and in their gut, if they haven’t actually grappled, if they haven’t actually changed their beliefs, if they don’t have conviction, then the strategy won’t actually get implemented.
Chris Bradley: One of the trends in the way we’re looking at strategy is to be very analytical about it. And what we’re finding is a whole series of empirical norms that are actually challenging many of the ways companies actually do strategy. For example, we’ve just done a study of economic profit and have found that 60 percent of companies are really in a very flat zone.
Most of the action happens up in the top quintile. But the trick is it’s actually very rare to escape that middle class. Over 80 percent of companies who start there are still there ten years later. The companies that do escape the middle class have to do something very, very special. And they ordinarily are riding a huge industry trend to get into the top quintile.
Resource allocation is another topic where we’ve brought empirics into the picture. Resource allocation is fundamentally important in differentiating high performance from low performance, particularly on stock-market returns. But this jars against the fact that most companies actually are very sticky in the way they allocate resources.
Granularity of growth is another example. If you look at what drives the growth of companies, it turns out that selection at a micromarket level is much more important than trying to gain market share. In fact, 80 percent of growth is explained by decisions about where to compete or by market selection.
If I weave these threads together, what it says to me is that companies should be just as focused about positional improvement as they are on performance improvement. It reveals the importance of strategy in that light, not as a method of how we gain market share or decide what our edge is going be in the next quarter, but as a way to fundamentally position the company against the right trends, catch the right waves, and put our bets on the right markets.