Hockey stick dreams, hairy back reality
The ambitious hopes of strategy forecasts tend to fail over and over again—producing an unfortunate pattern you'll likely recognize. Here’s why it happens, and what to do about it.
– One of the most emblematic outputs of the dreaded strategic-planning process is the “hockey stick” forecast – the line that sails upwards on the graph after a brief early dip to account for up-front investment. These hockey sticks, confidently presented by executives pitching their new strategy, are easy to draw but they don’t score many goals.
What tends to happen in reality is that the strategy fails to meet the bold aspirations and is replaced by a new one. Over the years, the unrealised hockey-stick forecasts string together to produce what is both one of the ugliest and most common charts in strategy: the hairy back (yes, the chart below shows a real company’s performance).
Worse still, few companies check if their longer-range forecasts came true. Instead, the hairy backs are shoved into the dusty drawers of corporate history. Naturally – it can be hard to see your own hairy back!
One wonders how so many smart, well-intentioned people can get it so wrong time after time. Yet those familiar with strategic planning will recognise that the process is fertile ground for hairy backs to sprout. Here’s how it happens:
People start out being overly confident and optimistic (like the 90% of drivers who tell pollsters they are above average). Informed people are even more confident: as they gather data to support their hypotheses, their conviction in their forecasts grows.
Such confidence tends to be rewarded. Who ever got a promotion by putting forward a plan whose growth forecasts didn’t sail upwards? We need an ambitious vision to inspire great performance, executives tell themselves. Some, raised on a diet of self-help books, may even believe that merely setting a “stretch goal” will motivate people to meet it, no matter how unrealistic it may be.
Moreover, let’s remember that the strategic-planning process is really a resource competition. Executives know that all the others vying for their share of the capital-spending budget will put forward hockey-stick plans – they’d be mad not to play along.
It is also remarkable how many of the plans just make it over the funding threshold. Set the goal of 15% for internal rate of return and watch all those proposals magically sail over the bar. After all, no one ever walks into the strategy room offering to give back their capital budget because they have realised other business units could use it better.
The strategic-planning process is really a resource competition. All those vying for their share of the capital-spending budget put forward hockey-stick plans – you’d be mad not to play along.
By the end of the first year, when the strategy isn’t panning out as planned, our attribution bias usually kicks in. The missed target is blamed on the most convenient cause available, which is usually some one-off event (unseasonal weather, an IT outage, etc.). Interestingly, such one-off occurrences seem to happen every year. The failure dismissed, we double down and re-establish our goal. “We lost a year, but we’re going to get back on track.” The next hair sprouts.
Rarely does anyone review last year’s version of the five-year plan. More often than not, management just looks at year one. The strategy process becomes merely the set-up for the real conversation: my budget and KPIs for the coming year.
Academics Daniel Kahneman and Dan Lovallo captured these dynamics in a paper published almost 25 years ago, but their findings are just as relevant today. They disentangled two seemingly opposing errors people make: being excessively bold in making forecasts and excessively timid in making choices.
Why? Well, first, the tendency to make bold forecasts leads to a “baseline” of forecasts that are too high. It’s all too easy to click and drag a graph line in Excel to continue a trend without paying heed to how hard it was to get to the current point on that trajectory.
Not only is the baseline too high, but the plan is too small, failing to incorporate enough high-impact moves to truly raise performance. It’s like bragging about doing a marathon but under-training because you imagine yourself fitter than you actually are. Combine that with competition for resources and you get a stifling level of corporate inertia: resources don’t shift to where they can have the highest impact and the big moves don’t happen (see our work on resource allocation).
It adds up to the fallacy that underlies most strategies: “I will get better results next year by trying to do roughly the same thing as last year but just a little bit better.” Hope and hot air abound.
Is there anything you can do to avoid this scenario? Here are four practical ideas.
- Don’t hide the hairy back in the bottom drawer. Reconcile previous plans with what actually happened and figure out why your team failed to make the targets. Think like a private equity investor who has a five-year time frame to make good on an investment, without the luxury of being able to throw out the early years’ results and start over.
- Calibrate your results to the “outside view.” Most strategy processes rely on what Kahneman called the “inside view”: detailed facts but limited to your specific situation. This inside view is a breeding ground for all sorts of biases that subconsciously give more weight to facts that back your view than the inconvenient ones that don’t. What you need is an “outside view,” provided by looking at a larger class of similar companies in similar situations and seeing how their strategies panned out. For example, a plan projecting a 15% increase in revenue may seem reasonable until you discover that only about 5% of large companies actually grow that fast over a five-year period. Is it really reasonable to expect that your company will be in that top 5%?
- Build a momentum case. I suggest that you throw out the baseline forecast and start by projecting what would happen if management took their hands off the wheel and just let the ship sail on its own momentum. Yes, this will usually be a downhill slope because markets are competitive and you have to work very hard just to stay in the same place. But you should face this reality so you know the real gap the plan must address.
- Focus on moves, not promises. In his terrific book Good Strategy Bad Strategy, Richard Rumelt identifies the confusion of goals with strategies as one of the biggest mistakes in the corporate boardroom. Many strategic-planning processes are far more focused on setting goals (with no tangible lever that management can control) rather than crafting choices and moves to meet those goals (levers firmly in the control of management). Spend more time on deciding what actions you will take, then rack up the expected results. McKinsey’s turnaround experts force every goal to be backed by a “bankable plan” – a series of “what by who by when” steps that can link to the realization of value. Is your plan bankable?
My list of ideas is by no means comprehensive. I’d love to hear your hairy back stories and any suggestions you have for curbing their spread.
Chris Bradley is a partner in the Sydney office.
Originally published on LinkedIn.