Why your business needs a hit mentality

Some industries intuitively grasp that you have to kiss a lot of frogs before you find the prince. Fashion designers know the one big trend-setting style is what matters, not the ten that were so-so. The same is true in movie making, in oil exploration, and in venture capital. But most other businesses do not have this hit mentality—or, to put it differently, they lack an appreciation for probabilities.

Recent research my colleagues and I conducted shows that companies have a less than 1 in 10 chance of rising from middling ranks on the Power Curve of economic performance to the top over a decade. Interestingly, we found a similar ratio applies to individual businesses within large companies. Our data demonstrate that you’re far more likely to make a major move up the Power Curve because one or two businesses break out than because every business or operation improves in lockstep. In fact, this 1-in-10 idea is a sort of fractal: it applies at every level of the company, meaning managers of individual business units should also pour resources into the best candidates for striking it big.

That means you need to identify your company’s breakout opportunities as early as possible and feed them all the resources they need. That’s where the problem usually starts because the social side of strategy rears its head. Instead of marshaling resources for one or two big moves, companies tend to spread them thinly like peanut butter across all their businesses and operations, shortchanging their potential breakout successes in the process. Every business head wants his or her share, and will make a valiant argument for why they deserve it.

Strong leadership is essential at this point. You need to get your team aligned behind the likely winners. That may prove to be easier than you think. If you were to ask your management team to identify the most likely winners in the business portfolio, they will probably strongly agree on number one and maybe number two—but much less so on what ranks seventh or eighth. I have done this exercise with dozens of management teams and rarely found that picking the 1-in-10 is hard. What is tough is ensuring that the organization goes hard after that breakout opportunity. Here are some practical ways in which you can make this shift in your strategy process:

Adjust incentives to encourage resource reallocation. To move away from peanut-buttering resources, you need to explicitly address the motivation of your executives, and structure both performance management and incentives accordingly. If some people are taking a bullet for the team, they need to know why and what’s in for them. In my experience, it takes considerable leadership to get everyone to support skewed resource allocations, but just having the conversation about the 1-in-10s starts to reset expectations.

Pick where to compete at a granular level. One thing that really gets in the way of nimble resource reallocation is excessive aggregation and averaging. You can’t see the true variance of opportunity when things are rolled up into big profit centers. Instead, develop more granular opportunity maps—with at least 30 to 100 cells—then decide where to move resources.

One CEO traditionally framed strategy discussions around growth of 4% to 6%, and meted out resources accordingly to divisions. One year, he did a much more granular analysis and realized that one geography—Russia—was growing at 30%. He swamped the Russian operations with resources, created a more favorable environment, and subsequently enjoyed even faster growth from that unit.

I’ve seen many senior teams move away from peanut-buttering by using a form of voting to pick priorities. In some cases, that’s a secret ballot in envelopes. In others, CEOs set up a grand matrix showing all the opportunity cells and let executives allocate points to various initiatives by applying stickers to the matrix. Whatever the approach, I find that, most of the time, there is strong agreement on the best opportunities. The same holds true for what the likely duds are—not hard at all. It’s the broad middle where views diverge and resources get squandered.

Allocate resources at a portfolio level. Just because you are organized one way doesn’t mean that’s the only way you should look at the market. In fact, if resources are allocated in too much of a “trickle down” fashion as they move down the company hierarchy, you will never get the radical kind of resource shift you need. Studies have shown that resource allocation decisions change a lot when a company revamps its structure—even though nothing else has changed.

One company, for example, recently decided to examine plans one level down from the business unit and created a detailed curve of 50 or so specific, investible opportunities. The result was a much bigger shift in resources to the best opportunities that had tended to get “averaged out” in a more democratic process.

Interestingly, founder-owners are much more successful at betting on the big breakouts. They survey executives to get input on where to invest but make the final decisions on their own. As a result, they are much nimbler in deploying resources decisively to the most promising initiatives. I view them as examples business leaders should follow to finish off the peanut-butter business.

Judging by a recent survey we conducted, most companies haven’t mastered this shift. Only 12% report having put the 1-in-10 approach in “high gear,” while 54% believe they have achieved mid-level performance on that front. The biggest hurdle, it seems, is adjusting incentives so the full organization gets behind the focused effort (more on this later).

Play to win. Now that you have a granular view, and are making resource allocation decisions at a portfolio level, the next step is to truly distort resources so you can win. Don’t look at the resources relative to your other opportunities—remember that big moves have to be big versus the world, so you have to base your decisions on what your best competitors are doing. That may mean radical change.

Run the 8 Shifts Diagnostic to find out which gear your organization's strategy process in in, and how to raise it.

Martin Hirt is a senior partner in our Greater China office, co-leader of our Strategy and Corporate Finance Practice, and co-author of Strategy Beyond the Hockey Stick with Sven Smit and Chris Bradley.

This article originally appeared on LinkedIn.

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