Playing To Win
Strategy and Leadership #4
This is the fourth in my series on Strategy and Leadership and perhaps on the most subtle topic! It is a point of view on the thinking slant every leader needs to take that I have developed only in the past few years. I will describe it in my 18th Year III Playing to Win Practitioner Insights (PTW/PI) piece is called Strategy & Leadership #4: Being the Guardian of Validity. You can find the previous 128 PTW/PI here.
The Tension Between Reliability and Validity
As I have discussed before in this series and much earlier in my 2009 design thinking book, The Design of Business, there is a fundamental tension in the world between reliability — which is the production of a consistent, replicable outcome — and validity — which is the production of an outcome that meets the desired objective. For example, consistently meeting your quarterly guidance is the manifestation of reliability. Growing a great company is the manifestation of validity.
Obviously, both are good things. You would want to lead a great company that meets its quarterly guidance — because the latter would help you keep the shareholders off your back to better pursue the former, as I discussed in the first piece in this Strategy and Leadership series.
But there is, of course, a rub. Doing the things that you must do to hit quarterly guidance, like postponing investments, reducing advertising spend at the end of the quarter, stuffing the distribution channel, freezing hiring, etc., work against you becoming or remaining a great company. Of course, CFOs publicly claim that they never engage in such activities. But privately they admit that they will damage the future prospects of their companies to meet quarterly guidance/analyst consensus.
The thinking that underpins reliability is very different from that which supports validity. Those who seek reliability attempt to do so by restricting themselves to reliance on objective quantitative data to make their decisions. They believe (often implicitly but sometime explicitly) that the past will be a good predictor of the future. For this reason, they like to plan based on the assumption (again often implicit) that all the important things in their world are controllable if one plans rigorously and comprehensively enough.
Those who seek validity utilize a wider array of information, because in addition to quantitative data, they also embrace qualitative, to which they add judgment, even if that judgment is always subject to bias. While they believe that the past can sometimes predict the future, they fully appreciate that sometimes it can’t and doesn’t. They are more inclined to attempt to create the future they would like to have happen rather than assume an extrapolation of the past.
Challenges Arising from the Tension
The tension between reliability and validity generates a critical leadership challenge. A company can generally make costs behave the way it intends because the company is the decision-maker on the costs it decides to incur. Hence it is worthwhile to plan for costs — and rigorously control them. There will virtually always be reliability-oriented team members that will focus on that — unless they are overtly discouraged.
But these reliability-oriented team members will also want to plan revenues and will dedicate countless person-hours to guesstimating revenues and then getting the company to commit to them. The great delusion of revenue forecasting is that you can make revenues occur by projecting them. But, of course, customers couldn’t care less that you projected that they would take cash out of their personal or business pocket and give it to you. They own that decision. Planning for that decision to happen is useless and delusional.
What is valuable, in stark contrast, is to make strategy choices that create an environment in which customers feel compelled to give their cash to your offer instead of the offers of your competitors. That set of choices makes a bet on the future, a future that is not a simple and assumed projection of the past into the future. Good strategy creates a future that is superior to the past and present. Strategy imagines possibilities and chooses the one for which the most compelling argument can be made. That is a validity-intensive endeavor.
As for life in general, in strategy both reliability and validity are important. Too much validity risks a problematic level of disorganization in which controllable things are not controlled. This, of course, is the downfall of many entrepreneurs who create their businesses with a validity-based dream, but then fail to embrace, or in some cases actually suppress, reliability, and watch their baby dissemble. Even the great Steve Jobs fell prey to this in his first stint at Apple. However, too much reliability results in the creation of plans that are based on hope that former customer behavior will extrapolate into the future. But as my friend AG Lafley often asserts: Hope is not a strategy! When it comes to customers and markets, the future is like the past — until it isn’t.
This tension explains why reliability-oriented leaders engage in strategic planning while validity-oriented leaders develop strategy. And as I have pointed out, a plan is not a strategy. Balance is important to reliably manage costs while validly creating customer demand.
The Leader’s Context
I have always focused on balance as shown in the chart above, one that I have used for over a decade. The goal is to seek the sweet spot that balances reliability and validity. But I have come to believe in the past few years that this isn’t the best, most precise advice to give to leaders.
In companies, there is an inexorable drift toward reliability. Companies typically start with a validity-driven burst of creative energy — and if it isn’t a relatively profound burst, the fledgling company expires pretty quickly. But those who prosper and grow tend to acquire an outside board, professional managers, public shareholders, capital market regulators, etc. Reliability tends to take a more prominent role as various actors ask for more ‘proof’ to justify decisions and the proof needs to take the form of rigorous data analytics.
Strategy slowly but surely morphs into planning, a migration that is heavily reinforced by modern business education, which itself is a creature of the modern science-obsessed world. In this world of business, there are many data analysts, but not so many validity-oriented strategists. And the data analysts in companies are supported and encouraged by the outside actors — like equity analysts and boards of directors.
This puts the onus on leaders to be the guardian of validity. If they don’t play that role, validity will be overwhelmed by reliability. I keep seeing it over and over — and over. That is why planning absolutely dominates strategy across large companies and why big companies are so disappointed in the pace and level of their innovation. It is because their leaders don’t vigorously defend validity. They may think that they are promoting balance or that being relatively agnostic and supporting both will achieve balance. But the forces of reliability in the modern world of business are just too strong.
While the first thing that you might think is that this is applicable for the most part, or even solely, to the leader of the company — i.e., the CEO. But it most assuredly is not! Whether you are a leader of a single team near the bottom of your company, manager of a plant or product, head of a region, president of a BU, or CXO, you need to see yourself as the guardian of validity in your domain.
If all you seek is balance, the team below you is very likely to generate a bias toward reliability. It isn’t intentional on their part and most team mem ers will have no idea that they are producing this outcome. But they will consistently feed you analysis of what is and will work to convince you that it will continue to be.
They will rigorously forecast both costs and revenues and they will be very surprised and terribly disappointed when the revenues don’t show up as forecast. They will feel that they have been cheated; that the results are unfair given their rigorous analysis and planning. But they won’t blame themselves. They will hold you responsible for the failure because you are their leader.
All of this reliability-oriented work will usually happen whether you mandate and/or encourage it or not. In the modern business world, there is an endless stream of managers who have been trained to pursue reliability and just love to do so.
However, the modern business world produces fewer validity-oriented managers, in part because business education discourages the pursuit of validity. And when all these graduates get together in a company, reliability gets nurtured, and validity suppressed. Consequently, all leaders need to encourage and embolden the validity-oriented members of their team. I would avoid going so far as to diminish the desires and work of the reliability-oriented folks, but they need less support, nurturing and encouragement than those who will help you achieve a workable balance of reliability and validity.
Achieving balance in validity and reliability is essential for the sustained prosperity of any company. I am convinced that it won’t happen without leaders playing the role of guardian of validity — and as with freedom, the price is eternal vigilance!