Strategy & Time
I get frequently asked questions about strategy and time. When and how often should you do strategy? How long should strategy last? So, I thought it would make sense to do my 9th Playing to Win/Practitioner Insights piece on Strategy and Time. (Links for the rest of the PTW/PI series can be found here.)
When NOT TO DO Strategy
The generally accepted view is that strategic planning should be on an annual cycle. Hence, the dominant practice is to perform a strategy exercise as the front-end to the annual budgeting process. I understand the sentiment and the practice. It is true that a company cannot budget intelligently without a strategy. Strategy should drive investment of both expense and capital dollars, which should both be aimed at achieving the target value equation for the targeted set of customers.
But there are two logical weaknesses in this budget-driven argument for strategy timing.
First, you don’t actually have to run some form of a strategy exercise to prepare for the budget. As I have argued earlier in this series, strategy is what you do, not what you say. This means that every company has a strategy, regardless of whether it ever ran an exercise that we would describe as strategic planning. Revealed by its actions, every company sells to some customers and not others, has a way of competing for those customers, has invested in a certain set of capabilities, and has in place a certain group of management systems. All it needs to do is reverse-engineer its current strategy-in-use to have the starting point for its budgeting process. It doesn’t have to engage in a new strategic planning exercise as a prerequisite to budgeting.
Second, in organizing strategy to feed the budgeting process, recognize that the importance of budgeting — revenue budgeting in particular — is overrated. Every year, countless millions of person-hours a year are spent revenue budgeting. This is because we tend to believe that revenue budgeting is important because if you budget for revenue, it is more likely to show up. It is only more likely to show up in destructive ways. Customers decide what revenues to send to the company and whether they do so or not is a function of the quality of the company’s strategy. Strategy is the only thing that compels customers to send their sales dollars. If the strategy doesn’t produce a positive value equation for a given set of customers, those customers won’t send the company their sales dollars — and they certainly couldn’t care less whether they were assumed in your revenue budget.
However, there is another way to get customers to send money when they aren’t inclined to send as much as the budget calls for. It is to sacrifice the future for the present. For example, the company can run a sale/price promotion that damages the brand and trains customers to wait for the next sale before buying again. Or, if the company sells through a distribution channel, the company can stuff the distribution channel by convincing it to load up on its inventory in excess of its needs before the end of the budget period. That gets current revenue up helping to achieve this year’s revenue budget but hurts the relationship with the distribution channel and makes it harder still to achieve next year’s revenue budget, requiring still more desperate revenue-seeking measures.
The best thing for a company to do is to invest as its strategy dictates, specify the amount of revenue that would result if the strategy is to be successful — and then manage accordingly and watch. That would save millions of person hours a year currently wasted in revenue forecasting/budgeting and reduce the damage to future health of companies.
Because of these two considerations, I view that doing a new strategy every year as the front-end to budgeting is of limited utility. Is it a terrible thing? No. It is just of limited utility
When TO DO Strategy
Much more productive is to adhere to the principle that when a feature ceases to be true that has to be true for your strategy to work as intended, is the time to rethink strategy — without hesitation. Recall from my previous post in this series, strategy is a problem-solving tool. The archetypal problem in strategy is to have an aspiration for your strategy that requires a set of features to be true, but one or more of those features is no longer true. That will guarantee the emergence of a gap between your aspirations and the outcomes you achieve — soon if not already. That is precisely the time to get to work, not at the time of the next planning cycle.
It is for this reason that I advocate developing strategy by addressing the most important question in strategy: what would have to be true (WWHTBT)? A team working on strategy should develop a range of possibilities that if successful would make the gap between aspirations and outcomes go away and then reverse-engineer each possibility to determine the WWHTBT for each to be the best strategy to pursue. This is the template I use to reverse-engineer a strategy possibility.
Eventually you choose as your strategy the possibility that can best eliminate the gap between your aspiration and the outcomes you are currently achieving and for which the WWHTBT is either true now or you are confident can be made true.
The bonus of doing this WWHTBT work is that you then have the WWHTBT for the chosen strategy. Every morning, you should arrive at your desk, pull out the WWHTBT for your strategy and ask: Is our WWHTBT still true? If it is true, then you can comfortably get back to whatever is on your agenda for the day. If not, then you should start retooling your strategy that very instant. It doesn’t matter what time of year it is. It doesn’t matter how far away budget development is. Nothing else in the business matters as much. The canary in the coal mine just keeled over. The problems may not have shown up yet in the financials. But they will if WWHTBT is no longer true. That is when to do strategy.
How Long a Strategy Should Last
In addition to ‘when,’ people ask me ‘how long?’ What should be the time horizon of a strategy? They tend to want a very specific answer. Budgets are typically for one year. Should strategies be for three years or five years or what? The answer is: it depends. Of course, the longer a successful winning strategy continues its winning ways, the more valuable it will be, though even great strategies need to be tweaked periodically to keep winning. But how long does a strategy have to be a winning one for it to be a successful strategy.
That depends on the time frame for which your capital investments must be in place to earn a total life cycle return that is above the relevant cost of capital. Some businesses require little or no capital investment because their cost structure is predominantly expenses. In the modern business world, this is the case for many online businesses that bootstrap themselves and use SAAS providers, leased space, etc. to minimize investment capital. At the other end of the spectrum a business such as mining has to make huge long term capital investments to develop a greenfield mine.
For the online startup, the advantage doesn’t have to last very long — perhaps only several of years — for it to earn a return on its investment that is above the cost of capital. For the mining company, the competitive advantage that its new mine seeks to provide it will probably have to last more than 25 years, perhaps even 50 years, for its strategy to have been considered successful. This, by the way, might make it seem as though the online business is much more favorable because the advantages don’t need to be as long-lived. Not so. It is a pick-your-poison situation. When little investment is required, there are endless entrants who are willing to throw some spaghetti against the wall in hopes that, for instance, their spaghetti — in the case of online gaming — will be the next Angry Birds or Candy Crush or Fortnite. That is one reason why strategies in that domain come and go more quickly. In developing greenfield mines, the investment magnitude and the patience required are daunting. But that means that most will be daunted and not try. But those who do try know that their advantage must be maintained for a generation. That is why new greenfield mines tend to only to be built if they can achieve a cost position at the bottom of the cost curve so as to have a robust position across 25–50 years of market fluctuations and competitive activity.
The dominance of the current model of annual strategic plans means that you will probably be in a situation that requires you to participate in an annual strategic planning exercise at a predetermined time of year. That timing is a bad idea and to the extent you have control, don’t do it. Especially in diversified companies, strategy development should be going on in various parts of the company on a continuous basis because the various businesses will experience problems at their own unique times.
Even if you forced to participate in the annual ritual, you should spend a minute every morning to pull out your WWHTBT and ask yourself to what extent it still holds true. If it doesn’t, start reviewing and revising your strategy then and there — regardless of what any schedule says. You will have the best chance of rejuvenating your strategy before its warts become evident. Remember, your WWHTBT is your canary in the coal mine.
And when you are developing your strategy, assess it on the basis of whether it delivers a competitive advantage that has a sufficiently high probability of lasting long enough to justify the investment of the capital that is required to carry it out. That required length will depend on the kind of investments you will need to make in your specific business.
If you follow these ‘when’ and ‘how long’ principles, you will have created harmony between strategy and time!