We keep learning the same lesson over and over again – or not. Porter told us that strategy is choosing what not to do. Choosing not to focus is choosing to be average at everything. And average does not win. Marakon’s* Neal Kissel just sent me their latest research showing yet again that “the path to superior performance is determined by management’s decisions about where to focus the firm’s strategic resources (time, people and capital).”
Pay attention to the five BRAVE questions. Answer them outside-in in order:
- Where to play? (Environment – context)
- What matters and why? (Values – purpose)
- How to win? (Attitude – strategy)
- How to connect? (Relationships – communication)
- What impact? (Behaviors – implementation)
Marakon’s latest study of 1,200 companies revealed that “60-75% of the variation in performance between companies in the same sector can be explained by high level choices about where resources should be focused.” You can download the study from their website here.
You’d think everyone would understand this by now. Study authors Kissel, Formstone, Foley and Ramos point out five reasons why more CEOs don’t act on it:
- “It’s outside of the comfort zone of senior managers whose typical path to top roles is via a track record of delivering sustained operational improvement, rather than through making better portfolio choices;
- Continuing with the status quo feels less risky than taking bold decisions on future strategic focus and portfolio shape;
- Successful strategic resource management requires hard choices about whose business to starve, or exit, in order to invest behind others, but CEOs don’t like saying no to the executives running those businesses and this often results in ‘peanut butter’ spreading;
- The annual budgeting and planning games get in the way, as the battle to win extra resources crowds out decisions on future shape and investment priorities; and
- Nobody likes missing budget, so the pressure to deliver quarterly earnings means that when push comes to shove harder strategic choices get deferred.”
With these in mind, they then go on to suggest six ways for CEOs to deal with this:
- “Understand their starting point: Build a granular view on the value created for the company and customers in the existing portfolio (e.g., by geography, sub-sector, product segment, customer).
- Develop a view of the trend line: Look at how customer needs and behaviours are changing and the implications for where value will be created in the future.
- Put in place a disciplined financial framework: Set high standards for reinvestment in the business, optimize balance sheet leverage, and be willing to raise external finance to pursue value creating opportunities.
- Optimise the use of all resources: Adopt a zero-based approach to resource allocation, use the annual processes to look at 100% of the capital and talent base. Concentrate resources on businesses where they can sustain or build valuable differences and continuously ask whether there is a higher value use for any of the resources they control.
- Actively reshape their portfolio: Use acquisitions and divestiture to accelerate the reallocation of capital and other resources to the highest value opportunities, with a strong internal finance and M&A capability to support a continuous programmatic approach.
- Invest behind intangibles: Ensure they are customer focused, innovate to remain on trend and build reputational and brand value to sustain profitable growth in the long-term.”
The difference between where to play and how to win
It’s not an either/or choice. You have to get both right. Strategy is about the creation and allocation of resources to the right place in the right way at the right time over time. Question #1, where to play goes to the right place. You must make the “high level choices about where resources should be focused.” This is the art of the general.
Then get aligned on what matters and why and work with your captains to figure out the “right way”, how to win. That’s how you deliver consistent over-performance.
* Marakon Strategic Advisory is part of Charles River Associates”.