Importance of Strategy

The inability to elevate thinking in order to set strategic direction can have devastating long-term effects on an organization. Research by The Conference Board has shown that 70 percent of public companies experiencing a revenue stall lose more than half of their market capi- talization.4 Additional research attributes the primary cause of these revenue stalls to poor decisions about strategy.5 While it’s convenient to blame an organization’s failings on external factors such as the economy, decisions about strategy account for failure a whopping 70 percent of the time.6 Following are two examples of executives citing external factors, in these cases “headwinds,” for their organizations’ failings:

We faced a number of competitive headwinds that became more pronounced in the second quarter.7

—Telecom CFO

We are saddened by this development. We were all working hard towards a different outcome, but the headwinds we have been facing for quite some time . . . have brought us to where we are now [bankruptcy] .8

—Retail store president

So, the next time you hear someone blaming the economy or headwinds for their poor performance, smile and hand them a mirror. If you’re going to take credit when things go well, then you’ll need to take accountability when things don’t go well. And that accountability begins with your strategy. As former United States Treasury Secretary Paul O’Neill said, “The great companies don’t make excuses, including excuses about how they didn’t do well because the economy was against them or prices were not good. They do well anyway.”9

When poor decisions about strategy are made and an organization goes through a revenue stall, it’s been shown that, on average, low performance continues for more than 10 years.10 Unfortunately, this prolonged period of poor performance can lead to bankruptcy. Research on 750 bankruptcies during a 25-year period showed that the number- one factor behind these bankruptcies was bad strategy.11 Contrary to popular opinion, the researchers attributed the failures to flaws in the strategies themselves, not to poor execution of the strategies. Therefore, it’s important to be skilled at crafting strategy.

Great strategy is created by great strategists. Great strategy doesn’t magically emerge from Excel spreadsheets, or elaborate PowerPoint decks. It comes from managers who can think strategically. In the Wall

Street Journal, Filippo Passerini, president of global business services and CIO at Procter & Gamble asserts:

It is becoming even more important to have the right strategies in place at the right point in time. Having the right strategies now is so important because if you happen to be wrong, you will derail within months.

In the past, to figure out you were wrong, would take a few years. Now in three to six months, you may be in grave difficulty if you don’t have the right strategies.12

While most managers believe strategy is an inherent factor in their organization’s success, several studies also document the support for this claim. One study concludes that, “strategy has a positive and significant effect on a firm’s performance. Specifically, it is found to influence both the growth and profitability of a firm.”13 Another study summarized its findings as, “strategy contributes to profitability differences between successful and unsuccessful companies.”14 While both anecdotal and empirical evidence demonstrate the importance of strategy to an organization’s success and the lack of strategy to an organization’s failure, a thoughtful, methodical, and practical approach to strategy development is not common. A survey of more than 2,000 global executives found that only 19 percent of managers said that their companies have a distinct process for developing strategy.15 For those firms that do have a process for strategy development, an alarming 67 percent of managers said that their organization is bad at developing strategy.16 Clearly, there are some real-world challenges managers face in bridging the “knowing-doing gap” when it comes to strategy. Most managers know it’s important, but few do it effectively.

 
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