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The East African : February 10th 2014
42 The EastAfrican BUSINESS FEBRUARY 8-14,2014 MANAG E R If you a≥e enti≥ely satisfied with you≥ st≥ategy, chances a≥e it is not pe≥fect A ll executives know that strategy is important. But almost all also find it scary, because it forces them to confront a future they can only guess at. The natural reaction is to make the challenge less daunting by turning it into a problem that can be solved with tried and tested tools. That nearly always means spending weeks or even months preparing a comprehensive plan for how the company will invest in existing and new assets and capabilities in order to achieve a target. This is a terrible way to make strategy. If you are entirely comfortable with your strategy, there’s a strong chance it isn’t very good. You’re probably stuck in one or more of the traps I’ll discuss in this article. True strategy is about placing bets and making hard choices as follows. Comfort trap 1: Strategic planning: Strategic plans all tend to look pretty much the same. They usually have three major parts. The first is a vision or mission statement that sets out a relatively lofty goal. The second is a list of initiatives that the organisation will carry out in pursuit of the goal. The third element is the conversion of the initiatives into financials. In this way, the plan dovetails nicely with the annual budget. This exercise arguably makes for more thoughtful budgets. However, it must not be confused with strategy. Planning typically isn’t explicit about what the organisation chooses not to do and why. Its dominant logic is affordability; the plan consists of whichever initiatives fit the company’s resources. Comfort trap 2: Cost-based thinking. The focus on planning leads seamlessly to cost-based thinking. Costs lend themselves wonderfully to planning, be- come and will be able to make necessary adjustments. I have argued that planning, COMMENTARY ROGER L. MARTIN “True strategy is about placing bets and making hard choices.” cause by and large they are under the control of the company. For the vast majority of costs, the company plays the role of customer. It decides how many employees to hire, how many machines to procure, how much advertising to air and so on. Costs are comfortable because they can be planned for with relative precision. The trouble is that planning-oriented managers tend to apply familiar costside approaches to the revenue side as well, treating revenue planning as virtually identical to cost planning and as an equal component of the overall plan and budget. But when the planned revenue doesn’t show up, managers feel confused and even aggrieved. “What more could we have done?” they wonder. “We spent thousands upon thousands of hours planning.” There’s a simple reason why revenue planning doesn’t have the same desired result as cost planning. For costs, the company makes the decisions. But for revenue, customers are in charge. Comfort trap 3: Self-referential strategy frameworks. In identifying a strategy, most executives adopt one of a number of standard frameworks. Unfortunately, two of the most popular ones can lead the unwary user to design a strategy entirely around what the company can control. How can a company escape these traps? By ensuring that the strategy-making process conforms to three basic rules. Rule 1: Keep the strategy statement simple. Two choices determine success: Which specific customers to target and how to create a compelling value proposition for those customers. If a strategy is about just those two decisions, it won’t need to involve the production of long and tedious planning documents. Rule 2: Recognise that strat- egy is not about perfection. Managers must internalise that fact if they are not to be intimidated by the strategy-making process. For that to happen, boards and regulators need to reinforce rather than undermine the notion that strategy involves a bet. Rule 3: Make the logic ex- plicit. The only sure way to improve the hit rate of your strategic choices is to test the logic of your thinking: For your choices to make sense, what do you need to believe about customers, about competition, about your capabilities? If the logic is recorded and then compared with real events, managers will be able to see quickly when and how the strategy is not producing the desired out- cost management and focusing on capabilities are dangerous traps for the strategy-maker. Yet those activities are essential; no company can neglect them. For if it’s strategy that compels customers to give the company its revenue, then planning, cost control and capabilities determine whether the revenue can be obtained at a price that is profitable for the company. Human nature being what it is, though, planning and the other activities will always dominate strategy rather than serve it — unless a conscious effort is made to prevent that. How can a company escape these traps? By ensuring that the strategy-making process conforms to three basic rules. Rule 1: keep the strategy statement simple. Two choices determine success: which specific customers to target and how to create a compelling value proposition for those customers. If a strategy is about just those two decisions, it won’t need to involve the production of long and tedious planning documents. Rule 2: recognize that strategy is not about perfection. Managers must internalise that fact if they are not to be intimidated by the strategy-making process. For that to happen, boards and regulators need to reinforce rather than undermine the notion that strategy involves a bet. Rule 3: make the logic ex- plicit. The only sure way to improve the hit rate of your strategic choices is to test the logic of your thinking: For your choices to make sense, what do you need to believe about customers, about competition, about your capabilities? If the logic is recorded and then compared to real events, managers will be able to see quickly when and how the strategy is not producing the desired outcome and will be able to make necessary adjustments. Roger L. Martin is a profes- sor and the former dean at the University of Toronto’s Rotman School of Management. The ‘moneyball’ app≥oach in hi≥ing of chief executives By KNOWLEDGE@WHARTON IT WAS the lesson of the bestselling book-turned-movie, Moneyball: Don’t throw money at big-name baseball players or judge future performance by purely physical attributes. Assess them, instead, by more relevant measurements, like their on-base percentage. Wharton professor J. Scott Armstrong and Philippe Jacquart of Emlyon Business School in Écully, France, say the same principles can be applied to choosing corporate executives. In a recent paper, they challenge the popular belief that higher pay leads to selecting chief executive officers who will outperform their lowercompensated counterparts. After doing an extensive review of existing experimental research, Mr Armstrong and Mr Jacquart concluded that just the opposite is true — higher pay does not attract better talent, and can be expected to undermine performance. They suggest that a better method of choosing the right leader is to use quantifiable measures to judge candidates for the job, anonymously if possible. Their paper, “Are top executives paid enough? An evidence-based review,” was published, along with commentaries, in the NovemberDecember edition of Interfaces journal. The authors say executive search firms and corporate boards typically use “unaided expert judgment” — i.e., gut instinct — in making decisions about hiring CEOs, who in 2008 were paid 185 times more than the average worker. Those instincts, they note, are often triggered by factors unrelated to a person’s ability to do the job at hand. Their review included a 1994 experiment in which participants viewed videotaped job interviews, “Corporate boards can use a method similar to sealed bids to help select top executives.” which included some candidates who wore prostheses to appear overweight. When viewing the overweight candidates, participants made negative inferences despite no evidence that body type makes any difference in executive performance, the authors write. Mr Armstrong says companies have more precise methods at their disposal, but are so entrenched in traditional, subjective recruitment methods that they are reluctant to experiment with new ideas. The biggest shortcoming of executive recruitment, the researchers say, is the failure to apply “Meehl’s Rule:” Never meet a job candidate until you decide to make them an offer. The late Paul E. Meehl, a psychologist from the University of Minnesota, advised using relevant, quantifiable factors to judge candidates. Instead, height, body build, gender, accent and looks often get considered, the authors note. The authors suggest that corporate boards can use a method similar to sealed bids to help select top executives. Instead of coming in for a traditional face-toface interview, candidates would be allowed to submit sealed bids about what they can do for the organisation, what skills they possess, how much money they require, how long a contract they need and whether they would require a pay-off if asked to resign.
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