Print this page... More Business Risk than Execution
Strategy Making vs. Strategy Execution
Strategy formation, the making of strategy, is a different animal than strategy execution. Strategy execution is achievable with analytical techniques, aligned resources, empowered people, and discipline. Strategy making, on the other hand, requires a bit of managed chaos in the form of divergent thinking and synthesis in place of analysis. Some of strategy formation is deliberate, more is emergent.
Strategy Formation -- The Greatest Business Risk
The contention made here that despite all of the attention given strategy execution risks, failures, and need for improvement; the risk of a poorly made strategy is greater than strategy execution risk. Strategy execution has gotten tremendous attention as being the key to business success. When businesses have problems, they are often blamed on execution. This lets the business leaders off too easy. More often than not, ineffective strategy is the root cause of the eventual failure of the business to produce a competitive advantage.
Value Loss Due to Poor Strategy Formation
Poor strategy has led to massive losses in value. AT&T's repeated strategic errors led to its demise. GM's decades of strategic mistakes resulted in a market capitalization of $12 billion vs. Toyota's $209 billion as of early 2006, even with Toyota's smaller revenues. Motorola failed to understand their industry trends and lost 75% of their mobile phone market with the shift from analog to digital. Motorola also failed to react to industry trends which negated the value for its Iridium satellite-based phone as they invested nearly $5 billion over its long implementation. Xerox repeatedly failed to innovate with its many inventions, including much of what eventually became the Macintosh computer. Polaroid did not adjust to digital photography. And the list goes on and on.
Most Value Lost Is Due to Poor Strategy Formation
According to a Booz Allen Hamilton study of market capitalizations from 1998 to 2004, greater losses of shareholder value are due to poor strategy than poor execution. In a study of value lost in 1,200 firms with market capitalizations over $1 billion, 60% of value lost was due to poor strategy, 27% due to operational reasons, and 13% due to compliance issues. Sound strategy, even with poor execution, has the potential for the execution to improve and produce outsize returns. A poor strategy, even with excellent execution, has no chance of success.
Only One in Ten Businesses Sustain an Advantage for 10 Years
Bain & Company conducted a study of business performance to see what percentage actually sustained profitable growth over just ten years. The results of this study are in Chris Zook's book, Profit from the Core. The study was conducted for the period from 1988 to 1998. The study's objective was to see how many companies create economic value in the long-term. Using the objective of achieving 5.5% real growth in earnings and revenues while earning at least one's cost of capital for over ten years was the first screen used. One in eight companies, 13%, achieved sustainable and profitable growth over a decade that ranks as one of the best for the world economy. The target of 5.5% is very modest. Bain's survey of strategic plans found that two-thirds of them targeted 8% real growth. At that level, the sustained value creators dropped to 9%, less than one in ten companies.
Strategy Formation Skills Deficit
The skills to create truly innovative strategy are not prevalent in business organizations. In fact, the notion of broad participation, cognitive diversity, divergent thinking, and free flowing idea generation can be both foreign and fear-inducing to organization leaders. There is a concern this type of activity opens the door to potentially uncontrollable behavior and expectations. It is like letting the genie out of the bottle. They are not sure what will come out, and if they don't like what does come out, they are not sure they can get it back in.
Strategy Formation, Hand-in-Hand With Innovation...
The BAi framework provides successful methods and knowledge of how to innovate and form competitive strategy. Knitting together these techniques into one comprehensive strategic management framework is an essential element of BAi's unique value proposition.
