How to Determine the Best Company Strategy

How to Determine the Best Company Strategy

 The leader's obligation to set the direction for the company is to have a plan in the face of uncertainty. One way CEOs try to reduce strategic uncertainty is to focus on the options with the most robust business cases. Research shows, however, that this approach yields another result: the dreaded "hockey stick" effect. What CEOs fear is the projected budget cut for next year, followed by promises of success that don't come to pass. McKinsey's research found that a more realistic approach recognizes that 10 percent of companies create 90 percent of total economic gain (profits after deducting costs of capital), and that only one in 12 companies moves from average to top performing quintile over ten years. The chances of making the leap from average to extraordinary may be long, but CEOs can greatly increase the odds of beating those opportunities by following
 these practices:

The CEO is the ultimate decision maker when it comes to setting the company's vision (where do we want to be in five, ten, or 15 years?). Good CEOs do this by taking into account their mandate and expectations (from the BOD, investors, company people, and other stakeholders), the relative strengths and goals of their company, a clear understanding of what enables the business to generate value, opportunities, and trends in the marketplace, and their personal aspirations and values. 

The best visions go one step further and reframe the reference point for success. For example, instead of a manufacturer that aspires to be number one in the industry, the CEO can expand his goal to be in the top quartile among all industries. Such reframing recognizes that companies compete for talent, capital, and influence on a stage larger than their industry. It provides key performance measures such as margins, cash flow, and organizational health in a different light, thereby cutting through biases and social dynamics that can lead to complacency. 

According to McKinsey's research, five bold strategic moves correlate best with success: reallocating resources; programmatic mergers, acquisitions and divestments; capital expenditures; increased productivity; and increased differentiation (the last three are measured relative to the firm's industry). A "bold" move means shifting at least 30 percent more than the industry median. Making one or two bold moves more than doubles the likelihood of moving from the middle quintile of economic profit to the top quintile, and making three or more bold moves makes such an increase six times more likely. Furthermore, CEOs who make this move earlier in their tenure outperform those who move later, and those who do it multiple times in their tenure avoid the usual drop in performance.

Not surprisingly, the data also show that CEOs recruited externally are more likely to move boldly and quickly than those promoted from within the organization. CEOs promoted from internal roles must explicitly ask and answer the question, "What would an outsider do?" as they determine their strategic move. Reallocation of resources is not just a bold strategic move; it is also an important driver of other strategic moves. Companies that reallocate more than 50 percent of their capital expenditures among business units over ten years create 50 percent more value than companies that reallocate more slowly. 

The benefits of this approach may seem obvious, but a third of companies reallocate only 1 percent of their capital year over year. Furthermore, McKInsey research using a database of CEOs of their partner firms, found that the top decile of high-performing CEOs were 35 percent more likely to dynamically reallocate capital than the average performer. To ensure that resources are quickly reallocated to where they will provide the most value rather than being thinly spread across the business and operations, excellent CEOs institute an ongoing (rather than annual) step-by-step process. Such a process takes a detailed view, makes comparisons using quantitative metrics, prompts when to stop funding and when to resume it, and is backed by the CEO's personal determination to continue optimizing the allocation of company resources.

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