Why Strategy Matters Most
Leading people is exciting and inspiring. Formulating strategy? Not so much. Cynthia Montgomery, a professor of business administration at Harvard Business School, urges CEOs to stop treating the strategic plan as a dead, dusty document and instead make it the beating heart of the enterprise. In her recent book, The Strategist: Be the Leader Your Business Needs, Montgomery imbues strategy with an existential quality: It is why companies exist. Done right, it is why companies succeed. Leigh Buchanan spoke with Montgomery about why CEOs should learn to love this misunderstood part of the job.
Exposure to a group of entrepreneurs changed the way you had long thought about strategy. Tell me about that.
For a long time, I had been teaching strategy, mostly to managers in large corporations, as a matter of frameworks and analysis. Then I started working with entrepreneurs. They talked, sometimes very emotionally, about hard decisions they had faced about whether to stay the course or try to reinvent themselves. And I realized, first of all, that the way we think about strategy has become too mechanistic. And second, I realized how responsible these people felt for their strategies because they felt responsible to their companies and the people working for them. So I thought we should shift our emphasis from the strategy to the leader responsible for that strategy--the strategist.
What is the strategist's job?
The strategist's job is to determine what the company's identity will be, why it will matter, and to whom. Just saying why you are different isn't enough if you're not different in a way that matters to a customer. Think of the distinction Peter Drucker draws between doing things right and doing the right thing. Strategy is about doing the right thing. Here is an exercise. Take a piece of paper and write down the purpose of your business. Then describe what the world is like with you and what it would be like without you, and see if there's a meaningful difference.
You've asked a lot of entrepreneurs what makes their companies different. What are some bad answers you've received?
"We're a one-stop shop." Usually the leader thinks that's more important than the customers do. So I say, OK, if what you have relative to competitors is that you've put these things together, why is that important to the customer, and how much are they willing to pay for that? Another is something like, "We're the largest independent wholesaler in the Midwest." Well, who cares? A lot of people have points of difference. But they're not points of difference that matter.
What's a good answer?
Say someone who grows pineapples can show that the number of days from the field to the store is fewer than his competitors'. Pineapples are a perishable good, so that really matters. The customer will come to him instead of the other guy. Because he's connecting the customer's needs with his offerings.
What are CEOs spending a lot of time on at the expense of strategy?
Leadership has become all about people and culture and these soft things. Yes, it's important to get buy-in, but buy-in to what, exactly? People say, "Which is more important: formulation of strategy or execution?" That's a stupid question. What's the point of having a half-baked strategy executed well?
But a lot of CEOs pin their successes on their people, not their strategies.
I hate it in these annual reports where they just say, "It's our people." That's lazy thinking. Why do those people want to work for you, and why are they more effective working for you than for somebody else? In what way are you adding value to the people? You've got to think about your company, not just your people. You've got to look at your customer and how your company is meeting that customer's needs uniquely well. Because the customer will decide whether you are successful.
If strategy is created by the entrepreneur rather than by committee, is it more likely to resemble the leader's character?
It's amazing how often that is true. You look at people like Henry Ford and Alfred Sloan, and the strategies for their companies match up with their backgrounds. A student once told me he used to know Michael O'Leary, the CEO of Ryanair. He told me how O'Leary was socially. Blunt. In-your-face. Then you look at Ryanair's strategy of having everything bare-bones. They wanted to charge people to use a bathroom. It was about reducing costs, but there was a rudeness to it as well.
You say strategies often fail because the leader didn't understand the industry. In what way?
They look at Starbucks and think they can make a lot of money selling high-end coffee. What they don't understand is the whole system behind Starbucks that enables them to do what they do, and the importance of the brand. They should be looking at different niches. Or they may see an industry that no one has ever got quite right, such as furniture delivery. And they just kind of glibly think, Well, there's something wrong with this industry, and I should be able to fix it. They don't think about all the forces that have made it so difficult. Or they're attracted to an industry because the barriers to entry are low. Everyone says storage is a great opportunity. I can't tell you the number of entrepreneurs I've worked with who have tried to get into storage. And they've failed.
What other mistakes do leaders make when formulating strategy?
A lot of companies get into strategy creep. They just keep adding technologies, adding services, adding customers they'd like to serve. The cost of breadth is often edge--you lose sight of the thing that makes you different.
If a strategy is composed of interlocking parts--customers, suppliers, pricing, human resources, etc.--can you change pieces of it without changing everything?
If you realize that this whole idea of who you are and what you're bringing to market doesn't work anymore, then you have to change everything. Look at Gucci. It had drifted way off course, and when a grandson of the founder tried to take it back to being the pinnacle of the fashion world, he failed miserably. Then they got a new leader, Domenico De Sole, who said from now on, Gucci will stand for good value, fashion forward, and good price. And he changed every single thing in the business model. He changed the stores to be edgy. He changed the customers from conservative, middle-aged women to younger women. He changed the supply chain. He put people on pay per performance--and he had to win over the unions to do it. And it worked, because he had absolute clarity about what Gucci was going to be.
The alternative is to keep the core but update it?
There are lots of changes you can make without changing your core identity. Ikea is always looking for new technologies and new ways to save. But they still do things in a very Ikea way. Students without cars would buy their stuff and had no way of getting it home, so now Ikea lets you rent a van. A higher-end furniture company would never dream of handling deliveries that way. They also have services that can assemble your furniture for you. So as competition comes in and they're expanding the market, they embellish their strategy. But the essence stays the same.
How much time should leaders spend on strategy?
Strategy is like an open folder on your desk. You should always be thinking about it. You probably have a formal process once a year where everybody gets together and talks about the strategic plan and connects it to budgeting and sets targets for people. But that's not where real strategy is made. Entrepreneurs have to think of strategy as something dynamic and fluid: What is a good idea in 2012 may be a bad idea in 2014. They should be constantly reinterpreting the company's experiences as they happen. So it's not just, Does my company make a difference? It's, Does my company make a difference today?