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Why strategies fail

Why strategies fail

Thoughts on why between 60% and 90% of all formulated strategies fail.

Last month I introduced the concept of business strategy, and why I believe it is critical to organisational success. This month I thought I would offer thoughts on why between 60% and 90% of all formulated strategies fail. Analysis by Practical Strategy from around the world (Strategic Implementation Survey) and observations here in New Zealand shows that organisations and individuals are failing in their ability to implement strategy. Fierce competition, increased customer expectation, pressure on market share, new technologies and delivery channels … All are dictating change more rapidly than ever, and fewer than two-thirds of organisations are coping (Figure 1). Essentially there are six key issues that impact on strategic success; 1. Strategy is seen as a once a year event (rather than as a dynamic process) For many organisations strategy is a discrete once a year event that articulates the higher goals and aspirations of those that were involved in developing it. At the operational coalface little changes, budgets and targets get adjusted to meet the revenue and cost requirements but the organisational behaviour of running the company is the same as before the strategy was developed. Everything changes — all the time: your customers’ needs, competitors’ actions, employee loyalty, shareholder expectations, market behaviour … everything. So why on earth should organisations sit down once a year and try to predict the future? The future isn’t a year from now. The future is what your competitors do tomorrow, and what your customers read and believe in the newspapers next weekend. Strategy is only ever a hypothesis. It’s a theory: “If we do this, hopefully we’ll get that”. As new information becomes available strategy needs to be adaptable to that information. If necessary, strategy should be fine-tuned to ensure its relevance within the business environment it is designed for. To ensure the hypothesis can be implemented, strategy needs to be a holistic (that is, it does not treat strategy development as a separate activity from strategy implementation) dynamic process rather than a prescriptive (development focused) discrete event. (Figure 2) 2. Weak, poor, and non-communicated terminology Within organisations often there are numerous terms to describe components of strategy: mission, vision, objectives, policies, programmes, measures, KPIs, KRAs, outputs, outcomes, tactics, actions, and the rest. Depending on a manager’s experience (both educational and business) these terms mean different things. However, rarely in business are these critical terms clearly agreed and articulated to staff who use them. The term strategy is rarely clearly understood by those who are asked to design and implement it throughout the entire organisation. Many organisations see strategy as the overall destination of the company — in short, what the organisation wants to achieve. As mentioned, strategy is a journey (a process) with the organisation’s destination in mind. Essentially strategy should be seen as the process that supports the hypothesis of what your organisation wants to achieve (via the strategic theme and objectives) and how (via measures, targets and projects) it is going to be achieved. (Figure 3) Figure 3 offers organisations a clear terminology set for strategy and performance management within an organisation. Perspectives show the cause and effect relationship within the strategy. The cause and effect relationship explains the strategy’s hypothesis. Every organisation has challenges and opportunities resulting from cause-and-effect relationships. These relationships can best be understood by viewing them from four perspectives, which are the building blocks of any strategy. To create the outcome required (Strategic Theme), we must have access to critical information, skills and attitudes (Innovation and Growth) which, when channelled through specific processes (Processes) will deliver stakeholder value (Stakeholders) whilst achieving expected financial returns (Financial). The Themes (for example, Create the Experience then Exceed it), answer the question “What does the this strategy want to achieve?” Strategy can be defined as “the process of what the organisation wants to achieve and how the organisation is going to achieve it”. Strategy exists at all levels within the organisation — for example, corporate, business unit, operational and functional. Objectives are the longer-term desired outcomes grouped by perspectives and they define how the theme will be achieved. The strategy map shows via the theme and objectives what is to be achieved, and the cause and effect relationship that supports the strategy. Measures define whether or not the objective is being achieved — that is, the current or “now” state of the objective. The measures include targets for how well the objectives are being met. Projects are finite actions required to correct or build an objective. Projects need budgets and must be aligned to an objective to ensure its strategic relevance. If measures help define the “now” state of the objective, projects help to determine what is happening in the company to drive up the future state of the objective. Note: Those of you familiar with the concept of the Balanced Scorecard will see its influence here. I believe that the theory of cause and effect across multiple perspectives (financial, customer, process and learning and growth), as refined by Balanced Scorecard aficionados Kaplan and Norton, have defined a new era in strategic management. 3. Strategy development and implementation are separate activities In today’s business world, separating development from implementation is not only wrong — it is competitively dangerous. The business world is a dynamic and turbulent place. In years gone it was commonplace to pontificate about the company’s mission and vision while considering the macro-economic and micro-economic issues, factoring in global trends while dealing with the opportunities and threats within the industry. Once this was done, and only then, did the organisation focus on how to achieve whatever it was it had strategically agreed. In today’s business environment the what and how (development and implementation) need to go hand and hand. Do not misunderstand — strategic development is critical. However, dovetailing strategy development to an effective implementation methodology that drives it allows for faster and more robust strategies and a complete strategy process. 4. Reporting is not linked to strategy. What is the point of reporting if it is not delivering strategy? Reporting is one of the last bastions of moving from strategy as a destination to strategy as a journey. Many organisations have invested millions of dollars on reporting packages that deliver diagnostic, not strategic, reporting capability. Further, the software companies have been quick to define strategy in a way that meets their reporting capability. Sadly the amount invested in a technology package rarely correlates highly to strategic success. There is good technology out there but a lot of rhetoric as well. For management reporting to be effective it must be focused on strategy. Without effective reporting, strategies do not get the essential feedback they need to stay relevant within their environment. Further, without strong communication effective co-ordination of competing resources becomes very difficult. 5. Strategy lacks clear cascaded ownership and accountability For strategy to be truly effective it needs to become everyone’s job. This can be done only if the issues and strategies within the organisation have been cascaded to the correct levels so they can be implemented — for example, corporate, business unit, operational. When cascading strategy from higher to lower levels (and vice versa) some strategic objectives need to be modified to ensure they are put in the right context for that level in the business. By way of example: At the corporate level an objective may be to maximise EVA. This objective would be less relevant to second-tier managers, as only (usually) head office can directly influence the capital cost component of EVA. At the business unit level, the appropriate objective may be maximise operating profit. This objective reflects the business unit’s language and influence. At the operational level, “build revenue and reduce costs” may be the objectives that managers at this level in the business can influence. To ensure the higher-level objectives are implemented effectively throughout the organisation they need to be cascaded to the appropriate level, in the appropriate context. In essence, this example shows the path profitability has taken as it is cascaded down through the organisation. An example of a Level 1 objective that may not require cascading is “Enhance Government Relations”, as this may always be addressed by head office. Clear ownership and accountability of the strategic components are essential. If nobody can be held to account for results, all your efforts will have been in vain. To drive ownership and accountability, strategy should be linked to manager’s remuneration (Figure 4). An effective remuneration scheme linked to strategy (by strategy level within the organisation) greatly improves the focus and commitment of the managers tasked with the strategic delivery. 6. Many organisations lack the discipline to manage dynamic strategy In many organisations change can be a very difficult thing. Thus changing strategic management ideas and action (especially amongst the senior team) can be very difficult. Driving any successful strategy will be the processes that support it (see Holistic view, Figure 2), one of the challenges for business and in particular senior management teams, is to ensure they lead by example regarding the strategic management process that the business has commitment too. Table 1 outlines some factors to watch out for. To conclude, many organisations are failing to implement strategy. We have observed six key issues critical to strategic success. Strategy needs to be viewed as a holistic process that ensures strategy development and implementation at all levels within the organisation is one, not two, events. Clear strategic terminology, via effective reporting and communication with strong ownership and accountability, helps each strategy become the target of actions required for effective implementation. Finally, at the heart of any strategy is process; all managers need to ensure that they commit to the disciplines that drive and deliver successful strategy. This document was written by David Linstrom, managing director of Practical Strategy Consulting, david.linstrom@practicalstrategy.net, author of At Last — A How To Guide for Strategy, available from www.practicalstrategy.net.

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