Why Strategy Matters and How it Influences Culture

Does strategy matter?  

If you do not think that it matters then you are in good company.  There are many who question the value of strategy. And I see many companies where there is no formal strategy; the informal strategy is to keep doing what has worked in the past or to chase what is fashionable today.

Strategy v Execution

When it comes to questioning strategy there are two schools that are particularly prominent.  First, there is the school of execution. The execution school which says that strategy is waste of time. Why? Because strategies are generic-obvious and what matters is execution. The ability to turn strategy into the daily live of the organisation. Clearly, there is some truth in this school. Strategy which cannot be operationalised is waste of time-resource.

Strategy v Culture

Then there is the school that says “culture eats strategy for breakfast”.  Yes, culture is powerful. Culture determines what gets done and how it gets done.  A strategy that does not take into account the fit with culture will meet lots of resistance.  Getting people to enact such a strategy will be like fighting a guerilla war with an enemy who is patient and cunning.  What is forgotten is that culture can be and is influenced-shaped-shifted through strategy.

To see strategy and culture as being separate and distinct is a gross misunderstanding.  This misunderstanding arises due to our reductionist-analytical thinking.  Strategy and culture are interlinked. Put differently, if you change strategy, you will take actions that will influence the culture. And if you change culture it will eventually influence the strategy.

HBOS: strategy shapes culture and leads to downfall?

If you still have doubts over the importance/significance of strategy then I say let’s consider the case of HBOS bank and the latest report on how this bank was brought to its knees.  The HBOS bank was rescued, after significant arm twisting and sweeteners by the UK Govt, in 2008 by Lloyds bank. Why did a bank that was valued at £30bn when it was created in 2001 need to be rescued?  Because it racked up £47bn of losses on bad loans.

Who were the architects of the HBOS downfall? 

Three Tops have been singled out in the report published by the parliamentary commission:

The primary responsibility for the downfall of HBOS should rest with the Sir James Crosby, architect of the strategy that set the course for disaster, with Andy Hornby, who proved unable or unwilling to change course, and Lord Stevenson, who presided over the bank’s board from it’s birth to its death.

How was strategy responsible for the downfall of HBOS?

Here is what the parliamentary report says:

The strategy set by the Board from the creation of the new Group sowed the seeds of its destruction. HBOS set a strategy for aggressive, asset-led growth across divisions over a sustained period. This involved accepting more risk across all divisions of the Group. Although many of the strengths of the two brands within HBOS largely persisted at branch level, the strategy created a new culture in the higher echelons of the bank. This culture was brash, underpinned by a belief that the growing market share was due to a special set of skills which HBOS possessed and which its competitors lacked. The effects of the culture were all the more corrosive when coupled with a lack of corporate self-knowledge at the top of the organisation, enabling the bank’s leaders to persist in the belief, in some cases to this day, that HBOS was a conservative institution when in fact it was the very opposite. :

The growth of HBOS’s Corporate Division was not the result of superior performance but of its high-risk strategy. The nature of its activities did not alter after the creation of HBOS, although the pace of growth accelerated and the scale significantly increased. When the Division later incurred huge losses, these too were due to the particular nature of its business and resulted directly from its high-risk strategy. Its losses were on a larger proportionate scale than those incurred by any other major UK bank. This was caused specifically by its distinctive loan book, including concentration in commercial real estate and leveraged loans, high exposure to single names, a high proportion of non-investment grade or unrated credit and holdings of equity and junior debt instruments. The loan book was therefore significantly more exposed to the domestic downturn than that of any other large UK corporate banking businesses.

The acceleration in loan growth, in part caused by the Division’s neglect of the storm signals of 2007 and 2008, is likely to have exacerbated the scale of the subsequent losses. However, even without this acceleration, the Division would still have incurred disastrous losses. The roots of all these mistakes can be traced to a culture of perilously high risk lending. The picture that emerges is of a corporate bank that found it hard to say ‘no’.

In view of the reckless lending policies pursued by HBOS Corporate Division, we are extremely disappointed by the attempts of the most senior leaders of HBOS at the time to attribute the scale of the consequent losses principally, or in significant measure, to the temporary closure of wholesale markets. The lending approach of the Corporate Division would have been bad lending in any market. The crisis in financial markets was merely the catalyst to expose it. Losses in the Corporate Division did not prove temporary. Indeed, we estimate that the HBOS Corporate loan book has continued to incur significant impairments in every year since 2008, demonstrating that the losses were the result of incompetent lending and not caused solely by the events of 2008. Furthermore, HBOS’s Corporate Division was significantly more exposed than other banks to the downturn in the economy due to the nature of its loan book.

Strategy and CX: what are the five questions that you need to answer?

Recently, I came across this piece – Don’t Let Strategy Become Planning – from Roger Martin.  I recommend reading it.  If you do not wish to make the time then this post is for you.

Strategy is not planning, it is an integrated set of choices

Strategy is not planning – it is an integrated set of choices that collectively position the firm in its industry so as to create sustainable advantage relative to competition and deliver superior financial returns.  Obviously you can’t execute a strategy without initiatives, investments, and budgeting.  But what you need to get managers focused on before you start on these things is the strategy that will make these initiatives coherent.

Strategy is singular: there is only one strategy for a given business

..strategy is a singular thing; there is one strategy for a given business – not a set of strategies.  It is one integrated set of choices: what is our winning aspiration; where will we play; how will we win; what capabilities need to be in place; and what management systems must be instituted?

Strategy by Roger Martin

What has this to do with being customer-centric or customer experience?

If we stand in this framework, then it occurs to me that the customer-centric orientation as put forth by Don Peppers and/or customer experience are relevant if and only if the answer to the question “How will we win?” is “through being customer-centric and/or delivering a great customer experience”.

Looking at what is so, it occurs to me that the majority of companies have a business strategy whose answer to the question “How will we win?” is “not by being customer-centric nor by crafting/delivering a great customer experience.”

What do you think?

What is the Kernel of Strategy? (Part IV – Coherent Action)

This post is related to and completes the conversation started in the following posts:

Why not stop at Guiding Policy?

“Without action, the world would still be an idea.”  General Georges F. Doriot

Richard Rumelt (Good Strategy Bad Strategy) rightly points out that many equate strategy with guiding policy.  And thus the work of strategy and the strategist stops there.  He says that this is a mistake.  Why?  Because strategy is about action not ideas/concepts/theories.  Only action has an impact on the situation at hand: influences, shapes, alters that which is.  Here is what Rumelt says:

“Strategy is about action, about doing something.  The kernel of strategy must contain action.  It does not need to point to all the actions that will be taken as events unfold, but there must be enough clarity about action to bring the concepts down to earth. “

Whilst Rumelt does not mention this, I can see another advantage of moving beyond guiding policy and grappling with action.  Grappling with action allows me to grapple with feasibility and thus answer the question “Is this a bridge too far?” And thus I find that I am that much more likely to come up with a strategy that occurs as ‘doable’ as opposed to one that shows up us ‘pie in the sky’ for the people who have to enact the strategy.  A strategy that is not enacted is worthless.  A strategy that is badly enacted is not just worthless it is costly in terms of time, effort, money and depletes faith in management and strategy.

Coherent Action: action that delivers punch

Will any kind of action do?  No, serious thought is required.  Why?  Because the whole can be so much more powerful, pack more punch, than the sum of the parts.  Here is what Rumelt says:

“The actions within the kernel of strategy should be coherent.  That is the resource deployments, policies and maneuvers that are undertaken should be consistent and coordinated.  The coordination of action provides the basic source of leverage or advantage available in strategy……… The idea that coordination, by itself, can be a source of advantage is a very deep principle.

Just in case this is not clear Rumelt spells it out more bluntly:

“To have punch, actions should coordinate and build upon one another, focusing organisational energy..”

When Rumelt speaks coordination what is he referring to?  He is not talking about the commonly accepted way of thinking about coördination:  “continuing mutual adjustments among agents”.  So what is he talking about, pointing at?

“Strategic coordination, or coherence, is not ad hoc mutual adjustment.  It is coherence imposed on a system by policy and design.  More specifically, design is the engineering fit among parts, specifying how actions and resources will be combined.”

Why is coherence so powerful

Whilst this sounds easy, I can say from experience that this is one of the hardest feats to accomplish.  Whilst the talk suggest that we dealing with one/unity (one team, one organisation, one society..) the reality is that we are permeated by decentralisation/fragmentation/silos.  What does Rumelt have to say on this?

“Strategy is visible as coordinated action imposed on a system.  When I say strategy is “imposed”, I mean just that.  It is an exercise in centralised power, used to overcome the natural workings of a system.  This coordination is unnatural in the sense that it would not occur without the hand of strategy.”

Hold on, is Rumelt questioning the free market and decentralisation?  Here is what he says on the matter:

“…decentralised decision making cannot do everything. In particular, it may fail when either the costs or benefits of actions are not borne by the decentralised actors.  The split between costs and benefits may occur across organisational units or between the present and the future.  And decentralised coordination is difficult when benefits accrue only if decisions are properly coordinated.”

If you are working on customer based strategy or customer experience you should be at the edge of your seat.   Isn’t one of the key challenges that focussing on the customer does mean taking a hit now (giving up bad profits) in order to win in the longer term through generating ‘good profits’.  Isn’t another challenge that the customer orientation requires diverting funds and status from the marketing & sales functions towards the folks that come up with products and the Customer Services function?   And how is that going to happen if we leave the product guys to pursue their agenda, the marketing girls to make the numbers that matter to marketing, the sales guys to do whatever it takes to make the numbers and collect commission and we are busy swapping human beings for technology to cut customer service costs?  I do hope that you get what I am getting at.

And finally I leave you with some more wise words

“.. strategy is primarily about deciding what is truly important and focusing resources and action on that objective.  It is a hard discipline because focusing on one thing slights another….. In many situations, the main impediment to action is the forlorn hope that certain painful choices or actions can be avoided – that the long list of hoped-for “priorities” can all be achieved.  It is the handcraft of strategy to decide which priority shall take precedence.  Only then can action be taken.  And, interestingly, there is no greater tool for sharpening strategic ideas than the necessity to act.” 

As your read these words I draw your attention to the failure of the customer-centric orientation to take root and flower. And the failure of governments to do what needs to be done when it comes to banking, financial services, deficits and the structure of western economies…..

What is the Kernal of a Strategy? (Part III, Guiding Policy)

This post is related to and carries on the conversation started in the following posts:

Good Strategy and Bad Strategy: What is the kernel of a strategy? (Part I)

Good Strategy Bad Strategy: What is the Kernel of a Strategy (Part II – Diagnosis)

What is a guiding policy?

Let’s start with what it is not.  A guiding policy is not concerned with ambition – the desired outcome, the end state, what you wish to accomplish. Arguably it is easy to create a picture of the kind of customer experience you want your organisation to generate say in 12 months.  Figuring out which course of action is most likely to get you there is a very different exercise and requires a different type of thinking.   Here is how Rumelt puts it in his book Good Strategy/Bad Strategy:

“The guiding policy outlines an overall approach for overcoming the obstacles highlighted by the diagnosis.  It is “guiding” because it channels action in certain directions without defining exactly what shall be done.…Like the guard rails on a highway, the guiding policy directs and constrains action without fully defining its content.”

I once consulted with a financial services company that had aggressive revenue and profit growth targets. Yet its growth – customer base, revenues, profits – had stagnated after a great start.   How to generate that growth?  Which guiding policy to pursue?  The options on the table included: attracting new customers for existing products; coming up with more products e.g. pension plans; moving into new geographical markets; selling more financial products to existing customer base….

The diagnosis showed that on the whole each existing customer held only one financial product.  The guiding policy chosen was that of x-selling the existing portfolio of products to the existing customer base.  Why?  Because: the company had a sizeable customer base; the customers were satisfied and loyal; and research suggested that many of these customers were not aware of the full range of products that the company offered.

A good policy seeks to create/exploit advantage

This brings me to issue of advantage – how a good guiding policy seeks to create/exploit advantage.  This is how Rumelt puts it:

“A good guiding policy tackles the obstacles identified in the diagnosis by creating and drawing upon sources of advantage.  Indeed, the heart of the matter in strategy is usually advantage.  Just as a lever uses mechanical advantage to multiply force, strategic advantage multiplies the effectiveness of resources  and/or actions.”

What guiding policy did Howard Schultz put in place to turnaround Starbucks when growth had stalled and the Starbucks brand had lost its former magic?  The first part of his guiding policy, as I understand it, was to stop the bleeding: to close stores that were unprofitable and unlikely to be profitable.  The second part of his guiding policy (once the first part had been executed) was to focus on getting back to the kind of customer experience that Starbucks generated and to be the ‘third place’ again.

Why did he go down this route?  Because many of the people in Starbucks had noticed how the original passion for coffee, the customer, the customer experience had gone out of Starbucks and were up for, even crying out for, bringing it back into Starbucks so that it could be the soul of the brand once more.  Put differently, Schultz exploited the passion of his people for the Starbucks and what it stood; when you are instigating change there is no advantage like tapping into the hearts of the people in your organisation.

A good guiding policy itself can be a source of advantage

How?  Let’s take a look at Gerstner and his turnaround of IBM.  Gerstner came up with the guiding policy of providing customer solutions instead of selling products.  This made great sense because it met customer needs and played to IBM strengths – its breadth and depth of expertise in almost all areas of IT.  Yet the policy itself “provide customer solutions” created advantage because it replaced ambiguity/uncertainty with clarity about what to do and how to do it.  It was the stimulus that got IBM going on the journey of coordinating and concentrating IBM’s vast resources on a specific challenge “provide customer solutions”.

I want to end this post with the words of Richard Rumelt:

  • “A guiding policy creates advantage by anticipating the actions and reactions of others,
  • by reducing the complexity and ambiguity in the situation,
  • by exploiting the leverage inherent in concentrating effort on a pivotal or decisive aspect of the situation, and
  • by creating policies and actions that are coherent, each building on the other rather than canceling one another out.”

If you have any interest in strategy then I recommend buying Good Strategy Bad Strategy.  Alternatively you might want to watch this speech/presentation:

Good Strategy Bad Strategy: What is the Kernel of a Strategy (Part II – Diagnosis)

In this post I continue the conversation I started in the last post on the kernel of a ‘good strategy’.  Why?  Because if you are talking about a ‘customer strategy’, a ‘customer experience strategy’, or any other strategy you should know what you are talking about when you talk ‘strategy’.  And because you should know the difference between what passes for strategy (‘bad strategy’) and real strategy (‘good strategy’).

As the following diagram shows the kernel is composed of three strands: Diagnosis; Guiding Policy; and a Set of Coherent Actions.  In this post I want to explore the first strand – Diagnosis – and stress its criticality to generating a ‘good strategy’.

Diagnosis is concerned with the question “What is going on here?”

In my consulting work(as a strategist) a great deal of my time is spent in the following: creating a ‘map of the territory’; and coming up with a diagnosis.   Being an outsider I have to ‘create a map of the territory’ as it is essential to being able to come up with a diagnosis.  So I conduct high level research on the company (history, key players, organisational structure, products, markets, distribution channels, financial performance..), its industry, its competitors etc.

Once I have an adequate (usually high level) ‘map of the territory’ to orient myself I concern myself with the task of Diagnosis.  The diagnosis is always linked to the ‘strategic issue’ that requires a strategy. What might that strategic issue be?  Examples include: Why are we signing up less and less customers through our website?  Why is it that so many customers are leaving us and going to our competitors?  Why is it that our sales folks are so much less effective in selling to our business customers?  Or why is it that there is crisis around the Euro?

Lets make this discussion real through a personal example.  During August holidays my young daughter told us (her parents) that her left wrist was hurting.  It continued to hurt for several days and we could not figure out why it was hurting.  So my wife took her to a doctor.  The doctor asked various questions: when did it start; what were you doing, where does it hurt, what kinds of actions cause it to hurt…. And then he examined her arm: pressing here, pressing there, and observing her reactions.  At the end of this his answer to the question “What is going on here?” was that my daughter was most likely to have as a small fracture in her wrist.  This was later confirmed by the x-rays.

Diagnosis: insight, genuine insight, is of the utmost significance

According to Richard Rumelt in Good Strategy/Bad Strategy:

“An especially insightful diagnosis can transform one’s view of the situation, bringing a radically different perspective to bear.  When a diagnosis classifies the situation as a certain type, it opens access to knowledge about how analogous situations were handled in the past…”

What does an insightful diagnosis look like?  Allow me to share a personal example, again.  My eldest was being disruptive and obnoxious at home but only at home. So I was grappling with the question “What is going on here?”.  I came up with various answers: he eats too much junk food and that is affecting his mood/behaviour; he is bored; we are not being strong/consistent enough in enforcing discipline ……  When I discussed this with my wife she replied: “What is missing is a relationship between you and him!”  It immediately struck me that this was a game changing diagnosis: it opened up avenues that had simply not been present.  And it struck me that it was an accurate and insightful diagnosis: most poor/disruptive behaviour is a result of poor relationships. As a result I ended up with a completely different guiding policy and this triggered a radically different set of coherent actions.

Do you want examples of especially insightful diagnosis that transformed a view of the situation at hand?  You will find them (Apple, IBM) towards/at the end of this post.

Diagnosis: what constitutes a good diagnosis?

It is not always possible to come up with an insightful, game changing, diagnosis.  Sometimes we just have to settle for a good diagnosis. What constitutes a good diagnosis?  A good diagnosis according to Rumelt:

  • links facts into a pattern and at a minimum names/classifies the situation into a certain type;
  • replaces the overwhelming complexity of reality with a simpler story, a story that calls attention to its crucial aspects and thus enables/encourages more attention to be paid to some issues/feature and less to others;
  • “does more than explain a situation, it also defines a domain of action” that is to say it is actionable, it identifies one or more levers that can be pulled; and
  • is explicit and thus permits an independent person to evaluate the strategy (diagnosis, guiding policy, set of coherent actions).

Diagnosis: both a hypothesis and a decision of utmost significance

The real world is complex there are so many actors/variables that interact and are interdependent.  Put differently, challenges that really matter and which face companies/organisations/governments are ill-structured.  That is to say it is not obvious how to define the problem (the situation at hand) nor is there an obvious/sound list of guiding policies or actions.  And the linkage between actions and outcomes are not clear.  This means any diagnosis and every diagnosis in an ill-structured situation is an educated guess.

It also means the a diagnosis is a decision – a decision of substantial importance. Why?  Because the diagnosis shapes the future: the guiding policy, the set of coherent actions, and the outcomes that result.   As Rumelt says:

“In business, most deep strategic changes are brought about by a change in diagnosis – a change in the definition of a company’s situation.”

Are you wondering what he is talking about and pointing out?  Then I draw your attention to:

  • Steve Jobs who changed the diagnosis and thus did the opposite of what the experts advised – sell Apple, license the software – when he took the helm at the almost bankrupt Apple;
  • Lou Gerstner who changed the diagnosed and how he did the opposite of what experts were advising – break IBM up into seperate/distinct businesses; and
  • Stepen Eloph who has shifted Nokia from independence to being reliant on Microsoft and its operating software for smartphones.

I will continue the conversation in the next post and explore the second element within the kernel of a strategy: the Guiding Policy.