Five secrets to success in business strategy

Citation

Jackson, S.E. (2012), "Five secrets to success in business strategy", Journal of Business Strategy, Vol. 33 No. 2. https://doi.org/10.1108/jbs.2012.28833baa.003

Five secrets to success in business strategy

Article Type: Reaching for value From: Journal of Business Strategy, Volume 33, Issue 2

Stuart E. JacksonPresident of L.E.K. Consulting LLC, Chicago, Illinois, USA.

Purpose – The author aims to sum up his 27 years’ experience as a consultant in business strategy with five pieces of advice that can help uncover new sources of value. Simply stated, these involve: how to be aggressive in seeking out new ideas and sources of inspiration; using forecasting techniques that go beyond simple trend analysis and look future inflection points; carefully separating short-term operational issues from long-term strategic considerations when evaluating company performance; evaluating market timing as well as opportunity attractiveness when evaluating transactions; distilling recommendations into an easy-to-follow story.Design/methodology/approach – In this article, the author discusses some of the common mistakes made by those with responsibility for business strategy and how these can be avoided. He cites several case examples of how these lessons can be applied to real-life business situations.Findings – The key message proposed by the author is that there are few simple considerations that those with responsibilities for business strategy should always keep in mind to help maximize opportunities for long-term value creation.Originality/value – This article sheds light on techniques for developing successful business strategy learned from the author’s long personal experience. These techniques are summed up in five simple messages.

Keywords: Forecasting, Timing, Strategy, Analogs, Communication, Valuation

This will be my last column in this journal as I take on a new role as President of L.E.K. Consulting LLC, starting in January. By way of farewell, I thought I would use this last note to try to answer the most the mostly commonly asked question of new recruits and young professionals in the field: “what does it take to be successful in business strategy?”

My first answer is the same as I would give to someone in any career: find an area that you love working in and learning about. As anyone who knows me will confirm, I think I have a fantastic job. I work on some of the toughest and most interesting business problems. And I get to do it with really smart colleagues and for clients who often feel more like old friends. I firmly believe that if you cannot truly enjoy your work, it is hard to succeed.

Still, if pressed further, there are some pieces of advice I would offer to anyone who has responsibility for business strategy, whether as a business executive, a consultant or an academic.

1 Steal ideas from everywhere

The great thing about business strategy is that it is hard to keep it a secret. In almost every case, the key decisions companies make – about which businesses to grow or divest, what products to offer, which channels to sell through, and how to position themselves to customers – are all there for others to see. With a bit of digging, it is also possible to get a good idea about which of these strategies seem to be delivering good results. The biggest mistake companies make is trying to develop their strategy in a vacuum. Look at what competitors are doing and learn from their mistakes and successes. Find out about the cool new things companies are doing outside your industry, and think about whether they can be made to work in your business situation. Despite the weight of current adulation, Apple Corporation does not have all the answers. Think broadly and look for businesses that face similar challenges to the ones you are trying to solve.

It has been said that the greatest competitive advantage a company can have is being able to learn and adapt faster than the competition. Anyone with responsibility for business strategy should be doing their part to help companies get better along this critical dimension.

2 Do not extrapolate

The Encarta dictionary defines extrapolate as “to estimate a value that falls outside a range of known values by, e.g. by extending a curve on a graph” – in other words, a fancy term for putting a ruler on a page and drawing a straight line. In the worst case, it is synonymous with “not doing your job.” The numbers for US home construction for the years 2003-2005 were 1.5 million, 1.6 million, and 1.7 million respectively. At the time, most forecasters were predicting continued healthy growth in the housing market. Using the “ruler on the page” approach, a reasonable estimate for 2010 would have been 2.2 million. The actual number? Something like 400,000. Was this predictable? Well, the US needs to replace about 600,000 homes a year because of age and dilapidation. Add another 1 million new households per year because of population growth, assume 60 percent of these are owned homes (as opposed to apartments) and you get underlying US demand for new homes of around 1.2 million per year. The only way to get long term demand above this level is to shift more and more households from rental units to single-family homes: something that is unsustainable without income growth, despite the best efforts of purveyors of exotic mortgages. So now we are in period when we need to burn through the excess inventory accumulated in the previous decade. Extrapolation would not have pointed to that conclusion.

As business strategists, an important part of our job is to try to predict the future. Clearly, there are all sorts of challenges to doing so accurately, but that does not mean you should satisfy yourself with the “ruler on page” approach, even if that is exactly what 90 percent of other forecasters are doing. If you look at the fundamental drivers and are prepared to defy conventional wisdom, you can find great opportunities to create value (and avoid spectacular losses).

3 Worry about the building, not the paintwork

If you are considering buying real estate, the three things an experienced real estate agent will tell you to worry about are location, location, location. Maybe you go a bit further and look at the appeal of the building’s layout and systems. The last thing you worry about is the paintwork and finishes for the simple reason that these are the easiest things to change.

The same thinking can be applied to businesses. Some attributes are relatively easy to adjust – staff numbers, pricing and service levels, for example – while other attributes will take much longer to change (think brand reputation, intellectual property, customer relationships, and market shares). Any deterioration in operating performance could be the result of short-term operating issues, or of more fundamental strategic problems that will be harder to turn around. Similarly, recent improvements could be the result of short-term fixes to “dress the company up for sale.” Just like an experienced real estate investor, a smart business executive will look behind the most recent reported figures to understand a company’s underlying strategic positioning.

4 Think like a capitalist

Most corporate executives are terrified of failure. Failure messes up careers, and is awkward to explain to shareholders. So when most business executives consider acquisition opportunities, they look for “safe” investments in businesses that are highly acclaimed by analysts and observers. Unfortunately, the point in time when there is broad agreement about how great a company is doing often coincides with the peak of its valuation. The same analysts that talked up the target company will often applaud the acquisition initially – how could they not? But once the honeymoon period is over, the acquiring company is often left with a business that has very high expectations, little upside, and a lot of downside if expectations are not met. Paradoxically, this makes “failure” more likely than success, as has been shown by many academic studies of shareholder returns from corporate acquisitions.

The does not mean that transactions are always a bad idea, or that you should wait for an attractive target to become cheap. I have plenty of clients who have missed out on good deals because whatever they looked at was either “too expensive” or “too risky and we need to wait to see how things develop.” Of course, by the time the risks had been resolved, the target was either unattractive or too expensive.

The way to avoid over-paying for acquisitions is to be open-minded to a broad range of opportunities. Yes, it is possible to make money by making a good company even better. This is especially true if the acquiring company can add new capabilities in distribution, customer access, or supply chain. But it is also possible to create value with a business that appears to some to have passed its peak, but nevertheless has strong strategic positioning with brands or customer relationships that have been under-exploited.

5 Make the story simple

Business is complicated. There are a hundred different reasons why a business can fail. And success is often the result of keeping dozens of small things on track as well as getting the right answers to some big questions. But if you want recommendations to be embraced by top management rather consigned to a dusty shelf (or worse still, the round filing cabinet), then you need to make the message dead simple. For example: “our vegetables-in-sauce business is far more profitable than our plain vegetables-in-brine business. We need to put all our development efforts behind our vegetables in sauce, and avoid diluting our resources chasing volume growth in low-margin vegetables in brine.”

The trap inherent in “dead simple” is that you know it is a whole lot more complicated than that. You have 128 different product configurations. Many have different brand value, different competitors across regions, and different market shares. There are also different supply-chain issues to be taken into account. And we also need to consider evolving consumer trends, population demographics, and increasing health concerns. For the last six months, you have worked through all these details and trade-offs before coming to your conclusions, and you want to make sure top management appreciates all of your detailed analysis.

So how do you make dead simple intersect with reality, and at the same time, get buy-in from busy executives? You select the evidence that supports your recommendations for your short presentation, and you bury the rest of your research in the appendix. No, this is not being deceitful. After all: you carefully weighed the alternatives in coming up with your recommendation, and you tested your conclusions with other managers in the business. Now your job is to create order out of the chaos, and make the conclusion blindingly obvious. If you do that, you have a chance of your recommendations being read, remembered beyond the end of the meeting … and maybe even implemented.

That is it from me. Remember, above all else, to keep looking for the value!

A About the author

Stuart E. Jackson is President of L.E.K. Consulting LLC, the North American practice of L.E.K. Consulting worldwide. He is author of Where Value Hides: A New Way to Uncover Profitable Growth for Your Business (Wiley, 2007). Stuart E. Jackson can be contacted at: s.jackson@lek.com