Product #92

Strategy Beyond the Hockey Stick · 2018

When the CFO starts to translate the vision into a budget - those who stand to lose resources fight. The result is that the new budget looks a lot like last year’s budget - and it’s back to business as usual. The real barrier to good strategy is social.

Everyone tries to secure more resources while deferring accountability for the returns on the investments until later. That’s when you start to see the hockey stick graphs, showing short-term investments and delayed returns.

Most companies aren’t bold enough with strategy, causing incremental improvements and no real outperformance of peers.

Strategy rarely moves the needle very far - as they’re often launched without enough energy.

Executives tend to seek further investment in their area, even when not warranted.

When you introduce other people - you get agency problems fuelled by incongruences between management and other stakeholders:

• Sandbagging - agreeing only to plans you’re sure you can deliver
• The short game - making short term decisions knowing someone else will inherit the mess later.
• My way or your problem - if I don’t get the resources I ask for - then that’s my excuse
• I am my numbers - I’m going to work hard enough just to hit my numbers

The social side of strategy results in the peanut butter approach - spreading a thin layer of resources smoothly across the whole enterprise, even though the best opportunities aren’t spread evenly.

Changing strategy is like trying to move an octopus by the leg whilst the other 7 remain completely committed to staying put.

The Power Curve of economic profits should be the main reference point. The extremes of the results render an average all but meaningless. For most businesses the practical challenge is how to escape the broad, flat middle of the curve and move up into the region on the right, where most profits accrue. Companies in the top quintile capture nearly 90 percent of profit.

Companies and entire industries move up and down the curve. It is uneven but also very dynamic: a firm’s place on the curve changes all the time.

Big success may need drastic measures like moving to more profitable industries or restructuring economics

Hockey stick plans are common in strategy but often paired with timid actions. Hockey stick plans are usually conservative initially, becoming overly aggressive long-term.

The social side of strategy involves collective aspirations clashing with individual fears, ambitions, and biases. Overconfidence, blind extrapolation, and resource competition can skew target setting.

Bold forecasts often come with timid plans, ignoring the need for significant moves.

Errors in performance attribution and momentum assessment can mislead strategy.

Uncertainty is inherent in strategy, often ignored or superficially addressed.

Resource allocation often becomes evenly spread (peanut buttering), preventing significant strategic moves.

Real hockey stick growth exists but distinguishing genuine opportunities from false projections is crucial.

You have just an 8% chance of moving from the middle to the top quintile over 10 years. But superior strategies have higher probabilities of success.

Companies must compare strategies against peers to assess their true potential for success.

Allowing for "noble failures" encourages innovation and risk-taking without stigma.

Use stretch targets alongside baseline budgets to balance ambition and realistic expectations.

CEOs need accurate odds to set appropriate goals and compensation. Understanding whether success is due to good management or favourable conditions is crucial for strategy evaluation.

They back-tested our data and were able to verify that our model generates accurate predictions.

The variables are all measured relative to other companies in the sample.

To get the effect - you have to cross an upper threshold. It’s not enough to make an incremental improvement, you have to put yourself into a different league all together.

Endowment - The variables related to your starting position that matter the most are:

1. Size of your company - the larger your company, the better your chances of moving up.
2. Debt level - the less debt you have, the better your chances of moving up.
3. Past investment in R&D - being in the top half of your industry in your ratio of R&D to sales increases your chances of moving up

Trends - the two key trends that affect your trajectory are:

4. Industry trend - the single most important of all 10 attributes. Your industry needs to be moving up the industry Power Curve by at least 1 quintile over a 10-year period
5. Geographic trend - you need to be in markets that are among the top 40% for nominal GDP growth.

Moves - these are the five moves that matter, they work best in combination:

6. Programmatic M&A - A stream of deals, each no more than 30% of your market cap but adding up over 10 years to at least 30% of your market cap. This surprises people because they’ve heard studies show most M&A deals fail (factually wrong) and rightly resist the idea of a bet-the-company deal.
7. Dynamic allocation of resources - Re-allocating at least 50% of capital expenditure among business units over a decade. You’re more likely to succeed when you re-allocate capital quickly, feeding successful units and starving those without potential.
8. Strong capital expenditure - Your ratio of capital spending to sales should be in the top 20% for your industry. Spend at least 1.7 times the industry median.
9. Strength of productivity program - You need to improve productivity consistently faster than your competitors. You need an improvement rate that’s at least in the top 30% of your industry.
10. Improvements in differentiation - Your gross margin needs to be in the top 30% for your industry - through business model innovation, pricing advantages etc

It all matters - the more you can be on the right-hand side of the distribution for the 10 variables, the better your odds. Are you above the threshold, boosting your odds, or below the threshold, lowering them?

Endowment determines about 30%, trends determine about 25%, and your moves determine about 45% of the probability of moving on the curve. The strategic moves in aggregate, explain almost half of the mobility of companies on the Power Curve.

Companies don’t do enough to build the capabilities or lay out the specific actions to capitalise on the trends. Your strategy should put you ahead of trends (the ground moving beneath your feet).

Industries are escalators: either heading up and accelerating your progress, stuck on stop-mode so it’s only your effort that counts, or on a downward track, meaning you have to work hard just to stay where you are.

If you can’t rewrite the rules of your industry, you might have to re-position your portfolio toward new growth businesses. Strong re-allocators move more than 50% of their capital base to new industries over a 10-year period.

Make sure you have the flexibility to adapt and channel your resources to the best opportunities accordingly, and doing so faster than your competition.

Pick the right geographies, the right customer segments, the right micro segments—and re-allocating resources within your current business to capitalize on differentiated growth prospects and trends.

You need privileged insights to differentiate

The secret to survival is to recognise and overcome the typical lack of response, and act boldly before it’s too late, which usually means acting before it’s obvious you have to do so.

As an Incumbent, you need to navigate four stages of a disruptive trend

• Young companies start with uncertainty but are agile and focused on learning and future growth. As they mature, they become incumbents, standardising processes and prioritising efficiency. This shift replaces the expectation of future gains with a focus on consistent cash flow and escalating performance demands.
• In a disruption, companies nearing the top of an old S-curve face new business models at the bottom of a new S-curve. Two main challenges arise: recognising the new S-curve, which initially shows minimal impact on profitability, and adapting to different operational modes required at the bottom of the new S-curve. Often, new skill sets are needed, and the value of past experience diminishes.

The five big moves will shift your odd of success, they sound scary but they’re actually the safest bet.

What surprises most business leaders we talk to is just how big a big move really needs to be. Incremental doesn’t get companies very far - incremental moves increase the risk of underperformance.

The moves matter because they’re within your control and collectively they are the strongest determinants of success - that should be empowering.

The Five Moves:

Programmatic M&A and divestitures. The myth that 75% of mergers fail has been debunked. Success in M&A depends on the type of program. The most effective is programmatic M&A, involving at least one deal per year that cumulatively exceeds 30% of market capitalisation over 10 years, with no single deal more than 30% of market cap. Infrequent, large deals tend to hurt value creation.

Resource re-allocation. Spreading resources evenly (peanut buttering) doesn't work. Effective re-allocation involves moving resources between industries, geographies, business units, and projects. Companies that shift more than 50% of their capital expenditure across business units over 10 years create 50% more value. Danaher's success is attributed to its focus on resource re-allocation, using processes like the Danaher Business System (DBS).

Capital expenditure. Expanding faster than the industry is key. Successful capital programs manage a pipeline of investments, including riskier and long-term options. TSMC succeeded by investing anti-cyclically during the Internet bubble burst. Discipline and robust investment processes are crucial, as capex can amplify success or failure.

Productivity improvement. Productivity programs need to deliver 25% more improvement than the industry median over 10 years to make a significant impact. Extraordinary efforts and new tools, like machine learning and AI, can drive substantial productivity gains.

Differentiation improvement. Differentiation covers market share gains and pricing. It involves long-term thinking and understanding the source of competitive advantage. Burberry improved differentiation through vertical integration and a focus on digital innovation. Private firms tend to invest more long-term than public firms, avoiding short-termism driven by quarterly earnings.

They are most effective when combined - and the worse your endowment or trends, the more moves you need to make. Companies that made three or more big moves were six times more likely to jump from the - middle quintile to the top.

Understanding big moves in strategy involves their interplay and combined impact.

• Big moves are highly valuable.
• Big moves can offset a poor inheritance.
• Big moves are non-linear and must be significant relative to your industry.
• Big moves must be substantial to make a difference. Outperforming competitors is crucial.
• Big moves compound; multiple moves significantly improve odds.
• Big moves are asymmetric; upside potential outweighs downside risk.
• Big moves are cumulative, not instant solutions.
• Successful companies integrate big moves into daily practices.

Eight shifts that’ll help you effectively address the social barriers of strategy:

1. From Annual Planning to Strategy as a Journey
2. From Getting to "Yes" to Debating Real Alternatives
3. From Peanut Butter to Picking your 1-in-10s
4. From Approving Budgets to Making Big Moves
5. From Budget Inertia to Liquid Resources
6. From Sandbagging to Open Risk Portfolios
7. From You Are Your Numbers to Holistic Perspective on Performance
8. From Long-Range Planning to Forcing the First Step

The eight shifts are a package deal. You cannot do some of them and not do others

Full Book Summary · Amazon

Subscribe Button 

In the News

Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris nisi ut aliquip ex ea commodo consequat. Article · Article

Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris nisi ut aliquip ex ea commodo consequat. Article · Article

Quick Links

AI discosure framework · Article

The Product Ops Identity Crisis · Article

How we make money here · Article

How to measure space complexity · Article

Designing for clarity · Intercom’s Information Architecture · Article

Richard Hamming on Creativity · Video · Takeaways

New Dropbox brand guidelines · Website

Working Smarter Not Harder is Wrong for Beginners · Article

The relationship between Recall and Precision

Michael Buckland, Fredric Gey. 1994. (View Paper → )

Empirical studies of retrieval performance have shown a tendency for Precision to decline as Recall increases. This article examines the nature of the relationship between Precision and Recall. The relationships between Recall and the number of documents retrieved, between Precision and the number of documents retrieved, and between Precision and Recall are described in the context of different assumptions about retrieval performance. It is demonstrated that a tradeoff between Recall and Precision is unavoidable whenever retrieval performance is consistently better than retrieval at random. More generally, for the Precision–Recall trade-off to be avoided as the total number of documents retrieved increases, retrieval performance must be equal to or better than overall retrieval performance up to that point. Examination of the mathematical relationship between Precision and Recall shows that a quadratic Recall curve can resemble empirical Recall–Precision behavior if transformed into a tangent parabola. With very large databases and/or systems with limited retrieval capabilities there can be advantages to retrieval in two stages: Initial retrieval emphasizing high Recall, followed by more detailed searching of the initially retrieved set, can be used to improve both Recall and Precision simultaneously. Even so, a tradeoff between Precision and Recall remains.

The precision-recall tradeoff is an important truth for both search and machine learning. Product managers need to understand the context in which their products or models are being used and strike the right balance.

Book Highlights

Any big market is a bad choice, and a big market already served by competing companies is even worse. Peter Theil · Zero to One

The document model targets use cases where data comes in self-contained documents and relationships between one document and another are rare. Chip Huyen · Designing Machine Learning Systems

The organisation appeared to reward compliance rather than initiative or creativity. The result was passivity and fear. Stephen Bungay · The Art of Action

Take a hard look at your Key Results. If you are getting a funny little feeling in the pit of your stomach saying, “We are really going to have to all bring our A game to hit these …” then you are probably setting them correctly. If you look at them and think, “We’re doomed,” you’ve set them too hard. If you look them and think, “I can do that with some hard work,” they are too easy. Christina R Wodtke · Radical Focus

Instead of simply making the machines bigger and faster, which was what IBM and the other big manufacturers were constantly trying to do, the industry would somehow have to start making them more intuitive, easier to program, easier to understand, and easier to communicate with—in short, more closely adapted to the workings of the human mind. M.Mitchell Waldrop · The Dream Machine

Quotes & Tweets

Efficiency is counterproductive to reducing consumption. William Stanley Jevons · 1865

Luck = High energy, in the right place, around the right people, producing more than consuming, avoiding any and all distractions, able to manage multiple interests, high agency and self-educated, doesn't quit after one mistake, luck is a lifestyle Dan Koe