Developing a winning strategy is an uphill task for leadership at most organizations. One of the reason is not digging enough to answer the right questions. The mainstay of a successful strategy is creation of Competitive Advantage. However, for most organizations Competitive Advantage is a moving target, which is hard to pin down.
A global study by McKinsey pinpoints a possible cause: just 53% of executives characterized their companies’ strategies as underscoring the development of differential advantage over rivals. The rest declared their strategies as merely matching industry best practices and delivering operational imperatives.
The research encompassed online survey of executives from across the world who went through a series of questions to test if their companies’ business unit strategies pass 10 tests that constitute a good strategy. The overall sample size was 2,135 executives from various parts of the world, representing a range of industries, regions, tenures, functions, and company sizes.
The 10 tests in the strategy survey inquired the executives to rank their companies’ strategies in creating a wining market position, the basis of their companies’ strategy formulation, and their implementation planning. The main test questioned the potential of a company strategy to overcome rivals by creating a Competitive Advantage. The rest of the 9 tests validated the efficacy of their strategy, assessing how the strategy positions the company in the market, the insights and data incorporated to develop the strategy, and the robustness of their implementation plans.
The 10 Strategy tests included:
- Our strategy balances some major commitments with flexibility to make future choices.
- Our strategy highlights creating relative advantage over competitors.
- Our strategy incorporates a detailed understanding of our Competitive Advantages.
- Our strategy defines opportunities based on detailed market segments.
- Our strategy results in a concrete set of actions to reallocate resources.
- Our strategy consists of decisions based on vigorous debate about alternatives.
- Our strategy arises from management’s strong belief in basic assumptions that underpin it.
- Our strategy is mainly built to win in future market conditions based on major trends.
- Our strategy takes into account unavoidable uncertainties about the future.
- Our strategy relies on novel data and insights not available to competitors.
Although a company’s strategy can succeed even though it fails most of these tests, but leaders can stress-test their strategies through these tests.
Insights from the Tests
The results from the respondents’ assessment of whether their company’s typical business unit strategies can pass these 10 tests revealed:
- About 50% respondents regarded their companies to pass only 1 to 3 of the 10 tests.
- Fifteen percent executives believed that their company strategies cannot pass a single test.
- Only 2% of the respondents stated that their companies pass 9 or all 10 tests.
Region-wise results revealed that:
- 51% Indian, 37% Chinese, 49% North American, and 44% Europeans thought that their strategy balanced major commitments with flexibility.
- Overall, just about 14% of the executives stated that their companies’ strategies were based on novel data and insights not available to their competitors. Region-wise, this was indicated by 20% Indian executives, 18% Chinese, 14% North American, and 13% European executives.
- Chinese executives graded their companies’ strategies higher (43%) than those in the other regions (34% globally) on the basic test of pinpointing relative advantage.
What Organizations Do Well
Results from the test “what our organization does well” revealed:
- Seventy percent (70%) of executives reported that their strategies provide a mix of commitments and flexibility.
- Just about 29% respondents thought their strategy to be based on concrete plans that lock in key choices immediately.
- Very few executives believed that their strategy relies on novel data and insights not available to their competitors.
Impact on Financial Performance
The survey participants’ response to the question: “which aspects of strategy have had the greatest positive effect on your company’s financial performance” was:
- “Novel insights and data as the basis of strategy” test was rated least critical to financial performance.
- More executives (46%) in the energy sector mentioned a focus on market trends to have a positive effect on their financial performance.
- Executives from the manufacturing industry ranked “relative advantage” (43%) and “market segmentation” (40%) as the top contributors to bottom line.
Strategy Development Process
The respondents’ responses to the test of using strong Strategic Planning practices for decision making included:
- Not too many companies develop their strategies based on a concrete, logical process.
- Forty-four percent respondents declared that their companies hold a regular planning cycle. In contrast, 35% respondents mentioned that their companies make decisions as the need arise.
- A majority of the study respondents—56%—reported that their companies now make strategic decisions more frequently than before. This trend of speedy decision making can cause some companies to fail in conducting a thorough evaluation of each decision.
Interested in learning more about the Strategy Tests and their impact on the organization? You can download an editable PowerPoint on Strategy Execution: The 10 Strategy Tests here on the Flevy documents marketplace.