Transcript
Speaker: What are you going to sell? Where are you going to compete? How are you going to win? And how should middle market companies approach and answer these questions so that they have a strategy that drives growth? That's what we'll discuss on the next episode of The Market That Moves America.
Speaker: Welcome to The Market That Moves America, a podcast from the National Center for the Middle Market, which will educate you about the challenges facing mid -sized companies and help you take advantage of new opportunities.
Speaker: Today's podcast is about strategy and about how mid -sized companies can strengthen their strategy and consequently improve their results. I'm Tom Stewart, the executive director of the National Center for the Middle Market at the Ohio State University Fisher College of Business. We're the nation's leading research group studying mid -sized companies which account for a third of private sector employment and GDP and the lion's share of economic growth.
Speaker: It is the market that moves America. The National Center for the Middle Market is a partnership between Ohio State and SunTrust Bank's Grant Thornton and Cisco Systems. With me today is a special guest. Michael Leiblein is an associate professor at the Fisher College of Business at Ohio State. He's on the editorial board of several strategy journals, and he served as the academic expert advising us on the newest NCMM report, which is called Strategic Planning for Growth. Professor Leiblein, Michael.
Speaker: Welcome to the Market That Moves America. Well, thank you, Tom. It's a pleasure to be here. Let me begin with a couple of points. A few years ago, I learned something that surprised me, which is that strategy wasn't always there in business thinking, that it really didn't come into business thinking until the last quarter of the 20th century. And before that, people, executives talked about something called administration or business policy.
Speaker: But even today, people use the word strategy loosely. I mean, they'll talk about, you know, a strategy for keeping the ants away from the picnic lunch or a strategy for a meeting or something like this. I mean, what is strategy really? Yeah, this is a great question. I think lots of folks conflate the word strategy with big decisions, important decisions, even decisions by senior managers.
Speaker: And of course, all these conceptions are incomplete. There's plenty of functional areas, like finance or marketing, that also deal with big or important decisions. And confusing what is and is not strategy can lead to some very poor decision -making.
Speaker: a point made nicely by Richard Rummel with his recent book, Good Strategy, Bad Strategy. So I think what's happened in the last probably quarter century or so is that folks have started thinking and defining strategy as a pattern and a stream of decisions, a plan or a theory of how someone will create and capture value.
Speaker: Michael Porter, a famous professor at Harvard, has talked about strategic decisions as being what you do not do, in part because those decisions impact a lot of value and guide a lot of subsequent choices. Another influential professor, Pankaj Gemwat, has talked about strategic decisions being significant commitments under levels of uncertainty or ambiguity.
Speaker: In my own work, and in fact, a recent special issue we have, we've had several prominent academics defining strategy as a series of interdependent decisions. Decisions that are interdependent with other choices within a firm that guide other choices within a firm. Decisions that are interdependent with other actions of other rivals or close competitors.
Speaker: and decisions that are interdependent with a series of events or other actions across time. So I love that interdependent idea. So one of the things you said, it's interdependent with other things. Strategy depends on other things. So strategy depends, for example, on execution, on carrying it out and on
Speaker: getting the resources to carry it out and on having the talent to carry it out. So if I have a strategy of X, that's one set of dependencies. Another set of dependencies is what the other guy does or how the market is changing. So if I have a strategy and I forget the fact that my competitors might have something too, I'm missing a point.
Speaker: And the third thing is it's not just a black binder today, it has a past and it's making decisions that I guess they create decisions that they create future choices. I mean, my future is affected by the strategic paths. We get path dependency, I guess, by the decision -making. Yes, that's exactly right. It's that guiding.
Speaker: One of the early quips that I've always found interesting is people would talk about strategy is more than the optimal distance between telephone poles. So there was this functional expertise and operations research of how do we solve a specific problem, but that's missing the interdependence across other choices, things that are often missing in other functional approaches we might see. We call this study strategic planning for growth in part because
Speaker: Middle market companies told us that that was their number one strategic goal. We want to grow. I suppose there could be others like we want to be really profitable or we want to set the company up for sale, but growth was the number one thing. And some work we did in our DNA of middle market growth study last year,
Speaker: showed that like, sorry, at the beginning of, in the summer of 2018, showed that more than 14%, one in every $7 of middle market company growth could be attributed to its strategy and its strategy processes. Does that surprise you? That's a big amount of money. After 30 or 40 years of my career, I guess I'm thankfully not surprised by that.
Speaker: I think fortunately there is some data to back that up you know that in it there's some
Speaker: a series of empirical studies in the early stages of the strategy field tried to think about how much of, it was here, various measures of accounting and economic performance were attributed to different types of choices or different types of decisions. And in general, I think this work has found that maybe business or industry effects are accounting for 15 to 25 or so percent
Speaker: of profitability, business -level choices, resource allocation, organization choices, are accounting for somewhere between 35 % and 45 % of performance differences. Corporate choices have a lot of variance, but probably on average 10 % to 15 % difference. Corporate choices like corporate scope or things that will probably be outside of a lot of the interest in the
Speaker: in the middle market, because I tend to think most of these firms are more focused in a single industry, or maybe thinking about it for a clean, and a great presentation. So am I a conglomerate? What industries do I compete in? How global am I? Yeah, thank you. That's right. Product diversification, geographic diversification. I mean, again, I come back to that earlier comment. Beyond the data, I think what you find is that
Speaker: firms with good strategies, strategies that marshal resources to create unique positions based on those internal competencies, environmental conditions, and that are contingent on the actions by responsible and intelligent rivals. Those firms run experiments
Speaker: more effective experiments and more effectively run experiments than firms that do not have a strategy or seem to have a poorer or less well -defined conception of what strategy is. Pick up on the word experiments. One of the things that I'm struck by
Speaker: as a difference perhaps between large companies and mid -sized companies is that it seems to me that large companies run a lot more experiments and then leave a lot more of them on the shelf. They have pilot projects and all that's interesting and then nothing happens with them, whereas mid -sized companies maybe have fewer experiments
Speaker: but are more likely to say, aha, I like that, and go and act. Is that square with what you've said? Yeah, I think that's fair. I think there also is, what do we mean? You're appropriately asking me, what do I mean by the word experiment? And I think those could be informal thought experiments or actual experiments.
Speaker: So it can range from a what if to a let's actually do a prototype. That's right. So I can think of, you know, so I think that there is a problem formulation phase that you'd see in, you know, as a consultant I would see a lot of times in my, you know, academic consulting with other companies or my academic work, we see.
Speaker: you know, thinking about what the problem is and the firms with well -defined strategies are better able to conceive of alternatives to frame problems as more or less strategic, to understand whether a problem is more or less strategic, to frame it appropriately, to think about alternative solutions from multiple vantage points, and then to either go through the conceptual what -if or
Speaker: In some sense, some firms are rigorously running some A -B testing or more sophisticated testing of what they think were the likely outcomes. So you've actually raised a question that's sort of an intriguing question to me. I think every company or executive team sits and thinks, what are we missing? We could be better. What would it take to be better?
Speaker: And I'm wondering if you could, what you just said is that a clear understanding of strategy, of my company's strategy, will help me answer that what would it take to get better question, better, to get a better answer to that question. How does that work? I mean, do you have an example of that or just a hypothetical? I mean, how strategy, which tells me what I'm going to do and what I'm not going to do, helped me
Speaker: sort of cope with this morass of it. We're at the beginning of a new year. Where do we want to be at the end of the year?
Speaker: Yeah, so I think that's, you know, I'll try to think of an example. But, you know, I think the first thing is reflect back on that definition of interdependence. It's more than functional skills. So you need a in a complex world where there's multiple components and lots of interdependencies or actions across or decisions have multiple ramifications for other choices. You need some sort of theory that
Speaker: theory could be as simple as, you know, if I flip the light switch, the lights are gonna go on or off, I have a theory of what's gonna happen when I take an action.
Speaker: And so I think firms need to have a theory in that sense of how certain actions are likely to lead to certain consequences. What the field of strategic management provides is a set of tools, various three, four, five theories of profit. There's a nice book out actually by the consultants from BCG. Martin Reeves has a nice book, Your Strategy Needs a Strategy. And a lot of this I think depends on identifying the problem or the most important problem.
Speaker: focusing attention on after defining that problem, what series of tools or logics are most appropriate, and then finding a way, one of your other findings from this report, finding a way to coherently execute on
Speaker: the alternative plan, right? So finding a way to implement this and to allocate resources and organize and motivate people and all the human things that we think are important. You know, one of the things that we talk about in the report is sort of three elements of like the plan itself, right? Is it smart? Is it good? Is it, you know, is it a path to victory? The process for developing the plan and then the process for carrying it out.
Speaker: And in your experience, I mean, obviously you need all three, right? I mean, a great plan with no execution is, you know, I've had that pipe dream too, you know, and superior execution of a bad idea, you know? We know what that leads to. But if you think about your experience, particularly with mid -sized companies, of those three things, the planning process, the plan itself, the execution, where are they strongest and where are they weakest?
Speaker: First of all, I'd say this is an important result. I think it's important or critical to focus on both the content and the process, the decision -making and the implementations of the decision -making, and any separation between the two is largely artificial.
Speaker: Now, in my experience, I think you're right with the idea, the intuition, I think, in the report that small firms tend to struggle more with the planning process. And I think it's largely just a function of scale. They lack the scale to hire specialized strategy experts or maybe specialized HR experts or marketing experts. I mean, so early on, you have one or a limited number of people wearing many hats.
Speaker: Now, I think actually one data point that didn't make it into the study is that a lot of people in a lot of mid -sized companies, the strategic planner, same law. I mean, it's the boss, or maybe three or four people, but there isn't—
Speaker: There aren't binders full of strategies. There aren't a whole lot of consultants. And there's not a sort of a formal cadence, this is what we do in March and this is what we do in May, which may be a bad thing if you have too much process. Yeah. Yeah. So I would not.
Speaker: advocate for a formal annual planning process. I don't think that's what a lot of the contemporary strategy work is arguing for. It's rather a framework to look at these problems. I think in some survey work I've done with the Mid -Atlantic YPO -WPO,
Speaker: I think we found, I think those firms would sort of fit the NCMM middle market definition. And a lot of it was what I think we'd all expect. It's the CEO, maybe his or her family, maybe a set of close advisors that are coming up with these ideas. But it's not a particularly systematic process. One of the things we learned in the DNA of middle market growth, and I think it repeats itself here, is that keeping up with
Speaker: the business literature and the management literature. So reading the paper and reading HBR, whatever, keeping up with what's going on is a critical component of superior strategy. You can't just sort of take it all down from the mountain.
Speaker: Yeah, I think, so I'm, you know, again, maybe, you know, probably biased a little bit for, you know, but the, I think there's a reason, there's a reason for professors, there's a reason for academia, you know, there are people who've thought about these things. And my guess is what you're getting is a reminder through reading those periodicals is a reminder there's three or four or five, you know, in the strategy field, clusters or families of ways of approaching problems.
Speaker: And it's probably useful. It's like the blind man and the elephant, one of my favorite metaphors, right? We get so fixated on, you know, the elephant put my arms around the leg and the elephant's like a tree, but I'm missing the hole. I'm missing the interdependence across all the parts. And I think reading the literature, keeping up to date on it, or hiring some experts, you know, can maybe help bring in a couple of reminders
Speaker: This isn't rocket science, but it's reminders of the value of these different perspectives. One of the things that I found striking, and it connects to this striking in the study,
Speaker: We asked people, how satisfied are you with your strategy? How confident are you that it will lead to success? And there was a very strong correlation between confidence and success and the degree to which people did two things. One, they got input from outside, and two, they got input from lower down in the organization. So it was outside in and bottom up.
Speaker: That reminded me that a couple of years ago when you worked with us on a study of innovation in mid -sized companies, you found in that study that they were more likely to be a more successful and be bolder in their innovation if they brought not just a team in the lab, not just a handful of people, but actually had a lot of feedback from the other parts of the organization and also from outside.
Speaker: How do companies get more confident or increase their capacity to get that feedback both from the bottom and from the outside? How do you open up those membranes? Well, there's a little magic there, I guess. In some sense, I think the confidence comes from some awareness of the nature of the problem,
Speaker: and how I'm working through, I'm aware of the alternative solutions, I'm aware of the assumptions I'm making. And so I think that's what's generating the confidence that you're seeing in some of these folks who believe in their strategy versus those that are maybe believing a little bit less. In terms of the communication and spread of ideas, I think that what we start seeing is categories of firms or typologies of firms that have taken
Speaker: bundles of approaches. So you can think of a firm like somebody like Richard Branson or Steve Jobs, visionary leader, and it's very top down. And I can imagine that work that's not the finding we found in the innovation study, but I can imagine that archetype working
Speaker: I think you find companies. And though I bet that each of those actually is less Moses on the mountain than you realize. And actually, you know, I think that there's a quote that Steve Jobs said, you know, that there's a quote that only half of which is repeated, and I cannot remember, but it's like, you know, you want to ask me where technology is going. I'll tell you. But then he also says, but by the way, you'll listen a lot too. Yeah.
Speaker: Yeah, yeah, so you have the visioners you have these you have these crazy You have the jobs types I think you have firms that run really I call them you know these firms that are running a marketplace for ideas I'm thinking of 3m or Google where you know individuals everyone is charged with creating and sharing ideas and
Speaker: And there are processes in place to collect and select amongst those ideas. And so rather than talk around a water cooler, there's a process. So rather than informal, it's formal. And I have confidence, to come back to your point, because I know I have the process in place, and it's been thought out. And sometimes like Google and even 3M, they have even internal markets where you can
Speaker: bet and vote on ideas, and so that's the market. So we've got the guru, whom we hope is an informed guru, then we have the marketplace of ideas where things are bet on, in a sense, by people. That's right. So actually, in that marketplace for ideas, we could be internal. It could be you think of the work that's doing, you know, the folks that are doing crowdsourcing or open innovation processes, and these are processes to involve more and more discovery. Crowdfunding, likewise, for capital markets.
Speaker: Yeah. Like, here's my entrepreneurial idea if it's fun. It's Shark Tank, man. Yep. That's right. That's right. Yeah. Exactly. So I think the point being, we could think about these, whether it's visionary leader, it's market for ideas, whether it's some sort of crowd -forcing or crowd -sourcing or Kickstarter or open innovation process, whether it's even a portfolio of ideas that you might see in a Battelle or a Siemens, where there's
Speaker: There's a rigorous process to run experiments or think of the value to the portfolio or think of even the optionality value of these things. I think the confidence comes from having a well -thought -through process. This is the process we follow.
Speaker: portfolio theory but there's also a fourth which might be a bureaucratic process. We put these things together, this is the way in which we do it and we follow it through a hierarchy and it goes up and we all go to the offsite and we come back down. So you could have those four different models and I think part of the point is,
Speaker: Have one. Have one. Yes. And probably don't have three. That is correct. Because there's inconsistencies across—this comes just reflecting back on our interdependence word. There's inconsistencies in what you're assuming regarding the source of information, the selection of the information, the implementation of the information.
Speaker: across those three or four. And part of this is legitimacy. So if I've got Steve Jobs or Richard Branson, it's legitimate because the guru says so. If I've got a marketplace for ideas, it's legitimate because the market said so. If I've got optionality, it's legitimate because of the financial asset. And therefore, that legitimacy is an important part of execution. Because if I think it's legitimate, I'm going to sign up to do my bit to carry it out. And if I don't,
Speaker: hey, I might go my own way. And that's where you get these strategy execution failures where the organization just sort of. It's not aligned, doesn't believe. It either passively resists or it goes off in all kinds of different directions. And so legitimacy and a legitimate process creates a culture for execution.
Speaker: Yeah, I think a legitimate process. Yeah, that makes sense. That's kind of cool. I like that kind of. All right, one more thing. We're just about out of time. But I think one of the findings in this study is I think a lot of executives would give themselves and give their companies a B on strategy. The plan's pretty good. The plan's good. Yeah, the process is good. Yeah, we execute it pretty well. It's a B. And maybe there's some C minuses in there. But what's the difference between a B and an A?
Speaker: Yeah, to me, I may be reflecting on some of this. A lot of this is in the problem formulation process and then the implementation process or the decision process and the implementation process. It's reflecting on your three stages. And what I mean by that is that I think that the true strategic thinkers are able to discriminate well
Speaker: between strategic and non -strategic decisions. They see a problem, they see an issue in their firm, and they understand whether or not it is truly strategic or maybe not. And it's not that it's a big decision. I mean, we just need a different person running the fax machine, and that's not strategy. That's right. I mean, so it could be big, it can be small, but this has, they understand the theory of how they are creating value as an entity.
Speaker: They understand when a decision, whether it's big or small, threatens the coherence of the organization. They can work through multiple perspectives. They're well -read. They understand, at least intuitively or heuristically, that there's these two or three or four approaches. We'll talk about four theories of
Speaker: of performance but you know there's they understand intuitively several of those perspectives can rapidly iterate through in their mind okay this is more salient in this problem they generate alternatives and then based on experience based on some
Speaker: you know, maybe some sort of more rigorous experiment, they choose what is a good or a less good approach. If I come back to remote, good strategy, bad strategy, or good or strategy anti -strategy, I think you could say, you know, they understand and purposely select which actions they'll implement. So what I think I've heard is that
Speaker: The critical—strategy is critical to growth. We know that. To get it right, it starts by knowing how to ask the right questions and not the wrong questions, trying to answer those questions by getting a lot of input from outside and from upside, from down through the organization.
Speaker: Mediating, I mean, working those inputs through a process that people see as legitimate, that through a process that fits your culture, fits your style, and that is consistent. And at the end of that process, making a decision and ruling it out.
Speaker: It's that simple, right? It's that simple. And there we are. I want to thank you. Michael, thank you so much. Michael Leiblein, who is an associate professor here at the Fisher College of Business at The Ohio State University, you can learn more about him at the Fisher College of Business website and all the research that he is doing. You can learn more about us at the National Center for the Middle Market on our website, which is middlemarketcenter .org.
Speaker: and thank you for listening to The Market That Moves America. Never miss a new episode. You can subscribe to this podcast on iTunes, Stitcher, Google Play, or wherever fine podcasts are found. And as I said, you can learn more about us and you can download our report, Strategic Planning for Growth, at middlemarketcenter .org.
