By Professor Marc Jones, Unit Coordinator, Strategies for Growth, The University of Sydney Business School MBA program
One of the key findings in a recent major study of Australian leadership was that it was common for senior leaders to not seek strategic advice from qualified parties when making major decisions about the future – therefore ‘baking in’ a lack of insight into their actions and undermining the formation and roll-out of coherent strategies. We often speak in the normative sense that organisations should be ‘strategy driven’, but what exactly do we mean?
Inspired by the Playing to Win strategy framework appearing in a 2013 book by the same name by A.G. Lafley and Roger Martin, over the past couple of years I’ve developed what I call the ‘Playground Matrix’ to assist clients to diagnose the extent to which they are – or aren’t – strategy driven.
The Matrix is structured along two dimensions: Market Attractiveness and Ability to Win. The level of Market Attractiveness depends on growth ambition (which defines risk appetite, or vice versa) and profit pool size. Ability to Win fluctuates according to competitor moves, new entrants or exits, and the client firm’s efforts to strengthen its position. In the context of the Matrix, being strategy driven is defined as focusing your time and resources in the Northern Arc region of the Matrix (composed of the Sweet Spot, Ballast and Capability Gaps zones).
When working with clients, the process I use with the Matrix is (1) populate – with businesses, business units, products or geographies; (2) validate; and then (3) redirect resources from the Southern Arc region (composed of the Fool’s Gold, Graveyard and Revenue Trap zones) to close Capability Gaps and grow the Sweet Spot. The Matrix is thus both a diagnostic and decision support tool.
The various zones of the Matrix are defined as follows:
Sweet Spot: you want as much activity here as possible, as this is business you have qualified as being attractive and in which your competitive position is strong.
Capability Gaps: this zone should be sucking in resources (financial, technical, managerial) that are diverted from the Southern Arc (particularly the Revenue Trap zone) as various ‘babies are killed’ (see below)*.
Fool’s Gold: you can see the bags of gold on the horizon which is very exciting, but your current ability to field a competitive offer is weak or nonexistent. Perhaps consider an acquisition; otherwise cool your jets and focus on closing Capability Gaps.
Graveyard: you really don’t want to be active here, except for two potential situations. First, there are synergistic linkages between activities here and those in the Northern Arc. Second, if you are expecting business conditions to improve markedly in the future and are willing to make additional investments to improve your competitive position now – I call this strategic optionality.
Ballast: these are existing activities that fall below the attractiveness hurdle (e.g. because margins are too low or profit pools too small) but in which you are highly competitive. Particularly for businesses that are capital/infrastructure intensive and cyclical, retaining a degree of ballast can be strategically justified as it can keep factories running, workers employed and their skills up to date, and cash-flow ticking along. Beyond a certain point, however, Ballast transforms into the Revenue Trap.
Revenue Trap: the key concept here is opportunity cost. As you pursue or persist with activities deeper and deeper in this zone, you forego options in or proximate to the Capability Gaps zone. The prescription is to ‘kill babies’* that cannot justify themselves in terms of either synergistic linkages with Northern Arc activities or with respect to strategic optionality. As a rule of thumb, the denser the Capability Gaps zone is populated with promising activities, the narrower your Ballast band should be. But here’s the rub: eliminating existing income streams in the hope that future, more attractive income streams will eventuate is easier said than done, particularly when time horizons are short.
*Before closing, I should explain the use of the rather harsh phrase ‘killing babies’. Decisions to exit markets, close sales offices, and terminate relationships with existing partners and customers can manifest highly charged emotional impacts on executives, managers and employees. Each item appearing on the Matrix is, quite literally, somebody’s ‘baby’ in the sense that careers, reputations, and livings rely on the continuation of existing activities. Pretty much every conversation between the corporate or BU centre and activity managers in the Southern Arc will play to the same script, with managers pleading that they need more time or resources to deliver on commitments – or they will invoke claims of synergistic linkage or strategic optionality. In my experience, more often than not the centre lacks the clarity and courage to make the tough decisions that are necessary to cull Southern Arc activities and become more strategy driven.
So then – how strategy driven is your business?