Excerpt: Introduction to Know Your Capabilities
Some of you probably have participated in your own company’s annual business planning process, or the 3 year plan, or the 5 year plan.
Maybe you brought in one of the major strategy consulting firms to help you. Maybe your in-house corporate strategy group or M&A group did most of the work.
Either way, you have an existing approach and infrastructure for strategic decision-making. And what does this process typically look like? A group of 5 to 10 confident, creative people in a boardroom, spurred on by the enthusiasm, instincts, and charisma of their chief executive, seizing upon the new idea on the whiteboard.
And just like a group of studio executives in Hollywood, they don’t really know if their choices have any chance of success. Their instincts tell them to follow. In fact, there is even a respectable corporate strategy called “fast follower” that many of them were taught in business school.
What they weren’t taught in business school, one of the dirty little secrets of corporate strategy, is that most strategies fail. Fail miserably.
Why? The decision-makers rarely, if ever, take the time upfront to think through what they realistically can accomplish and execute successfully.
With their own people, their own resources, and with their accumulated intangibles, such as processes, culture and innate knowledge. Factors that, when put into action, we call the capabilities of the firm.
The irony underlying the premise of this book is just how much investment in the form of research and analysis typically goes into the strategy process of a Fortune 500 firm, only to be disappointed with the result.
And how do they end up with such disappointment? There are two reasons.
Reason #1 – the error of too much noise, not enough signal
By not deliberating on what are your capabilities, you set yourself up for failure by incorporating unnecessary risk and uncertainty inherent to the open-ended, unconstrained process of discovery within the Create step of strategy (see graphic below).
After all, whoever said that any company can do anything under the sun? We don’t make that claim about individuals, do we?
There’s a reason why we don’t find jockeys who are two metres (six feet) tall, or professional basketball players under two metres in height.
There’s a reason why there are so many lawyers in regulated industries, why there are so many military veterans in supply chain logistics firms, and why there are so many former athletes in sales.
Reason #2 – the error of false positives and false negatives
By not explicitly including the influence of existing capabilities on the probability of successful execution, you are prone to misrepresenting (through optimism or pessimism) the risk and uncertainty in your financial projections and models of the strategic options under consideration with the Analyse step of strategy (see graphic below).
Because, no matter how you view strategy, some things serve as starting conditions, upon which you can reasonably invest for future growth. Despite the claims of some to the contrary, you can’t simply go out and acquire capabilities “off the shelf” from other firms. It’s too easy to believe in the fallacy of instant, problem-free integration.
For, in the end, firms are simply groups of people, sometimes large groups of people, and as such they are governed by aspects of human nature and behaviour. The members of a firm, either individually or collectively, are able to get certain things done or not. And, on average, you can figure out in advance what those do-able things are.
That “figuring out” is the piece of analysis we suggest adding to your existing strategic decision-making process, as the Know step of strategy.
The easiest analogy is that of DNA and genetics: the presence or absence of a particular gene does not definitively predict an outcome, but it does tell you the relative likelihood that some outcome may or may not happen, given a certain environment.
If you are not a carrier of the CFTR mutation for cystic fibrosis, chances are you won’t develop the disease. If you are a carrier, and you mate with another carrier, then there is a much higher likelihood that your offspring will develop the disease.
Similarly, if the capabilities of your firm do not include a proclivity to design innovative products, then chances are you will struggle to deliver on an innovation-based strategy.
Even if you acqui-hire one or two dozen start-ups out of Silicon Valley (sorry, Yahoo! and eBay).
Some commentators go so far as to describe companies as if they have some form of corporate DNA, or distinctive way of doing things that goes beyond culture. We refer to this “DNA” as their set of capabilities.
And, if you don’t take the time to know your capabilities, you will make decisions without the benefit of the simplest piece of data available to you.
In this book, we set out the provocative case that your success depends on knowing your capabilities and building that knowledge into your decision-making models.
Not provocative in the sense of stating something for the first time.
After all, the idea of knowing one’s self goes back in history all the way to the temple of Apollo and the oracle of Delphi (if not earlier), and has been used as a call to reason ever since.
No, provocative in the sense that we give it the prominence it deserves.
Call it the re-balancing of our inner reason, or impulse for intellectual order, with our inner impulse for chaotic creativity. Both deserve a fair hearing in strategic decision-making.
Like so much else in leadership studies, academics have barely scratched the surface of what really goes on inside the minds of CEO’s and other executives tasked with major strategic decisions. There exists an ongoing tension between logical thinking and the thinking that appeals to emotions and instincts. And this is especially the case in circumstances associated with creativity and growth.