Why Strategies Fail?- 8 Reasons and how to avoid them
Why Strategies Fail?– It is because traditional planning is too slow for a dynamic and hyper-competitive world.
A typical strategy will have the following constituents.
- Customer Segments and Value-Proposition
- Pricing Vs. Demand vs. Profitability
- Geography Foot-Print
- Sales Volume vs. Profitability
- Branding & Marketing
- Cash vs. On-Credit Sales
- Fulfillment- Production, Logistics and Supply Chain
- Financial Model, Ratios and Boundary Conditions
New business models & technologies with the power of digitization are disrupting existing companies. So enterprise strategy has to be agile, fact-based, and responsive. Here are the 8 biggest reasons for strategy failures and what we can do to avoid them.
Reason #1- Lack of Sub-Segmentation
As an example, an entity selling restaurant discount coupons can project 100K customers by selling to 1% of the 10 million target market. Based on this premise, they may over-investing.
From a mathematics standpoint, this may sound great, but this is one of the key reasons companies go down. A large customer segment has many sectors (High-end vs. low-end eateries, frequent vs. occasional visitors, discount seeking vs. non-seeking, etc..). Each of these sub-segments needs different sales & marketing strategies and product variants. Also, other niche players are serving various sub-markets.
Lack of sub-segmentation leads to a vanilla approach across the diversity of customers. This ends up making you doing everything for everybody.
How to avoid it?
There is no harm in thinking big, but you need to shift from ‘Vanilla’ to ‘Niche’ targeting. Select top-3 (say) niches and limit your phase–1 of growth to the said areas. Going deeper is preferable over going wider. Remember, if you are not in the top 3 of the markets you serve, you will fail. So better to narrow your areas(s), than being an ‘also ran’ player in a larger population.
Strategy Failure Reason #2- Lack of Data and Facts
Misplaced and invalid assumptions are the biggest killers of a business strategy. One wrong assumption can take a company in a wrong-direction. Today’s environment does not provide many chances to make corrections.
The major reason for misplaced assumptions are:
- Companies lack the patience to collect loads of data and to meet hundreds of customers. They do not have the stamina to do research, track competition, and to collect ground intelligence.
- Decision-makers sometimes consider their experiential learning as a universal truth. They end-up building their business models around the same.
For example, a senior executive who has excellent direct sales track-record could assume that it is the best way to go. He may fail, if market has have moved to a network-based sales model and digital-channels.
How to avoid it?
- You can engage a 3rd party who is fearless and objective to look at the assumptions with a hard-nosed view.
- Create an ‘assumption-strength’ checklist, which enforces a dispassionate view. Use this check-list to measure top 10 assumptions on how well you have validated them.
Reason #3- Lacking Investor mind-set
You make business game-plan in two different environments:
- Internal corporate strategy with the management team driving the assumptions and decisions.
- Investor review of business model, where an organization is seeking the funding
Keeping everything as same, the dynamics of these two environments are opposite. Investor review will have the following aspects, for an excellent strategic blueprint:
- Hard Questions– An investor will be fearless, ask hard questions, question every assumption. He will not give respect to anyone’s sensitivities apart from his money.
- Risks to Strategy– looking into all areas where things go wrong and how to mitigate them.
- Competitive land-scape– A funding company will have a closer view of the market. They will do smarter diligence on competitive threats.
- Tight on monies– A prudent investor will look at all expenses with a high-powered lens. He will beat down the financial ratios to ensure that company is running operations as a tight ship.
- Future-Ready thinking– An independent entity will bring in out of the box thinking. It will focus on the future and not limit itself to short-term thinking.
By limiting, strategy formulation to a closed group of CxOs has risks and disasters. It is not a question of competency or intent. Every team has its blind zones, and external strategy input can be valuable.
How to avoid it? Every organization should bring in an empowered external coach/strategist. He will play the role of being:
- A guardian of the strategy formulation process
- Devil’s advocate questioning every assumption (including obvious ones)
- Ensuring that you have taken holistic inputs from all stakeholders
- Bringing in broader industry experience
- Establishing Boundary conditions and ratios for a healthy business model
It’s difficult for a management team to bring in an external entity and give high empowerment. Ideally, it should not be the decision of shareholders but owned by the management team.
Reason #4- Lack of Agility and Responsive Strategy
Let’s say that you have created a robust strategy with most of your assumptions validated. What will you do if the market conditions change and new competition comes in?. How will you react, if new technology disrupts your products, and tariffs change?
A business strategy has to be a living and evolving organism. Most companies do not prepare themselves for new developments, sudden shocks, and setbacks. There is a rigidity built in finance, production, products, and channels.
This limits the capacity of a company to respond to expected and unexpected events. Trust me; uncertainty is the only certainty in today’s business environment. However, most companies do not invest in building flexibilities and back-ups.
How to avoid it?
You can build agility and responsiveness by adding the following components:
- Event-Response Sheet: List the top 10 possible disruptions and how you will mitigate them. What readiness and resources an organization will deploy? For example, what you will do if there is a price war, and you cannot match your competition?
- Assumption Validation Sheet: You cannot confirm every premise. You should mark out the hypothesis which is not confirmed, and set up strategies in case it does not work out. For example, what you will do if the demand you imagined on a given price does not materialize?
- Agile Capabilities– You need to make a ‘Flexibility’ game-plan, including
- Your production facilities to change their product-mix
- Ability to change financing sources
- Diverse Sales & Service Channels
- Ability to create product variants to fine-tune customer tastes
Strategy Failure Reason #5- Not involving stakeholders
Companies consider strategy as an ivory tower function. A set of senior individuals churn out the blueprints, which the worker bees will execute. It is less blame to corporate governance, but more to the traditional mindset of inertia.
Typically, strategy formulation excludes field employees, vendors, customers, channel partners, and industry experts. Thus, companies miss out on high valuable and passionate inputs. Also, not involving stakeholders dilutes ownership at all levels.
How to avoid it?
- Set-up a process to collect ground-level inputs from your field staff.
- Reach out to key customers, understand their business needs and plans.
- Include key channel partners in the strategy discussion teams
- Include core vendors to take their ideas and also to confirm their readiness in delivering the product and production agenda
- Hire industry expert(s) to validate assumptions and provide market land-scape.
Stakeholder involvement will give rich dividends when we listen with humility. We need to complete the feedback loop, updating people on what happened to their inputs. It will help to show openness to diversity of views. It is the actual test of leadership.
Reason #6- Traditional ‘Annual’ Mind-set
For certain months in a year, the management team spends a lot of energies to develop next year’s strategy. However, the plan falls apart more often than not within the first few months. Then the organization moves from one fix to another, and one crisis to another. Also, it takes the focus away from building a future-ready organization.
How to avoid it?
- An enterprise should plan for Short (6 months-1 years), medium (2-3 years), and long-term (3-5 years).
- A strategic blueprint should now be an annual but a quarterly rolling exercise. You should make ongoing adjustments to keep the strategy in synch with current realities.
Strategy Failure Reason #7- Imitation trumps over out of box thinking
Companies play safe and that is why strategies fail. They feel secure by following the strategies followed by the industry leaders. There is nothing wrong with learning from your competition. However, unless you have innovative and creative ideas you will always be a follower. Companies with killer new ideas and courage to try them out, get ahead of the competition.
How to avoid it?
A company cannot bet its existence on a new, untested idea. At the same time, they should have at least ten brain-stormed ideas which they should incubate. The chances are that out of 10 pilots, 2-3 ideas will be winners and become force-multipliers.
Reason #8- No Strong differentiators and Entry-Exit barriers
Every company needs to have USP, entry, and exit barriers is a risky proposition. Good operational backbone and sales machinery can ensure short-term success. Still, without offering something unique, you will ultimately become the victim of price-wars.
Companies without differentiators, become a ‘Commodity’ player and a ‘low-cost leader.’
The reason for not being able to develop differentiators are:
- Differentiation demands change in the existing product portfolio, processes, skills, and infrastructure.
For example, if I offer onsite replacement instead of repair, it will mean a complete service overhaul. It will need after-market parts inventory management and higher working capital.
- Differentiation demands quick and decisive change-management, and few companies have adequate leadership depth.
- Additional investments- Differentiation means money for new products and sophisticated infrastructure. Companies may not be ready to sacrifice their current margins for future growth.
- Differentiation means taking a risk and doing things that you have done before. An enterprise may want to play safe.
How to avoid it?
Lack of differentiators is the biggest reason for why strategies fail. It would help if you work out your strategies so that at any point, you have at least:
- Five short-Term differentiators (competition can catch up within 6-12 months)
- 3 Medium-term differentiators (competition will catch-up in 2-3 years)
- 2 Long-term differentiators (competition will catch-up in 3-5 years)
It is the CORE of your strategy blueprint. Working out differentiators is difficult. There are three stages in the process:
- Picking the right differentiators– For example, if you make batteries, you will go for the back-up duration, and not for lighter weight. The customer is not concerned about the weight as these batteries are placed on load-bearing structures.
- Going for maximum return and most competitive USPs– There are many things, for which customers will pay. Choose the ones, for which he pays the most, and what will be difficult for your competition to catch-up. For example, giving onsite replacement could be difficult for your competition if he has to overhaul his service and support network.
- Invest in differentiators– If you have picked a differentiator that makes sense, invest in it all the way to make it a strong competitive edge. Please do not leave it half-way.
The idea is like the previous point of out of box thinking, where you incubate new ideas and work out some big winners