This book, written by three leaders in McKinsey’s Strategy Practice, seeks to address the problems of poor strategy execution that McKinsey has seen in many large companies. Based upon decades of experience working with senior executives around the world, it describes a common dysfunctional sequence of events in annual strategy meetings that often lead to mediocre performance.
Participants at these strategy meetings sit through a typical detailed slide presentation in which only one course of action is offered – the one that is ultimately approved. While the presentation may include several new initiatives, there is typically a resistance to making big moves that would require some business units (BUs) to accept smaller operating and capital budgets. BU managers typically aim for incremental improvement, which results in available resources being spread across the organization in a thin layer like peanut butter on bread. Thus, the annual strategy review is really just a budgeting exercise that seldom leads to superior performance. BU managers may give presentations that show “hockey stick” growth trajectories several years out, but those projections are rarely achieved. Plotting planned vs. actual results over many years results in the dreaded “hairy back,” with each year’s plan showing hockey stick projections that are never realized.
Through its own empirical research, McKinsey has developed the Power Curve, which plots the economic (profit) performance of 2,393 companies in 59 industries and 62 countries from 2010-2014. The Power Curve is divided into quintiles and has an S-shape with a very long middle. The curve rises sharply in the top quintile because companies included in it are spectacularly profitable, while it falls sharply the bottom quintile because those companies are spectacularly unprofitable. Every company’s goal, according to McKinsey, should be to move into (or remain in) the top quartile. By determining the factors which led to superior profitability at each of these companies, McKinsey has been able to calculate the various probabilities associated with moving up or down the Power Curve.
The shape of the Power Curve from the middle to the top quintiles is essentially a hockey stick. McKinsey acknowledges this, but says that it has a strategy and implementation framework that helps make the hockey stick achievable. That framework consists of ten variables or performance levers in three categories: endowment, trends and moves.
Endowment includes factors that are indicators of competitive advantage, including size, debt level and past investment in R&D. Companies that are large, with relatively low debt and significant past investment in R&D have better odds of being in the top quintile or moving up the Power Curve.
Trends consist of industry and geographic trends. Industry trend is the most important of the ten variables. Companies operating in industries with strong average profit growth have a better chance at winning. Similarly, those in faster-growing geographies stand a better chance of moving up the Power Curve.
While endowment and trends are mostly well established (and often beyond the control of management in the short-term), moves are the levers that management can pull to grow revenues and profits. Of the five moves identified by the McKinsey team, the one that received the most emphasis in the book is the dynamic allocation of resources (i.e. the ability of a company to shift funding, people, technology and other resources quickly to capitalize on emerging opportunities).
This three category, ten variable framework is fairly simple, but quite powerful. By assessing the performance of the 2,393 companies in its database, McKinsey has calculated the relative importance of each category and variable and their contribution to the probability of moving up the Power Curve. While the framework applies to all companies, it is the specific application of each variable to a company’s individual circumstances that is the ultimate determinant of success.
McKinsey emphasizes “opening the windows” in the analysis of endowment and trends to get an outside (i.e. objective and complete) view. Companies that are stuck in the middle quintiles or those that slip to lower quintiles are likely to have an internal dynamic that fails to assess these variables accurately.
McKinsey has calculated the probabilities of moving up the Power Curve that are attributable to each variable and determined that companies have only an 8% chance of moving to the top quintile. This raises the question of whether the pursuit of the hockey stick is appropriate. Yet, the authors assert that by pulling hard on two or more of the levers, the odds of success can be greatly improved (but still do not exceed 50%). Furthermore, they argue that few companies that make bold moves are likely to slip down the Power Curve.
Even so, it seems critical for a company considering climbing the Power Curve to make as accurate an assessment of their current circumstances and opportunities as possible to improve its chance of success. Formulating a plan for implementing the strategy and measuring progress along the way is also key. (Presumably, many companies will be well served by embarking on this journey with a knowledgeable and experienced consulting firm like McKinsey.)
It also strikes me that while the book’s prescriptions may not be suitable across the entire corporation, there may be pockets within it (i.e. within the individual business units) that will benefit from adopting this approach. Indeed, some companies may find that a small-scale application of the Power Curve may be a useful way to begin building a culture that is flexible and achievement-oriented. Once mastered, the process can then be rolled out to other business units, if appropriate.
The book also provides valuable insights into the causes of the dysfunction that corrupts the strategic review process and techniques for changing the culture to improve both process and outcomes. It provides many specific examples of top quintile companies that have taken bold steps to obtain superior performance. The Power Curve concept may not be suitable for all companies, but the book should be useful to many companies that are looking for ways to improve the strategic planning process to raise their chances of achieving their objectives.
December 7, 2018
Stephen P. Percoco
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