1/3/2019
TOM STEWART: 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.
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ANNOUNCER: 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.
TOM STEWART: 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. It is the market that moves America.
The National Center for the Middle Market is a partnership between Ohio State and SunTrust Banks, 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 is 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, welcome to The Market That Moves America.
MICHAEL LEIBLEIN: Thank you, Tom. It's a pleasure to be here.
TOM STEWART: 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.
But even today, people use the word strategy loosely. I mean, they'll talk about a strategy for keeping the ants away from the picnic lunch or a strategy for a meeting or something like this. What is strategy, really?
MICHAEL LEIBLEIN: This is a great question. I think lots of folks conflate the word strategy with big decisions, important decisions, even decisions by senior managers. 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. I think that's a point made nicely by Richard Rumelt 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. 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 in part a lot of value and guide a lot of subsequent choices.
Another influential professor, Pankaj Ghemawat, has talked about strategic decisions being significant commitments under levels of uncertainty or ambiguity. In my own work-- and in fact, a recent special issue we have, we've had several prominent academics defining strategies-- strategy as a series of interdependent decisions. Decisions that are interdependent with other choices within the firm, that guide other choices within a firm. Decisions that are interdependent with other actions of other rivals or close competitors, and decisions that are interdependent with a series of events or other actions across time.
TOM STEWART: 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 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 the point.
And the third thing is, it's not just a black binder today, it has a past and it has-- and making decisions that-- I guess they create decisions that-- they create future choices. I mean, my future is affected by the strategic paths-- like a path dependency, I guess, by the--
MICHAEL LEIBLEIN: Yeah, that's exactly right. It's that guiding, it's-- one of the early quips that I've always found interesting is people would talk about strategy is more than the optimal decision-- the optimal distance between telephone poles. So there was this functional expertise in 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.
TOM STEWART: We call the study "Strategic Planning for Growth" in part because 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," a study over the last year, showed that like-- sorry, at the beginning of-- in the summer 2018-- showed that more than 14%-- one in every $7 of middle market company growth could be attributed to its strategy and its strategy process. Does that surprise you? That's a big, big amount of money.
MICHAEL LEIBLEIN: After 30 or 40 years of my career, I guess I'm thankfully not surprised by that.
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TOM STEWART: You mean your job matters.
MICHAEL LEIBLEIN: My job matters.
TOM STEWART: You've got a reason for being.
MICHAEL LEIBLEIN: I think fortunately, there is some data to back that up. There's some series of empirical studies in the early stages of the strategy field, tried to think about how much of-- it was here. It was 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 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%--
TOM STEWART: Corporate choices--
MICHAEL LEIBLEIN: Like corporate scope or things that will probably outside of a lot of the interest in the middle market. I tend to think most of these firms are more focused in a single industry or maybe thinking about--
TOM STEWART: Oh, right. Right, what-- yeah. Am I a conglomerate? What industries do I compete in, right? How global am I?
MICHAEL LEIBLEIN: Yeah. Thank you. Right? 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 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-- more effective experiments and run 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.
TOM STEWART: Pick up on the word experiments. One of the things that I'm struck by 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 oh, that's interesting, and then nothing happens with them. Whereas mid-sized companies maybe have fewer experiments, but are more likely to say, aha, I like that, and go out and act. Does that square with what you--
MICHAEL LEIBLEIN: Yeah, I think that's fair. I think-- I mean, I think there also is, what do we mean-- you're appropriately asking me, what do I mean by the word experiment? I think those can be informal thought experiments or actual experiments.
TOM STEWART: So it can range from a "what if--"
MICHAEL LEIBLEIN: "What if."
TOM STEWART: To a "let's actually do a prototype."
MICHAEL LEIBLEIN: That's right. So I can think of-- so I think that there is a problem formulation phase that you'd see in-- as a consultant, I would see a lot of times in-- my academic consulting with other companies or my academic work, we see 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 their 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 in some studies, some firms are rigorously running some A/B testing or more sophisticated testing of what they think are the likely outcomes.
TOM STEWART: So you've actually raised a question that's sort of an intriguing question to me. I think every company's executive team sits and thinks, what are we missing? What we could be better. What would it take to be better? 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. They 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 is strategy, which tells me what I'm going to do and what I'm not going to do, help me sort of cope with this morass of-- or at the beginning of a new year, where do we want to be at the end of the year?
MICHAEL LEIBLEIN: Yeah, so I think that's-- you know. I'll try to think of an example. But I think the first thing is reflect back on that definition of interdependence. It's more than functional skills. So you need, 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 theory could be as simple as, if I just flipped the light switch, the lights are going to go on or off, I have a theory of what's going to happen when I take an action.
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, 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 sort of findings from this report, finding a way to coherently execute on the alternative plan. 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.
TOM STEWART: One of the things that-- we talked about the report, there's sort of three elements of it. The plan itself-- is it smart? Is it good? Is it a path to victory? The process for developing a plan, and then the process for carrying it out. And in your experience, I mean, obviously you need all three, right? I mean, a great plan with no execution is-- I've had that pipe dream too. And superior execution of a bad idea, 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 they weakest?
MICHAEL LEIBLEIN: Well, I think that's-- first of all, I'd say this is an important result, right? So 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.
Now in my experience, I think you're right. With the idea of the intuition I think in the report, that small firms tend to struggle more with the planning process. 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. So early on, you have one or a limited number of people wearing many hats.
TOM STEWART: Now I think-- yeah, 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 are the same one. I mean, there aren't very-- it's the boss, or maybe three or four people, but there isn't-- 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.
MICHAEL LEIBLEIN: Yeah. Yeah. And I wouldn't-- I would not 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, I think we found-- I think those firms would sort of fit the NCMM middle market definition.
TOM STEWART: Yeah.
MICHAEL LEIBLEIN: 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.
TOM STEWART: 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 the business literature and the management literature-- so reading the paper and reading HBR or 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--
MICHAEL LEIBLEIN: Yeah. I think-- so again, maybe I'm probably biased a little bit, but the--
TOM STEWART: So again, there's proof that there's a reason for professors of strategy. [LAUGHS]
MICHAEL LEIBLEIN: There's a reason for-- well, there's a reason for professors, there's a reason for academia. There are people who 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 in the strategy field clusters or families of ways of approaching problems. 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 the elephant. Put my arms around the leg, and the elephant's like a tree, and I'm missing the whole. 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 can maybe help bring in a couple of reminders. This isn't rocket science, but it's reminders of these-- the value of these different perspectives.
TOM STEWART: One of the things that I found striking in the-- and it connects to this-- striking in this study, we ask 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.
And that reminded me that-- that 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 B, bolder in their innovation if they brought not a team in the lab, not just a handful of people, but actually had a lot of sort of feedback from the other parts of the organization, and also from outside.
How do companies get more confident or increase their capacity to get that kind of feedback both from the bottom and from the outside? How do you open up those membranes?
MICHAEL LEIBLEIN: Well, that's-- there's a little magic there, I guess. In some sense, I think the very confidence-- the confidence comes from some awareness of the nature of the problem and how I'm working through. I'm aware of the alternative solutions, I'm aware of the assumptions I'm making. And 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 we start seeing is categories of firms or typologies of firms that have taken bundles of approaches. So you can think of a firm like-- somebody like Richard Branson.
TOM STEWART: Yeah.
MICHAEL LEIBLEIN: Or Steve Jobs is a visionary leader and it's very top-down. I can imagine that work-- that's not the finding we found in the innovation study, but I can imagine that archetype working. I think you find companies--
TOM STEWART: And though I bet that each of those actually is less Moses on the mountain than you realize. And actually, I think that there's a quote that Steve Jobs said that-- there's a quote that only half of which is repeated, and I cannot remember it, but it's like, 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.
MICHAEL LEIBLEIN: Yeah.
TOM STEWART: So you have the visionaries. You have these crazy Richard Bransons--
MICHAEL LEIBLEIN: --the Branson type, you have the Jobs types. I think you have firms that run really-- I call these firms that are running a marketplace for ideas-- I'm thinking of 3M or Google-- where know individuals-- everyone is charged with creating and sharing ideas, and there are processes in place to collect and select amongst those ideas.
And so rather than talk around the 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.
TOM STEWART: Sometimes like Google and even 3M, they have even internal markets where you can bet and vote on ideas, and so--
MICHAEL LEIBLEIN: That's right.
TOM STEWART: That's the mark-- yeah. So we've got the guru whom we hope is an informed-- an informed guru. Then we have the marketplace of ideas where things are bet on, in a sense, by--
MICHAEL LEIBLEIN: That's right. So you could actually in that marketplace, it could be internal. It could be-- you think of the work that's doing crowd-- the folks that are doing crowdsourcing or open innovation processes, and these are processes to involve more and more--
TOM STEWART: Crowdfunding, likewise for capital markets, yeah. Like, here's my entrepreneurial idea. If it's fun, it's Shark Tank, man!
MICHAEL LEIBLEIN: Yeah. That's right.
TOM STEWART: [LAUGHS] Yeah.
MICHAEL LEIBLEIN: 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 crowdsourcing or Kickstarter or open innovation process. Whether it's even a portfolio of ideas that you might see in a [INAUDIBLE] or a Siemens where 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.
TOM STEWART: Right. And that third might be-- it's probably not-- you talked about portfolio theory. But there's also sort of a fourth, which might be a bureaucratic process. We might have-- 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 off-site and we come back down.
So you can have those four sort of different models. And I think part of the point is, have one.
MICHAEL LEIBLEIN: Have one. Yes.
TOM STEWART: And probably don't have three.
MICHAEL LEIBLEIN: 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. Across those three or four--
TOM STEWART: And part of this is legitimacy, right? 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--
MICHAEL LEIBLEIN: The system says so.
TOM STEWART: And therefore that legitimacy is an important part of execution, right? 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, hey, I might go my own way, and that's where you get the strategy execution failures where the organization just sort of--
MICHAEL LEIBLEIN: It's not aligned. Doesn't believe.
TOM STEWART: And either passively resists or it goes off in all kinds of different directions. And so legitimacy and-- a legitimate process creates then a culture for execution.
MICHAEL LEIBLEIN: I think-- a legitimate process. Yeah, that makes sense. It's kind of cool.
TOM STEWART: I like that kind of-- all right, one more thing. We're just about out of time, but, I mean, 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 is pretty good. Yeah, the plan's good. Yeah, the process is good. Yeah, we executed it pretty well-- it's a B. And maybe there's some C minuses in there, and maybe there-- but what's the difference between a B and an A?
MICHAEL LEIBLEIN: Yeah. To me-- and 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 in 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 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--
TOM STEWART: --just need a different person running the fax machine, and that's not strategy.
MICHAEL LEIBLEIN: That's right. I mean, it could be big, it could be small, but this has-- they understand the theory of how they are creating value as an entity. 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, ah, at least intuitively or heuristically that there's these two or three or four approaches-- I mean, we'll talk about four theories of performance.
But they understand. Intuitively several of those perspectives can rapidly iterate through in their mind. OK, this is more salient in this problem. They generate alternatives. And then based on experience, based on maybe some sort of more rigorous experiment, they choose what is a good or a less good approach. If I come back to Rumelt's Good Strategy/Bad Strategy or strategy/anti-strategy, I think you could say, they understand and purposefully select which actions they'll implement.
TOM STEWART: So what I think I've heard is that the critical-- strategy is critical to growth, we know that. 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 down through the organization.
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. It's that simple.
MICHAEL LEIBLEIN: It's that simple.
TOM STEWART: 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. 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 our 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.
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