Corporate Strategy Is About Trends
With the rise of COVID, we’ve seen huge trends take over, galvanize and basically capture the entire world within a short period of time. Corporate strategy is about how one identifies and responds to trends. It’s about knowing when your business should find a trend, knowing when to jump in, knowing when to ride that trend through the release of products, services, etc., and knowing when to jump out.
History is littered with examples of companies that saw a big trend—like social media, over-the-top streaming, virtual reality and electric cars. Some companies saw those trends and went in early, but ultimately, they were unable to ride the trend, or they went in before the trend reached mainstream status. Therefore, the investment never really panned out. Other times, they went in early and waited it out until the trend gained momentum, but someone else came along and benefited from the trend to a greater extent.
In surfing, the first surfer is not always the one who is able to ride that big wave. So the question becomes, how do you identify trends? If you extend this to pure strategy and look at the work of Clayton Christensen, he liked to say that disruptors are very hard to identify because they are usually ignored in the market. They are ignored such that incumbents stay working with established clients, and the disruptor picks up all these little clients at the bottom that nobody wants to serve and slowly starts adapting and improving. And as they adapt and improve, they start picking off all of the bigger clients. By the time the incumbent notices this newcomer, it’s too late. But the issue becomes: how do you identify this trend? How do you know something is worth pursuing?
Trends can originate in different places, but there are usually two ways they originate.
I recently read an article about a French restaurant that received a Michelin star, which is a big deal because it’s a vegan restaurant. While non-French restaurants have received Michelin stars for vegan menus, it’s the first time a French restaurant has received this. It’s even more of a big deal because one of the restaurant’s signature dishes is a vegan version of the enlarged liver of a duck, and the restaurant is located in the region of France that is known for producing this liver.
This premium establishment, the Michelin committee, confers a Michelin star on a vegan restaurant, and therefore helps make veganism cooler. This is an example of how an establishment is anointing that something is cool, worth having, luxurious and part of the mainstream. We see this very often. If a large company adopts something as a best practice, the mass market will follow. That is one way it occurs.
The other way this occurs is when the establishment never sees it coming but change bubbles through at the grassroots level. Hip hop is an example. This genre has exploded recently, but it’s been around for the last few decades. The difference is that it’s only now being noticed by established brands or what we like to call the establishment.
Ten years ago, you wouldn’t see a hip hop music video or hip hop music being used in mainstream advertising. You wouldn’t see hip hop symbols used in mainstream ad campaigns. This is an example of a trend created outside of the establishment, but because it became so popular, the establishment had to work with hip hop brands, taking the genre even further.
As you’re thinking about trends that are affecting the world, one of the biggest mistakes I see in strategy, in every country I worked in, for every type of client, is that they will go to an established, elite market research company or consulting firm and ask about trends. But here is a mistake. If the establishment—consisting of the elite consulting firms and the elite market research agency—is unaware of the trend, but the trend may be real, they’ll never put it in their report in the first place.
Many years ago, I listened to an interview with one of the world’s most famous fashion designers. They asked him how he knew what would be important in the world in a few years, and he said that twice a year, he goes to the Ginza fashion district of Tokyo, Japan and spends time drinking coffee, walking around and watching what young girls think is cool. According to this successful designer, they tend to set the fashion trend for Asia, and parts of it then get absorbed and exported into the West. He said that nobody is going to be able to commission a report telling him what a trend is going to be in a couple of years because nobody knows it’s coming.
As you try to identify trends as a business, remember that there are two types of trends you can identify: trends that are already here and trends that are coming. Trends that are coming can be split into two parts: trends that will be created by the establishment, and trends that will be forced on the establishment by a grassroots campaign. For trends that are created by the grassroots, you have to keep your ear on the ground and see what people are doing, listening to, reading and eating—and you can’t get that in a report. You have to keep your ear on the ground and see what is happening out there.
This is an excerpt from Monday Morning 8 a.m. newsletter, issue #14.
Before reading this, remember that it is a successful Firmsconsulting strategy to sometimes “park” MBA clients in internal strategy units at banks before we feel they are ready to apply to MBB (McKinsey, Bain and BCG) and other consulting firms. This works because the client is in an internal strategy unit that has some cache with consulting firms, but crucially, this is a temporary stop before they go on to join McKinsey, BCG, etc.
The article below is about readers who simply want to stay in internal strategy units to learn management consulting skills. There is a major difference between both strategies. We recommend the former and not the latter if you want to become a capable management consultant.
Management consultants are all over the place. The big-3 alone have an estimated 50,000 alumni working across the world. Moreover, the rise in the use of management consultants throughout the 1990s accompanied by their rising fees led to some clients actively trying to replicate consulting skills in-house by creating internal strategy units. This professionalized the development of internal strategy consulting teams and created a second-act for many exiting consultants who did not want to immediately jump into operating roles.
The banks have been particularly guilty of propagating this trend. They also never seem to learn from the difficulties associated with such past attempts. Every three years or so another banking executive, usually in the same bank, thinks he can set up an internal strategy unit which will work. Despite years of failure, he thinks it can be done correctly this time. It’s a predictable pattern, like death and taxes.
Every bank we have met is doing this, trying to do this or exploring the idea. If I tried to name them all it would take too much time.
The thinking behind internal strategy unit is almost always the same:
(2) Hire associates and analysts to do the work.
(3) Save money by not hiring management consultants.
The idea that a few smart people can find ideas for improvement and opportunities for growth is a supposed no-brainer.
Each week we get several queries asking about the value of joining these internal strategy teams at banks.
The reader surmises that since the team is led by ex-BCG or ex-McKinsey partners and managers, then it would be the same as joining a management consulting firm. The reader is sometimes, though not always, trying desperately to justify their wish to take the opportunity.
And why would they not? Given how hard it is to get into McKinsey surely the idea of working for an internal strategy consulting unit staffed with consulting alumni must be the second best option.
7 reasons why working for internal strategy unit may not be right for you
There are some major and critical differences between working for an internal strategy unit at a bank versus joining an élite management consulting firm. If you really want to join an internal strategy consulting unit, then that is fine. There is value and merits to doing that. In fact, in many countries it can help you eventually land a consulting position, but does not teach you the same skills as what you would learn at an elite management consulting firm.
That sounds counter-intuitive but it is true.
Just do not justify it on the basis that it is the same as joining a top management consulting firm. It is not. Here are the critical reasons why:
1) First, in a management consulting firm you will be carefully taught a rigorous problem solving approach which you can apply to any situation. This flexibility is one of the values of management consultants. They can work in any situation, at anytime, anywhere in the world and at a moment’s notice.
In a bank, you will be working on very similar issues. Therefore, it is unlikely you will learn the ability to apply the problem solving approach across issues and industries. In a perverse case, you will acquire industry knowledge and rely on this knowledge versus applying basic and rigorous problem solving to understand the fundamental issues. If you see how much effort goes into testing the case interview capabilities at the top firms, you will realize just how important basic problem solving really is.
2) Second, when you work in a bank, you will be encouraged to bond with your peers, colleagues in other divisions and basically make friends. Given that close bonding and the fact that recommendations need to be publicly debated for them to have any impact, how likely is it that you will produce analyses calling for a colleague’s department to be right-sized? What about an analyses pointing out that the leader of the largest and most important business division is actually underperforming? Do you have the backbone to do this? Are you willing to put your career on the line given the fact that power lies in the operating divisions?
Unfortunately, when you work in internal strategy units at banks, the existing power structure forces you to put out politically correct recommendations. You have no choice. If you put out the correct material which challenges an important person, it is sidelined. You can choose to continue being sidelined or play the game and progress. Offering lukewarm recommendations to get ahead is not management consulting.
3) Third, speaking about power structures, in any bank anywhere in the world, the power and influence lies with the operating units and the operating leaders. It is a badge of honor, a sign of recognition to be awarded the chance to run an operating unit.
In fact, you can Google this, read about the careers of Jamie Dimon and Mike Carpenter. Dimon was a brilliant HBS graduate who led Sam Weill’s strategy and planning. Dimon did everything in his power, according to his biography, to get into the operating units and lead a profit centre. In his words, “planning was half of the game”. Carpenter was a star BCG partner who was recruited by Jack Welch. He ran Kidder Peabody and eventually went to Citigroup. There he was “exiled” into strategy planning when his performance dipped.
Sir Deryck Maughan the former head of Salomon Brothers experienced the same issues. When his performance dropped he was asked to move into strategy planning.
The bottom line (no pun intended) is that internal strategy units at banks are seen as killing fields for under-performing executives. It’s hard to admit this but it is true. The exception to this rule is Goldman Sachs. Of course, they do not staff the internal strategy unit with ex-consultants and the unit works on organizational issues. Assuming you are not going to Goldman Sachs’ internal strategy unit, why would you want to work in a part of the business with such a bad reputation and absolutely no influence?
4) Fourth, consultants from even the top consulting firms are given a really tough time when they work at banks. What makes you think you will fare any better? It will be much worse by a factor of 10 to 50! Your advice will be ignored, analyses openly ridiculed and questioned. It can become debilitating. This would not happen to you if you were a BCG case-team assigned to JP Morgan. You would get respect even if the employees resented you.
The internal consulting units inevitably respond to these internal organizational issues in two ways:
Despite their moniker of being an internal strategy unit they end up picking up fairly mundane work. They focus on conducting surveys, and, especially, undertaking business-process-reengineering work. There is nothing wrong with business-process-reengineering work, but even here, they struggle to get any traction for the reasons listed above.
They also become quant jockeys. They put out fancy analyses which makes them feel all warm inside but which is never ever used. A management consultant’s job is to give the correct recommendations AND make an impact at a client. Consultants are sometimes unfairly mocked for producing reports which sit on a client’s desk, I would argue that dishonor belongs to internal strategy teams at banks who want to act like management consultants and do not realize they face a very different set of expectations. No one really wants their reports. They are seen as implementation managers.
5) Fifth, whether you like it or not, you must realize that in a bank, to rise you must run a business. Please make sure you understand this distinction. Consulting firms are designed to promote and reward thinkers. That is how you make partner and eventually senior partner. In the internal strategy unit at a bank, your reward for doing great work is to have your entry into the operating units fast-tracked.
Understand that for a minute. No matter how well you do in the internal strategy unit, you will still need to very much prove yourself in the operating side. Even if you came to Bank of America from BCG as a manager, while you will have that incredible brand on your résumé and respect it confers, you will still need to eventually move into the operating units.
6) Sixth, banks do not reward smart ideas. A bank’s currency is its share price, net profits and risk profile. If a bank produces this then it is a success. Those who help the bank produce these things are rewarded and recognized. Smart internal strategy unit’s guys and ladies are not rewarded unless they meaningfully and directly contribute to the bottom-line.
Management consulting firms on the other hand build value via ideas, publications and influence. Can you see the mismatch? Your internal strategy unit will march to a different beat.
About 70% of McKinsey, Bain and BCG employees are managed out of the firm. That means they are asked to leave since the firm did not think they would make partner. In laymen terms, they are not good enough. So when you meet an alumnus of these firms you have to ask yourself the following:
- Were they managed out?
- They may be a McKinsey alumnus, but how long were they actually there?
Do not be afraid to ask these questions. Just do not ask them directly. It is your career on the line. Can you learn anything from someone who was managed out? What can anyone teach you who spent just 12 or 18 months at a management consulting firm? If they left as a partner that is a different story. The bottom line is to be wary of working with internal strategy units stocked with alumni of the top firms. Quality is an issue.
7) This point comes at the end but it is probably the most important. People who served at the junior levels of consulting firms think true management consulting is all about analyses. They are wrong. Unless they made case manager or associate principal they have likely never learned how to take the pieces of information from analyses and construct recommendations.
This is a critical point. Knowing how to break down an issue with analyses is only part of the way in an engagement. The other part is to bring it all together to create the recommendations. Only partner level consultants can do this. Junior employees are always analyses junkies.
My point is that you can only be exposed to the full collection of required skills at a management consulting firm. Moreover, you need to learn the consulting value system. It is vague but without it learning how to size a market means little. Learning the culture and value system of management consulting takes time to understand.
So if you get an offer to join the internal strategy unit at a bank or another company, even if it is led by “ex-McKinsey managers”, think very carefully about what you are getting into. I can assure you it will not teach you to be a management consultant or expose you to even 10% of the true experience. If anything, you may learn the wrong skills and never gain the correct training, or worse end up thinking this watered-down version of consulting is management consulting.
If you do not get into McKinsey, Bain or BCG then do not subject yourself to an internal strategy unit unless it is just a stepping stone to move into consulting. In that case, you need to be very careful about doing things which make you attractive to consulting firms. Merely being in the internal strategy unit is usually insufficient.
6 things to do if you want to join an internal strategy unit as a step to join MBB
If you want to join an internal strategy unit at a bank, you should do the following:
- First, ensure you have the capability to see through your plan to the end. If you have weak grades, a weak leadership profile and a poor profile in general, then the odds are that even if you worked in a good internal strategy unit, you will not be successful when you eventually apply to BCG. Simultaneously fix these gaps.
- Second, choose roles where the impact you are having is very specific, quantifiable and your role in influencing others is very clear. That is very important to your personal experience interview discussion.
- Third, show rapid progression in everything you do. Mediocrity will not play well when your application is reviewed.
- Fourth, try to avoid the habit of picking up and using consulting jargon. This is irritating to McKinsey interviewers who all speak in very crisp, clear and jargon free language. Understand the basic principles of what you are doing and explain things in English.
- Sixth, create a network of ex-consultants from outside your group at work so you have an independent source against which to verify and corroborate the expectations of management consulting firms.
- Seventh, before you start any initiative ask yourself how it will look written up in your resume and only proceed if it is acceptable to you. If it looks weak, you still have time to alter the initiative, your role in the initiative or possibly avoid the work altogether. Show initiative on things that matter and see it through to the end. Before you assume responsibility for a 3-months project to save $15,000 in printing costs ask yourself how this story is going to play out in a case interview. Is it really that impressive?
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Corporate Strategy for Power Utility
Corporate strategy is not like a business unit strategy whereby the corporate objectives of the parent are guiding the business unit/division.
Understanding business unit strategy is much easier if you think of a lighthouse analogy.
The direction and objectives of the parent company are the lighthouse, and the purpose of the business unit strategy engagement is to watch the lighthouse and build a plan to get there. So, the lighthouse may be, for example, insisting on no less than 30% market share and a return of 18% on all investments.
In business unit strategy, the consultants need to build a path to these objectives.
In corporate strategy, there is no lighthouse. The job of the corporate strategy engagement team is to develop that lighthouse. What should be the purpose, direction and objective of the parent? The canvas of options is blank and it is scary. The longer the team takes, the longer you have life rafts aka the operating divisions floundering around for direction.
This is why corporate strategy is so complex. There are so few rules and boundaries and an inexperienced consultant can end up causing a lot of damage. A too conservative management consultant would stick to the core business while a too adventurous management consultant could recommend a leap in a direction that is just too far to make.
The key is, of course, to follow the data. But it is naïve to think that is enough. It is also about judgment and the ability to extract a different understanding from the data.
An outstanding corporate strategy partner will need to think about where the market is going, what competitors would do and whether the client has the resources to execute the recommendations.
I was a corporate strategy partner and I have actually done very little business unit strategy work. The jury is, of course, still out on my abilities as a corporate strategy partner because we need to wait about 10 to 15 years to see how my clients will do.
Why so long? I worked in slow sectors like resources, utilities, and state-owned-enterprises. They do not work as fast as Apple, and even if the advice I provided shows some results in the short-term, we need to see if it is sustainable in the long-term.
To imagine a state-owned-enterprise doing a victory lap, close your eyes and picture a snail jogging through molasses.
I could have written any piece about corporate strategy, but I want to focus on one area.
It will be very easy for me to talk about the data analyses and the fairly creative techniques we used in this study. I am going to do that a little because it is important to understand them for context. However, I am going to focus this piece on the method we used to help the executive board of a power utility in Asia understand their strategy choices.
In all my time in management consulting, this is the most elegant piece of work I have ever had the privilege to lead and help a client understand. When I die, I will think back to this study and consider it a crowning moment in my career.
I really consider all the mentoring I received as an associate, consultant and project leader, etc., was building up to this moment.
Context to the Corporate Strategy Study
“Utility” is the name given to a business that typically does not see radical shifts in its business model over short periods of time. Given the steep barriers to entry and the massive costs to change, once the utility is operational it will generate a predictable flow of cash.
Think of your local water provider. That business has probably not changed much in the last 20 years. It is usually profitable but has very low margins.
Although this is true on average, there are pockets of rapid change. Deregulated markets where private companies can operate, customers can pick service providers and prices are set in the market tend to see lots of competition.
Parts of the US and Canada have experimented with allowing renewable power which allows consumers like you and me to put a solar panel on our roof and sell the power to the local utility. So there is movement in some parts of the world.
But most markets are dominated by one or two giants and in most places just one giant. Since it takes so many years to build a power station or the lines connecting power stations to cities, the opportunity for change is limited.
If you have one dominant player, regulated or controlled by the government, then you can imagine how many corporate strategy studies will be done. Very few actually since the dominant utility in a market does not need a corporate strategy every year. Maybe a review every two to three years but never a full study.
As a firm, we had done a lot of work on power utility corporate strategy out of the German offices. The German offices have always been the flagships for corporate strategy work.
Particularly in that period from 1992 to 2000, the collapse of the USSR saw many Eastern European countries require help on restructuring and privatizing their power assets. So that is why the German offices had so much experience in this field.
Outside of Germany, we were not doing as well. McKinsey, in particular, was doing a lot of good work but there were not so many opportunities beyond the emerging markets.
We saw a shift begin around 2000. Massive urbanization around the world, consumerism, and industrialization led to the start of huge power plant and transmission line construction projects around the world.
A good strategy partner needs to identify a trend that will impact a client and help a client understand that trend.
One of the things we noticed is that all corporate strategy work, including our German offices and competitors, build their recommendations on power plant construction around least cost analyses. I do not want to get into the details, but basically, it meant which power plants cost the least to build and maintain over their lifetime.
Power plant construction analyses had been done that way for years. It was the gold standard.
When something is conventional wisdom it is ripe for disruption.
The Insight on How to Present Corporate Strategy Options
At a utilities conference in London, I had witnessed an academic by the name of Shimon Awerbuch present a very crude and theoretical way to advise power utilities on their construction projects.
When I saw what he presented, it is a little bit like seeing the answer to the meaning of life. While this poor guy was being obliterated by the energy planning executives in the audience, I could see the brilliant value of what he was presenting.
I think I saw more in his work than he saw in his own work.
We spent a lot of time talking and he shared much of his work with us. It was very crude and there was much more to be done for this to work. He had not even discovered the balance sheet constraints or how to fix them. Yet, the principle was brilliant.
Basically, it takes a well-established principle in financial economics and applies it to corporate strategy in power plants. Harry Markowitz and William Sharpe won the Nobel Prize in Economics for their work on mean-variance analyses.
Basically, imagine a graph with stock returns on the y-axis and risk (volatility of the stocks) on the x-axis. Markowitz and Sharpe independently showed that if you had a portfolio of 100 stocks and changed the mix of stocks in your portfolio 10,000 times. You would get 10,000 different stock portfolios.
Each portfolio would generate a different risk and different return. If you plotted the risk and returns for each of the 10,000 portfolios you would get this beautiful efficient frontier graph. On a single page, you could visually see the impact of adding more tech shares to your portfolio.
The mechanics and math of this is not important.
Basically, Awerbuch was saying you could do the same things with a construction project. If you wanted to generate 100 Gigawatts of power, you could have 10 nuclear stations do it, or 1 nuclear station and 9 coal stations, or 2 nuclear stations, 3 wind plants and 4 coal stations.
Each of these combinations produces the same output but have different returns and risk profiles.
When I looked at that I realized something important. A consulting partner wants the executive board in a strategy session to not become inundated with lots of data points. Basically, I do not want the board to get involved in vetting painfully specific data. That is not their job.
I would want the board to see the big picture and make decisions on the big picture. I have led several corporate strategy sessions with utilities and the board always struggles to understand the trade-off between different data points using different techniques and from different sources.
For example, the board will typically receive a pack of about 60 slides in a presentation, and not all are from the same consulting firm.
Some slides will be from the internal planning department showing the costs of building each plant. Another team will have a slide showing the risks to the transmission system. Another set of slides will show cash-flow projections. Yet, another may come from bankers showing the impact on the bond ratings if more debt was used. You get the point.
I have always seen board members struggle to understand what would happen if they took more debt. How would it impact all the other issues? Therefore, a meaningful discussion could not take place because those answers cannot be provided in the meeting.
What happens is the board will speculate and ask for further analyses, which merely paralyzes discussions. The trick is to give the board enough to make a decision, but not so much that the data is confusing or stalls decision-making.
All you end up seeing is a bunch of frustrated executives trying to make some decisions blindly.
What I saw in this new approach from this professor was an elegant way to get the board to make decisions. Rather than giving them 60 slides, we could give them 1 slide. Each of the options available to the company plotted on one simple graph, and you could intuitively see which option created more risk or return.
Granted, he had not figured out how to do it beyond very crude calculations, but the principle was sound.
For that matter neither had we.
Whenever you are introducing a new way of thinking to a client there is a level of education involved. The concept was and is unusual. It would take time for clients to understand its value.
Therefore, we decided to start discussing the idea with an Asian utility planning a large construction program. We had been retained to evaluate the different nuclear design options that the client could use. It was a basic feasibility study.
As that study was coming to an end, we began talking to the head of the planning committee to determine how his team could analyze the trade-offs and how he would get the board to analyze the trade-offs.
Conducting the kind of analyses required to produce this simple chart was extremely difficult. I had not seen it done anywhere else. Given its complexity, the head of the committee was intrigued but not really qualified to know if it had the rigor of its current planning process.
Therefore, before he would commit to anything, he wanted us to meet the head of the cost-planning department to see if our approach would pass the rigorous standards of that department. Basically, did the new approach take into consideration all the factors currently taken into consideration? If not, why?
Proud engineers ran the cost-planning department. These were not guys who were simply waiting it out for a promotion to a management role. Some of them had had the same slide-rule desk for their entire career. If you enter the department all you see is a sea of slide-rule desks used by architects.
They check everything, in painful detail and with painfully long explanations.
That meeting morphed into 8 meetings over 4 months. They would raise questions and concerns and we would need to go back to the office and think through the approach. Now, clearly, this was taking up a lot of my team’s time and my engagement team of consultants was pretty busy on the main study.
So, we proposed the idea of doing a higher-level version of the study, just to test the idea. If that worked, we could consider the more detailed study. In many ways, this was a paid proposal to the client that allowed our team to begin working on the corporate strategy before the client issued a request for proposals.
As a state-entity, they had to tender everything.
Corporate Strategy Proposal Strategy
I do not want to turn this piece into a discussion on the intricacies of the power sector because the lessons are useful to readers in all sectors.
Suffice it to say, we did an outstanding job thinking through the approach we will use to do the full study. We worked with the cost-planning team for 5 weeks to come up with the issues they wanted addressed in our analyses. We had still not figured out how to actually do the work, but the cost planning engineers believed we knew enough to proceed to the full study.
All this time, we did not care much about the fees or even the smaller high-level study we were conducting. It was nice to have it but we had two other more important objectives.
First, to ensure the cost-planning engineers signed-off on our approach. That was crucial for credibility.
Second, we were following a Trojan-horse strategy to plant ourselves in the department, which would be writing the request for proposals.
As we were showing the cost-planning engineers this simple and elegant way to get the board to understand the construction options, the engineers became excited. They believed that for the very first time, the board could receive a document that crisply articulated the trade-offs.
In a normal board meeting, the engineering opinion would be in a separate document while the business issues would be in another. The boards technically spent most time on the business issues. With everything on one page, the board could no longer ignore the technical impact.
For example, it frustrated the engineers that they were never allowed in board meetings. Yet, crucial decisions were made which they had to implement and which the board failed to analyze fully.
In one case that became the most cited tale of failure, the board had voted to reduce costs by changing the engineering standards applied. The board had failed to realize that the new standards did not apply to all the power plants and one plant had to be scrapped when it could not be run safely based on those standards.
The cost-planning engineers felt that although our approach did not discuss any engineering issues, the impact of those decisions could be plainly seen and that excited them.
Seeing this, the planning engineers basically wrote out the requirements, for the analyses portion of the corporate planning request for a proposal, which was asking for something no other consulting firm had heard of.
So imagine you are Accenture or Booz receiving this document and you see very detailed requirements on a technique to measure and integrate all the risk and return probabilities into one simple metric. What do you do?
You assume, like they did, that the client was just listing everything they could think of and was not really sure of what they wanted. So Accenture and Booz presented their usual approaches and did not meet the requirements.
Therefore, while we never influenced or wrote the request, our presence led to the authors of the request having very specific ideas of what the study should look like.
Why was this important?
Therefore, the request for proposals is written in this manner. They typically are a list of items that must be completed. It is assumed that if the list of work is done, the strategy can be generated. It is not uncommon to see things like “scenario planning” and “economic model of the options” listed in these requests.
This is not what strategy is about, especially corporate strategy.
If the request is written in this way, it is conceivable a very weak consulting firm can secure the work if their proposal perfectly matches the listed requirements. These proposals typically work on a scoring system and the highest score can win.
We faced a bigger problem. Through our extensive efforts to educate the client about our new approach to present strategy options, we were implicitly telling the client our old approach was slightly inferior.
In addition, the client knew we had never tried the new approach at a single client, beyond the mini-study we had done for them.
Our problem was that to show the value of the new approach, we had to show the flaws of our old approach. So we had basically destroyed any chance of getting a meaningful portion of the 25% of scoring points allocated to prior work.
Therefore, the committee reviewing our proposal could simply conclude our past experience was not relevant. It is possible the committee would be mature about this and not do so. However, we did not know for sure.
In a state-entity request for a proposal, a major requirement is to dedicate about 15% to 25% of the scoring to previous work done of a similar nature. This contribution is so high because the request for a proposal is written as a scandal hedge.
Should something go wrong in the study or the strategy fail, the entity can also say they hired someone who had done this before and how could they have done anything more to vet the consultants.
Therefore, part of our effort was to make the team writing the request understand that prior experience should not count as extensively, but a greater proportion of the scoring should be allocated to how the study would be uniquely tailored to this client.
That was a fair way to do it because a management consulting firm should not rely solely on its past work. It should demonstrate a unique approach for every client.
Therefore, this did not give us an advantage but eliminated an unfair disadvantage we had at this point in time.
Executing the Corporate Strategy Study
We won the right to advise the client. I believe we won it because we had a superior way to allow the board to make decisions.
When you are building any financial model, the bigger the model the greater the trade-offs in accuracy. Our approach was certainly less accurate everywhere but provided a more useful output overall.
Other firms were going to partner with specialists and amalgamate all the different data. However, it still meant the board would need to pull out their reading glasses, squint and try to understand what was being done.
Make no mistake this was a tough modeling study where we would have nothing at the end of the day unless the model worked. However, I did not want the client to see that side of the study. We did not want them to think of this as a modeling assignment so we hid that part from them while we were finishing the model.
Therefore, for the first four to five weeks of the study, we were in the awkward position of presenting theoretical updates to the committee.
Rather than showing them actual results in those updates, we had to show them dummy numbers and use that moment as an opportunity to teach them how to have the main discussion when the real output started arriving.
That was really tough to plan and manage. We had to resort to almost discussing case studies of competitors to help the board think about how to analyze the issues in the industry. This was hard to do because the board consisted of CEOs of other utilities as well, who felt they did not need the exercise.
I think there was a lot of frustration on the part of the client because the output was taking so long to come out.
What we did was very challenging but I think it is important to discuss this a little further. I want to talk about one of the many challenges, which made this work difficult to do. It is called the balance sheet constraint.
Anyone with basic math skills and exposure to Monte Carlo simulations can put together a model in one night and use different power fuel mixes for the power plants. You can have 100% coal, 80% coal and 20% nuclear, 20% coal – 20% hydro – 60% nuclear and so on, and generate the graph.
Yet, life is not that simple. In fact, this is what most people do when applying this technique to power plants. They, therefore think it is easy to do but get meaningless numbers.
Remember, to plot this graph you need about 10,000 different portfolios of power stations generating the same output.
If you allow the model to plot a portfolio consisting of 100% nuclear power stations in the mix, that may very well be the portfolio which generates the highest return with the lowest risk.
Obviously, every sane board of directors in the world would want to pick that portfolio. They would want to build a portfolio of power stations consisting of 100% nuclear stations.
Ha, but there is a problem.
You already have 70% of power generated by coal stations. So clearly, the model must distinguish between new and existing stations.
There is another problem.
The power stations are not built at the same time. They are built over time and the model must simulate this. It needs to determine when capacity is being reached, how long it will take to build, and then begin the building at the appropriate time.
There is still another major problem.
Assuming it does all of this, some nuclear station designs need to be built near specific locations to help them cool. So if the model started building that type of nuclear power station, it would need to do so near the basin of a river, and it would need to also build transmission lines if they did not already exist there.
Therefore, we needed to understand the transmission costs and constraints.
Moreover, the model calculates the return from the power stations. It works out the return and risk of each portfolio of power stations.
Here is the problem. Let’s assume the perfect portfolio is 20% coal and 80% nuclear. However, the company may not have sufficient cash to build that portfolio, and if it tried to do so, its credit rating could drop and the cost of borrowing increases. So, as you can see, the volatility of the returns is a different risk from the credit rating change due to the deterioration of the balance sheet.
The solution was to model the entire balance sheet. Now, when you run 10,000 permutations of portfolios on a laptop or PC in the early 2000’s, it is going to take a basic Dell laptop 8 hours to run one permutation. We had to run 10,000 permutations.
That is a problem we honestly did not predict. This was before cloud computing, Amazon S3 or big data. There was no easy way to do this work.
We initially rented 50 Dell laptops and had to manually set the models to run and collect the results in the morning. We wanted to do the simulation on a small scale to see if the data at least worked.
That first few nights we had to have consultants work in shifts to watch the laptops and make sure they did not crash or freeze. If they did, we needed to reset the machine and rerun the analyses on that machine. So if the machine crashed at 6 am and the other results were coming out at 8 am, we needed to work with one less data point or wait for the resent laptop to complete its run.
The reason I am mentioning this is because in some ways we were well before our time in using big data and technology. Management consultants today drop around those words like it is easy to just plug in and play around with big data technology.
I agree that technology is exponentially much better, but the problems have become even more complex. So, the net impact is that it is still confusing if you are working at the frontier of using technology to solve consulting problems.
Unfortunately, we had to completely rely on our fabulous office IT team for help. They were very nice about it, but this was well outside their league. We needed 10,000 portfolios a night at the bare minimum and 100,000 portfolios run to generate meaningful results.
But they really tried. They were up most nights trying to figure this out.
Eventually, the cost-engineers came to the rescue. They were working with Accenture to use the mainframe at a university to run their infinitely more complex models. They worked with Accenture to write the code to string together everything and run the models at night.
Discussing The Power Utility’s Corporate Strategy
Therefore 6 weeks into the study we had our very first results. There were some kinks and bugs in the analyses, but we quickly ironed them out and developed this simple, elegant and insightful single view of the client’s choices as a business.
While we were waiting for the results, we could have easily have shown the data from parts of the model.
For example, we had to calculate labor benchmarks for each power station, to use in the model and we had these. However, when we tried to present this to the client they would also push back and say “but you said the relationship between the data was more important so we will wait for the first cut of the numbers.”
Yet, it was well worth the wait.
The discussion went as we expected. Though, I really took a lot of stress in the initial update sessions because we had little to present and used the sessions as education sessions. This paid off in the end because the board and project committee could easily understand and discuss the findings.
When I say “I” note that the associates and consultants typically do not attend the board meetings. So it was senior partners, the project leaders and myself. It was the senior partners who were putting gentle stress on me. It was stress nonetheless.
Let me give you an example of the counter-intuitive findings this approach presented.
There was an off-take agreement the utility was negotiating with a neighboring country in the South and it was generally assumed the deal was not beneficial. In the agreement, the country agreed to buy power from the client. The rates were not fixed and fluctuated with demand. Moreover, to meet that agreement, the utility could only build gas plants since the agreement was to provide peak power.
Peak power is a generic phrase for power demand that happens very quickly and is expensive to supply because the plants producing them are expensive to run.
We call it the peak because if you visualized a graph of power supply over time across the country, the graph is typically drawn by horizontally layering the source of the power. So think of a lasagna dish cross-section. At the bottom, you have very cheap power like coal and nuclear plants.
The layer on top of this cheap layer is slightly more expensive. The layer at the top is the most expensive. That is usually gas. When power demand peaks it happens really quickly and you need to produce the power needed fast and for a short period. Gas stations are best for this.
They are called peaking power since they occupy the peaks of the graph.
The study showed that while this contract by itself destroyed value, its impact on the overall portfolio of power generation was very beneficial. For one, the behavior of gas prices hedged out the behavior of nuclear prices. So they were canceling out each other. Roughly speaking, when the price of nuclear fuel went up 7% the price of gas tended to drop 5%, so the portfolio only saw a 2% increase in costs.
Typically, the least-cost analyses could not show this type of relationship.
So we could have this type of discussion with the board. The kind of discussion they never had before. For the final board meeting, they even requested we run five special strategic options they had considered and we could show them the impact.
The biggest finding of the study was the client was not running their optimal portfolio. In other words, they were generating a much lower return for the risk they were taking on and to increase that return while keeping the risk the same, they could make a few operational adjustments.
The approach does not work in every sector, but it is an effective way to present options on a single piece of paper.
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Storyboard matters in consulting studies because useful insights mean very little unless they can be woven into a compelling story. Critical insights which are not presented as a story, generally fail to get any traction at a client. In fact, that is one reason strategy studies collect dust on a client’s desk: they did not present a clear message.
When one of FIRMSconsulting partners, Michael, was a corporate strategy partner, he pretty much drove teams a little crazy to constantly refine the story. He still does that. If you are following the US Retail Banking Study (one of step by step consulting studies we released to help train our clients) you would have seen us push for a crisp and compelling story. We do the same on the current power sector study (another step by step consulting study we released for our clients to help them develop strategy, problem solving, leadership, and communication skills). We just push and push for the best story out of the data. A great storyboard will get the client to act.
That’s exactly why you should be looking into a consulting storyboard – to create a compelling story that will convey the key message to your client. Whether you have your team do an analysis and create storyboard ideas based on that, or you have a completely different strategy, your client will see a well-defined path to success.
And that is what you want at the end of the day.
Where a storyboard fits in a consulting strategy study
Boiled down to the basics, the business consulting strategy engagement structure can be explained as follows. First the key question the team needs to answer in the engagement is determined. The key question has to be split into smaller questions in a logical format. This allows the team to develop a decision tree.
The decision tree has to meet two criteria. It has to be mutually exclusive and collectively exhaustive (MECE). There are two other criteria to be met and that is taught in our programs on strategytraining.com, though if you stick to the MECE rule that will be fine. Based on the decision tree, the hypotheses are developed.
The consulting storyboard is the message engagement team delivers to the client, using the decision tree and hypotheses that have been developed, and it is based on the anticipated results of the consulting project.
Next the team develops analyses to test each hypothesis. Based on the results of the analyses the hypotheses are proved or disproved and the consulting storyboard is refined.
The diagram below shows a structure of a strategy study and a point at which the rough consulting storyboard is developed. Although this diagram helps to understand how strategy engagements are conducted from the structural perspective, keep in mind that a strategy engagement is an iterative process and can be messy. In fact, it is usually messy.
Finally, the idea of using an objective function works in almost all types of strategy and operations engagements, but does not work in corporate strategy. In corporate strategy a very different approach is used because those engagements are different. That will be covered in a different article since corporate strategy studies are so rare. And it is also covered in our advanced strategy training programs, including Corporate Strategy and Transformation Study.
What is a storyboard?
To explain the management consulting storyboard concept, let’s use an example from the animation industry. Before producing detailed animations and more, the animation team must first agree on the story.
The animation team gathers together in a room and takes blank pieces of A4 paper, they write out a short 10-word description of a scene on the top of the page and produce a rough 15-second pencil sketch to outline the animation which could go into this part of the movie.
In all, they can produce about 30 to 120 such A4 pages, stick them on a wall in sequence and everyone will be able to follow the story. This allows the animation team to debate the story and messaging without expensive animation work which would definitely change as the story changes.
To extend this analogy to a management consulting storyboard, the team needs to prepare a story of their message so that everyone in the team can understand their thinking and provide feedback. The management consulting storyboard is basically the headlines of the presentation which summarize the anticipated results from the work stream or from the entire strategy study.
In the management consulting industry, these kinds of storyboarding presentations can prove useful to everyone, from seasoned veterans to aspiring consultants trying to improve a crucial set of skills for their consulting career. It helps visualize the key takeaways and create a presentation for the client to see where they are and where they’re going.
Question from a reader about developing a consulting storyboard
To dig deeper into the concept of developing a storyboard, we will answer a question we received from a reader, let’s call him Henry.
Henry was avidly following the life blog on a study we did in the United States, where we were helping one of the largest Latin American banks to put together a strategy to enter the profitable, large and rapidly growing US financial services market. The study was focused around providing financing to low income entrepreneurs, either immigrants or US citizens.
We had been live blogging the study so everything we did you could follow in real time and we spent a lot of time discussing what we were putting together. Fascinating work. It is definitely a new way to teach strategy consulting and tends to be very popular.
“Michael, what you are doing is very interesting but one thing I don’t understand is how is it that you are able to come up with a storyboard for the client only in the beginning of your 3rd week of a 8 to 10 week strategy study?
This kind of seems to me as if you are giving a client a solution that you already have versus relying on the analysis to tell you what the answer will be. And isn’t that the criticism that consultants get that they don’t really develop new ideas for clients but put out what they already know? It does not make any sense to me so I am not sure how it can be right. “
I can understand the reader’s confusion but he is wrong and I want to explain why he is wrong.
Piece of advice on how to communicate
First it is important to point out one thing about this guy’s communication style. And, to be fair, many people have this style of communicating so it is worthwhile to address it here.
Henry is basically saying, “I don’t understand something. And because I don’t understand it, it must be wrong“. This is a really bad way to communicate.
It is extremely naïve or egotistical, or arrogant, you pick, to assume that if there is something you don’t understand then it must be wrong. For all you know, it may make perfect sense but you don’t have the necessary mindset or the necessary prerequisite knowledge to understand it.
If you don’t understand, it is better to say, “Look, I am sure it makes sense. I don’t actually get it so I will let you try it out and maybe I will get it later.” But don’t make it sound that if you don’t understand it then there is something wrong with the actual work.
It is just not appropriate. It sounds really bad to clients, superiors and colleagues when you do it. You sound like a 5 year old child.
How we could come up with a storyboard in such a short time
Besides that piece of advice on how to communicate, let’s get into how we were able to write a storyboard in such a short time.
Note that anything that we will be able to teach you here will be at a high level. You can learn these concepts in depth as you go through our strategy training. How to develop a storyboard and other strategy capabilities is also taught in our book “Succeeding as a Management Consultant“.
Now let’s address how we were able to come up with the storyboard so early.
Think about the logic here. We are not doing analysis just because we have to do it. We are doing analysis because we are trying to answer some questions.
If you are just doing the analysis because this is the analysis you always do in a strategy study (e.g. market segmentation, cost effectiveness and revenue analysis), then yes, you have to wait for the analysis to be done to see what the analysis will tell you.
But this is not the way we do things. We do the analysis for a reason and that is the fundamental mind shift you have to make.
We start off with the objective function. What is the problem we are trying to solve for the client? We then break that objective function into the direct drivers of the problem. We then continue breaking down those drivers until we get what looks like a Christmas tree, that is actually a decision tree.
The objective function is the apex of the tree and the tree breaks out. We then prioritize the branches that are most important in the decision tree to help us figure out where to spend most of our time (refer to the exhibit below for an example).
For each of those prioritized branches we then say, “Ok, what is the hypothesis to explain why this is the issue impacting the objective function?”.
Once we have the hypotheses, we can then say, “Hey, if these are the hypotheses, what tests do we need to do to prove or disprove the hypotheses?”.
Those tests then become the analyses.
We do the analyses which directly help us answer the hypotheses, which directly helps us determine if each of the prioritized branches should in fact be prioritized and, therefore, what drives the objective function.
So even before we finish the analysis, because we know why we are doing the analysis, we can say, “Ok, if the analysis turns out to be this, what is the message we will give to the client?”.
For each analysis you probably will have one or two, at most 3, possible outcomes. Rather than writing a storyboard for each outcome, we write a storyboard for what we think is the most likely outcome. And then, if the analyses turn out to be a little bit different than we expected, obviously the storyboard will be revised.
But more or less we don’t turn out to be wrong. We turn out to be right most of the time because of the logic we apply and because we are attacking the problem from so many angles that this allows us to cross reference and cross check things.
And that is the crucial point here. We don’t just do analysis for the sake of doing it. And, therefore, we don’t have to wait to see what the analysis is telling us. The analysis is being done to check certain hypotheses that we developed at the start of the consulting study. And the hypotheses are not random. They are built off the decision tree, which is also not random because the decision tree is actually brainstorming the issues which are driving the objective function.
And this is the important difference in which elite firms do analysis. We don’t just decide, “Ok, this is the checklist of analysis we need to do, let’s do it”.
We say, “Hey, hold on a second, why are we doing the analysis? What purpose does it serve?”. In our mind we are developing the storyboard which states if these are the issues and this is the way the issues turn out in the analysis, then this is the recommendation we give to the client.
We can write that consulting storyboard in the first, second or third week. And once we complete the analysis, we can go back and check if the storyboard we wrote out, based on what we thought the analysis will turn out to be, makes sense.
And if it does not, we will revise the storyboard. But I can tell you right now, 80-90% of the storyboard usually turns out to be correct. The more and more you think about it, even 95% of it could turn out to be correct.
By the 3rd week of the study, the storyboard is more or less there. Yes, few things will change. The data will definitely change. For example, we may know that a certain segment of the market is unprofitable, but likely will not know why it is unprofitable or by how much it is unprofitable. But we more or less will be able to figure out it is unprofitable.
So that explains how we are able to come up with the consulting storyboard so early. Because we are not doing analysis for the sake of doing it but because we have a reason for doing it, and the reason allows us to structure the storyboard.
What is next?
If you need an example of developing a consulting storyboard, presenting a storyboard and using a storyboard to structure analysis you may find this article helpful.
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