Strategic Flexibility Is a Myth
The first theme is what I call “strategic flexibility is a myth.” In business—and for anything in life—you need to go all in. COVID-19 is obviously a big topic that’s driving news and corporate strategy around the world. One of the big things we’re seeing is that banks that made a big investment in going digital before COVID-19 are reaping the benefits. These banks looked at the volume of foot traffic across their branches and decided early that they would reduce the number of branches and reduce the size of the branches they kept open. The goal was to have superior digital offerings so that customers could do the majority of their banking online, without having to go into the bank.
I would say, to some degree, that’s an example of luck. If COVID-19 hadn’t come along, they would have eventually reaped the benefits of going digital. But COVID-19 did come along, and it forced a massive acceleration towards banks that had the infrastructure in place to serve their customers online.
Many companies talk about strategic flexibility. When you have strategic flexibility, it means that you can pursue two or more valid strategies at any given time. The issue about going digital is that it’s a long-term trend, and everyone will need to go digital to some degree. It’s not as if in 15 years, you could be the one bank that has no digital offerings and have a successful, thriving business. Of course, there may be some exceptions to the rule, but by and large, digital is a trend. When it comes to trends, you have no choice but to eventually go there. Many companies are talking about strategic flexibility. They’re saying, “When COVID-19 came along, we were caught flat-footed, so we need a strategy that’s so flexible that no matter what happens in the market, we can respond to it.”
Yet, strategic flexibility does not actually work, and I’ll explain why. In my time as a partner, senior partner, engagement manager, and business analyst, I’ve worked with many companies around the world. With every single executive across my entire career, they’ve had to respond to a major traumatic event that has shaped the industry and their country—a hurricane, flood, fire, or pandemic. It could be anything. Invariably, that traumatic event forces a shift in their strategy. I’ve had this discussion in every single year of my career whereby an executive wants to have strategic flexibility. I always explain to them why they shouldn’t have strategic flexibility and why it’s actually a tremendous destruction of value if they were to go down that route.
I’ll give you an example of why it’s so hard to do this. It’s very hard for a company to be good at its strategy. It requires tremendous effort for a company to be exceptional at what it does. I’m going to use Walmart as an example because they’ve done many good things over the past few years in responding to threats in their industry. Obviously, there are other examples, and of course, they could do many things better, but let’s take them as an example. Walmart has perfected serving middle America with the widest selection of everything under one roof at a very reasonable price. For a moment, visualize the organization that sits behind Walmart and ensures their stores run like clockwork.
Let’s zoom in on a buyer who buys for Walmart. This person has spent a few years with Walmart. They’ve been trained in Walmart’s culture of buying in bulk, buying at the lowest price, sourcing from suppliers who can offer a very good price, and sourcing good quality in the volume that Walmart wants. Those buyers are trained on how to negotiate and get the best prices, how to work with suppliers to ensure continuity of supply, how to make investments to drive down prices, and how to educate their customers. Everything Walmart is doing is about ensuring continuity of supply at the right volume and at the right prices for a very appreciative customer base.
That buyer gets training, goes to seminars, goes to meetings with their teams to understand negotiating tactics, sourcing tactics for volume, continuity and best prices—and that’s all they do. They have to stay ahead of the latest techniques. Time is limited. They have to attend meetings and training. They’re probably working with management consultants who are teaching them about the latest techniques to ensure continuity of supply at the right volume, for the right price.
That’s difficult to do. If you’re in business, you know that being good at your business is tremendously difficult. It takes every hour of every day to do that—you don’t have time to do something else.
That is what Walmart is good at. To say that Walmart needs to have strategic flexibility is to say that Walmart’s strategy of volume, continuity of supply and best prices must be able to shift in a week or two towards, let’s say, low volume, infrequent supply and higher prices, for whatever reason—maybe the market changes or there’s some unpredictable disruption like COVID-19 that forces them to go in that direction.
When companies talk about flexible strategies, they’re saying that their strategy must already be capable of shifting in a week or two. But how do you do that? If you’re committing 10% of management’s time and 10% of resources to being flexible, that’s 10% of redundancy in your system. Let’s go back to the level of the buyer because when you talk about strategy, you assume it’s a document, but a strategy lives in the actions of employees. So, this buyer spends all their time trying to be the best at volume, continuity of supply and low prices. Are we now saying that this buyer needs to spend 10%, 20%, 30% of their time learning about how to buy if Walmart had an opposite strategy? How would that work? Would they get a document telling them how to change their strategy? In that case, does that mean they also have suppliers on hand that can work with the new strategy? If there are suppliers on hand, who’s negotiating those contracts? Why would a supplier agree to something that may never happen? If you’re spending your whole life trying to be the best at one thing, does it mean you’re going to spend 30% of your time trying to be the opposite of that one thing?
When companies talk about agile strategies, it’s a romanticized myth because you’re basically saying that you want to build in some redundancies and buffer in your system. It’s never worked. Ideally, companies need to be flexible—but that doesn’t mean that your strategy can just change. Your strategy needs to pick a direction and go all in. But when things go wrong, the company must be willing to move fast enough to find another strategy. It doesn’t mean that it must have an alternative strategy on hand because that’s just waste.
When you talk about a trend, like going digital or moving into emerging markets, that’s not an agile strategy; that’s your strategy. If the world is going digital, you need to be moving towards digital. That’s not about being agile; that’s your strategy. Agile strategy means that if an abrupt dislocation occurs, how will you quickly change what you’re doing to compensate for that? While a lot of companies talk about building buffers, backups and building warehouses full of stuff, you’re going to get punished for that at some point. Let’s assume you’re a company that serves a certain clientele and there are other companies that also serve that clientele. Those redundancies and buffers you built in are a cost to the system. That’s a cost that you have to either eat into your margins or pass on to customers. If you pass it on to customers, why would they buy from you when they could buy from someone else who doesn’t have those redundancies?
That’s the insight: You have to have a strategy that goes all in, but when things go wrong, you have to be willing to change and adjust as a business. If you have an agile strategy, you’re going to have a very confused employee base because they won’t know what the priorities are.
This is an excerpt from Monday Morning 8 a.m. newsletter, issue #16.