The Necessity of Changing the Strategy Conversation
Streaming is probably one of the biggest digital shifts we’re seeing. Around the world, conversations are taking place with companies about how to build successful business models around streaming—whether it’s books, audio, video or podcasts. These companies range from giants like Netflix to small indie podcast producers.
I have a client who is an executive in strategy at a fairly large streaming organization in the United States, and I’m going to paraphrase some of the discussions we’ve had to underpin this overarching theme about the economics of streaming.
Her business and many others are facing an underlying issue: Artists who supply content for streaming platforms are complaining because they’re not being paid enough. Whether it’s artists streaming on Spotify or podcasters streaming on other platforms, they feel that the percentage of revenue they make is not big enough. In the old model of the music industry, large record labels would listen to many potential stars, pick a few, pay them an advance, assign them a big budget and massive promotion, share around 30% of the profits or less, and only after the advance was paid off would the artists continue to get 30% of profits.
In the new model, anyone can create music and distribute it through numerous streaming sites. You could go on Spotify or YouTube Music and use a number of monetization models like getting a percentage share of profits through Spotify or ad revenue from YouTube. There’s little to no budget required to start up. No one’s putting a big advertising or promotional budget behind you. No one’s giving you an advance. To generate sales, most of your capabilities are about optimizing your titles but also building a large social media following so that people will listen to you.
This is happening across many sectors: books, podcasts, music and TV. In the conversation I had with this client, their entire organization was caught up in how they should strategically manage this overriding set of complaints from artists who are complaining that they’re not being paid enough. I had her step back and told her that the underlying premise of everything her company is doing is saying that the complaints are the problem. The population of the countries where that platform is available has obviously grown over time, but the percentage of people who are listening to music has stayed roughly the same. At the same time, there’s been an explosion in the number of artists who have music streaming through technology and apps. There’s been an explosion in the amount of music. There’s been an explosion in the number of channels to get music to customers.
Here’s some basic math. If you have roughly the same amount of people listening but more artists, more music and roughly the same amount of money being created overall in the industry—in fact, it’s even less now because people pay less for streaming—the returns per artist are going to drop. That’s just basic math. Let’s assume that the economics of streaming are not different. Let’s assume the profit per song was the same as profit from CDs. If you have many more artists with the same number of listeners, the profit per artist is going to drop. At the same time, the market value of streaming is less than the value of CDs or DVDs, so they pay less for it, and there’s an even steeper drop. It’s not that her company is doing something wrong or trying to steal money from everyone—the economics have just changed. That’s the first thing I got them to look at.
Secondly, why is their strategy about validating the complaints? The complaints, to some degree, may be true because maybe the technology company is keeping too much of the profit for itself. But the reality is, it doesn’t really matter much what the technology company is doing, the economics have changed. In this situation, the artists who have entered the music industry will still do what they’ve always done: produce songs and then try to produce better songs. They were doing that 5, 10 and 15 years ago. But there’s a very big difference here. Without the backing of a big record label, they don’t have the capabilities to run what is essentially a mini business because, previously, a record label managed the business side and the artist just performed. But now, each of these indie artists produce songs, but they also need a different skill set because the economics have changed and the business has changed.Rather than developing a strategy of trying to minimize complaints by saying, “It's not your fault,” maybe you need a strategy of trying to give the artist tools they’ve never had and educating them about why they need these tools. Click To Tweet
Rather than developing a strategy of trying to minimize complaints by saying, “It’s not your fault,” maybe you need a strategy of trying to give the artist tools they’ve never had and educating them about why they need these tools. It’s like a DIY model. A lot of artists are going to need to do it themselves. They don’t have the record label to help, and many of them now think they actually cannot be successful without that help.
Imagine you decide to remodel your home. You do a pretty good job, but you do it all by yourself. You want Architectural Digest, a premium architectural magazine, to review your house. But why would they do that if you don’t have a world-class designer working on the house, you don’t have a world-class contractor, and you don’t know anyone at Architectural Digest? It’s the same with indie content producers. They want the result of working with a big label, but they don’t have the tools. Even if they had the tools, many of them don’t understand why they need those tools.
The big insight here is that this company was essentially being defensive about why content producers had lower profits. I showed them that they need to shift the conversation away from one of combativeness to one of saying, “It’s going to be lower because the economics and the industry has changed. You can’t avoid that. But we acknowledge there are certain things you need because you’re an independent producer of content, and we’re going to produce those tools for you.” This company’s strategy changed from being defensive to seeing an opportunity to create tools that artists would pay a slight premium for. It’s a subscription-based model, and it bolstered their revenue.Strategy is about knowing what's happening and knowing the numbers, but even when you know the numbers, you can get caught in a paradigm of being defensive. If you're constantly under attack about how revenue and profit have fallen, you could… Click To Tweet
The insight here is that strategy is about knowing what’s happening and knowing the numbers, but even when you know the numbers, you can get caught in a paradigm of being defensive. If you’re constantly under attack about how revenue and profit have fallen, you could start believing something is your fault even if it’s not your fault. In this particular case, it’s not the fault of the technology company that there’s an explosion of content with a reduction in the perceived value from customers. But there’s also an opportunity for giving content producers tools they don’t get from a studio to bolster the skills they need.
You can see how strategy and tactics change, and that’s how you need to think about things. There will be many opportunities like this because the streaming wars are still young. Many things that exist offline will go online, and you’re going to get more and more independent content producers.
This is an excerpt from Monday Morning 8 a.m. newsletter, issue #17.
25 Best Strategy Books to Help You Excel at Business Strategy
This is a curated list of the best strategy books that I, and other partners you know from the FIRMSconsulting training programs, think are best in preparing you to understand, apply and excel at the development and execution of business strategy. We are going to recommend books that we have recommended for our clients and the partners use themselves.
These books teach you how to think like a major consulting firm’s partner.
They teach you how to think to develop unique solutions to your specific problems.
14 best strategy and critical thinking books recommended by Michael
When people think about the business strategy we often think about the field of strategy consulting/management consulting and firms like McKinsey, BCG, et al. If you are interested in learning how to conduct a management consulting engagement, you will likely enjoy this book. Succeeding as a Management Consultant is a book set in the Brazilian interior. This book follows an engagement team as they assist Goldy, a large Brazilian gold miner, in diagnosing and fixing deep and persistent organizational issues. This book follows an engagement team over an 8-week assignment and explains how they successfully navigate a challenging client environment, develop hypotheses, build the analyses, and provide the final recommendations. It is written so the reader may understand, follow, and replicate the process. It is the only book laying out a consulting assignment step-by-step. (Published by FIRMSconsulting.) One of the best business books if you are interested in management consulting and strategy. This book will be very useful as well if you are a small business consultant.
Bill Matassoni’s (Ex-McKinsey and Ex-BCG Senior Partner) Marketing Saves The World is a truly unique book. Never before has a McKinsey partner published his memoir publicly. This book is a rare opportunity – a true exclusive – to see what shapes the thought process of a partner and learn about marketing and strategy. The memoir essentially lays out McKinsey’s competitive advantage. One of the best business books if you are interested in marketing, strategy, how McKinsey, BCG and other major consulting firms operate. This book will be very helpful if you are a small business consultant, if you work for a large consulting firm or if you want to learn how to think like a partner from a major consulting firm.
Turquoise Eyes started off the groundbreaking new genre developed by FIRMSconsulting that combines compelling narrative while teaching problem solving and critical thinking skills. Set after a bank begins implementing a new retail banking strategy, we follow Teresa García Ramírez de Arroyo, a director-general in the Mexican government, who has received some disturbing news. A whistleblower has emailed Teresa with troubling news about a mistake in the loan default calculations and reserve ratios. The numbers do not add up. The book loosely uses the logic and financial analyses in A Typical McKinsey Engagement, >270 videos.
Lords of Finance is another book that has a prime place on Michael’s giant bookshelf. He says this is one of the few books that changed his thinking about finance in the last ten years. Winner of the 2010 Pulitzer Prize. “It is commonly believed that the Great Depression that began in 1929 resulted from a confluence of events beyond any one person’s or government’s control. In fact, as Liaquat Ahamed reveals, it was the decisions made by a small number of central bankers that were the primary cause of that economic meltdown, the effects of which set the stage for World War II and reverberated for decades. As yet another period of economic turmoil makes headlines today, Lords of Finance is a potent reminder of the enormous impact that the decisions of central bankers can have, their fallibility, and the terrible human consequences that can result when they are wrong.”
House of Cards is another book on Michael’s bookshelf. “It was Wall Street’s toughest investment bank, taking risks where others feared to tread, run by fueled gamblers who hung a sign saying ‘let’s make nothing but money’ over the trading floor. Yet in March 2008 the 85-year-old firm, Bear Stearns, was brought to its knees, and the global economic meltdown began. With unprecedented access to the people at the eye of the financial storm, William Cohan tells the outrageous story of how Wall Street’s entire house of cards came crashing down. ‘Gripping …high drama …riveting, edge-of-the-seat reading’ – Michio Kakutani, “The New York Times”.”
Bill and Michael mention this book often as the one book that perfectly explains marketing from a strategy perspective. I would take this further and say this book explains business models from a macro-perspective and explains the principle of capitalism very well. It is a dense read but Irresistible Empire is worth looking into since it drives so much of the thinking in The Bill Matassoni Show.
From Third World to First is a book that has been mentioned in our podcasts far too many times to count. It is the key book mentioned in The MasterPlan Program. We are not recommending this book because we want you to learn about Singapore or how countries compete. Although, this is of course very valuable. This book helps you understand how to think strategically when you personally are coming from a poorer/weaker position in life. So think about the analogies to yourself when reading this book.
Michael says this biography of Akio Morita, along with “The New GE”, are 2 books that convinced him to leave the sciences for a career in management consulting. “The chairman of the Sony Corporation discusses the rise of Sony, his extraordinary career as a businessman, and his views on the United States, Japan, and the world economy”
There is no better book than McKinsey’s Marvin Bower to explain the philosophy of strategy and the way in which management consultants develop a strategy. What we do is very different from the way a researcher of strategy would develop a strategy. I highly recommend this book and have read it several times. Bill Matassoni (see Marketing Saves The World) was a mentee of Marvin so reading both books will allow you to see things from 2 sides.
Bill Matassoni speaks highly of Kenichi Ohmae in his memoir Marketing Saves The World. He is one of a few people Bill calls “brilliant.” The Mind of The Strategist remains one of a few strategy books we recommend to understand how to think critically. Now you can read Bill’s memoir, a book about Bill’s mentor (Marvin Bower), and a book by one of Bill’s close colleagues at McKinsey (Kenichi Ohmae). Definitely, one of the best business books, especially if you are interested in management consulting and strategy.
In How Countries Compete the author addresses what does it really mean for a country to compete, and how to do so successfully. We highly recommend this book to clients in government, state-owned-enterprises, and emerging markets. “Richard Vietor shows how governments set direction and create the climate for a nation’s economic development and profitable private enterprise.”
The New GE is one of the older books but it has a prime place on Michael’s bookshelf. It was one of the books that led Michael to go into business. “Through rare and exclusive interviews with Jack Welch and dozens of GE insiders, internationally renowned Time Magazine reporter Robert Slater gives readers an inside look into General Electric and the bold leader responsible for GE’s magic.”
The Goal is a great book to read if you want to understand operations. It was recommended by Michael multiple times, including in this popular episode from our Youtube channel which explains how to solve Operations cases. A factory may be an unlikely setting for a novel but this book is very effective in helping you understand operations. It is also quite entertaining to read. In fact, I had it as prescribed reading for my Operations course during an MBA and it is probably the most memorable book, case or article I have read during my MBA, so highly recommended.
Michael referred to Netflixed in his programs and some of you were reaching out to know the name of the book, so we are adding it to Michael’s list. “Netflix has come a long way since 1997, when two Silicon Valley entrepreneurs, Marc Randolph and Reed Hastings, decided to start an online DVD store before most people owned a DVD player. They were surprised and elated when launch-day traffic in April 1998 crashed their server and resulted in 150 sales. Today, Netflix has more than 25 million subscribers and annual revenues above $3 billion. Yet long- term success-or even survival-is still far from guaranteed. Journalist Gina Keating recounts the absorbing, fast-paced drama of the company’s turbulent rise to the top and its attempt to invent two new kinds of business.”
9 best strategy books and critical thinking books recommended by Bill
Thinking in Systems is highly recommended by Bill. This essential primer shows readers how to develop the systems-thinking skills that Bill and many other thought leaders across the globe consider critical to succeed now and in the future. “Thinking in Systems, is a concise and crucial book offering insight for problem solving on scales ranging from the personal to the global.”
Solving Tough Problems – “Read this after you read Meadows,” recommends Bill. Adam Kahane has worked on some of the toughest problems in the world. South Africa after apartheid, Colombia during the civil war, Argentina during the collapse, Guatemala after the genocide, etc. “Through these experiences, he has learned how to create environments that enable creative new ideas and solutions to emerge and be implemented even in the most challenging contexts.”
The Opposable Mind – Bill recommends reading this book after you first read Thinking in Systems and then Solving Tough Problems. “Though following best practice can help in some ways, it also poses a danger: By emulating what a great leader did in a particular situation, you’ll likely be terribly disappointed with your own results.” The book focuses on how to engage in integrative thinking, “creatively resolving the tension in opposing models by forming entirely new and superior ones.”
One of the best business books of all time. The Innovator’s Dilemma – “By the nineties, most books on management were just rhetoric, but this book is the real deal. A well-researched classic,” says Bill Matassoni. Named one of 100 Leadership & Success Books to Read in a Lifetime by Amazon Editors. In his book, Clayton Christensen showcases how even the most outstanding organizations can do everything right and still lose market leadership.
Capitalism at Risk – “There has been a lot of lousy thinking about this topic, but this book is well worth reading,” says Bill. Harvard Business School professors Joseph Bower, Herman Leonard, and Lynn Paine argue that governments must play a role but businesses should take the lead. “Capitalism at Risk draws on discussions with business leaders around the world to identify ten potential disruptors of the global market system.”
The Reflective Practitioner – “This was a giant book for me as I sought to understand how professionals think and act,” says Bill. A leading M.I.T. social scientist and consultant examines five professions. He argues that the best professionals know more than they can put into words. “This unarticulated, largely unexamined process is the subject of Schön’s provocatively original book, an effort to show precisely how ”reflection-in-action” works and how this vital creativity might be fostered in future professionals.”
Elements of Style – “Because so many people don’t know basic grammar and can’t write a strong, crisp sentence,” says Bill. You probably recognized the title and the authors. “This book’s unique tone, wit and charm have conveyed the principles of English style to millions of readers. Use the fourth edition of “the little book” to make a big impact with writing.”
Capitalism and Freedom – “This is the only book on economics you need to read. Yes, I’m biased,” says Bill. ” In this classic book, Milton Friedman provides the definitive statement of his immensely influential economic philosophy—one in which competitive capitalism serves as both a device for achieving economic freedom and a necessary condition for political freedom.”
Excellence, Can We Be Equal and Excellent Too? – “This book raised America’s standards. Mine too,” says Bill. “This is a book about excellence, more particularly about the conditions under which excellence is possible in our kind of society; but it is also—inevitably—a book about equality, about the kinds of equality that can and must be honored, and the kinds that cannot be forced.”
2 best strategy books and how to succeed books recommended by Kevin
Live for Success, by John T. Malloy
“After interviewing and observing thousands of business men and women, Molloy identifies those personal and professional characteristics that lead to success and offers guidance in improving dress, posture, body signals, verbal skills, and social skills”
Winning Through Intimidation – #1 New York Times Bestseller. It teaches you how to defend yourself against the intimidators of the world. The author argues that the results a person obtains are largely proportionate to the degree to which he or she is intimidated. So it is not as much your words and actions that count but your posture while you say those words and take those actions.
Celebrate the number of choices and options you have to learn strategy
Reading the best strategy books and critical thinking books above is a great start. But what if you want to take it to the next level. What should you do next?
Strategy thinking is not linear and we want you to understand and appreciate how messy it can be. At the end of the day, you want to think like a partner versus simply having a bag of tools to use. And this is what we do. By working through the programs on StrategyTV.com/apps, and especially through the programs on StrategyTraining.com/apps, you will be able to master the skills of consulting partners from major international firms like McKinsey and BCG, including strategy skills.
When I started my career there was no website I could go to to learn strategy. I personally cannot think of any website anywhere in the world even today, apart from the FIRMSconsulting platforms (FirmsConsulting.com, StrategyTV.com/apps, StrategyTraining.com/apps), that teach strategy in this step-by-step approach.
Developing a strategy that works and getting it implemented requires many skills. I know, it seems that is all about the analysis, but it is much more than that. Think of these problems you will likely encounter, and we will teach you to handle.
What is the real problem I need/must/should solve?
What is the scope of the problem?
How do I solve the problem?
How do I find the data?
How do I collect the data?
How do I change my approach if the data is not available?
How do I present my findings in a convincing way?
How do I convince people to follow me?
There are many more little steps to getting things to work. Our goal is to give you the skills and confidence to fully succeed. That is why we have such a comprehensive and in-depth range of training programs within Premium membership, and especially within FC Insider. So don’t be intimidated by the bounty of choice. Embrace it. Follow the guides and you will master this.
You have to put in the work. You have to make the decision this is worth learning.
I believe you want to and we want to help you achieve that goal. Just follow the guidance we provide and if you do not know where to start, the 21 Day programs are probably the easiest to start, finish and begin seeing some results if you are an FC Insider.
If you are a new Premium member then we recommend to start from The Consulting Offer (TCO) programs, even if you are not preparing for consulting interviews. TCO will help you develop a strong foundation before you can move on to more advanced programs like Strategy: Follow a full McKinsey et al Engagement.
If you have any questions about the recommended strategy books above or our membership level training programs do not hesitate to reach out to us at support @ firmsconsulting.com.
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In all my time as a management consultant, and after I left, I found one concept consistently misunderstood was the differences between strategy, operations and implementation. Here are the common misinterpretations I hear:
• McKinsey only does strategy work.
• Deloitte and other accounting firms are great at implementation.
• Implementation is the same as operations.
I am going to explain the differences and which firms are good at which type of consulting.
Strategy work refers to helping senior executives determine the overall direction in which they will take the business. It is about taking a top-down view of the business and looking at the allocation of scarce resources. Strategy consulting is difficult. It requires deep analytical skills and the application of strong and disciplined problem solving skills. Principles like decision trees, MECE and hypotheses led research are used. Examples of strategy work include:
• What should be our long-term vision?
• Should we retain the same portfolio of businesses?
• Should we enter this market?
• What is the best way for us to extract value from our SUV division?
At the end of a strategy engagement, the client is given a detailed report outlining the exact market shares, pricing, volumes and other conditions under which the recommended strategy will work. The end of a strategy engagement must be a report. That’s because a strategy is a plan. And before you implement anything, you need a plan.
Strategy engagements tend to involve long hours; they have a high intensity and involve senior client engagement. Throughout the engagement, strategy consultants must work with the most senior executives of a firm. Proper strategy consulting can only be done for the most senior executives. These are after all the decision makers of a business.
Operations consulting is actually very similar to strategy and is not implementation work. In an operations engagement the consultants are again usually working for senior executives to determine how to extract value (e.g. how to extract more value from a facility, plant, mine or division). Operations consultants apply the same problem solving approach as strategy consultants: MECE, decision trees and hypotheses led research. Examples of strategy work include:
• How do we increase the throughput of this plant?
• How do we reduce costs in this facility?
• How do we increase productivity in this factory?
• How do we reduce bottlenecks in this plant?
Here is a crucial similarity between operations and strategy engagements. At the end of an operations project, the client also will receive a detailed report outlining metrics, benchmarks and a laundry list of changes to improve the operations. At this stage the client and consultants have not yet implemented the recommendations.
Operations and strategy engagements use the same highly disciplined problem solving processes, but they apply it to different parts of the business. This is a very important point. Operations consulting is just as tough, just as intense and just as appealing as strategy consulting, provided it is done correctly.
The top firms in operations consulting are still Mckinsey, Bain and BCG. To this list you can also add AT Kearney and Booz. In some areas of operations, firms like Deloitte, PWC, E&Y, KPMG and Mercer also do well. The accounting firms tend to be good at financial processes and operations. These latter firms are not consistently good across all sectors and markets.
Implementation consulting is totally different from operations and strategy consulting. The consulting skill sets are different, the hours are different, the type of work is different and so is the profile of consultants and fee structures. In an implementation engagement, the consulting team must take the recommendations from the strategy and operations engagement and help the client realize the targets. Let’s assume Bain advised an airline to set up a new low-cost airline division. The strategy calculated that doing this would lead to the airline saving $100 million over 3 years.
The implementation consultants need to determine the pieces of activity required to take all the existing employees within the airline, create a new division, brand it, set up the operating structures and move the employees to the new division. Although the implementation consultants will not do everything, like branding where a brand specialist firm would do the work, they will manage everything.
Here are some of the things involved in doing this:
• Setting up the new division
• Transferring employees and making adjustments to their employment contracts
• Creating a new profit center
• Setting up a new accounting system and adjusting SAP
• Assisting in deciding if the low-cost fleet will be leased or bought
• Creating a new organizational structure in micro-detail
• Set the start date for the new division and begin migrating process and employees
• Set up a trial run for the new division
• Determine the go live date
• Manage the labor unions
You get the picture right? Implementation is not just for the smartest MBAs. It’s for smart people who can roll up their sleeves and literally work alongside a client to solve countless tedious problems and march towards a common goal. Yet, a dumb person who can make things happen is a far more effective implementation consultant than someone with the best solution which is never used. Implementation consultants also use the strategy or operations plan as a guide only. No matter how good a firm is, they can never predict all the problems with implementing a strategy. The implementation team will need to find a way to make the strategy work. Implementation projects also have less stressful work hours. Since the team is working hand-in-hand with the client, they generally need to work to the clients’ schedule. This slows down implementation projects. There is also a need to blend in more closely, use processes which can be used by everyone and focus more on transferring knowledge.
In my experience, despite the countless adverts, not many firms do implementation well. Capgemini used to be good at implementation through their United Research team. Accenture is great at technology implementation. E&Y is quite good and so is IBM. The rest have poor records. Of course, there are also regional and sector specialists.
So the next time someone says McKinsey only does strategy, know they are wrong. McKinsey does plenty of operations work which is just as rigorous as any strategy engagement. They also do implementation work. The difference is that none of the elite consulting firms do implementation work very well, and I am not sure they could do it well even if they tried.
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 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 I was a corporate strategy partner, I pretty much drove teams a little crazy to constantly refine the story. I still do that. If you are following the US Retail Banking Study you would have seen us push for a crisp and compelling story. We do the same on the current power sector study. We just push and push for the best story out of the data. A great storyboard will get the client to act.
And that is what you want at the end of the day.
Where a storyboard fits in a strategy study
Boiled down to the basics, the strategy engagement structure can be explained as follows. First the key question 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 online strategy training program, though if you stick to the MECE rule that will be fine. Based on the decision tree, the hypotheses are developed.
The storyboard is the message engagement team delivers to the client, using the decision tree and hypotheses that has been developed, and it is based on the anticipated results of the study.
Next the team develops analyses to test each hypothesis. Based on the results of the analyses the hypotheses are proved or disproved and the storyboard is refined.
The diagram below shows a structure of a strategy study and a point at which the rough 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.
What is a storyboard
To explain the management consulting storyboard concept, lets 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.
Question from a reader about developing a storyboard
To dig deeper into the concept of developing a storyboard, I will answer a question we received from a reader, lets 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 it 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 I want 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, lets get into how we were able to write a storyboard in such a short time.
Note that anything that I 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 lets 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 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 at elite strategy firms. 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 this is the hypotheses, what tests do we need to do to prove or disprove the hypotheses?”.
Those tests then become the analyses.
We do the analysis 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 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 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, lets 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 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 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 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.
QUESTION(S) OF THE DAY: What challenges will you face in applying this technique in a corporate or tier-2 firm? Please let us know in the comments.
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What is scenario planning and how to use it
In today’s post we are going to talk about scenario planning, the last technical input that went into the visioning workshop /strategy workshop as part of the Corporate Strategy & Transformation study.
We will discuss what is scenario planning, some reasons why the scenario planning tool is insufficient to make decisions and steps in scenario planning. We will also offer an example of how to use this tool in visioning workshops with clients.
What is scenario planning
Before we discuss how to conduct scenario planning let’s look at what is scenario planning.
So what is scenario planning? Scenario planning is a planning tool used to make flexible long-term plans to deal with major, uncertain shifts in the organization’s environment.
It is also a tool that allows companies to develop a resilient strategy or test the flexibility of the existing company strategy against various possible future alternatives.
In other words, scenario planning is a structured way for an organization to identify and gain a deeper understanding of the underlying major drivers of change, think about how those potential changes may impact an organization, determine what is required for the organization to succeed if potential changes occur and develop the strategy accordingly.
And no surprise, scenario planning has its roots in military strategy, with the use of scenario planning in business pioneered by Shell.
One interesting aspect of running a scenario planning workshop for a client is that as we run a scenario planning exercise we are basically admitting to the client that we cannot predict the future. We just can’t do it. There are too many uncertainties.
No consulting firm anywhere in the world can do this since no analytic technique exists to predict the evolution of a market. This is an important insight to keep with you.
And even of uncertainties we are certain will occur, we can’t predict how those variables will change. They can go up or down, or sideways. For example, the price of oil could go up or down. We know it is uncertain but we don’t know which side it can go.
So in a scenario planning exercise the first thing you are doing is you are admitting to the client that there are uncertainties and, even if you can predict some of the uncertainties with certainty, you can’t predict with certainty which side the uncertainty will go.
Instead, you are helping the client to determine which of these uncertainties are the most important ones. And given the fact that uncertainties can go in either direction, you are helping client to understand what would a market look like depending on the multiple combinations and permutations of the most important uncertainties.
Some limitations of the scenario planning tool
Scenario planning is something that is useful, definitely spurs conversation, yet this tool is by itself not sufficient for client to make a decision. It is just one of the tools in a strategist’s armoury.
There are number of problems with scenario planning.
One, with scenario planning you get these very loose guidelines about the future and you still have to figure out what to do with it.
There is also a risk that the organization’s leadership will act like deer in the headlights if faced with a broad range of uncertainties and possible outcomes. That is one of the reasons why we prioritize uncertainties so it can be displayed on a two-by-two matrix, as explained below.
Scenario planning also runs the risk of executives becoming complacent. Executives can assume that all potential futures were considered so there is no need to keep their mind open and constantly scan the environment for drivers of change, their potential impact on business and actions required to prevent negative impact.
Extreme scenarios are also often ignored as they are deemed highly unlikely to happen. Yet, as financial crises and many other events showed us, this type of limited scenario planning can be very deficient. Instead all extremes, positive and negative, must be considered during scenario planning.
Scenarios are also often viewed as right or wrong, and as static. With this line of thinking “wrong” scenarios are often disguarded. Instead, scenarios should be viewed as something that are a work in progress and which are adjusted over time as more information becomes available and as environment changes. It is crucial to remember that scenario planning is an iterative process.
Despite the limitations of scenario planning, it is still a powerful tool to have in the strategist’s armoury. You need to know this because it is still useful as a staging point for a discussion.
Firmsconsulting’s 6 scenario planning steps
We usually do the scenario planning exercise nearly a 3rd of the way into the visioning workshop. And, unless you have educated the executive team about the issues and you would have done that through the case studies and the industry analysis discussion, they are going to start throwing out issues that are not really issues. So the scenario planning exercise only works well if you have seeded the right concepts in there.
If you haven’t and they are working off with context base that is completely inappropriate you are going to have a problem. The entire exercise will fail.
Once an organization’s environment is well understood after discussing industry analysis and case studies, scenario planning can begin.
Scenario planning is run following a logical sequence of steps, which are actually the same in every single study.
Step 1 – “Brainstorm” major issues impacting the sector
The first step of the scenario planning exercise is to sit down with the executive team and “brainstorm” major issues impacting the sector.
Here we need to do the kind of brainstorming that Alex Osborn (the “O” of legendary ad agency B.B.D.O.) invented in the 1930s and popularized in his 1953 book “Applied Imagination“. The kind of brainstorming where a group of people throw out ideas in a meeting, or in Osborn’s words “using the brain to storm a creative problem”, and do so with the absence of criticism or negative feedback. The kind of brainstorming that, according to Osborn, was central to B.B.D.O.’s success.
However, please keep in mind that usually when we talk about brainstorming within the context of case interviews and management consulting, we are talking about a very different process vs. the type of brainstorming process which we use in scenario planning. Usually when we refer to brainstorming we are referring to a structured, methodical, logical process of identifying drivers of the issue, which ultimately can be showcased as a decision tree.
As the “brainstorming” process gains momentum, it helps to ask executives to look beyond the medium term. If executives only focus on the short- and medium-term they will tend to extrapolate current environment conditions into the future. Asking them to think beyond the medium-term resets their mindset and makes it easier to see what are the major drivers of change, how those drivers may change in 5-10 years and how they can impact the organization.
Issues are ideally listed with a thick marker on separate Post-It Notes and placed on the wall. All the participants should provide input so they feel a sense of ownership. All inputs must be publicly displayed versus being captured on a laptop by a consultant who resembles a squirrel.
Step 2 – Cluster Issues into groups
Once you have listed all these issues, you need to cluster them into two groups.
The one group is what are the predictable things we know will happen. And the other group is what are the uncertainties.
Step 3 – Select top 2 drivers of change
Then we can put aside certainties and we need to determine which uncertainties are highly correlated and can be combined (Post-It Notes stuck to each other and placed on the wall) and which uncertainties are not key drivers of future scenarios (removing Post-It Notes from the main wall to a separate area in case the group wants to go back and reconsider adding back certain variables).
Key independent uncertainties are then prioritized to identify those having the most impact on the business. Specifically, we need to rank independent uncertainties from one that has the biggest impact on organization to the one that has the least impact on organization. So if we come up with 10 independent uncertainties we will list them, one having the biggest impact, two having second biggest impact and so on.
This exercise should help to cut down the number of uncertainties to 3-4, usually because independent variables can be clustered into 3 or 4 groups. And out of top 3-4 we should further prioritize the top 2. And, as stated above, it is a key to make sure such 2 variables are not dependent on each other.
Step 4 – Develop a two-by-two matrix
For those top two independent uncertainties we develop a two-by-two matrix. The base assumption here is that by defining the extreme corners of any given environment one explores the correlation between all relevant uncertainties, recognising that reality will likely be somewhere in the middle. Defining scenarios is not meant to describe the most likely case. It purely explores uncertainty correlation and illuminates the “what might be” to better understand associated risks with any path forward.
As a side note, if, lets say, the four top uncertainties are highly important to consider, we can create additional two-by-two matrixes to depict additional outcomes, but this is usually not necessary as generally key drivers can be prioritized to only two.
Moreover, if the result of scenario planning work is more than 4 scenarios managers tend to just focus on the most important (in their opinion) scenario and ignore other scenarios. Therefore, it is best to prioritize issues to the point that the top two drivers can be selected.
Each scenario should be given a catchy name so it can be more easily internalized by executives, such as “All bets are off”, “Sustainable Growth” and “First Frost”. Internalizing scenarios will help executives keep scenarios at the top of their mind, ask better questions and, as a result, better prepare for the future.
Step 5 – Understand each scenario and adjust strategy accordingly in light of scenarios
Each scenario is then analysed to understand what will it take to succeed in such environment.
The two-by-two matrix gives you four scenarios of the future. Scenarios A, B C and D. That is what the market could look like in the future.
Then you need to facilitate a discussion addressing the following types of questions:
- What products and services do we need to offer in each of these four possible future markets?
- What would our pricing strategy be for each of these 4 future possible markets?
- What our channel strategy will look like?
- What sales and marketing will look like?
- What would alliances and acquisitions look like?
- What would our core business be?
- Why would that be our core business?
That is the type of discussion you need to have with the executive team. And this analyses of each scenario should be captured in written form by someone on your team. Again, always in public versus clicking away on a noisy keyboard.
Scenarios can then be used to shape the ongoing strategy of an organization.
Step 6 – Iterate
As mentioned above, scenario planning is an iterative process. While the consulting team can help kickstart the process and run the initial scenario planning analysis, scenario planning exercise should not end at the conclusion of the visioning workshop. Instead the major drivers of change and scenarios generated should be revisited by executives on an ongoing bases to factor in new information and changes in the environment.
An example of using a scenario planning tool in visioning workshops
We are going to pick two uncertainties here for the point of explaining them. Lets assume one uncertainty is market openness and the other one is degree of commoditization of the energy market.
A market can either be highly opened or not open at all. So you get two options for market openness. Markets can also be commoditized or specialized.
Therefore, on one axis you have got market openness, high or low. On the other axis you have degree of commoditization, either commoditized or specialized.
So you can see you have 4 options. Markets can either be very open and commoditized or very open and specialized. Or it could be closed and commoditized and closed and specialized. These are the only 4 options.
For each of those options you then have to figure out what that market looks like and what it means to play in each of those segments. That is the kind of discussion you are having with the client.
You are saying, “If the market is closed and very specialized what kind of skills do we need to play in this market?” So you are basically saying, “What is the winner looks like in this market?” And what you are trying to do here you are trying to determine what is common for these 4 options, because what is common for each of 4 options is the attribute or skill that the client must possess if they are to win in any scenario.
If something is only a requirement to succeed in, maybe, one of those four options, and not a likely one, you can say, “Hmm, may be we don’t really need it. But if we could have it, it would be great.”
If something is needed in 3 of those 4 possible scenarios of the future, and not needed in all four, you can say, “Ok, we need it in 3. So even though it is not needed for every option I think this is a skill we need to have.”
Through the process of attrition you are collecting the skills you need to succeed here. And at the end of the day you say, “Ok, if this is what the market could look like (looking at 4 options) these are the skills we must have to compete and what would a strategy for us look like if we had those skills?”
That is the kind of discussion you are having here. And someone from your team needs to be capturing everything.
The question of how to amass so many skills for so many scenarios is for a different update. This refers to the note at the bottom about the evolution of scenario planning and this is the part most companies get wrong. How does one pick one future and bet on it while remaining flexible to all possible futures?
At the end of the day what you will have is four scenarios. Scenarios A, B, C and D. Only your final scenarios will have catchy names as per above.
Because you are dealing with two axes of uncertainty, market openness and the degree of commoditization and there are only 2 outcomes for both of them, you have got a two-by-two matrix.
And remember it is a role of the partner to keep the group focused. To say, “Even though you think this is highly unlikely, remember that Empire Energy may do the opposite? Do you want to be further away from them or be closer to them? What does it mean to go further away from them?”
At the end of this you are going to get some critical principles. Not hard and fast rules, but you will have some critical principles for what it is going to take to win in the future. These principles are the boundaries of our thoughts. They are like flagpoles with rope around them. We will not stray outside them unless we have a damn good reason to do so.
And one of the critical principles we came up with for this study is that given the amount of turbulence and uncertainty it is far better to be anchored to some large client and work with them, which is a vital, vital principle because going forward that large client is likely to be Empire Energy, which again reinforces this notion that we should only do what is in Empire Energy’s best interest.
Running a scenario planning workshop
That is how you run a scenario planning workshop. It is not difficult once you know the principles and steps to follow. And it is a lot of fun.
The skill level required to run this type of workshop is very high. We have seen junior people do it but they make it too mechanical and wooden. They also usually fail to get the leadership team to see a unique future. Juniors typically generate plans for a company that are evolutionary versus revolutionary because it is far easier to recommend a slight change to the strategy versus a radical change.
It takes an enormous amount of skill to allow the executives to be free flowing yet keeping them focused on the overall objective function, which the partner will know but cannot make obvious.
It is very easy to just go off on a tangent, especially with all this talk about technology and so on. People may go as far as suggesting to put drones in the air to deliver electricity. You have got to keep them focused.
You have got to say, “What is going to happen in a deregulated market? Well in a deregulated market it means competitors arrive and they steal market share. Less market share means less revenue. Less revenue means less free cash flow to do fancy things that could appear in the sci fi channel.”
You have got to be able to tie these logical pieces together. You have got to know where you are trying to get them to go and shepherd them there. This is very hard to do because if the executives raise material differences, they need to be seriously considered and that means the partner needs to re-juggle the workshop structure in his or her head, in real time and while managing the conversation.
If you are leading this kind of workshop this can make or break your career because the impact can be so significant. You get a lot of airtime with senior executives. You get to coordinate the discussion. You get to guide them and shepherd them. And it’s a really big opportunity so don’t mess it up. This is an opportunity very few people get.
In effect, you are being observed and judged by very senior people in industry. It is a live job interview.
And when you get the opportunity you have to make it count, make it exciting. And you need to brace yourself for hard work. Running a workshop like this is incredibly tiring.
Summary of steps for scenario planning
To wrap up, remember that scenario planning is an admission that the future is uncertain. And it means that you are going to present ideally four scenarios of the future to make sure the strategy can operate in all four scenarios.
To do this you have got to rank the issues facing the company, cluster them into two groups, things that are certain (we call them trends) and things that are uncertain (we call them uncertainties).
Then you need to determine which uncertainties are highly correlated and can be combined and which uncertainties are not key drivers of future scenarios and can be removed. Then you rank the remaining independent uncertainties.
For the top two uncertainties you need to build a two-by-two matrix and each quadrant of a two-by-two matrix becomes a potential future scenario.
And then you need to have an elaborate discussion about many vital aspects such as skills, competencies, resources required to succeed in each scenario, what should be company’s core business given each scenario, and those become principles which you will use to shape the on-going strategy for the organization.
Lastly, make it clear to executives that this process has to be iterative.
And, of course, you can see us conducting scenario planning in training videos which are part of the Executive Program.
We hope you enjoyed this post. We hope that through these type of posts and related podcasts you are more excited about strategy. We hope you can see the power, the impact, just enormous change we can bring to people’s lives.
Because that is what we are doing. We want to go out and we want to help this utility overcome damaging blackouts, shutting down of schools and hospitals, and make them into a successful company that can compete in the future.
This drive to change the world should be the only reason to want to be a strategy consultant.
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