Why is Strategy so hard?

Why do corporations find it so hard to get strategy right?

Lawrence Friedman said

“It is hard to avoid the conclusion that while strategy is undoubtedly a good thing to have, it is a hard thing to get right.”

Strategy is quite a tricky thing to get right. Strategy is essential that nearly everyone agrees with but when it comes to creating it, boy do we have a problem at our hand.

So why is strategy so hard? and what stops most of the companies at getting it right?

There are many reasons for this but I would like to call out 3 reasons which I would urge all strategists to pay attention to while formulating strategy.

Principal agent problem

You can call it however you like but humans just care about themselves. This is hardwired in our genes and gives us our survival instinct. So why should a company’s employees or managers be any different. In more jargony terms we call it the principal agent problem

The principal-agent problem arises when the interests of a company's owners (the principals) are not aligned with those of its managers (the agents) who make decisions on their behalf.

Managers want their companies to do well but more than that they want themselves to do well.

Now imagine a company needs to shut or sell a division because it is not doing so well but whose advice would it usually first heed to? The manager leading the division. This manager wants to maintain their fiefdom and would therefore try and make the company “understand” why this is a temporary bump, how they can get the division back on track, maybe even interest them to put in some more investments to get the division up and running again. This is the classic case of principal agent problem.

How do you get around this? Well usually it is argued that if you make the agent a principal as well (give the managers equity stake) you will manage this problem. Well it might work in the startup or scaleup world where equity might have a high upside but in a mature organization, the equity incentives are not that great an offering for most managers and the problem continues to persist.

Change is good, as long as it’s not for me

Well well well, managers hate risk (even though that is the exact thing they are paid to manage). The idea at modern corporations of managing risk is - do not, I repeat do not do anything out of the ordinary.

And on the surface this seems quite logical. Change brings uncertainty and that has been our biggest fear ever since we were cavemen.

So we stick to the routine, except one thing - in modern corporations that is a death sentence, because everyone else is evolving and they are coming for you, sure enough.

But this death sentence is not that easily visible and happens sometimes over many years at a corporation. A lot of smart people work at these corporations but still cannot see it coming. Or even if they see it coming, the fear of uncertainty is too big, so they try what they can - a small shift in the current path. And all you get is an incremental strategy which basically gives you maybe some funds to start a new pet project but that’s about it and you never truly get out of the quicksand.

When Heraclitus said -"The only constant in life is change." he was yet to meet the modern day middle manager.

We are all the same

Well we like to think we are very distinct but in the end we are all quite the same. We even share 99% of our genes with a chimpanzee!

How can you expect people to think differently when you hire the people who

• are from similar colleges.

• are from similar companies.

• read the same book

• go to the same movies.

• have a mortgage and a leased car

So when you ask your team to come up with a strategy of entering a new market, they come back with a standard answer of build, buy or partner. When you ask them for new product ideas, they tell you to add 5 new features which the competition does not have and will now make you the best product out there (note, the competition managers are doing the exact same thing!)

And the ones who do try to be unique and different as often shut down by saying

• you do not know the system

• young blood

• immature and too eager

And then there is benchmarking; where companies who want to be unique want to meet the industry standard! Well if you want to meet the standard, maybe you are trying to be average.

In the end, we try but we are more similar than we are different.

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So yes, this is why strategy is hard. We have a conflict between the principal and agent at most corporations, people hate change and love to maintain the status quo and we are all quite similar in the way we think and act. Breaking these 3 (and many more) barriers is not easy but recognizing them is the first step to understand the challenges one might face in the pursuit of creating strategy.

So this was our rant for this week. Let us know if some of this resonates with you. What else makes strategy hard? Do share your thoughts in comments and DM. See you next week