Prof. J. Carlos Jarillo, HEC, University of Geneva
One of the great success stories of the last twenty years has been the consulting industry. Although it may be suffering right now due to a decline in sales, it has grown for many years at very high rates. Some of the largest companies in the world are now consulting organizations or consulting divisions of large multinationals, such as Accenture or IBM’s Global Services division.
Within this industry, the most profitable segment has been that of strategy consulting. This reflects an increased use of strategy consultants’ services over the years. Yet profitability for many of those same firms’ clients has often deteriorated over the corresponding period, in some cases spectacularly. Is there then no value added by strategy consulting? To answer this question we must spend a few words defining what strategy is… and what it is not.
Strategy is, essentially, the effort to find products and/or services to offer that have two basic characteristics: customers will want to buy them and the company will be in a unique position to deliver them. If either criterion fails, the new activities will not be profitable and the exercise will destroy value. Thus no matter how technologically advanced customers are, they do not really seem to want highly sophisticated wireless services, and companies which invested billions in 3G licenses just because they were available are now paying a heavy price. But even desirable products or services are only profitable if companies can avoid all-out competition, i.e., if they can deliver those products in a (permanently) better way or at a sustainably lower cost. International phone service usage, following liberalization, has soared in the last ten years, proving that customers really wanted more of it. But dozens of different companies offer an undistinguishable service, and are all losing money.
From this definition we clearly see what strategy is not: it’s not about being number one, having market leadership, going global, getting into the next thing or even growing faster than everybody else. Strategy is about making money over the long term, without taking disproportionate risks. That can only be done by following the view of strategy mentioned above. Certainly, it will imply low growth in many cases, for most companies cannot constantly find new products or services with the mentioned characteristics of desirability and uniqueness. But low, profitable growth beats strategies à la Vivendi, Swissair, or Credit Suisse every time. History has shown that fast growth through acquisition is simply the first step in a process that continues with inflated expectations (“becoming a truly world class company”), through big executive bonuses (“we must reward world class performance”), good-will restatements (“perhaps we paid too much for some acquisitions”), rumours of liquidity problems (yes, acquisitions must eventually be paid for and loans returned) and eventual bankruptcy, either formal (Worldcom) or informal (Marconi). Grand “visions” frequently turn out to be grandiose “hallucinations.”
Finding activities with the desired characteristics is not easy. Otherwise, most, if not all, companies would be in excellent shape. It is therefore not rare then, for top managers, embattled by the day to day pressures of running a company, to enlist all the help they can to develop those new ideas. Unfortunately, when that help implies actually outsourcing strategic thinking, problems will necessarily appear. To understand why, go back to our definition of strategy.
Finding products or services that customers will consider valuable requires an understanding of those customers. It means constant trial and error. Strategic breakthroughs are, by definition, far from obvious. In almost all success stories (from Benetton to Microsoft, Ikea to Southwest Airlines), the entrepreneur has tried many times until, receiving constant feedback from customers, finds the “right” formula. Developing a winning strategy in the real world takes, in most cases, years of false starts, small discoveries and fine-tuning. If the company expects that some outsider will, in a few weeks, come up with the strategy, it is going to be sorely disappointed. It will get something, at best, analytically brilliant… and unworkable.
But there is a second, deeper reason why an “outsourced” strategy cannot work. Making sure the company can actually produce those desirable products or deliver those innovative services better than any competitor requires a thorough understanding of the business and of its technology and procedures. In most cases, the difference between a profitable and an unprofitable product (which is what strategy must uncover) lays in apparently minor details. For instance, cooked ham tends to be much more profitable than cured ham. The technology involved in producing the first restrict the viable number of competitors to two or three per national market; but anybody can produce cured ham, which results in a highly fragmented “industry.” Similar “details” would explain why Easyjet can make money flying between Geneva and London but not London and New York. A company that invests its limited resources in one type of ham or one type of flight instead of the other can reap very different results. Estimating that beforehand is the role of strategic analysis.
Outsourcing this analysis cannot work for quite obvious reasons. If the provider of strategic advice has no industry experience, it is extremely unlikely that its advice will actually be useful. We just discussed how important apparently trifling details may be. This lack of understanding of minor yet crucial information explains why so much consulting advice looks excellent… and does not work.
If the consultant does have industry experience, then a different problem develops. We just repeated that for a strategy to be successful it must be somewhat original, for it implies finding activities where the company is at an advantage over competitors. But strategy consultants, reasonably enough, tend to provide similar advice to many of their clients in an industry. Thus, even if the recommended strategy were a good one it would be rendered useless by its replication. “Bancassurance,” hub-and-spoke airlines and integrated media conglomerates may or may not have merit as innovative strategies (we would have to be industry experts to really judge), but one thing managers can be sure of: if the strategy is being pursued by everybody, nobody will make much money with it.
Managers must realize that a new strategic plan cannot be a “silver bullet” that solves all operational or strategic problems. In the real world, populated by tough competitors, difficult customers, regulating agencies, uncooperative trade unions, etc., companies can only progress with difficulty. They need to pay an enormous amount of attention to daily detail and, at the same time, have the creativity and courage to try new things that make sense and do not put the company at risk. Above all, strategy cannot be a “flight forward.”
Are strategy consultants useless or, even worse, dangerous? The truth is that their recent record is not very good. But many companies use them with excellent results. To perform the strategic analysis we have outlined here often requires a lot of data on competitors, markets, etc., that the company may not have access to. Furthermore, this data is only useful if properly analyzed and presented. Consultants can also be of enormous help as sophisticated sounding boards that help managers sharpen their own strategic thinking by providing them with well founded challenges to their ideas. But those ideas must come from the managers (I have seen consultants being charged with developing the company’s new “vision/mission,” or to determine what its “core competencies” are!).
In the end, companies that outsource their strategic thinking remind me of the personage in Edmond de Rostand’s Cyrano de Bergerac who, unable to say the right things to the girl he is courting, asks the hidden Cyrano to whisper to him burning love verses that he repeats to his desired one. I don’t think great lovers make their conquests this way.
One of the great success stories of the last twenty years has been the consulting industry. Although it may be suffering right now due to a decline in sales, it has grown for many years at very high rates. Some of the largest companies in the world are now consulting organizations or consulting divisions of large multinationals, such as Accenture or IBM’s Global Services division.
Within this industry, the most profitable segment has been that of strategy consulting. This reflects an increased use of strategy consultants’ services over the years. Yet profitability for many of those same firms’ clients has often deteriorated over the corresponding period, in some cases spectacularly. Is there then no value added by strategy consulting? To answer this question we must spend a few words defining what strategy is… and what it is not.
Strategy is, essentially, the effort to find products and/or services to offer that have two basic characteristics: customers will want to buy them and the company will be in a unique position to deliver them. If either criterion fails, the new activities will not be profitable and the exercise will destroy value. Thus no matter how technologically advanced customers are, they do not really seem to want highly sophisticated wireless services, and companies which invested billions in 3G licenses just because they were available are now paying a heavy price. But even desirable products or services are only profitable if companies can avoid all-out competition, i.e., if they can deliver those products in a (permanently) better way or at a sustainably lower cost. International phone service usage, following liberalization, has soared in the last ten years, proving that customers really wanted more of it. But dozens of different companies offer an undistinguishable service, and are all losing money.
From this definition we clearly see what strategy is not: it’s not about being number one, having market leadership, going global, getting into the next thing or even growing faster than everybody else. Strategy is about making money over the long term, without taking disproportionate risks. That can only be done by following the view of strategy mentioned above. Certainly, it will imply low growth in many cases, for most companies cannot constantly find new products or services with the mentioned characteristics of desirability and uniqueness. But low, profitable growth beats strategies à la Vivendi, Swissair, or Credit Suisse every time. History has shown that fast growth through acquisition is simply the first step in a process that continues with inflated expectations (“becoming a truly world class company”), through big executive bonuses (“we must reward world class performance”), good-will restatements (“perhaps we paid too much for some acquisitions”), rumours of liquidity problems (yes, acquisitions must eventually be paid for and loans returned) and eventual bankruptcy, either formal (Worldcom) or informal (Marconi). Grand “visions” frequently turn out to be grandiose “hallucinations.”
Finding activities with the desired characteristics is not easy. Otherwise, most, if not all, companies would be in excellent shape. It is therefore not rare then, for top managers, embattled by the day to day pressures of running a company, to enlist all the help they can to develop those new ideas. Unfortunately, when that help implies actually outsourcing strategic thinking, problems will necessarily appear. To understand why, go back to our definition of strategy.
Finding products or services that customers will consider valuable requires an understanding of those customers. It means constant trial and error. Strategic breakthroughs are, by definition, far from obvious. In almost all success stories (from Benetton to Microsoft, Ikea to Southwest Airlines), the entrepreneur has tried many times until, receiving constant feedback from customers, finds the “right” formula. Developing a winning strategy in the real world takes, in most cases, years of false starts, small discoveries and fine-tuning. If the company expects that some outsider will, in a few weeks, come up with the strategy, it is going to be sorely disappointed. It will get something, at best, analytically brilliant… and unworkable.
But there is a second, deeper reason why an “outsourced” strategy cannot work. Making sure the company can actually produce those desirable products or deliver those innovative services better than any competitor requires a thorough understanding of the business and of its technology and procedures. In most cases, the difference between a profitable and an unprofitable product (which is what strategy must uncover) lays in apparently minor details. For instance, cooked ham tends to be much more profitable than cured ham. The technology involved in producing the first restrict the viable number of competitors to two or three per national market; but anybody can produce cured ham, which results in a highly fragmented “industry.” Similar “details” would explain why Easyjet can make money flying between Geneva and London but not London and New York. A company that invests its limited resources in one type of ham or one type of flight instead of the other can reap very different results. Estimating that beforehand is the role of strategic analysis.
Outsourcing this analysis cannot work for quite obvious reasons. If the provider of strategic advice has no industry experience, it is extremely unlikely that its advice will actually be useful. We just discussed how important apparently trifling details may be. This lack of understanding of minor yet crucial information explains why so much consulting advice looks excellent… and does not work.
If the consultant does have industry experience, then a different problem develops. We just repeated that for a strategy to be successful it must be somewhat original, for it implies finding activities where the company is at an advantage over competitors. But strategy consultants, reasonably enough, tend to provide similar advice to many of their clients in an industry. Thus, even if the recommended strategy were a good one it would be rendered useless by its replication. “Bancassurance,” hub-and-spoke airlines and integrated media conglomerates may or may not have merit as innovative strategies (we would have to be industry experts to really judge), but one thing managers can be sure of: if the strategy is being pursued by everybody, nobody will make much money with it.
Managers must realize that a new strategic plan cannot be a “silver bullet” that solves all operational or strategic problems. In the real world, populated by tough competitors, difficult customers, regulating agencies, uncooperative trade unions, etc., companies can only progress with difficulty. They need to pay an enormous amount of attention to daily detail and, at the same time, have the creativity and courage to try new things that make sense and do not put the company at risk. Above all, strategy cannot be a “flight forward.”
Are strategy consultants useless or, even worse, dangerous? The truth is that their recent record is not very good. But many companies use them with excellent results. To perform the strategic analysis we have outlined here often requires a lot of data on competitors, markets, etc., that the company may not have access to. Furthermore, this data is only useful if properly analyzed and presented. Consultants can also be of enormous help as sophisticated sounding boards that help managers sharpen their own strategic thinking by providing them with well founded challenges to their ideas. But those ideas must come from the managers (I have seen consultants being charged with developing the company’s new “vision/mission,” or to determine what its “core competencies” are!).
In the end, companies that outsource their strategic thinking remind me of the personage in Edmond de Rostand’s Cyrano de Bergerac who, unable to say the right things to the girl he is courting, asks the hidden Cyrano to whisper to him burning love verses that he repeats to his desired one. I don’t think great lovers make their conquests this way.
Partner-Inhalte
