This blog is originally published as a sub-chapter of The G.O.S.P.E.L. of Strategy.
The second step of winning is to analyze your options based on facts and data. There are six subprinciples related to option analysis:
1. Consider all options.
2. Be fact-based and data-driven.
3. Analyze external factors.
4. Analyze internal factors.
5. Ensure fit between internal and external factors.
6. Beware of analysis-paralysis.
Since analytical tools play an essential role in this phase, we will discuss some key analytical tools. However, as this manual focuses on the principles, we won’t go ‘deep’ into the tools nor cover a vast array of strategy tools.
Instead, we will discuss only the tools that reflect the subprinciples well. I have intentionally selected a limited number of strategy tools that are: 1) useful, 2) easy to use, and 3) applicable in many situations.
2.1. Consider All Options
Once you set your goal, don’t rush to action before considering the best course for you to achieve it. Winning Strategy is about choosing the most optimal option. So, don’t jump the gun. Always consider all available options before choosing one.
Napoleon Bonaparte, one of the greatest military commanders in history, won many battles because he methodically analyzed every possible option before each battle.[i] He wrote: “There is no man more pusillanimous than I when I am planning a campaign. I purposely exaggerate all the dangers and all the calamities that the circumstances make possible. I am in a thoroughly painful state of agitation.” In the months and weeks before operations commenced, he would begin to collect information. In addition to reading an enormous number and variety of books bearing on the enemy and the theater of war, he studied the copious volumes of intelligence reports forwarded by the agents he had scattered throughout Europe. He would pursue works of political history, accounts of the state of roads and bridges, reports on the politicians and generals, and even studied local patterns of food stockpiling and distribution.[ii]
If you don’t spend effort analyzing all possible options, you will end up with a sub-optimal strategy. Choosing the best option from a limited set of options gives you a local-optima. Choosing the best option from all possible sets of options gives you a global-optima.
Don’t make excuses such as: “There’s no other option,” “This is the only way.” Know that there is always more than one way to achieve your goal. Just because you aren’t aware of another way of achieving your goal, it doesn’t mean there is no other way.
Alternative ways do exist. To find them, consult experts, ask experienced people, do research and deep-thinking. Once you have done these, you’ll see your problem from different perspectives and begin seeing the alternative solutions you can take.
Follow this simple rule of thumb: have at least five options before you start analyzing your options. If you can’t find at least five options, it means you have not done enough homework. Please think harder and do more research. You may not like this rule of thumb. But it forces you to do divergent thinking, the kind of thinking that you exactly need in the analysis phase, as it encourages boundless creativity.
A young man I mentored once told me he didn’t have money to buy a suit for a job interview. A suit from the ‘high street’ stores in London typically costs around $200-300, a hefty sum for a jobless young man. He had planned to ditch the interview when I pushed him to think divergently and explore his other options. He did come out with more options, i.e., he could:
Borrow a suit from one of his friends.
Rent a suit just for the day.
Buy a second-hand suit from the charity shops.
Get his grandma to sew him one (he grossly underestimated the complexity of sewing a suit).
Steal a suit from a store (yes, a possible option, but not the one he must ever take).
Come without wearing a suit (which is much better than ditching the interview entirely).
The young man finally went to the interview in a two-buttoned, single-breasted, midnight blue suit (along with a burgundy silk tie, black oxford shoes, and a crisp white shirt) donated by his mentor – an option he didn’t consider previously. Sometimes, to develop options, we just need to stop making excuses and think a step further.
Use the 5-How tool to help you generate options. The idea is to keep asking How? for five times or more. By consistently answering the how-question, you break down a big problem into smaller and more manageable components. Just don’t forget to ensure your answers are mutually exclusive (each answer is different from the other answers) and collectively exhaustive (complete answers without anything missing). We call this the MECE rule in McKinsey. See the example below.
Goal: Grow our B2B sales in China by $100M in the next 3 years. How?
By growing the sales organically in China. How?
By establishing a new factory and distribution channel in China. How?
By serving the Chinese market from our existing factory in India. How?
By finding an existing distributor which is already trading in China. How?
By encouraging an existing distributor that has the capacity and capability to expand into China. How?
By finding a new distributor who has an operation both in China and India. How?
By acquiring another local player (inorganic growth). How?
By merging with the biggest player in China. How?
By establishing a joint venture with another big local competitor. How?
By acquiring a small local competitor with the potential to achieve $100M and then grow them. How?
By finding a small local competitor in the same industry. How?
By finding a small local competitor in the adjacent/related industries. How?
By finding a small local competitor in a different industry. How?
Once all possible options are generated, you need to assess which ones are realistic for you/your business and the advantages/disadvantages of each option. Then, you can choose the best option for you, given your circumstances and conditions. This chosen option then becomes your strategy. See how your options are related to your strategy? It is why the master strategists always said: “Strategy is what you choose to do and not to do.”
While we are on this topic, let’s examine the relationship between Strategy, Business Model, and Tactics. If you look carefully, an option is basically a set of choices. Imagine a chocolate company with three options for growth: a) enter the healthy snack market; b) target the indulgent snack market; or c) pursue the everyday low-price snack market. Basically, the company has three sets of choices, i.e., Set A, B, and C.
If the company chooses the set of choices B and ignores choices within Set A and C, then Set B becomes the strategy of the company. In other words, your strategy is none other than your chosen option.
But, if the company chooses the set of choices B but still pursues some choices from set A or C, it means the company hasn’t had a strategy. Imagine this: a chocolate company said its strategy is winning the indulgent snack market. But, to reduce costs, it cuts the chocolate content by 20% and replaces the cocoa butter with some other cheaper alternative butter. Then, to attract health-conscious people, the company also reduces the amount of sugar. After some time, the company executives wonder why the company loses market share. This chocolate company is sabotaging its own strategy (without even realizing it) by taking conflicting sub-choices.
If Set B gets implemented, then Set B becomes the business model of the company. A business model is none other than an implemented strategy. When you observe a company, you cannot see its strategy, but you can see its business model. From its business model, you can deduce its true strategy – not the one claimed in the annual report or strategy documents, but the actual strategy it pursues. Remember: Many companies have a business model that is entirely different from their claimed strategy.
Once the business model has been created (i.e., the strategy has been implemented), there are smaller choices still available to the company. Imagine this: the chocolate company has invested a lot in making delicious chocolate. It has hired the best chocolatiers, perfected the recipe, sourced the ingredients, and configured the factory. At this point, it still faces many lower-level tactical choices, e.g., in which product category (chocolate bars, chocolate cookies, hot cocoa, or truffles) to play? Which packaging design (color, font, shape, type, size, material) to use? What price point (price level, discount level, discount frequency) to offer? The chosen lower-level choices are the tactics of the company.
2.2. Be Fact-based and Data-driven
When assessing your option, you should base your analysis on reality (i.e., facts and data). Don’t blindly make decisions based on opinions, speculations, sayings, or anything which isn’t based on reality. Instead, ensure you have sufficient data to conduct an accurate, reliable, and (ideally) statistically significant analysis.
Executives run businesses based on what they think is true. If what they think is true actually isn’t, all subsequent actions are based on a false premise. If you catch the false premise early, you prevent the amplification of the error. Therefore, make sure to test your ideas iteratively. In business, many things can go wrong. If you don’t do tests, you may waste a lot of time and money. To increase your odds of success, follow the HTI (Hypothesis-Test-Improve) formula. An illustrative example:
Step 1: Develop a hypothesis, e.g., British customers are willing to pay more for plastic-free shaving products.
Step 2: Design a series of small tests to collect data, e.g., don’t immediately order 10,000 units of bamboo shaving kit from China. Instead, get feedback from potential customers first (deep interviews, conjoint survey, or focus group discussion). If the result is positive, do a mini-test (try to sell 100 units). If the result is promising, then you can try to do bigger things (such as approaching national retailers).
Step 3: Improve your initial ideas. Based on your tests, find ways to improve the products, the ideas, and the offering. Often, you will get new, much better ideas than your original hypothesis. Don’t forget to test these new ideas too.
Many company executives frequently make complex decisions based on anecdotes, intuition, and gut sense. It is horrifying to see that people make million-dollar decisions without a single input of data. While intuition and gut sense can be powerful, you must know that they aren’t always 100% accurate.
Similarly, anecdotal evidence isn’t statistically significant nor reliable. I once worked as a freelance consultant for a manufacturing company. The management of the company believed that they were performing exceptionally well ahead of the market. They claimed that they were growing faster than the competitors by 1.5 times (based on anecdotal data from the salespeople). The company's CEO initially believed them, and the whole company styled themselves as the fastest-growing company in the industry. Alas, when I checked the market data to verify their claim, I found that the company was actually growing slower than the market – at about 0.8 times of market growth. The CEO was shocked when he learned the fact!
Never confuse opinions with facts or conclusions. Facts are true and verifiable things. Opinions are people’s thoughts about the facts. Conclusions are logical implications derived from the facts. When you don’t have sufficient facts to complete your analysis, don’t proceed with the strategy development. Focus instead on collecting the needed data to complete your analysis.
Without the right facts, you won’t have the right analysis and the right conclusion. Once, I had a constructive debate with the Procurement Director of a multi-billion dollar company. He claimed that he had consistently reduced costs on polyester chips. And he provided internal spending data to support his argument (i.e., declining buying prices quarter-on-quarter). I pointed out that the buying prices had fallen much slower than the crude oil price decline. The market prices of polyester are highly correlated to oil prices as the principal ingredient of polyester, ethylene, is derived from oil. Long story short, depending on which data you use, you can draw a completely different conclusion. Therefore, ensure you have all the relevant facts on your hand.
Facts are beneficial when the executives in the company have diverging opinions on what direction a company should go in. For example, should we invest more in TV advertising or digital marketing? Various opinions on this. Should we focus on product segment A or B? Various opinions on this. But opinions widely vary as people can base their opinions on many misleading factors:
Old memories (e.g., “based on my experience in the 1990s, the return on TV advertising is substantial. Thus we need to invest in TV.”)
Recent emotional interactions (e.g., “Mr. Smith, our largest buyer, just yelled at me due to our poor delivery. We need to invest in logistics to improve our delivery.”)
Personal interest (e.g., “I know that the sales and profits have increased. But our stock prices have declined. The analysts would like to see bold moves from us. Let’s take the big bet of entering the conductive yarn market.”
Suppose half the executives think the business is growing and the other half thinks it’s shrinking. In that case, it’s tough to have a productive strategy conversation, as the executives are operating from two completely different mental starting points.
This is why we always start with the facts. When you begin a strategy project, the first week or two should focus on compiling the fact pack. It is a (presentation) document that summarizes the data and defines the facts of the current situation, e.g.,
“This business has $100 million in sales and has been growing 20% per year.”
“This business has profit margins of 15%, which have been declining 5% for the last three years.”
“Customer satisfaction ratings have gone from 90% satisfied to 60% satisfied over the past 36 months.”
A fact pack contains no strategy; it simply depicts the status quo. The purpose of developing one is to make sure all the company’s executives are informed, agree on the facts, and operating from the same base of facts.
Before you use data, check for the data’s accuracy. Too many times, people analyze and make a decision based on wrong and inaccurate data. Hence, they end up with a sub-par strategy. There is no guarantee that the right data leads to the right strategy, but the wrong data is guaranteed to lead to the wrong strategy. It is better to suffer delays due to data collection than to suffer a wrong strategy.
Now, to best understand your options, you need two kinds of facts, i.e., the facts about your business' external and internal environment. We will discuss External Analysis in Section 2.3. and Internal Analysis in Section 2.4.
Continue to explore the secrets of Winning Strategy here.
To read about External Analysis click here.
To read about Internal Analysis click here.
[i] Andrew Roberts. 2015. Napoleon the Great. Penguin Books. [ii] www.napolun.com/mirror/napoleonistyka.atspace.com/Napoleon_tactics.htm [iii] www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-strategic-yardstick-you-cant-afford-to-ignore [iv] pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/margin.html [v] Michael Arndt. 2010. Urban Outfitters’ Grow-Slow Strategy. BusinessWeek. [vi] ICCT. 2020. The Retail Fuels Market in Indonesia. Working Paper 2020-23. [vii] Matthew Boyle. 2009. Wal-Mart’s Painful Lessons. BusinessWeek Online. [viii] wharton-ibr.com/blog/2020/11/25/why-walmart-was-destined-for-failure-in-japan-by-sarah-zhang-w22 [ix] asia.nikkei.com/Spotlight/Comment/How-Walmart-flopped-in-Japan-and-elsewhere-overseas [x] Based on personal experience while travelling to these countries. [xi] The Manufacturer. Vol 23. Issue 9. December 2020. [xii] Based on personal observation. [xiii] www.numbeo.com/cost-of-living/country_price_rankings?itemId=19 [xiv] www.statista.com/topics/3594/auto-dealers-in-the-us/ [xv] www.dairyuk.org/the-uk-dairy-industry/ [xvi] hbr.org/2005/04/how-strategists-really-think-tapping-the-power-of-analogy [xvii] www.quotes.net/quote/40044 [xviii] Michael Shearn. 2012. The Investment Checklist: the Art of In-depth Research. John Wiley & Sons. [xix] Based on discussion with a friend of mine who worked for the UK Government. [xx] www.telegraph.co.uk/news/2020/11/17/donald-trump-concede-joe-biden-election-2020-what-happens-president/ [xxi] eu.usatoday.com/story/news/politics/elections/2020/08/06/election-2020-War Games-trump-vs-biden-race-show-risk-chaos/5526553002/ [xxii] The Manufacturer. Vol 23. Issue 9. December 2020. [xxiii] www.independent.co.uk/news/business/news/shocking-sales-results-from-m-s-deepen-fears-of-recession-in-uk-769273.html [xxiv] hbr.org/2005/04/how-strategists-really-think-tapping-the-power-of-analogy [xxv] Adapted from McKinsey & Company’s Strategy Under Uncertainty, [xxvi] insight.kellogg.northwestern.edu/article/what-went-wrong-at-aig [xxvii] www.investopedia.com/articles/economics/09/american-investment-group-aig-bailout.asp [xxviii] www.thebalance.com/aig-bailout-cost-timeline-bonuses-causes-effects-3305693 [xxix] The Manufacturer. Vol 23. Issue 9. December 2020. [xxx] quotefancy.com/quote/1548411/Sun-Tzu-Know-yourself-and-you-will-win-all-battles [xxxi] Four Season’s Annual Report. www.sec.gov/Archives/edgar/data/1030555/000116923203003172/d55326_ex99-1.htm [xxxii] www.shopify.co.uk/retail/119531651-how-nordstrom-made-its-brand-synonymous-with-customer-service-and-how-you-can-too [xxxiii] blog.goptg.com/microsoft-office-365-statistics [xxxiv] www.windowscentral.com/there-are-now-12-billion-office-users-60-million-office-365-commercial-customers [xxxv] Michael Shearn. 2012. The Investment Checklist: the Art of In-depth Research. John Wiley & Sons. [xxxvi] www.westernunion.com [xxxvii] Michael Shearn. 2012. The Investment Checklist: the Art of In-depth Research. John Wiley & Sons. [xxxviii] www.brainyquote.com/quotes/jack_welch_173305 [xxxix] strativity.com/hbr-change-report/ [xl] Michael Shearn. 2012. The Investment Checklist: the Art of In-depth Research. John Wiley & Sons. [xli] American Woodmark’s Annual Report Year 2010. [xlii] American Woodmark’s Annual Report Year 2019. [xliii] hbr.org/2005/04/how-strategists-really-think-tapping-the-power-of-analogy [xliv] www.gobigcreativelab.com/a-punch-is-just-a-punch-leadership-lessons-from-bruce-lee/ [xlv] quotefancy.com/quote/757912/Albert-Einstein-Make-everything-as-simple-as-possible-but-not-simpler [xlvi] hbr.org/2005/04/how-strategists-really-think-tapping-the-power-of-analogy
Comments