When Jeff Immelt took over as CEO of General Electric in 2001, he dramatically changed the company’s strategy. Under his leadership, GE became more internally focused, relying more on financial engineering and acquisitions in an effort to increase revenue and reduce costs. The company’s shares fell. Yet Immelt stubbornly stuck to what many saw as a failed strategy.
Strategic planning is an essential activity for senior managers, regardless of the size of the company. More than 88% of all large companies and 80% of small and medium-sized companies engage in strategic planning. For CEOs like Immelt, strategic planning is one of their most important tasks and they strive to communicate the company’s strategy to stakeholders.
But there is a problem: many do it wrong. In the search for our new book, FOCUS: How to plan strategy and improve execution to achieve growth, we found that many CEOs simply got their approach to strategic planning wrong. Contrary to popular belief, our research shows that many CEOs fail to make strategic decisions based on a systemic, science-based statistical process. Instead, they rely on intuition, emotions, and salient information from past experience.
In this article, the first in a nine-part series, I’ll explain why this is a major problem. In future articles, I will show how CEOs can plan their strategy well.
CEOs typically rely on strategic planning to set goals for their senior executives, define major initiatives, allocate and track resources between initiatives, create budgets, and hold mid-level and front-line employees accountable. Strategies become the means by which a CEO sets goals, measures success, executes plans, and communicates progress to the board and outsiders.
Certainly, strategic planning is a complex process and many CEOs agree that current practices need to be improved. Immelt, for his part, failed to turn GE around in part because senior and middle managers were unconvinced that the strategy he was proposing was coherent or would work. As one insider put it, “We’ve become too inward-focused and lost touch with our consumers.”
Another example is Wells Fargo. In 2016, regulators fined the bank $185 million for opening about 1.5 million bank accounts and requesting some 565,000 unauthorized credit cards from customers. The bank’s strategy and employee incentives emphasized maximizing sales by cross-selling to existing customers rather than delivering real value to customers.
Like GE and other companies that rely on a budget-based strategy to drive sales, Wells Fargo’s strategic plan prioritized how internal activities affected revenue rather than the effects of those customer value activities. The problem wasn’t that Wells Fargo’s strategy was poorly executed, it was that the company followed it.
But what, exactly, makes a strategy fail? When strategic planning goes wrong, our research indicates it’s usually for two main reasons. First, planning can fail when leaders strategize based solely on their gut feelings, intuition, emotions, and salient beliefs—beliefs that take priority. When these salient beliefs form the basis of the company’s strategic priorities, mission, or vision, they become a vehicle for the desires and aspirations of leaders.
Strategies based on leaders’ core beliefs often fail because they fail to consider what’s important to creating customer value — and customers are the largest component of a company’s cash flow. A company that relies on the core beliefs of leaders, by default, reduces customer value and simply cannot create healthy and sustainable cash flow.
That’s what happened at Wells Fargo, which began to use the salient personal beliefs of its leaders to justify its cross-selling strategy. This strategy drove employees to open accounts rather than help customers, which ultimately eroded customer value, sank company stock, and resulted in fines.
The second reason why strategic planning often fails is the belief of leaders that if they simply ask customers what they want, customers will transparently communicate exactly what is important to them. This is rarely the case. Instead, what customers declare as their desire often differs sharply from what actually creates value for them.
Take, for example, the relationship between a doctor and a patient. A patient walks into his doctor’s office with a health problem. Imagine what would happen if the doctor asked the patient what drugs and tests he wanted and prescribed them. Or imagine the patient simply insisting on certain tests and medications without being asked. In both cases, the clients have indeed expressed their wants and desires, but the doctor is unable to discern what would really help the client. It is up to the doctor to perform tests and use accumulated statistical benchmarks to detect the best way to help the patient.
Simply put, you can’t create customer value by simply catering to your customers’ wants and desires.
Companies must use the same process – using science, statistical expertise and data – coupled with effective listening, to define a customer-driven strategy.
In other words, what’s important to customer value isn’t usually obvious to customers themselves. More often than not, they lack the expertise, data, and statistical expertise to articulate what they need in a conversation. Yet a surprising number of senior executives rely on such conversations or “listening exercises” to uncover superficial wants and desires and use them to develop strategy. Such a strategy is doomed to failure.
Often, adversity provides the opportunity to pivot. During the COVID-19 pandemic, for example, companies and leaders have been forced to rethink and reorganize their strategic habits, compelled to learn about what is most important to customers.
This transformation can be powerful. When CEOs continue to evolve — embracing humility and no longer relying on past experiences, emotions, or hunches — they can organize around the most important customer needs, rather than the most salient ones. . They can simplify their plan. As a bonus, a cleaner, simpler strategy will be more appealing to employees.
CEOs can plan their strategy well. For companies willing to dedicate time and resources to strategic planning, the research we describe in Focus: How to Plan Strategy and Improve Execution to Achieve Growth offers a roadmap on exactly how to do this.
This article was originally published on Commercial wisdom of rice and is based on research by Vikas MittalJ. Hugh Liedtke Professor of Marketing at Jones Graduate School of Business and author of “Focus: How to plan strategy and improve execution to achieve growth”.