Dann: You get in deep with companies with your teaching, research and consulting. How are the best-managed companies you work with adapting their strategic planning efforts in recessionary times?
McGrath: Markets get good, markets get bad. We need to be attentive to this in the short-run, but if we don't pay attention to the long run, we're not going to have a future. So we're not going to get all whipped up by this. There's a need to separate out the activities that just don't generate a return from the things that have a longer-term return. The firms that worry me are the ones who are canceling training programs. They're stopping employees from going to conferences-- it's all about minimizing short-term travel budgets. Sure, it's going to show up in this quarter's ROI because of the reduced expense, but it will probably also show up in ROI a year down the line in a different way: when no one on your team knows about some new technology or trend and your competitors do. I see a lot of "meat ax" approaches.
Dann: So, what does a company do when they want to make more precise cuts, without employing the ax?
McGrath: I use a portfolio management approach that helps companies do that. This would include always having some more speculative projects that may or may not pay off down the road. But the watchword for these options is to treat them just like financial options. They are smaller investments you make today that give you the right, not the obligation, to make bigger investments down the road. These are the ones that give you a window on the future, help you anticipate what is going on in the market and give you early warnings. Companies [can] terminate them if they don't generate a return in a specified timeframe.
Dann: How should they make intelligent decisions about the trade-offs between the different types of projects in the portfolio?
McGrath: You want to understand how much of which kind of project your strategy requires. If you have a strategy which says times are tough, we need to baton down the hatches and, well, "tuck it all in"-- then you're going to want less in the option space. If, on the other hand, you're in industry like healthcare, with a lot of volatility and a lot of regulatory uncertainty, you need to bite the bullet and invest in options. You don't have enough knowledge to know what's going to happen. Otherwise you can find yourself completely out of it when the situation finally does unfold.
The watchword is: let like compete with like. So, you want options competing with options for funding and core business things competing with core business things. What some companies often do is sit down with a spreadsheet to look at their options; it would be a quantification of fantasy to say you could put an NPV on it. But that kind of option is competing with some add-on to the current business that has really predictable revenue increment streams. Companies do it all the time.
Dann: The business world is getting more complex. How have the methods you've used to teach students about strategy changed since you entered the field?
McGrath: The field of strategy itself has gone through a fairly substantial advance. If you were talking about strategy a couple of decades ago, you would have been talking about stable industry forces--you would have had Michael Porter's "Five Forces" model in front of you. The whole goal of strategy was the creation of what was called the "sustainable competitive advantage." Beginning with the publication of Rich D'aveni's book "Hypercompetition" in 1994, we're starting to see a lot more widespread recognition that advantages are fundamentally temporary. Thinking that way implies a whole different set of financial, planning, and management tools than those we have used conventionally. What you see in the classroom is people coming in with this uneasy feeling that their mental model of what strategy should be for -- sustainable competitive advantage -- isn't mapping to their experience. They're experiencing unpredictability and volatility-- the inability of a 5-year plan to last for more than three months. There's a hunger for new way of looking at the world that fit what they are seeing.
What I've found more useful in teaching strategy for core businesses these days are the tools that I've developed around new businesses--which is where the greatest uncertainty, I always believed, lay. Well, guess what? We're finding out now as unpredictability increases, this stuff is becoming relevant to people's core businesses.
(Image by Chris Campbell via Flickr, CC. 2.0)