We live in a culture of success. We adore successful people and often feel distressed when we believe we are not. Evolution punished us for mistakes and failures, making them painful so that we wouldn’t repeat them in the future. But it worked well many years ago when avoiding dark caves and predators was an excellent survival strategy. But when it comes to business strategy nowadays, this approach is incredibly inefficient, and CEOs and board members should revisit it to ensure growth and prosperity for their companies.
You may have read stories in the media about a CEO being fired because a company didn’t hit its strategic goals. Yet, we live within a paradigm in which the greatest virtue of a manager is the ability to deliver outcomes, whatever the circumstances. Of course, life itself has disproved this idea many times, but some investors, shareholders, and board members still believe in it.
Ups and downs
José Mourinho is a legendary football coach. There was a time when media and professional commenters called him “great” – when he coached Chelsea (for the first time), Internazionale (Milano), and Real Madrid. These teams seemed invincible, and Mourinho enjoyed the glory of the best coach of the time. But then he went through a series of failures – with Chelsea (during his second term), Manchester United, and Tottenham Hotspur. However, Mourinho is not an athlete whose skills fade over time; he is a thinker and strategist, and every year of work adds some tricks to his repertoire. Born in 1963, he was definitely not too old for this work in 2018 when Manchester United sacked him.
Jeff Bezos is one of the best managers ever. He used to be the CEO of Amazon for many years, and the company became an e-commerce giant under his command. But in 2014, it presented the Amazon Fire Phone, an ambitious project following the success of Kindle Fire. Unfortunately, it was a bad idea, and the company had to write off $170 million in losses.
On the 11 of April 2019, Jeff Bezos, then the CEO of Amazon, sent a message to the shareholders containing these lines: “As a company grows, everything needs to scale, including the size of your failed experiments. If the size of your failures isn’t growing, you’re not going to be inventing at a size that can actually move the needle. Amazon will be experimenting at the right scale for a company of our size if we occasionally have multibillion-dollar failures. Of course, we won’t undertake such experiments cavalierly. We will work hard to make them good bets, but not all good bets will ultimately pay out. This kind of large-scale risk taking is part of the service we as a large company can provide to our customers and to society. The good news for shareowners is that a single big winning bet can more than cover the cost of many losers”. So, Bezos wanted to convince shareholders that failure is a faithful companion of innovation.
We all have had our ups and downs, and it seems a natural part of human lives. But when it comes to management, we inexplicably believe that good strategic planning and teamwork can do miracles. It never happens, but it doesn’t stop us. For instance, personal incentives packages for C-suite executives are often framed against long-term accounting results, which implies they need to achieve them, whatever it takes. Shareholders and board members pay lip service to innovations and creativity, but when it comes to decisions, they base them on quarterly financial reports.
Strategy and the laws of nature
The idea that strategic goals must be hit, and this is the only criterion of a CEO’s credibility, conflicts with at least two natural laws:
- The future is unpredictable. No reliable research proves that humans can see the future even for a minute ahead. Who could imagine in February 2020, that in two months, the whole world would be paused?
- Strategy always entails changes, which means that a team will do things they have never done before (at least in these particular circumstances). And doing new things is always accompanied by mistakes. For example, have you ever seen how children learn to walk? They fall and rise many times before they begin walking without effort. Caring parents always support them, but if they dismissed them for making mistakes, they would never learn.
When a team devises and formulates a long-term strategy, they can’t foresee thousands of factors that may influence the future business outputs, from crises and natural disasters to new competitors emerging and national policy changes. Moreover, they need to change and improve dozens of business processes, which is a complicated task by nature, and the complexity is reinforced if the team does it for the first time. Therefore, if a company reaches all its long-term objectives, it is rather a miracle than a normality.
The ideas above look trivial, but why do many investors and board members rely so much on numerical indicators? Because it is much easier. A binary system – a goal either achieved or not, is straightforward and clear. If the board members want to find a root cause of a deviation, they need to delve deeply into the processes, which needs time, effort, and motivation. But in the future, they will have to accept strategic failures as a source of information rather than a disaster.
Failure as a source of information
All current business outcomes result from decisions taken months or even years ago. But if a company doesn’t hit its strategic targets, it doesn’t necessarily mean that these decisions were wrong. Business implies making decisions in uncertainty, and the level of ambiguity in today’s world is higher than ever. Making “right” choices in such conditions appears to be impossible. So, if a strategy fails, it is a sign that some processes – market analysis, decision-making, and implementation, need improving.
As such, board members and investors must not judge a team by its outcomes alone. They need to dive deeper and evaluate the team’s ability to hypothesize and test hypotheses, create new products and business models, and enter new markets. If a company has goals, and if it moves towards them – even though the speed of movement differs from what was planned, and even if it diverges from its plans once in a while, it is rather a good sign. And current outcomes are the indicators pointing out that some processes need revision.