Strategy Beyond the Hockey Stick

1. The social side of strategy hinders big moves and bold decisions

Strategy isn't the only thing that's at stake here. Jobs—even careers—are on the line, too.

Human nature complicates strategy. In the strategy room, personal agendas, risk aversion, and cognitive biases often overshadow rational decision-making. Executives may prioritize job security over bold moves that could benefit the company. This leads to:

• Sandbagging: Setting easily achievable targets
• Hockey stick projections: Overly optimistic long-term forecasts
• Peanut butter spreading: Distributing resources evenly instead of concentrating on high-potential areas

Overcoming social dynamics is crucial. To make big moves and bold decisions, companies must address these human factors by:

• Encouraging open dialogue and challenging assumptions
• Aligning incentives with long-term company success
• Using data and external benchmarks to counter biases

2. Economic profit reveals a Power Curve of corporate performance

Companies in the top quintile capture nearly 90 percent of the economic profit created, averaging $1.4 billion annually.

The Power Curve illustrates stark performance differences. Analysis of thousands of companies reveals a dramatic curve of economic profit (profit after the cost of capital):

• Top quintile: Captures 90% of all economic profit
• Middle three quintiles: Generate minimal economic profit
• Bottom quintile: Destroys significant economic value

Implications for strategy:

• Moving up the curve should be a primary strategic goal
• Understanding your position on the curve provides context for decision-making
• The curve is getting steeper over time, increasing the stakes for strategic choices

3. Industry trends and geography significantly impact company success

Your main competitor is the Darwinian force of the market that squeezes your profitability; your main measure of whether you are winning is the extent to which you avoid that squeeze.

External factors shape 50% of a company's position. Industry dynamics and geographic exposure play a crucial role in determining performance:

• Industry trends: Account for about 25% of a company's odds of success
• Geographic exposure: Contributes another 25% to performance odds

Strategic implications:

• Choosing the right industries and geographies is critical
• Companies must continuously assess and potentially pivot their industry focus
• Geographic strategy should target high-growth markets

4. Five big moves can dramatically improve odds of success

Companies that made three or more big moves were six times more likely to jump from the middle quintile to the top.

Big moves significantly increase upward mobility. The research identifies five moves that, when executed at scale, can dramatically improve a company's odds of success:

1. Programmatic M&A
2. Dynamic resource allocation
3. Strong capital expenditure
4. Distinctive productivity improvement
5. Differentiation improvement

Key insights:

• Making just one or two big moves doubles the odds of reaching the top quintile
• Three or more big moves increase odds by 6x
• Big moves must be substantial relative to industry norms to have impact

5. Programmatic M&A and dynamic resource allocation drive growth

Companies that shift more than 50 percent of their capital expenditure across business units over 10 years create 50 percent more value over that period than companies that move resources at a slower clip.

Active portfolio management fuels success. Companies that consistently pursue M&A and reallocate resources outperform peers:

Programmatic M&A:

• Execute at least one deal per year
• Cumulative value of 30%+ of market cap over 10 years
• No single deal exceeds 30% of market cap

Dynamic resource allocation:

• Shift 50%+ of capital across business units over 10 years
• Reallocate operating expenses and talent, not just capital
• Continuously evaluate and pivot resource deployment

6. Differentiation and productivity improvements are crucial levers

Productivity programs only make a real difference once you clear a high threshold. You have to deliver 25 percent more productivity improvement than your industry median over a 10-year period.

Outperforming peers on core metrics drives success. Companies must significantly outpace their industry in two key areas:

Differentiation:

• Achieve 30% higher gross margins than industry average
• Focus on innovation, pricing power, and unique value proposition

Productivity:

• Deliver 25% more productivity improvement than industry median
• Implement consistent, company-wide productivity initiatives
• Capture and retain productivity gains instead of giving them away

7. Strong capital expenditure programs amplify performance

Pulling the capex lever turns into a big move when your capex/sales ratio exceeds 1.7 times the industry median for at least 10 years.

Substantial, sustained capital investment drives growth. Companies that consistently invest more than peers in capital expenditures see amplified performance:

• Threshold: 1.7x industry median capex/sales ratio for 10+ years
• Benefits: Increased capacity, efficiency, and competitive advantage
• Risks: Potential for overinvestment or poorly timed expansions

Key considerations:

• Align capex with market demand and industry trends
• Maintain discipline in investment processes
• Balance short-term results with long-term growth initiatives

8. Strategy requires a holistic view and continuous adaptation

Strategy is precisely the wrong problem for human brains and the right problem for playing games, especially when the "inside view" goes unchecked.

Effective strategy demands a broader perspective. Traditional approaches often fall short due to cognitive limitations and internal biases:

• Inside view: Relying too heavily on internal data and past experiences
• Cognitive biases: Overconfidence, anchoring, and confirmation bias
• Annual planning cycles: Failing to adapt to rapidly changing conditions

Key shifts for better strategy:

• Embrace an "outside view" using external data and benchmarks
• Implement continuous strategy dialogues instead of annual cycles
• Track a portfolio of initiatives across multiple time horizons
• Regularly challenge assumptions and update plans based on new information

9. Overcoming cognitive biases is essential for effective strategy

The social side of strategy can overwhelm the intellectual side.

Human biases significantly impact strategic decisions. Recognizing and mitigating these biases is crucial for effective strategy:

Common biases in strategy:

• Overconfidence: Believing in unrealistic projections
• Anchoring: Fixating on past performance or arbitrary targets
• Loss aversion: Avoiding necessary risks to prevent short-term losses

Techniques to counter biases:

• Use data-driven benchmarks and external perspectives
• Implement formal de-biasing techniques (e.g., pre-mortems, red team/blue team exercises)
• Encourage diverse viewpoints and healthy debate
• Separate conversations about improvement, growth, and risk

10. Breaking inertia demands liquid resources and risk-taking

To re-allocate, you have to de-allocate.

Resource flexibility enables big moves. Many companies struggle to execute strategic shifts due to resource constraints and risk aversion:

Challenges:

• Budget inertia: Resources locked into existing business units
• Risk aversion: Reluctance to reallocate resources from "safe" areas

Solutions:

• Create resource liquidity: Free up 10-20% of resources annually
• Implement "80% based budgeting": Contest a portion of every budget
• Charge opportunity costs: Incentivize efficient resource use
• Manage risk at the portfolio level: Balance high-risk and low-risk initiatives

11. Execution begins with forcing the first step

Companies rarely die from moving too fast, and they frequently die from moving too slowly.

Turning strategy into action requires immediate steps. Many strategies fail due to a lack of concrete near-term actions:

Common pitfalls:

• Analysis paralysis: Endless planning without execution
• Vague long-term goals: Lack of clear, actionable steps

Keys to execution:

• Break long-term plans into 6-month increments
• Set proximate goals with clear operational metrics
• Focus initial performance conversations on actions taken, not just results
• Immediately mobilize resources for key initiatives
• Use "agile sprints" to jumpstart strategic priorities

By forcing concrete first steps, companies can overcome inertia and begin the journey of strategic transformation.

Last updated: February 17, 2025