In business, tradeoffs occur when companies have to make choices between strategies that are inconsistent. For example, senior executives’ short-term focus on earnings per share may conflict with long-term shareholder value and derail the firm’s strategy.
The pressure from financial markets can tempt executives to perform unnatural acts, such as managing earnings in a fashion that undermines a long-term strategy. They are motivated by the personal impact of the decision and fixated on the short term.
One downside of stock-based compensation for executives is that it incentivizes strategies that might benefit stock prices in the short term but could be detrimental to firms in the long term. So rather than repairing the unsafe roof on the factory in Toledo this quarter, they decide to postpone the work to meet investor expectations for the quarter.
This asymmetrical reality, coupled with the four-to-six-year average tenure for a CEO, undermines the serious consideration of strategy. This is unfortunate since the stakes and therefore the costs of failure are high.
Limited resources force executives to carefully and wisely match the resources available to the problem or set of problems at hand. They must not only choose among resources, but also integrate and rationalize their use.
One of the challenges in developing a successful strategy is to set goals that are realistic in the context of finite resources and not to confuse means with ends. Since executives can’t have everything at once, they need a set of goals that recognize the firm’s limitations. Goals should be feasible, not pipe dreams found in the wild blue yonder.
Closely related, since external circumstances are not static, resources that are valuable now may not be in the future. When this occurs, executives are faced with the interplay and tradeoffs between internal and external considerations.
Keep in mind that executives are trying to perform all these tasks while trying to cope with the tyranny of day-to-day events and crises. Functioning in this intense environment inevitably affects the quality of the choices made.
Moreover, all strategies are contextual. Strategies are derived from and shaped by political, regulatory, social-cultural, economic, and technological forces. None of these contexts should be ignored. Context provides meaning to events.
Strategies should act in these multiple contexts. Successful executives analyze the varied contexts that impact strategy and the ways in which context and ideas act on each other from the time they are developing strategy through its implementation, a progression that will in turn give rise to further ideas.
While the definition of strategy may have changed over the decades, in a word, strategy remains consequential and the stakes are huge. It involves long-term commitments, large allocations of resources, and the making of critical decisions – all in a fiercely competitive environment in which the path forward is often unclear. Executives need to maintain the ability to see the forest rather than the trees.
Strategy is an attempt to control the future. Long-term goals are translated into proximate goals for execution. Changing strategies is like the popular metaphor of changing the direction of an aircraft carrier—it doesn’t happen quickly.
Despite all these complex variables, strategy should be kept simple. Simplicity does not guarantee success, but complexity begs for failure. There is a chain of events between resources and goals. A chain is as strong as its weakest link, and the more links in the chain, the higher the odds that something will go wrong. The sovereign role of chance in strategy must be respected.