When running your own business, it’s easy to get caught up and focused on achieving only one business goal, sometimes out of inertia. SMB owners, who are constantly busy with taking care of their day-to-day operations, might be at risk of strategic fixation. While this problem is relevant to organizations both large and small, for small business it may mean life or death. This post will further explore inertia in business strategy and will offer advice on how to avoid it.
Stephen Hall and Reinier Musters, two McKinsey & Company consultants, and Dan Lovallo, a Professor at The University of Sydney Business School, researched the way companies reallocate their resources between different units and strategies and analyzed the relationship between that allocation and each company’s performance. The researchers reviewed 1,600 US companies for fifteen years and divided them into three categories based on their degree of reallocation: low, medium, and high.
The researchers found that “companies that reallocated more resources—the top third of our sample (high), shifting an average of 56 percent of capital across business units over the entire 15-year period—earned, on average, 30 percent higher total returns to shareholders (TRS) annually than companies in the bottom third of the sample (low).” Firms that were found to be high in resource reallocation enjoyed 10.2 percent annual growth, in comparison to only 7.8 percent for low-in-reallocation companies.
Finding that most companies operate on autopilot wasn’t the only realization the three came to in their study. They also explain the main reasons for this phenomenon and suggest ways to avoid it. Here are a few tips I found the most relevant for SMBs.
Companies should have a target portfolio in mind that goes beyond vague strategic statements such as “explore new markets” or “improve production efficiency.” Designing and outlining potential business targets maybe hard, especially for companies in industries that are dynamic and fast-paced, but they are important activities to do. This way, resources will not be wasted on an inefficient business strategy while the company is trying to understand and define a new business purpose. Looking into the way other companies in the industry reallocate resources can be a directing force for a company designing its target portfolio.
According to the researchers, allocation comprises four fundamental activities: seeding, nurturing, pruning, and harvesting. They found that there is no real difference between companies who are high and low in reallocation on seeding (i.e. investing in a new business) and harvesting (i.e. selling/closing the whole business). However, on nurturing (i.e. building and reinvesting in the new business) and pruning (i.e. taking away resources from an existing business), businesses with high reallocation were much more active. It is important to remember that the more you invest in seeding, the more important nurturing and pruning become to a successful harvesting.