The iconic image for business strategy is the hockey stick. The hockey stick illustrates that in a new ventures, with an initial investment and a short-term tolerance of loss, revenue and profits will eventually skyrocket. But not all business strategies lead to this desired effect. In fact, a series of failed hockey sticks can leave a company in exactly the same spot it started.
Get Out of the Inside View and Onto the Power Curve
Most strategy discussions are framed by an internal view of the company, the individuals, or the biases of both. Business leaders need to take a broader view and look at where the company falls within the industry and where the industry falls within the economy.
McKinsey & Company divides the power curve of economic profit into five quintiles: the lowest with steep losses, the second lowest with slight loss, the middle with no profit or loss, the second highest with slight profit, and the highest quintile with exponential growth.
Using this model, industries fall onto the curve with examples like software, technology, or aerospace falling in the highest profit quintile. Electric utilities, construction materials, and airlines fall in the lower quintiles. Companies within industries can also be charted in this way.
The role of industry can be so strong that an average company in a top industry can be more beneficial than being a top company in an average industry.
How to Move Up the Curve
A company’s location on the power curve can be changed by certain variables. Endowment—meaning a company’s size in revenues, debt capacity, and past R&D investment—can affect movement. Industry and geographic trends also play a role. Last but not least, moves can boost or hinder a company.
Moves include M&As or divestitures, resource re-allocation, capital expenditures, productivity improvement, and differentiation improvement. For these moves to make a difference, they need to be bold. McKinsey & Company shows that by making one or two big moves, a company doubles their chances of getting into the top quintile. If a company makes four or five big moves, they can move from the bottom rung to the top quintile.
HR as Key to Strategy
This model of making big moves to unlock profits provides opportunities for HR leadership. HR executives need to bring their expertise about social dynamics and biases into the strategy room. Ensuring that diversity and creativity are included at the strategic level is fundamental. Pushing against the need for certainty and timid ideas can help break through to formulate bigger and better strategies.
HR and the CHRO play a crucial role in facilitating big moves. Company culture and communication can make or break an M&A. Allocating resources—especially human capital—is a focus of HR. HR can adapt incentives and training to reward risk-taking. Company culture should encourage noble failure and quality of effort. HR is not just providing behind-the-scenes support, but a key player in formulating and executing transformative business strategies.
Adapted from Strategy Beyond the Hockey Stick by Chris Bradley, Martin Hirt, and Sven Smit.