McKinsey: 10 ways to test your business strategy (Part I)

by Vault Consulting Editors | January 11, 2011

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The question isn't "what's the next new thing in strategy," say the forward-thinkers at McKinsey & Company. Rather, good and sound strategies rely on a set of basic principles, the likes of which can now be put to the test by the firm's ten-part questionnaire on competent strategy.

Consultants at McKinsey have released a comprehensive set of "ten timeless tests" for business strategies, giving clients a key with which to shape their strategies and observers an insight into the fundamentals of McKinsey philosophy.

Without further ado, 10 tests for sound business strategies (plus a couple of exhibits):

Exhibit 1: Most companies' strategies pass fewer than four of the ten tests.

Before the testing begins, the authors set us up with a bit of their own business strategy. This is why you need us, they argue: only 35 percent of McKinsey-surveyed execs thought their strategies could pass more than three of the tests, while just 10 percent of strategies fulfilled more than six of the objectives.

Test 1: Will your strategy beat the market?

This is more like it. Of all the simple, basic principles proposed on this list, the first is the most fundamental. The authors admit that it's a broad and "comprehensive" first test, but the key is in the details.

Take it from McKinsey: the vast majority of companies use similar business strategies. Regardless of a strategy's success, a company won't beat its competitors if they all share the exact same business plan. If your plan isn't specifically tailored to outperform the market's—and particularly, your direct competitors'—you're losing out. "Good strategies emphasize difference," the authors say. Enter competitive advantage.

Exhibit 2: Markets drive a reversion to mean performance.

There's some McKinsey-speak here (and a graph—whoa!), but what they're saying is that the market will naturally pull its participants towards the center; without decisive action, the market will claw back big profits over time. What kind of decisive action is necessary, then? Let's look at some more tests.

Test 2: Does your strategy tap a true source of advantage?

Competitive advantage. The authors identify a couple of types: incumbent advantage, the benefits a company enjoys from having established itself within a particular industry, and special capabilities, the "unique benefits" afforded by access to scarce resources or specific expertise. Too many companies rest on the laurels of what they perceive as major advantages, the authors posit; successful firms think dynamically, cultivating the present and future success of their advantage.

Test 3: Is your strategy granular about where to compete?

Know your market. Companies are best off operating in very specific industry segments; those segments that are most perfectly suited for a company can facilitate major gains. "Push within reason for the finest possible objective segmentation of the market," the authors suggest, emphasizing the importance of detailed research and analysis. "80 percent of the variance in revenue growth is explained by choices about where to compete."

Test 4: Does your strategy put you ahead of trends?

When a company looks at an emerging market trend, McKinsey suggests that analysts "always look at the edges." Companies need to get in the game quickly—before the trend turns a profit—in order to fully capitalize (or even just to avoid losses) on it. To do so, companies must be lean, nimble, and willing to change direction.

Test 5: Does your strategy rest on privileged insights?

It's the age of information, which means that the vast majority of info out there is readily available for anyone to access or turn into strategies. The most successful and powerful strategies, though, are those based on propriety insights—when a company generates its own information and possesses the tools to derive meaning from it. It's a difficult step, the authors concede—only 35 percent of global execs "believed their strategies rested on unique and powerful insights"—but when achieved, it's also a remarkably compelling advantage.

Filed Under: Consulting

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