The Bottleneck Is at the Top

Gary Hamel | OKRs are not enough | Factoids | Elsewhere

Photo by Andrew Seaman on Unsplash

The bottleneck is at the top of the bottle. In most companies, strategic orthodoxy has some very powerful defenders: senior managers. Imagine an organizational pyramid with senior managers at the apex... Where are you likely to find people with the least diversity of experience, the largest investment in the past, and the greatest reverence for industrial dogma? At the top. And where will you find the people responsible for creating strategy? Again, at the top.

| Gary Hamel, Strategy as Revolution

…

Hamel is one of the business thinkers that have had the most profound impact of my evolution as an analyst. In the extract above, he basically lays the blame for dogmatic approaches to strategy creation at the feet of senior management. Why? Because — at least in part — they hold tightly to strategy formulation and, at a meta-level, the decision-making about how to go about strategic discourse.

Take, as one glaring example, the widespread adoption of OKRs (Objectives and Key Results) as a framework for (in principle) capturing strategic objectives and linking them to measurable and specific key results intended to guide the work of everyone in the company.

But they are controversial, as we’ll explore.

---

---

OKRs are not enough

A few years ago, I read an essay by the wonderful Roger Martin, Stop Letting OKRs Masquerade as Strategy:

For those not already familiar with it, the OKR approach involves setting an audacious objective and then laying out 3–5 specific, measurable and timebound key results that serve as indicators that you are on track to meet your objective.

But Martin zooms in on the weakness of the transition from objectives — for example, ‘going from #3 in market share to #1 in your industry in 36 months’ — to measurable outcomes — for example, ‘1) to increase new customer acquisition by 25% within one year; 2) to decrease existing customer churn from 15%/year to 7%/year within 18 months; and 3) to increase Net Promoter Score (NPS) from 28 to 52 within two years’.

Martin says there is a lot to like about OKRs, since the key results can be measurable outputs, and not necessarily instructions as to how to achieve them:

Don’t instruct a manager to visit 10 customers per week, spend twice as much time with existing customers, and work more hours — those all being inputs that may (but may not) lead to greater customer growth — but rather to focus on the output — X amount of customer growth, thus letting managers figure out for themselves what actions are most effective in achieving the output.

He offers a political example:

Congress was extremely out of character (in a good way) when it passed the Energy Policy and Conservation Act of 1975, which created the Corporate Average Fuel Economy (CAFE) standards. Rather than regulate inputs — like engine displacement, use of aluminum, etc. — as most governments do most of the time, the Act regulated outputs, mandating that average fuel economy of each producer’s new car fleet must achieve 27.5 mpg by 1985 — a near-doubling over a decade. And it worked, in large part because the auto manufacturers were left the flexibility to figure out themselves how to reach the target result and each one did so in its own way.

Both of these are examples of adopting a realist approach: structuring outputs so that those tasked with meeting output goals can figure out how to meet them.

But Martin is, at best, ambivalent about OKRs as practiced.

What I have found to be increasingly the case as OKRs have become the management rage is that OKRs have become an implicit substitute for strategy. That is a problem. OKRs must be a complement to strategy, not a substitute for strategy… It is problematic for OKRs to masquerade as strategy.

Martin believes that there has to be a learning loop oscillating between stating a strategic objective (his term is ‘winning aspiration’) and the need to clarify the combination of ‘where to play’ and ‘how to win’. As he says,

I argue that it is absolutely critical to toggle back and forth between WA and WTP/HTW until such time as you have consistency and mutual reinforcement among the three.

[…]

There is no such linkage step in the OKR process and in this way, it attempts to substitute for strategy, and I have gotten tired of it. I hate to see organizations design for failure.

I was motivated to write about this conundrum a few years ago, after reading Martin’s take:

The OKR framework is just one example in a long parade of models that are widely used and which become foundational concepts underlying our shared understanding of how businesses should operate. Other examples include SWOT (Strength, Weakness, Opportunity, Threat), Clayton Christensen’s Disruptive Innovation Theory, and the long list of decision-making models (like DICE, RACI, and DARE).

Over time, previously innovative ways to help people think about markets, business, and work are ritualized and applied without much — if any — reflection on the current context or the limits of the models themselves. That is, of course, the benefit of a model. It offers an abstraction of the situation at hand and minimizes the time and effort required to determine the salient factors of a situation.

In my experience, the shiny appeal of abstract models lies in making decisions through deduction. But deduction relies on starting with facts we know to be true, and in complex systems like businesses, we must work with incomplete information of unknown accuracy and reliability. If the inputs to our models aren’t very good, we must instead rely on something else. I believe we should rely on deeply internalized principles to guide us.

One approach to using internalized principles I’ve found helpful is making decisions based on explicit relative values. The approach uses “even over” statements to guide our decision making, like these:

• Employees' wellbeing even over customer satisfaction

• Customer satisfaction even over profits

With these principles in place, a customer support rep can make the decision to give a customer who has an emergency temporary free access to a paid tier of the product knowing customer satisfaction is more important than the profits from a single transaction.

A company, team, or individual can draw upon internalized principles like these when deciding a course of action that will take them from an Objective to Key Results, without resorting to some Harvard Business Review article on strategy.

Martin offers one critical takeaway, when focusing on the missing piece, saying “desire is not strategy”:

But desire (as with hope) is simply not a strategy. The desire to achieve the named key results won’t cause those key results to happen. You may desire the substantial rise in your NPS, but if you are serving customers that your key competitor serves better than you do, your NPS is unlikely to rise — even though you really want it to.

Your strategy is the thing that will cause your NPS to rise or your customer churn to fall, or your customer acquisition to strengthen

Perhaps, before forging ahead and hoping OKRs lead to success, it would be worthwhile to write down your principles and see if they help you navigate the chasm between Objectives and Key Results. Models will never be a substitute for the hard work of strategic thought.

I was inspired to cover this ground again by a deep and detailed post by Avi Siegel, Your OKRs Aren’t OKRs, in which he examines many, many ways that OKRs fail, strategically:

Together, Objectives & Key Results are (supposed to be) a framework that forces everyone in the company to row in the same direction, understand what it will take to win, and how to prove you did the job successfully. They:

1. Align the entire organization on what matters for success of the business

2. Encourage teams to think big and take calculated risks

3. Establish an understanding on how, quantitatively, success will be proven

4. Foster a culture of transparency and accountability

He then digs into many, many examples of ‘how to do OKRs poorly’. Here’s just one, which fails the realism test:

The to-do list masquerading as OKRs

OKRs are not meant to be just lists of what you need to do. Completing such a list only proves that you did the work you said you were going to do, not that you actually added value as a result.

For example...

Objective: Improve the product

Key Results:

• Launch features X, Y, and Z

• Redesign the home page

• Fix 30 bugs

These KRs are kind of Specific, but they are certainly not Metric-driven, and how Relevant they are is unclear since they aren't directly tied to a (good) Objective. Value-based? No, they are not associated with any semblance of value. Ambitious is a maybe --- depends on the on-the-ground realities.

The shared message from Martin, Siegel, and me is that strategic planning requires something that is not baked into OKRs, something more, some greater structured strategic discourse. OKRs can be an output of that discourse, but is not the discourse itself.

---

---

Factoids

Insurance

Across the United States, insurers lost $33 billion in 2023 on personal home and auto insurance, according to AM Best, a ratings agency for the industry. [...] Between 2018 and 2022, wildfires around the world caused $39 billion in losses for insurers, and four of the five costliest fires during that period were in California, | Emily Flitter

What if we reach a point where we can’t afford to insure property, anymore, because of climate change? What is the impact on business? At the moment, U.S. states are stepping as insurers of last resort. Can they continue that? They will have to raise taxes, and the cost of everything will have to rise, since companies will have to put aside more money as ‘rainy day’ (or ‘buildings burning down’) funds.

…

Gerontocracy

Almost 50 C.E.O.s of public companies are over the age of 67. | Sarah Kessler

Only 50? Did she mean 50%?

But think about Hamel’s quote: the oldsters are the greatest believers in ‘industrial dogma’.

…

It’s a slow world after all.

O.E.C.D. countries expected to expand on aggregate just 1.7 percent this year. | Bernard Warner

Yikes.

---

---

Elsewhere

Franchises

In Antitrust Regulator Tells Chains: Back Off Your Franchisees, Lydia DePillis reports on the FTC slapping down franchisers nickel-and-diming their franschisees. The Federal Trade Commission continues to minimally support chain franchisees over the depredations of franchisers. The only real push: 'the F.T.C. clarified that franchisers could not demand new payments — such as surcharges for technology or marketing — if they weren’t detailed in the documents that franchisees signed when they bought the business.' Otherwise, they released data and analysis of a survey:

In a lengthy “issue spotlight” accompanying its policy statement and guidance, the agency identified 12 top complaints from franchisees. They include dissatisfaction with unilateral changes to manuals that govern how the business must operate, noncompete clauses that prevent operators from starting new ventures, and misrepresentations in franchise sales documents about expected time requirements and investment returns.'

Consider this and the GAO's observations -- 'the Government Accountability Office issued a report finding that franchisees lacked control over crucial business decisions and that they often did not understand all the risks they faced before purchasing a license' -- in light of realist aspirations.

…