327. Four strategy myths holding your company back

0:01Like you need to know how you're going to make money. And the reality is that value creation, how the economics of industries are working is in flux right now. And it's important to step back and actually do the analysis, have the discussion, make sure you have a shared understanding of what do customers value? What does the new technology make possible? How will you compete? What will be your value creation story? Right? It's not obvious that the story you've had till now is necessarily the one going forward. And that leads to this second point where right now there's so much information, some of it conflicting, lots of different sources, that your leadership team and your organization might not all be on the same page.

0:45From McKinsey & Company, I'm Sean Brown and welcome to Inside the Strategy Room. That was Carolyn Dewar describing some of the fundamental strategic choices that are facing leaders in today's environment. She joins us today to debunk four conventional strategy myths and unpack how many organizations are reframing their approach to capturing competitive advantage, as well as how AI is resetting the map and what this strategy moment means for leaders today. Carolyn's a senior partner based in our Bay Area office. She founded and co-leads our global CEO excellence practice, and she's also the co-author of two New York Times bestsellers, CEO Excellence and a CEO for All Seasons.

1:29Marcus Jacob is a senior partner in our Berlin office and a leader in our strategy and corporate finance practice. And Laura LaBerge is a senior expert in our strategy and corporate finance practice based in our Connecticut office. Welcome everyone. So Carolyn, let's start with the big picture. Everyone's talking about how much the world is changing, but what does that mean for how leaders should be approaching their strategy today? I mean, I think it's not a surprise to anyone who's part of the conversation today about how much change is happening in the world, right? Enough that we're almost all sick of saying it, to be honest.

2:04But there is, whether it's geopolitics, whether it's AI, whether it's the blurring boundaries between industries, shifting dynamics, there's so much coming at us. And frankly, many leaders have felt Like there's been a lot coming at us for a while now, right? And the thing we want to talk about today and share some stories and examples is while all that's true, right, it's the role for all of us as leaders to kind of pick up the baton in March and say, well, this is where we're headed. Even in a world where you can't know everything, how do you separate the signal from the noise and lead your organization forward?

2:40How do you set strategy priorities? What does that look like? And we're hearing more and more from our clients about the importance of having real strategic discussions right now, right? Not the annual planning process necessarily. Hopefully it's part of it. But real heart to hearts as a leadership team on where are we going, right? Okay. So, Carolyn, what are some of the key strategy questions then that these leaders need to be considering right now? We'll lay out just a couple of them. You know, the first one is, like, you need to know how you're going to make money. And the reality is that value creation, how the economics of industries are working is in flux right now.

3:20And it's important to step back and actually do the analysis, have the discussion, make sure you have a shared understanding of what do customers value? What does the new technology make possible? How will you compete? What will be your value creation story? right it's it's not obvious that the story you've had till now is necessarily the one going forward and that leads to this second point where right now there's so much information some of it conflicting lots of different sources that your leadership team and your organization might not all be on the same page even in terms of what's the reality we face let alone where are we going to go and how do we need to win so the importance of again engaging in these conversations to make sure you have a shared fact base and alignment on where you're headed is so important.

4:09And then there's all the changes we've been talking about, right? Rules of the game in terms of competition are changing. Who are your competitors? People that might have been your customers or your suppliers now have the technology and insights that they might be competing against you. What does that landscape look like? Regulation, same thing, right? A lot of regulatory changes going on, whether it's tariffs or AI, all of these things are changing. And it's creating a high stakes moment, right? A high stakes moment where winners and losers are being decided, right? It's interesting when you look at after inflation, median large companies are not actually growing, right?

4:48This idea of just riding the market, going with the tailwinds, the data is showing that that's not the case anymore. You have to earn your growth. You have to earn your performance these days. And frankly, being average is sort of losing right now, right? There's this hollowing out of the middle, where the top quintile are earning 90 % of all academic profit. And then there's the losers, and there's not a lot of place in the middle. And so it really does matter, right? You can't just kind of ride along as you have been. Winners and losers are getting decided, and that takes real strategic choice.

5:23Yet, you know, amidst all of this, companies are still promising big things, right? We take it to the micro level of individuals where they are on clear timelines, promising real ambition, real delivery, and what does that look like? So we have this imperative, all of this change, yet big promises getting made out there. And gosh, you better make sure that you're having the right discussions and that you know how you're going to navigate and win. Thanks, Carolyn. And Laura, I know you've driven a lot of the analysis on this. And And now that Carolyn has set the stage, perhaps you can take us through some of the other insights from your recent research on this.

6:02Laura LaBerge: Yeah, exactly. One of the things that we really wanted to understand is while there is a lot of sort of macro data on what is happening in the world and at an industry level, what is this feeling like at the individual company level? And so one of the things that we've been doing is running stress tests on different companies of different sizes and different industries, different geographies, to understand what is this moment looking like for executives in their roles? How are companies responding? As Carolyn mentioned, right, there is this notion of a disconnect between what growth appears to be possible in aggregate versus what the aspirations of individual companies are.

6:48Laura LaBerge: And so we wanted to really look at for the companies that are succeeding in their growth ambitions, where the market is believing them, what are they doing that's different from the others? And are there lessons learned that we can take from the executive teams that are navigating this moment a little bit more adeptly at the current time period? And one of the things that really surprised me was not that one in four companies are facing a material threat to their business and the way they make money due to AI. I think sometimes the narrative makes it feel like it would even be more than that. But that nine and 10 of them are seeing the market, not really valuing them or believing them at not just the more aggressive growth ambitions that they might be stated, but even looking at the historical growth that they've had up to this point.

7:36Laura LaBerge: And so we wanted to really understand what was going on, what is the disconnect, and are there ways of looking at a business that maybe might be changing. Super. Thanks, Laura. And Marcus, what are you hearing in your client conversations on strategy right now? Are there any common patterns in thinking that you're observing? Well, I think the most fascinating thing in Laura's research that is also echoed in the client conversations that we're having in the last couple of months is that I think a surprising number of strategy rooms still run by very traditional ways of looking at competitive advantage and looking at value creation.

8:13In fact, there are four big beliefs or myths, as we would even call them, that we observe quite frequently still that we would consider to be rational when the environment is stable, as it may have been for very many years, but that are somewhat miscalibrated, particularly for industries that are being disrupted these days by AI or by the geopolitical tensions and changes that are happening. So I think we should look at those myths in turn. The very first one is, and we see it very clearly from the research, is there are a number of companies still that work by the very principle, wait for clarity before you moved.

9:03And it becomes clear that that happens when their competitive advantage is eroded. They're not seeing it in the P &L yet, but it is happening. The second myth is scaleless safety get bigger. I think we're still seeing that there is a certain hunger for scale when economic profit generated in the business that is being scaled or the existence of a sustainable competitive advantage is not quite given. We're also seeing that many companies still bet on running their machine just ever more perfectly and thinking that operational excellence will do the trick and will carry us through those turbulent times and will emerge as winners.

9:46We'll demystify that in a second. And then I think we see a lot of, you know, defend the core starting from last year's budget, reallocate away from your advantages, when staying true to one's core competitive advantage may be the better version to pursue again in these disruptive times. Super. So these myths are, one, wait for clarity before you move. Two, that scale is safety. Three, that operational excellence will carry the day. And finally, four, defend the core above all else. So perhaps let's walk through each of these in turn. And in particular, maybe Marcus, you can tell us what leading companies are starting to do differently on waiting for clarity when things are uncertain.

10:32I think many, many, many of the client conversations show this very clearly. There is a certain instinct in times of disruptions that feel the same all the time. Hold your position, wait for the picture to resolve, move decisively from strength once there is clarity. Now, we have tested that approach against two of the probably biggest shocks of our era, the global financial crisis and the COVID years. And what we see very clearly in the numbers and also in the conversations with our clients, the topics that we discussed, that those that move boldly in times of disruption, and I'll explain what that can be, outperform, very clearly outperform those that wait and see, polish on the edges and hope for the storm to go by.

11:27So we have done research again for two of these shocks, global financial crisis and COVID. And we classified companies before these disruptions happened, not after the fact, before these disruptions happened, by were they taking through those periods bold moves? M &A, significant CapEx investments, divestitures, market entries, significant redesigns of their setup in a way that would put them in a different cost position, or did they simply reduce SG &A, optimize processes a little? And very clearly, that former group outperformed the latter quite substantially. Now, you would think that this disruption is probably an even greater disruption, posing new challenges and opportunities.

12:20And indeed it is. If we look at AI in this context of new realities, fundamental disruptions, that I think what we're finding in the conversations that are happening today, that AI is amplifying that threat and at the same time amplifying the sheer opportunity that very many businesses are being given. we see clients coming to us saying, look, my business model is replaced, is eroded, is disrupted. The services that I have been offering are produced by a machine. What can be done about it? And they have to fundamentally reinvent themselves, not just optimize. They have to reinvent themselves. But we also have what we're seeing is that, and if I look at the consumer companies that I'm working with, The sheer opportunity of mass customization, personalization, more direct connect with their customers and consumers, you know, it gives many companies a wonderful advantage and opportunity through the power of AI.

13:22And it also helps them spread their content, multiply their products, again, personalize their products in a way that was unbelievable a few years ago. And Marcus, if we take not moving as now the more risky bet, how can executives think about what is really happening in their context before committing the capital and other resources needed to actually make that big bet? So for AI, how do they determine if AI is a wrecking ball for their industry or if it's actually going to be a flywheel that helps or if it's going to be a bridge? Because one of the obvious challenges of the current moment is that people really just aren't sure on how things are going to play out.

14:04I think we've got maybe two examples, two fascinating ways that we run strategy these days. In one example, where that AI disruption is very obvious, we have created a strategy process by which we don't just have the executive team as one team, but we've really separated it into two teams. And that one team is the AI challenger, the non-incumbent, that is really tearing down the incumbent way of working, operating model, competitive advantage of the other team. And that thought provocation, that almost wargaming, that interactive approach has helped us understand significantly better where are we being attacked, what part of my competitive advantage is being eroded, and what are the assets and ways of doing things that I have that I wasn't conscious they could be amplified with the help of AI.

15:03And the other thing is, you know, sometimes we just have AI run that test on the company's business model, which is not perfect, but it provides beautiful insights in ways that the human would have not questioned. And Laura, any other perspectives you'd like to share here, especially as you work with clients in addressing this AI as wrecking ball or existential threat?

15:29Laura LaBerge: Yeah, I mean, for me, I think what's interesting about this moment is that it is not just one or two industries that are experiencing this. So there's, while, you know, not every industry is facing an existential threat to it, even things like the fact that GPUs are more expensive now because of data centers that can embed into physical products and something that was just barely clearing its margins or being affordable by its customers. Now all of a sudden is in question. And so it's rippling in ways that are very specific and cascading through industries. And so, as Marcus said, it's really examining within a business model, very specifically, how is this touching you?

16:17Laura LaBerge: And sometimes it's a tremendous opportunity and sometimes it's a threat, but it's not just for AI services. services. Got it. And are there any early signals that come in that can help give leaders at least a little bit of clarity, perhaps something that tells them, hey, it's pretty clear that AI is going to eat my lunch here? I think that a lot of companies see it pretty quickly, both in terms of what their customers are saying, what their competitors are doing. In the past where you'd have an early signal and you'd have a significant amount of lead time to follow up on that signal, we're seeing a compression of that, which is part of why it's important to have these resets that are more frequent and are on a cadence that's faster than the typical strategy cycle, which we'll talk a little bit more about later.

17:04Okay. So now that we've debunked myth number one, let's move on to the next one, that scale is safety. Carolyn, maybe you can take us through that. Yeah, let's do it. And it builds on what Laura was saying about what really is the source of competitive advantage and has it changed? You know, historically, scale has been one that many industries have held up as that's the holy grail, right? If you just get bigger, you will be safe. And that has been a play that a lot of companies have been running. And what we're seeing now in terms of the reality is scale in and of itself is not the winning formula, right?

17:41You know, there actually isn't an advantage or scale is only helpful if it actually does real work for you, right? Is because you're scaled, are you getting lower cost and economies of skill and scale? Are you getting better pricing power? Are you able to do things that others aren't doing? Scale in and of itself is not the panacea to all of this. In fact, in some cases, it's the downside, right? It introduces more complexity, slowness. So many of my clients want to talk about how do we move faster, right? These nimble, young startups are moving so quickly. I sit in the Bay Area and incumbent companies that have scale are saying it's just harder to move, right?

18:25Not to mention in certain industries, scale attracts regulatory pressure, right? If you're a G-Cib bank, your costs are actually higher given you are of a scale that there's other implications. And so scale alone doesn't get you there. And can you give an example, Carolyn, of the myth of scale not creating value in practice? Well, two examples we can just speak to. One, you think about banking, right? You might have a bank that's global, spread all around the world, but highly fragmented and not actually a leader in many of its markets. That's an example where the economic profit benefit might not be there.

19:02Again, in managed care, there's examples of companies where they've just acquired their way through, right? This idea of acquisition itself, we're going to scale, but maybe we bought at high multiples with goodwill. Again, that's sort of this seductive myth, right? This idea that it looks good, it looks like a winning strategy, but is actually delivering the profit that you need, right? And so scale alone isn't just the answer anymore. Laura, I thought this was a fascinating analysis. Maybe you can talk about the compounding effect here.

19:35Laura LaBerge: Yeah. So as Carolyn said, right, scale is not the only thing at play. It can be a competitive advantage, but it is not the only one. And what we found as we tried to really understand what is it that actually causes customers to choose you over a competitor? And it's different than just a strength, which everyone in an industry might share. So in using AI to try to get a little bit more sophisticated on this in a way that we couldn't have done a few years ago, we actually spent 18 months trying to develop an algorithm that could really scan outside in and understand what are the elements and how do they interact across industries and across regions.

20:19Laura LaBerge: And one of the things that we found, which wasn't as much of a surprise, was that the advantages, if you have multiple of them, they compound. It's not just linear. But what was a little bit surprising, at least to me, was the opposite, which was if you have even one break in the chain, it has a destructive effect on the overall value you've created elsewhere that is outsized. And so, you know, in general, especially when you're in a time of disruption, a lot of the things I've been talking to my clients about is you have to really be careful of where is AI breaking your model or where is the geopolitical environment breaking it and focus on that first and then move into the where can I actually build better, more amplifying advantage.

21:10Laura LaBerge: But to me, it was very interesting, both how specific it was and the degree to which these things all interact. Thank you both. And when you think about your advantage, it sounds like by definition, it's relative to your competitor. So Laura, could you talk a little bit more about how best to keep an eye on your competitors so that you can see not just how you're doing relative to the things that your customers care about, but also how you're doing relative to those you are competing with for those customers' dollars? Yeah, that's a really interesting question, Sean. I think one of the things that has really evolved over the last five years or more has been the change from these very clearly defined value chains that were very tightly bounded in an industry.

21:58Laura LaBerge: And you had a set of competitors that were clear and relatively unchanging, not completely unchanging. But now that's becoming less and less true. And the first step in understanding competitive advantage is literally just like you said, who are my competitors? They might be my partners. They might be my customers. It's a very dynamic situation in this current moment. And And you can't understand your competitive advantage until you know who you're competing against. And so we find the need arising now to really look at this at a market level, at a product level, getting extremely granular around this in a way that maybe it's not quite true.

22:43Laura LaBerge: We didn't have to before, but we weren't able to before due to analytics. And now we actually can look at it and understand it at a level that we couldn't. And Laura, in your work with clients, how do you help them then listen for these changes in competitive dynamics? This is something that I think has really exploded over the last six months, at least for me, where more and more companies, whether it's a CEO or a CSO or the head of a business unit, is really looking for what are the ways to build in a sort of always on listening center, whatever you want to call it for my strategy so that I can actually make use of now all of the structured and unstructured data and have AI synthesize some things so that rather than trying to wade through hundreds and hundreds of analyses or all these different sources of information, internal and external, it can bubble it up for me and show me what do I need to be worried about or focused on or leaning into today.

23:45Laura LaBerge: And it might change in a week, but just seeing it in a more synthesized way is something that, again, was much more difficult to do a year ago and much less accurate. And I feel like every month, the state of the art changes on this. So let's switch gears now and talk a little bit about myth number three, which is this belief that operational improvements will carry the company through turbulent times and actually create real growth and profitability over the long term. Yes. So in a way, this is almost the flip of what Carolyn just talked about, where, you know, scale can be sort of unbounded growth and sometimes unprofitable growth, or at least growth that isn't returning its cost of capital.

24:30Laura LaBerge: This myth we see for companies who have been on the opposite side of that fence, right? They've been operationally excellent. They are getting every last bit of efficiency out of their processes, their approaches. and what has been true even before AI was that this can plateau. And after a while, the market starts asking the question of, okay, well, you're great in your operational excellence, but you're flat on growth. And so even companies who sometimes have gotten, you know, seven additional points of operational efficiency, the market doesn't even blink at it. And so how do you really balance between the two of keeping your growth profitable, but keeping your profitability growing?

25:17Laura LaBerge: And that's what, you know, however you want to slice and dice the numbers, this is just one example of looking at it across, you know, how much is the market valuing already very efficient, very operationally excellent companies comparing when they get incrementally a little bit more growth versus a little bit more operational efficiency? And the answer is it's valuing the growth because that's been the missing piece. That's the unproven lever. And Laura, just on this one, you know, with the leadership lens, right, this is so important as you think about the types of leaders you need and the skills they're bringing and how they're showing up, right?

25:57Because leaders who are excellent at operational efficiency aren't necessarily the same ones that are going to come up with your next new big innovation idea, or push the boundaries or be exciting. Frankly, you're working in hyper growth or startup companies, you see the opposite, right? You have folks that are incredible at growth, but have never been asked to turn a profit. It's a different skill set, right? And the reality is whether you've typically been in hyper growth mode, or you're a big incumbent, right now, you need to do both. You need to be efficient and innovative and growing. And that requires skills, experiences, willingness to do hard things on both sides that are feeling really unfamiliar to people right now.

26:40And Carolyn, how do you get clients to actually embrace that duality? Because it can be a really tough message for a leadership team that's just raised three margin points to then be told, actually, we really need to drive growth. And so how's the CEO's role play in this? Maybe if I reflect on two quick real situations or stories, one is a big leading company in their industry that has been laser focused on margin for many, many years. And it's interesting because in that case, it was through analysis like this and input from investors that The CEO and CFO were starting to get the message that an incremental point of growth is worth a lot more right now than an incremental point of margin for them in terms of how they're being valued.

27:28And what was refreshing and not necessarily expected was when he turned to his leadership team and the organization and said, oh, no, now we need to do both. There was actually, in that case, a lot of pent up ideas that people had been wanting to bring to the table, growth ideas, but they've been so margin focused for a decade that they didn't feel like they were allowed to bring them. So that was an interesting one where it actually unleashed a bunch of ideas. I think what's more common is you realize you don't necessarily have the muscle memory on the other side. And again, this either goes for margin focused folks who suddenly need to grow and the inverse where I spend a fair bit of time.

28:08And sometimes you literally need maybe a few new voices, people who've experienced the other side. Or do you have people on your team who've done this before? And if you haven't or you can't literally bring in new people, how are you going to expose them to radically new ways of thinking, go-sees at different companies, ways of really kind of challenging orthodoxies? Because it's a real muscle you have to build. Thank you, Carolyn. And Marcus, you're joining us from Berlin. Are you seeing the same kind of dynamics playing out with the European clients that you're serving? I do. And I wanted to add, Carolyn, one observation.

28:46And that is, I think there is a fascinating opportunity. We talked about AI earlier, and maybe Berlin is one of the places where AI is a bigger topic than in the rest of Europe. But certainly, AI, I think, is a wonderful opportunity to get that duality that you described between efficiency and growth in place. Let me give you an example. We've recently worked with a client, a Windows manufacturer. They would receive hundreds of thousands of requests for quotes every single year. They'd receive them as emails, as drawings, as pictures of paper notes taken really on the mobile phone. What they did was they end-to-end redesigned that process using AI.

29:29And all of the previous resources that human resources deployed in that process, they rededicated to the sales team. So at the same time, they optimized their cost and created a powerful sales force that has helped them increase sales quite substantially. And it is that end-to-end thinking, that thinking of, you know, AI efficiency and how can I rededicate what's been freed up to growth, you know, is a certain, you know, sentiment that we feel over here. Many don't yet make it, but there are some frontrunners that I managed to deliver quite impressively on that duality the way you described it, Cameron.

30:11And Laura, building on that, if we look to the research, what can you tell us about the new revenue pools that AI can generate? And what sort of ROI on AI investment are we actually seeing at this point?

30:24Laura LaBerge: Yeah, I think one of the really interesting things about AI, which is similar to past tech disruption waves that we've had, by the way, is that the first impulse for the majority of companies is to focus it on efficiency. So if, you know, there's a lot of numbers flying around out there about how AI is being thought of, but right, one of the common sets is that 88 % of companies have deployed AI to some extent in at least one business unit, but only 6 % of them are actually getting any economic, like significant economic benefit out of it, which is similar to, again, what we've seen in the past, big wave of activity, ROI, very low until everybody figured out where the value is.

31:07Laura LaBerge: What is also similar is that of that 88%, 80 % are focusing them on efficiency. And by that, I mean, they're taking an existing process and they're just kind of accelerating certain steps along the way using AI. What's particularly ineffective about this approach is whether you're coming from a computer science background or an operations background and thinking about things like theories of constraint or Amdahl's law, if you have a process that's flowing through and you speed up two or three of the steps by seven times, but you only speed up another, a different step by 10%, the total throughput of that process is 10%.

31:49Laura LaBerge: And so all the investment that you put in the 700X, it goes to waste essentially. Now, sometimes you can get an improvement in quality. And then that is an actual value. Where we see more value is for the companies who are deploying it against growth opportunities, or who are completely rewiring that entire process from scratch to think about how should I do this in a different way. And so of that 6 % of companies that are gaining material value from AI, a much higher fraction of them are doing those two things that I just said. And so we wanted to explore a little bit, even with the nascent data that's out there, by looking at, okay, if we just take the top thousand companies and we look at what can we see in the numbers that's real, what are some estimates, right?

32:43Laura LaBerge: And so what we see is, on average, for the companies that have deployed it against their cost base, they're getting maybe between 0.3 % and 0.8 % on OPEX in terms of an efficiency improvement, but they're getting up to a full percentage point on the growth pools that they're targeting. And so this is, and, you know, for a profitable business, your revenue is higher than your costs anyway. So those numbers really kind of play out. And if you think about what even is AI revenue, AI growth, right, it's not just things like Microsoft Copilot, which is in there, right? But it's also things like surgical robots that have, you know, sensors and vision and they can see things and act and respond in a way that AI enables.

33:30Laura LaBerge: And without AI, that wouldn't exist. But then there's a whole second category of growth, which is that it's enabled by AI. And so, you know, this is things like in pharma R &D, right? Your ability to accelerate drug design and R &D in any topic, right? You can have things like that. Or in retail media networks, where for a grocer whose margin might be 1 % to 3%, you know, RMN is sometimes 70 % to 90 % margin. And so if AI is enabling that more, improving it, making it more accessible, it's a huge uptick on their profitability and value pools. And so that is where I think it's really important for organizations to pause and rethink, is the most valuable place to deploy my top AI or technical talent or my most visionary thinkers in another cost pilot?

34:31Laura LaBerge: Or is it focusing it instead on what are my top three revenue pools? And now, Marcus, if I could ask, in the example that you shared of where the company redeployed some of their freed up resources into driving more sales, did they actually then see a bump in sales? And how did the market reward them or recognize them for it? Yeah, I think it's fascinating. They started that entire exercise as a cost exercise, to be very fair. They started thinking about efficiency improvements along the value chain, Laura, the way that you describe it, across the process. And then they realized that they have an opportunity here to let a series of agents redo the process in an entirely different way.

35:15And that redeployment of resources, it multiplies. They have increased sales by 22 % in a place that would typically grow at 2 % to 3%, 4 % in a good year. So, they're a massive uplift. Yes, more resources put against growth, but it also created an environment of enablement, confidence that allowed sales to grow. Different interaction models with customers, and that really created that boost that I described. Thanks, Marcus. That's actually pretty inspiring. And Laura, as AI becomes more prevalent and it penetrates more into companies, isn't there a risk that this could just be like an arms race where everyone actually has access to the same arms with these AI models?

36:02And then how does a company still turn early AI investments into a lasting competitive advantage?

36:11Laura LaBerge: And I think this is one question that a lot of companies are asking themselves. And in a way, it's similar to past things where, you know, if everyone has, if you think of way long ago, big disruptions like the industrial revolution or things like that, everyone got access to electricity. It blew up a lot of people's business model. There was an accelerant that everyone had access to. But what different? And so then that's not what differentiates you. AI, the AI tools won't be what differentiates you. It's going to be, as we talked about a little bit earlier, this notion of how can it amplify an existing strength or how will it accelerate an existing break?

36:50Laura LaBerge: And it's not necessarily changing for a lot of companies. It's not changing what those are. It's just causing an acceleration of it. But it's really important to understand, even though it's transforming the way you might be working today, the tool is not going to be the competitive advantage. I would agree, Laura. If I look at the topic and I look at the clients that get this done right compared to everybody else, I think this is an enormous leadership and cultural change journey, really. So many of my clients are still thinking incrementally, looking at individual improvements to smaller processes.

37:31They have process prioritization mechanisms by which people would bottom up, suggest very incremental small areas to improve on. Now that thinking, if not overcome by opening thinking to true end-to-end rewiring of processes, competitive advantages. If leadership and cultural change doesn't get an organization there, then I think you will lose out on this technology in this very moment. Okay, so we've made a really strong case for folks to leverage AI to help drive growth rather than just using it to reduce costs. But to revisit that earlier notion of making big bets, how do you use AI with your clients to help diagnose what the best bets are?

38:18and how do you help them make those bets as value creating as possible? Laura, maybe you could share your thoughts there.

38:25Laura LaBerge: Yeah, I mean, I think that one of the benefits of AI, even though it's causing a lot of disruption, is it also is enabling a lot of de-risking. So if I'm going to experiment with something, I can now, instead of maybe running three scenarios, I can run 30, I could run 300, And I can also be much, I can have much greater visibility into what are the factors that are driving the divergence in outcomes? What are the things I really need to focus on and matter, that will matter in terms of predicting the outcomes? And I can have a lot better line of sight into how are my customers' behaviors changing?

39:06Laura LaBerge: How are my competitors' behaviors changing? What are my internal operations? How are they tracking towards my ability to do this particular pivot? it. And so even though the moment can feel riskier, companies can use these techniques to de-risk them. But the most important thing, as we talked about at the start of this, is you have to actually move. You have to actually try something. And the only way you try something is funding it. If you just have an idea and a conversation, that can be exciting. But if the money and the people don't follow what that conversation is, it doesn't drive any real change.

39:49Laura LaBerge: And so this is one of the things that we have seen, you know, I've been working with clients for over 25 years now, and the whole last year plus or minus 5 % has been a mindset that's existed forever. And when you have disruptive change, that is a very dangerous mindset. And one of the things that's really challenging for organizations is there's a lot of inertia. There's a lot of politics. There's a lot of hesitancy. And when you have the world, the landscape around you changing very quickly, you're not going to move fast enough to keep up with that change if you don't break some of these habits.

40:33And so that's what this last myth really gets at is you have to really rethink in the

40:41Laura LaBerge: past, defending your core made sense because you had strong competitive advantage. You were aware of the pace at which it was eroding and who your competitors were. When you have a moment where things might be changing more quickly, your core might not actually be the best place to deploy where your competitive advantages are now the strongest. Sometimes it is, and it's just a matter of reallocating and focusing it more in certain parts of it. And sometimes it's looking to see where can I extend that? And even prior to AI, the fastest growers always did this well. And they did it, you know, sometimes at least double or at least, or sometimes double or even triple the rate that their slower growing peers would do.

41:23Laura LaBerge: But in times of disruption, it has, it happens even faster and AI as an accelerant. Okay. So for this fourth myth then, how do companies actually break away from this time-treasured approach of defending the core if it actually no longer serves them in today's disrupted environment? One of the things that we do is have companies just look at, okay, so for the portfolio of businesses or markets that you're in, how is your resourcing, your top talent, your OPEX, your CAPEX lined up against where the forward-looking growth is projected in these markets? for the countries that you're in? Is it growing faster or slower than GDP?

42:04Laura LaBerge: And sometimes you're in a business that that is what it is. And that's okay. But you need to really be deliberate on making that choice of how are you aligning against where future growth is coming from, because the pools of growth are changing. Then the second thing is your talent. And we talked about this earlier. If you have all of your top technical talent focused on incremental efficiency plays for AI, it's likely going to have a very low ROI compared to other places you could deploy it. And sometimes your industry is going through a cost compression curve and that's where you have to focus and that is the moment.

42:42Laura LaBerge: But again, make that a deliberate choice. And then finally, when you think about forward-looking capital allocations and CapEx, really understanding and doing the math around where is my real competitive advantage going forward, not where it was in the past. You already know where it was in the past, but it might be changing. And make sure that you do a relook at that and then deploy your forward-looking investments where you think that investment might compound, where the growth is really going to come from. And for some companies, this is a blind spot for them. They don't know. Interesting. And Carolyn, how does the CEO actually set the tone for this?

43:26What does the strategy discussion then look like with the leadership team and or the board? Sure. I think CEO and leadership team broadly. I think too often we see this disconnect between the strategy discussions and budgeting and finance and the CFO, if I'm honest. And a lot of us are in this season right now where you're all in 2027 planning, right? Maybe you had an offsite with your board to talk about strategy. Maybe you presented a bunch of things. And then separately, you're all submitting your numbers for 2027 and the finance team are allocating or cutting plus and minus. Are those two things syncing up?

44:06And that's one where you're a CEO because you see both sides or anyone on the leadership team should be calling out if those disconnects are happening. Right. We just all agreed that this was a huge priority. Yet we're only incrementally shifting talent or resource by a couple of percent towards it. if we're not putting our money where our mouth is and what we're saying is important, that's got to be hardwired and play all the way down through the system, right? The dollars, the incentives, the OKRs, right? The things that we say are important have to get hardwired all down in the organization.

44:43Because frankly, that's what people cue to, to say what really matters around here? What really will I be rewarded for? What really are we trying to get done? and you've got to check to make sure those things are reinforcing each other. And Laura, anything you'd like to add here?

44:59Laura LaBerge: Yeah, I mean, I think that we've covered most of what we wanted to say on this, but one last thought on this point to just leave you with is if you had to start your company from scratch, what would it look like? Where would you be placing your bets? And sometimes this is actually an interesting exercise to do with your teams, right? Is think through what would it look like if we really clean sheeted this as an attacker? And then think about what that means in terms of what it looks like actually right now. And if there's a big difference in that, it's time to have a conversation and rethink. That's a great way to frame it.

45:38And even looking at what comes up in like the recent press on the number of one person companies where founders are agentifying a lot of the things that used to require building a fairly sizable startup team. And now those individuals can be really nimble attackers. So how do you set something like that up within your own company so that you can preclude those attackers from actually being able to go after you? And it's not just about efficiency. One of my clients, they actually did this exercise with the leadership team. It was fabulous. And it was any broader frame of they said, if we were to re-found our company, they're 20 years old, if we were to re-found our company today, still trying to meet the customer need that we know is still there, but with all the technology available to us now that wasn't available before, how would we solve that customer's problem differently?

46:28And it wasn't just an efficiency question. They ended up realizing there's whole new services and offerings and ways of attacking that need that was unbelievably energizing and growth oriented. And so I think it's a fabulous question. Super. And Carolyn, where then should companies start on this journey in a really practical way? How can they move away from these four myths and best reset their thinking on strategy? And I do think starting with what is your source of competitive advantage? What aspects of it are under threat? What aspects of it are still pertinent? What new sources of competitive advantage might the changes in the world create for you?

47:09That has to be the grounding that all this goes from. I think you've heard several times today about focusing on the growth. Yes, we're all in efficiency mode. That's kind of a one-time hit. Really, the juice is coming from what will this enable you to do differently that wasn't possible before? What could that growth look like. And then as we're all in the midst of planning season, or many of us are, let's make sure it all lines up, right? The big bets you're going to place are getting backed, are getting flowed through. And frankly, we didn't talk about it today, but what are we not going to do?

47:43What are we going to say no more? What are we going to take resources away from? Even if it's a pet project that someone loves, those are often conversations that don't happen that are really, really critical so that you're growing by building your competitive advantage, your capability, what's possible, as opposed to just scale. We've touched on a lot of these today, but it's time you need to make it real. And Marcus, it looks like you'd like to add something here. Yeah, I would have two thoughts here. I think, Carolyn, what you said about doing less of, stop doing, I think is incredibly hard for most of the companies, but it's such an important topic.

48:23I would then also want to refer to this week's exercise or this week's task, mapping your advantage. I would really, really encourage everybody to move beyond the traditional way of defining one's competitive advantage in the sense of, I know I'm good at that, but I would challenge myself and say, is that giving me an ability to take price, to take margin? Does that give me access to a customer that I otherwise wouldn't? And the interesting thing is that we love having these competitive advantage discussions. They are actually quite revealing when you ask these second round questions and you suddenly reflect upon competitive advantage and what it truly is, as opposed to what you think it is.

49:13So I really encourage you to take that conversation extremely seriously and challenge yourself. Thanks, Marcus. And just to round us out today, I'd love to get a sense from each of you before we close on what most excites you about your work with clients on this topic. And Carolyn, let's start with you. Sure. I mean, as you as you could tell from my energy, yeah, my own alarm, that question of what's possible now really, I think, is exciting. And frankly, you know, it's energizing and will unleash bold thinking in a way that how will we just be more efficient is not right. That's sort of a restricting thought as opposed to an expanding thought.

49:53And Laura, your analogy of electricity. Right. And what that did, you're right. It wasn't electricity that did it. It's the fact, for example, that now we had light at night and what businesses were possible that weren't possible before. That's where the magic is going to happen. Thanks, Carolyn. And Laura?

50:10Laura LaBerge: I think for me, sort of building on what Carolyn said of the art of the possible is also the fact that you don't have to get it right the first time. I think one of the things that a lot of my clients have been concerned about is they feel like it's very uncertain. But this is a moment where you're able to explore. AI makes exploration cheaper than it ever was before. And it also makes line of sight into what's going wrong faster. And so to use some of the language of the ratio of one-way to two-way doors of what are truly irreversible steps versus not, that's changing now. And you can experiment more.

50:45Laura LaBerge: And I think that that can be freeing rather than stressful. Great. And Marcus, you get the last word. I guess it is two things, really. The first one is, as I just said, it is rethinking competitive advantage. And the second thing is pivoting our thinking towards growth. I think it is very, very natural in these turbulent times, you know, to focus primarily or even exclusively on cost, cost optimization, operational excellence. I think that pivot towards growth, leveraging what we discussed today, the new opportunities, is what gets me excited every month. This has been fantastic. Carolyn, Laura, Marcus, thank you so much for taking the time today.

51:22Always super to see you, Sean. Thanks, Sean. It's been a pleasure. And thank you to all of our listeners for joining us today. We hope you enjoyed the conversation and we welcome your feedback and ideas for future episodes. Just email us at itsr at mckenzie.com, which stands for Inside the Strategy Room. You can also share your ratings and reviews on any podcast player with many thanks to all who've already done so. We really appreciate the comments and feedback we receive every week and encourage you to keep them coming. And if you enjoyed this episode and you'd like to subscribe, you can easily follow our weekly series on any podcast player, where you can also access our entire library of nearly 330 episodes.

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52:25Thank you.