Client Discussion Paper

Ten Timeless Tests

of Strategy

March 2010
McKinsey Strategy Practice
Contents

Test 1: Will your company’s strategy beat the market? 4

Test 2: Does the strategy tap the true source of advantage? 4

Passing Test 2: Build strategies on real advantages 5

Test 3: Is the strategy granular about where to compete? 6

Passing Test 3: Take a granular approach to market analysis 6

Test 4: Does the strategy put the enterprise ahead of trends and discontinuities? 6
Passing Test 4: Make the trend your friend 7

Test 5: Does the strategy embed privileged insight and foresight? 7

Passing Test 5: Develop proprietary insight 8

Test 6: Is uncertainty properly defined and accounted for? 8

Passing Test 6: Rigorously understand the uncertainty you face 9

Test 7: Does the strategy balance high-commitment choices with flexibility and learning? 9
Passing Test 7: Balance commitment and flexibility 9

Test 8: Have alternatives been evaluated without bias or false inference? 10

Passing Test 8: Ensure “de-biased” decision making and solid inference 10

Test 9: Is there true conviction to act? 11

Passing Test 9: Take decision makers on a journey of discovery 11

Test 10: Is the strategy translated into clear actions and reallocation of resources? 11
Passing Test 10: Think implementation early and often 12
Ten Timeless Tests of Strategy
Strategy has always been a topic of prime importance to
companies. It has only become more urgent because of the
recent economic crisis, which has made some strategies
obsolete, revealed weaknesses in others, and forced com-
panies to confront choices and trade-offs they put off in
the boom years.
We have developed ten tests that, successfully passed,
ensure winning strategies (exhibit). Our first test, beat-
ing the market, is the primary one, because it is the most
natural starting point of any conversation on strategy. It is
also comprehensive: the remaining tests disaggregate the
picture of what a successful strategy looks like. We accom-
pany each of these remaining nine tests with advice on
how to pass them.
Exhibit: Ten timeless tests of strategy
1 Will it beat the market?
Does the strategy tap the true source
2
of advantage?
Is the strategy granular about where
3
to compete?
Does it put the enterprise ahead of
4
trends and discontinuities?
Does the strategy embed privileged
5
insight and foresight?
Is uncertainty properly defined and
6
accounted for?
Does the strategy balance high-
7 commitment choices with flexibility
and learning?
Have alternatives been evaluated without
8
bias or false inference?
Is there true conviction to act?
9 the importance of convinced, personal
Is the strategy translated into clear actions
10 and reallocation of resources?
Thinking about strategy in these terms is often a consid-
erable shift from common practice, which often amounts
to “just playing along.” We carry this theme—of beating
the market as opposed to just playing along—throughout.
Must a successful strategy meet all ten tests? Failing one
test will rarely result in a company collapsing, but it does
make breakthrough performance unlikely. At worst, it
may create a point of vulnerability. The wisest approach
is to meet the basic requirements on each test, and excel
on as many as possible. At a minimum, companies must
pass one test in each of the following groups: positioning
(tests 2 and 3), clear-eyed insights (tests 4, 5, and 6), solid
business choices (tests 7 and 8), and good implementation
(tests 9 and 10).
…or are you just playing along?
…or is it based on a misplaced diagnosis of
why you earn returns?
…or are markets defined conventionally,
leading to overly static allocation of resources?
….or does it optimize for the status quo,
holding on to old models too long?
…or does it apply common math to common
data to yield common wisdom?
…or is uncertainty either being ignored or
inducing paralysis?
…or is planning rigid and tactical, failing
to focus on choices that matter?
…or does the strategy fall victim to undetected
biases and untested attributions?
…or are you relying on analysis and missing
decision making?
…or are you settling for vague statements of
intent that don’t reallocate people, money,
or management time?
 Client Discussion Paper
4 Ten Timeless Tests of Strategy

Test 1: Third, market participants play out the drama of compe-

tition on a stage beset by randomness. Because the evo-
Will your company’s strategy lution of markets is path-dependent—that is, its current
beat the market? state at any one time is the sum product of all previous
events, including a very great many random ones—the
Originally, strategy was about the choices made to set the
winners of today are often an accident of history. Consider
conditions for victory on the battlefield. In a business set-
the development of the US tire industry. At its peak in the
ting, the enemy is the market. Beating the market is thus
mid-1920s, a frenzy of entry had created almost 300 com-
a shorthand definition of strategy, more fully defined as
petitors, yet by the 1940s, four producers controlled more
“an integrated set of choices—made ahead of time and in
than 70 percent of the market. Those winners happened
the face of uncertainty—to create and capture economic
to make retrospectively lucky choices about location and
surplus.”
technology, but at the time it was difficult to tell which
companies were truly “fit” for the evolving environment.
All companies operate in markets surrounded by custom-
The histories of many of today’s industries show remark-
ers, suppliers, competitors, substitutes, and potential
ably similar patterns.
entrants, each of which is seeking to advance its own posi-
tion and in doing so drain profits away from the company.
To beat the market, therefore, advantages have to be
That process, unimpeded, inexorably drives economic
robust in the face of the onslaught of market forces; they
surplus—the gap between the return a company earns
must be responsive to that onslaught, and they must
and its cost of capital—toward zero. So you know you are
be built so as to be ready as the competitive landscape
beating the market if you can sustain economic surplus.
unfolds—and ideally so as to shape that landscape.
For a company to capture and retain economic surplus,
Unfortunately, in our experience, most companies are
however, there must be an imperfection that stops or at
not asking themselves if they are beating the market—the
least slows the working of the market. An imperfection
pressures of “just playing along” seem intense enough.
controlled by a company is a competitive advantage. But
But playing along can feel safer than it is. Weaker players
even if a firm is fortunate enough to have a competitive
win a surprising number of wars when they are willing to
advantage, markets are tough to beat over the long term,
play by different rules.
for three main reasons.

First, over time, markets drive reversion to mean per- Test 2:

formance. The best companies are emulated by those
in the middle of the pack, and the worst exit or undergo Does the strategy tap the
significant reform. Essentially, the very value of a scar- true source of advantage?
city makes it energetically competed for, and so harder to
keep. Are you beating the market … … or just playing along?

Identifying the real source of sus- Building strategies on a misplaced

Second, markets are by their nature interactive, as each
player responds to the actions of others. This often results
in the escalation of minimum capability over time. This
immediately disposes of the idea that consistent adop-
tion of “best practice” guarantees a market-beating strat-
egy. Your competitive advantage establishes a gap that the
market can’t close if and only if you continuously defend
your position well against your competitors or consistently
outpace them. Strategy emphasizes difference—versus
your direct competitors, versus potential substitutes, and
versus potential entrants.
tainable competitive advantage that diagnosis of why you earn superior
drives differential performance and returns and focusing too heavily on
can withstand the onslaught of mar- best practices that keep you in the
ket forces game, rather than helping you deci-
sively win it
Know your competitive advantage, and you’ve answered
the question of why you make money (and vice versa).
Competitive advantage stems from two sources of scar-
city: positional advantages and special capabilities.
Client Discussion Paper
Ten Timeless Tests of Strategy 5
Positional advantages are roosts in structurally
attractive markets. By definition, positional advantages
favor incumbents: they create an asymmetry between
those inside and those outside high walls. For example, in
Australia, two beer makers control 95 percent of the mar-
ket and enjoy triple the margins of US brewers—a situa-
tion that has sustained itself for two decades.
The logic of positional advantage is captured in the struc-
ture-conduct-performance industry model. The increas-
ing consolidation of the Australian beer market during
the 1980s and 1990s (change in industry structure) was
associated with price growth that far outstripped general
inflation (change in industry conduct) and ongoing high
profitability (change in industry performance). But an
attractive structure can be ruined by poor conduct, and
an unattractive one can be overcome by good conduct.
Special capabilities, the second source of competitive
advantage, are scarce resources whose possession con-
fers unique advantages. The most obvious ones, such as
drug patents or leases on mineral deposits, we call privi-
leged tradeable assets: they can be bought and sold. A
second category of special capability, distinctive compe-
tencies, consists of things the company does particularly
well, such as innovating or managing stakeholders. These
capabilities can be just as powerful in creating advantage
but cannot be easily traded.
Too often, companies are cavalier about claiming special
capabilities. A special capability must be critical to the
company’s profits and exist in abundance within it while
being scarce outside. As such, special capabilities tend to
be specific in nature and few in number. Companies often
err here by mistaking size for scale advantage or overes-
timating their ability to leverage capabilities across mar-
kets. They infer special capabilities from observed per-
formance, often without considering other explanations
(such as luck or positional advantage). Any claimed capa-
bility advantage should be vigorously tested before pin-
ning the hopes of the company on it.
To be most effectively realized, competitive advantage
must be packaged into a total value proposition made up
of a bundle of features or processes. Competitors may
mimic specific product features or best practices. It is
much harder for them to copy a complex array of activities
assembled to deliver consistently on a value proposition.
Passing Test 2: Build strategies on
real advantages
Understand the fundamental drivers of industry
and company performance. Where does the com-
pany make surplus profits? Why? Where is the surplus
moving?
Be precise in defining special capabilities. Special
capabilities are differences that drive sustainable, supe-
rior performance. They are not best practices that can be
mimicked by others.
Take a dynamic view. Markets and firms are never
static. What is happening that can erode positional
advantage? Which special capabilities are becoming vul-
nerable? Assume points of vulnerability will be exploited.
Package advantages together into powerful bun-
dles. One of the best defenses against potential imita-
tors is to create a bundle of activities that together create
advantage. From outside, this makes it difficult to iden-
tify the exact source of advantage, and so difficult to rep-
licate it.
Seek out markets that exhibit network effects.
These are markets that feature network effects, in which
the more customers that are added to a company’s cus-
tomer base, the more attractive the company’s product or
service becomes.
Test for competitor response. Competitors do
not evolve in isolation—they are also responding to the
actions of the company, if they have the freedom, knowl-
edge, and capability to do so. What are they likely to do?

6 Ten Timeless Tests of Strategy
Test 3:
Is the strategy granular about
where to compete?
Are you beating the market … … or just playing along?
Matching the unit of analysis to the Defining markets by conventional
granularity of the market, so you can organizational boundaries or aver-
continually shift resources to out- aging out the real texture of markets,
position your competitors leading to an overly static allocation
of resources
The need to beat the market begs a question not yet
answered: which market? Research shows that the unit
of analysis used in determining strategy (essentially, the
degree to which the market is segmented) significantly
influences resource allocation and thus the likelihood of
success: dividing the same businesses in different ways
leads to strikingly different capital allocations. What is
the right level of granularity? Keep dividing into sub-
segments as long as significant differences continue to
appear within market segments. Too often, by contrast,
the business unit as defined by the organization chart
becomes the default for defining markets, and the strate-
gic review is hampered from the start.
The Granularity of Growth suggests that more, narrower
choices about where to compete are much more impor-
tant to success than strategies aimed at gaining share
in a broader market, because the attributes of narrowly
defined segments are much more important to growth
than the attributes of a market broadly considered.
Besides recommending a segmentation that goes well
beyond what is typical, we also note the need for a
dynamic approach that shifts resources to capture oppor-
tunities in the most promising granular segments (“mar-
ket granules”) as these opportunities shift within and
between segments.
Passing Test 3: Take a granular approach
to market analysis
Define granular segments in a “market-back”
fashion. Rather than defining analyses by an organiza-
tion-centric view of markets, strategists should seek to
Client Discussion Paper
determine the finest possible objective segmentation of
the market. Think 30 to 50 segments rather than the more
typical 5 or so.
Conduct all analysis at the granular level—don’t
“average out.” Conduct your analyses subsegment by
subsegment.
Ensure that a detailed plan of “where to compete”
is part of the recommendation. Eighty percent of
variance in revenue growth is explained by choices about
“where to compete,” leaving only 20 percent explained
by choices about “how to compete.” Unfortunately, this
is exactly opposite to the allocation of time and effort in a
typical strategy-development process. Companies should
be shifting their attention greatly toward the “where.”
Facilitate the shift of resources across market
granules. Strive to continually out-position competitors
by regularly reallocating resources.
Test 4:
Does the strategy put the
enterprise ahead of trends
and discontinuities?
Are you beating the market … … or just playing along?
Staying ahead of trends and discon- Optimizing for the status quo and
tinuities, building a strategy for the holding on to old models too long
future environment
Anticipating change is essential if a company is to ben-
efit from where economic surplus will be tomorrow. Dur-
ing a major transition in any market, companies have a
special opportunity to develop a new strategy for a new
environment.
New trends in your industry, highly disruptive and
destructive, can seem to come out of nowhere. In fact,
the long view suggests markets are much more turbulent
than most think: the emergence of new trends is in fact
the norm. Many strategic reviews miss this because they
extrapolate from the past three to five years, a time frame
too brief to capture the true violence of market forces. The
Client Discussion Paper
Ten Timeless Tests of Strategy 7
probability of the next three to five years continuing the
pattern of the prior period is low.
A sufficiently powerful trend such as a major innova-
tion in the business model or an external shock in regula-
tion, demand, or technology can drive a full-scale indus-
try transition. But most trends emerge fairly slowly—so
slowly that companies generally fail to respond until the
trend hits company profits. At this point, it is too late to
mount a strategically effective response, let alone shape
the change to your advantage. Managers typically delay
action, held back by sunk costs, unwillingness to canni-
balize a legacy business, or an attachment to yesterday’s
formula for success. The cost of delay is steep: consider the
plight of major travel-agency chains slow to understand
the power of new online intermediaries.
The key is to convince decision makers to move ahead of
trends (distinguishing between a trend and an uncer-
tainty is crucial—is something happening? Or is it just a
possibility?). Then test whether the present strategy is in
line with it.
Passing Test 4: Make the trend your friend
Assume continuation of the status quo is the
least likely scenario. Never assume the environment
is fixed. Some of the most powerful strategies are in fact
simply about positioning the company in line with an
emerging trend. Make trend analysis fundamental to
strategy development.
Know your history, and match time horizons
accordingly. Most industries develop along an “S-curve,”
in which industry revenues grow slowly, then increase at a
rapid rate, and finally level off, often for a long time, before
declining. As such, linear extrapolation is never right for
long. Take a longer view: the pattern will become clear, as
will where on the curve the industry currently sits.
Incorporate major global forces. Many long-term
trends can be deduced from economic development,
changes in technology and demographics, and so on. All of
these should be visible long before they affect businesses.
Scan broadly to seek advance signals of change.
Always look to the edges. How are “frontier” customers
acting—early adopters and that small cadre of consum-
ers who seem to be “ahead of the curve”? What are small,
innovative entrants doing? What technologies under
development could change the game?
Determine specific implications of emerging
trends and quantify their impact. This is the tricki-
est but most valuable part. To see which trends really mat-
ter, articulate the decisions your company would make
differently as a result of the impact of each trend on the
company’s financials.
Test 5:
Does the strategy embed
privileged insight and foresight?
Are you beating the market … … or just playing along?
Seeing or knowing something others Applying common math to common
don’t—or are unwilling or unable to data to yield common wisdom
act on
Analysis requires that a fact-based methodology always
be front and center. However, companies live in a world
flooded with data, but often suffer from a shortage of
insight. Data are cheap and accessible and easily assem-
bled into detailed analyses that leave one with the com-
fortable feeling of possessing an informed strategy. But
much data is noise and most of it is widely available to
rivals. Most dangerously, routinely analyzing readily
available data diverts attention from where insight-creat-
ing advantage lies: in the weak signals buried in the noise.
So, too, the frameworks and tools often used to generate
strategy are widely known. There is nothing wrong with
sound frameworks, but they aren’t the same as privileged
insight.
Three types of privileged knowledge can support a suc-
cessful strategy. First, you need superior insight into how
value is generated in the industry. Second, you need fore-
sight, to stay ahead of everyone else in seeing how the

8 Ten Timeless Tests of Strategy
world might unfold. Third, you must be realistic about
your company’s starting point: no strategy is devised
without a legacy of positions and capabilities.
Passing Test 5: Develop proprietary insight
Search carefully for the right problem. The best
insights usually start with new and interesting questions.
Look for multiple viewpoints; leave space for
dissent. Don’t rush to confirm conventional wisdom; let
contrarian views be heard. Actively seek out dissenters.
Find proprietary data. Rather than recycling the same
industry reports as everyone else, be adventurous. How
are you going to find and use data that only you can see?
Take the user’s perspective. Never forget the users.
Companies that go out of their way to experience the
world from the customer’s perspective routinely develop
better and more convincing strategic views.
Seek novel ways to analyze the data. Often, a new
analytical technique or framework will provide new
insights.
Employ creative idea-generation techniques.
There are many techniques available, but they share a
core purpose: to help groups of people come up with more
innovative ideas.
Learn from experience generated at your com-
pany. Often, the strongest proprietary insights are gener-
ated through experimenting, prototyping, and piloting on
a small scale in your operations.
Challenge assumptions. Examine the assumptions,
explicit and implicit, behind an established business
model. Do they still fit the current environment?
Client Discussion Paper
Test 6:
Is uncertainty properly defined
and accounted for?
Are you beating the market … … or just playing along?
Eliminating unknowns that can be Assuming away uncertainty through
resolved and then acknowledging bold point forecasts or assuming
the irreducible uncertainties that that uncertainty prevents clear-
remain headed analysis of a situation
A central challenge of strategy is that we have to commit
to choices now, but the payoffs occur in a future environ-
ment we cannot fully know or control. To accommodate
this uncertainty, a company must balance the commit-
ments it makes to build competitive advantage with the
flexibility to respond as events unfold. A strategy that is
“robust under uncertainty” will limit the downside risk
and maximize the upside.
The primary step is to characterize the real dimensions
of the uncertainty the company faces (a surprisingly rare
activity). That does not mean “assuming away” uncer-
tainty (a surprisingly common activity), but stripping
away apparent uncertainty until only the irreducible
uncertainty is left. Many variables seem highly uncertain
but can be clarified by proper analysis. Those that remain
represent the uncertainty not to be assumed away; it must
be at the heart of the strategic response.
McKinsey characterizes uncertainty at four levels. Level 1
offers a reasonably clear view of the future: a range of
outcomes tight enough to support a firm decision. At
Level 2, there are a number of identifiable outcomes for
which a company should prepare. At Level 3, the possi-
ble outcomes are represented not by a set of points but by
a range that can be understood as a probability distribu-
tion. Level 4 features total ambiguity, where even the dis-
tribution of outcomes is unknown.
In our experience, companies oscillate between assum-
ing, simplistically, that they are operating at Level 1 (and
making bold but unjustified point forecasts) and suc-
cumbing to an unnecessarily pessimistic Level 4 paraly-
sis. In each case, careful analysis of the situation usually
redistributes the variables into the middle ground of lev-
els 2 and 3.
Client Discussion Paper
Ten Timeless Tests of Strategy 9
Passing Test 6: Rigorously understand the
uncertainty you face
Accurately identify the driving variables. Start
with the strategic decision the company needs to make,
and list the variables that would influence it. Prioritize
analyses by sorting the variables by their impact on the
decision.
Reduce the uncertainty. Focus analysis as early as
possible on removing as much uncertainty as you can.
Useful methods are to rule out impossible outcomes,
examine the forces at work and the dynamics among
them, and seek to understand the underlying economics.
Characterize the irreducible uncertainty. The
most famous, and most powerful, tool for characterizing
uncertainty is scenario analysis.
Test 7:
Does the strategy balance
high-commitment choices with
flexibility and learning?
Are you beating the market … … or just playing along?
Focusing on a few high-commitment Engaging in rigid and detailed tacti-
choices that matter and building in cal planning without considering the
flexibility to make advantageous big choices
commitments in the future
Commitment and flexibility exist in inverse proportion
to each other. The greater the commitment you make,
the less flexibility remains. This tension is one of the core
challenges of strategy. Indeed, strategy can be expressed
as making the right trade-offs over time between commit-
ment and flexibility.
Making such trade-offs effectively requires an under-
standing of which decisions involve commitment. Inside
any large company, hundreds of people make thousands
of decisions each year. Only a few are strategic: those that
involve commitment through hard-to-reverse invest-
ments in long-lasting, company-specific assets. Com-
mitment is the only path to sustainable competitive
advantage.
In a world of uncertainty, strategy is not just about where
and how to compete but also when. Committing too early
can be a leap in the dark. Being too late is also dangerous,
either because opportunities are perishable or because
rivals can seize advantage while your company stands on
the sidelines. Flexibility is the essential ingredient that
allows companies to make commitments at the time when
the risk/return trade-off seems most advantageous.
A market-beating strategy will therefore have a few dis-
tinguishing features. It will focus on just a few crucial
high-commitment choices to be made now but will leave
flexibility for other such choices to be made over time. It
will be explicit about the way in which the time afforded
by such flexibility will be used for learning purposes and
superior opportunity generation. There will not be a rush
to make too many decisions. Rather, the strategy should
frame the decisions to be made down the line so that the
cumulative result (sometimes called emergent strategy)
is an advantaged one.
Passing Test 7: Balance commitment
and flexibility
Focus on the high-commitment choices to be
made now. Look for the strategic choices: those that are
made least often, are hardest to change, and will have the
greatest impact. Most of the analysis should be spent on
informing these choices.
Build a robust portfolio of contingent actions. To
cope with uncertainty, build your strategy as a portfolio
of big bets—taking an informed, committed position in
the face of uncertainty in a bid to gain significant com-
petitive advantage; no-regret moves—actions that will
pay off whatever happens; and real options—actions that
involve relatively low costs now, but which can be elevated
to a higher level of commitment as changing conditions
warrant.
Enhance option value. Where can you build under-
priced options into the strategy, for example, by modular-
izing major capital projects or maintaining the flexibility
to switch between different inputs?
Consider explicitly how the flexibility in the strat-
egy will be managed. To exploit the flexibility in a

10 Ten Timeless Tests of Strategy
strategy, consider growth staircases and the portfolio-
of-initiatives approach. Growth staircases highlight the
improvement in capabilities companies enjoy as they
gradually move into new product and geographic markets.
The portfolio-of-initiatives approach maintains this time
dimension but explicitly adds the notion of familiarity.
Companies should assemble a portfolio designed to maxi-
mize learning opportunities, select the best options over
time, and amplify positive results through a staged proc-
ess of escalating commitment.
Frame how future decisions will be made. One of
the most powerful ways to drive the dynamic evolution of
the strategy is by refining your resource-allocation proc-
esses. If there is a lot of contingency in the strategy, work
on how your company will make these contingent choices
over time.
Test 8:
Have alternatives been evaluated
without bias or false inference?
Are you beating the market … … or just playing along?
Making decisions in a way that mini- Falling victim to undetected biases
mizes the impact of human bias, in the way decisions are made, and
and applying logic with care so as to untested attributions in the way data
steer clear of mistaken inference are interpreted
Even the best executives armed with the best insights and
tools can make bad decisions. Recent research from fields
such as behavioral economics suggests two important
sources of such failure: decision bias and faulty inference.
Decision bias stems from certain characteristics of the
brain that are often strengths in our broader, personal
environment but can work against us in the world of busi-
ness decision making. The worst offenders include over-
optimism (our tendency to hope for the best and believe
too much in our own forecasts and abilities), anchoring
(tying our valuation of something to an arbitrary refer-
ence point), loss aversion (putting too much emphasis on
avoiding downsides and so eschewing risks worth tak-
ing), confirmation bias (overweighting information that
validates our opinions), herding (taking comfort in fol-
Client Discussion Paper
lowing the crowd), and champion bias (assigning merit to
an idea based on the person proposing it).
The second important type of failure is faulty inference.
Strategy is especially prone to faulty logic because it relies
on extrapolating ways to win in the future from a com-
plex set of factors observed today. This is fertile ground for
two big inference problems: attribution error (succumb-
ing to the “halo effect”) and survivorship bias (ignoring
the “graveyard of silent failures”). Attribution error is the
false attribution of success to observed factors. It is strat-
egy by hindsight and assumes that replicating the actions
of another company will lead to similar results. Survivor-
ship bias refers to analysis based on a surviving popula-
tion, without consideration of those who did not live to tell
the tale: this skews the view of what caused success and
presents no insight into what might cause failure. Were
the survivors just luckier? Case studies have their place,
but hindsight is in reality not 20/20. There are too many
unseen factors.
Passing Test 8: Ensure “de-biased” decision
making and solid inference
Bring a fresh pair of eyes to the issues. Maintain a
culture of challenge in which the obligation to dissent is
fostered.
Develop multiple potential solutions and hypoth-
eses. Too often, the typical drill is to develop a promising
hypothesis and put a lot of effort into building a fact base
to validate it. It is better to develop multiple alternatives
and choose among them.
Watch specifically for confirmation bias. It is nat-
ural to like being right. Guard against this by explicitly
trying to disprove your hypotheses.
De-bias the decision-making process. Specify
objective decision criteria in advance, and design deci-
sion-making processes that include both group and indi-
vidual interactions, maximizing the likelihood that the
decisions made are sound.
Always ask about failures as well as successes.
Don’t just look at the survivors. And when looking for suc-
cess factors, check that those factors do in fact differenti-
ate winners from losers.
Client Discussion Paper
Ten Timeless Tests of Strategy 11
Examine the possibility of being wrong. Tech-
niques such as the “pre-mortem assessment” (imagining
yourself in a future where the answer turns out to have
been wrong and identifying why that might have been so)
and “alternative inference” (checking that other conclu-
sions can’t be made from the same data) can be useful.
Test 9:
Is there true conviction to act?
Are you beating the market … … or just playing along?
Making sure top management devel- Relying solely on analytical exercis-
ops conviction in the new beliefs that es that underplay the importance
underpin a new strategy of personal discovery by decision
makers
The learning and social processes required to embed a
strategy are as important as the analytical and creative
ones used to develop it. Many good strategies fall short in
implementation because their authors fail to build con-
viction in the organization. This is particularly important
in the top team: just one or two nonbelievers can strangle
strategic change at birth.
Where a change of strategy is needed, it is usually because
changes in the external environment have rendered obso-
lete the assumptions underlying the company’s earlier
strategy. To move ahead with implementation, you need
a process to openly question the old assumptions, and
allow managers to develop a new set of beliefs in tune with
the new situation. This is not likely to be achieved just
via lengthy reports and presentations. Nor will the social
processes required to absorb new beliefs—group forma-
tion, building shared meaning, exposing and reconciling
differences, aligning and accepting accountability—occur
in formal meetings.
CEOs and boards should not be fooled by the warm glow
they feel after a nice presentation by management. They
must check that the whole team actually shares the new
beliefs that support the strategy, understands the implica-
tions of those beliefs, and agrees on how to take the strat-
egy forward.
Passing Test 9: Take decision makers
on a journey of discovery
Understand the company’s ambitions and con-
straints. Companies don’t make decisions. People do. A
human understanding of the leadership team and what is
important to them plays a central role.
Connect the strategy process with personal
learning. Adults don’t develop the level of conviction
necessary to behave and act in new ways that will be
required by the strategy without a deep level of under-
standing. They need to have an experience, not watch a
presentation. Create those experiences—for example, by
visiting plants or other companies.
Design all interactions to create conviction, not
just convey information. Think always about the kind
of response you are seeking to evoke. That will lead you to
the ideal stimulus. Mock-ups, video clips, virtual expe-
riences—any and all of these are powerful mechanisms.
When using traditional PowerPoint presentations, do so
in ways that allow decision makers at all levels to grapple
with the information and make it their own.
Build a support base of influencers in the organi-
zation. Build a network of people who feel connected
to the strategy and understand what it means. They will
become evangelists throughout the organization.
Test 10:
Is the strategy translated into
clear actions and reallocation
of resources?
Are you beating the market … … or just playing along?
Translating the strategy into a con- Settling for vague statements of
crete set of actions to executing intent that don’t change the alloca-
specific “from-to” shifts, reallocat- tion of people, money, and manage-
ing resources to reflect the commit- ment time
ments in the strategy
A strategy that is not well implemented cannot be suc-
cessful, as it will not beat the market. It is said that good
companies develop great strategies but struggle to exe-

12 Ten Timeless Tests of Strategy
cute them; great companies develop good strategies
and execute them brilliantly. The prerequisites for good
implementation must be embedded into the strategy
process as early as possible. Your company must under-
stand what changes are needed, what the requirements
are for successful implementation, and what obstacles
stand in the way.
Most well-implemented strategies share a common set
of features: they can be simply articulated in a way that
builds alignment, they connect very clearly to a trackable
set of actions for which accountability is clear, they are
enabled by a supportive environment for change, and they
link closely to ongoing resource-allocation processes.
Passing Test 10: Think implementation
early and often
Conduct closed-file reviews on past strategy
implementations. The many strategies that fail in
implementation do so in their own unique ways. Find out
what results were actually achieved on a handful of recent
implementation projects and what factors contributed to
success or failure. Tease out the lessons learned.
Make the strategy as easy to communicate as pos-
sible. If those responsible for implementing the strategy
cannot explain it on one page, implementation will be a
challenge.
Clearly define the “from-to’s” in the value propo-
sition, business model, organization, and capa-
bilities. Develop a detailed view of the shifts required to
move from the current state to the desired future state.
Ensure that a balanced set of mechanisms is in
place to effect the changes. Quite simply, this is an
Chris Bradley is a principal in the Sydney office, and Nick Percy is a consultant in the London office.
Contact for distribution: Tammy Anson-Smith
Phone: +61 (2) 82731886
E-mail: Tammy_Anson-Smith@mckinsey.com
Client Discussion Paper
action plan. Everyone needs to know what to do. Be sure
that each major from-to shift is matched with the energy
to make it happen.
Create an environment that enables the change.
Support change through role modeling, fostering under-
standing, capability building, and formal structures and
processes.
Align ongoing resource-allocation processes
with the strategy. If you want to know your company’s
actual strategy, look where the best people and the most
generous budgets are—and be prepared to change these
things significantly.
***
You may now be left with an awkward feeling that the ten
tests seem right—but represent an impossible hurdle.
Practically speaking, companies can succeed over long
periods of time without scoring an A-plus on all ten tests.
What is necessary is that a company pass one test in each
of the following groups: positioning (tests 2 and 3), clear-
eyed insights (tests 4, 5, and 6), solid business choices
(tests 7 and 8), and good implementation (tests 9 and 10).
The danger is always that you will persuade yourself you
are beating the market, when you are really just playing
along. Playing along can leave a company successful and
happy—when the times are good for all. But we must all
strive for the higher bar—the times demand it.
The authors of this paper would like to thank Angus Dawson,
Rajesh Garg, Martin Hirt, Sven Smit, and Patrick Viguerie,
who shaped and guided the effort. Many other current and
former McKinsey consultants provided valuable input.