Because of my current role I have been asked several times to think “strategically” , to develop a strategic plan, or asked to explain how a transformation plan fit in the overall strategy of the company.
Reading these articles , about the tendency of companies not doing hard enough work in developing and stating in a clear and concise way their strategy made me understand that it is a quite common problem: What is Strategy? How does strategy forms withing a company? Who defines strategy?
Trying to better understand all those questions I decided to find what are the best sources. As both of the articles state, there are hundreds of book but I decided to start with this book.
I guess I liked it because it treats the subject in general guidelines rather than being a prescriptive, “fill in the blanks” strategy book (which is just what the author refers to as an example of “bad strategy”).
The book is divided in this sections:”
- What is Bad and Good strategy
- Sources of Power: If good strategy key element is finding and using sources of power. What are those fundamental sources?
- How to gain proficiency in thinking like a Strategist
I will try to summarize those ideas in this blog post.
1. What is Bad and Good Strategy
The concept of bad strategy was first discussed by the author in a seminar of the “The Center for Strategic and Budget Assessments (CSBA)” to study the Decline in the quality of Strategy work at the national level . The full study is available on line, I highly recommend reading it (It’s 68 pages long, and mostly about US National Security Strategy but I think is worth the time).
According to the book bad strategy is above all the tendency to avoid analyzing in depth the current external trends, and the current internal situation of your company to define what the current challenge is. It is also a lack of focus and the inability to make hard choices as to where to focus the limited resources of a company . How to recognize it?
The author provides some guidelines:
Fluff: Fluff is a form of gibberish masquerading as strategic concepts or arguments. It uses “Sunday” words and apparently esoteric concepts to create the illusion of high level thinking
Failure to face the challenge: Bad Strategy fails to recognize or define the challenge. When you cannot define the challenge, you cannot evaluate a strategy or improve it.
Mistaking goals for strategy: Many bad strategies are just statements of desire rather than plans for overcoming obstacles.
Bad strategic objectives: A strategic objective is set by a leader as means to and end. Strategic objectives are “bad” when they fail to address critical issues or when they are impracticable.
As a consequence companies end up with a list of disparate generic goals:
Leaders may create bad strategy by mistakenly treating strategy work as an exercise in goal-setting rather than problem solving. Or they may avoid hard choices because they do not wish to offend anyone”
Bad strategy “is not the same thing as no strategy or strategy that fails rather than succeeds”. A lot of emphasis is made in different sections of the books to the challenges companies face in making decisions that prioritize resources. Anyone working in defining and implementing transformation plans as a part of a strategic plan would be familiar with this paragraph:
…The unwillingness or inability to choose. Strategies focus resources, energy, and attention on some objectives rather than others. Unless collective ruin is imminent, a change in strategy will make some people worse off. Hence, there will be powerful forces opposed to almost any change in strategy. This is the fate of many strategic initiatives in large organizations. There may be talk about focusing on this or pushing on that, but at the end of the day no one wants to change what they are doing very much.
Additionally the author tries make clear, that some things that are considered or labeled as “strategic” not necessarily are part of Strategy in a wider sense.
In business, most M&A, investments in expensive new facilities, negotiations with suppliers and customers and organizational design are normally considered “strategic”. Rather the term “strategy” should mean a cohesive response to an important challenge.
In essence, strategy is about analyzing , about discovering and designing:
The core of Strategy work is always the same: Discovering the critical factors in a situation and designing a way of coordinating and focusing actions to deal with those factors
To avoid abstract and generic definitions, emphasis must be made that a good strategy must include a set of actions to follow.
But defining strategy as a broad concept, living out action, creates a wide chasm between “strategy” and “implementation”.A good strategy includes a set of coherent actions. A strategy that fails to define a variety of plausible and feasible immediate actions is missing a critical component.
Since bad strategy is so common, there is a natural advantage in at least trying to develop a good strategy.
The first natural advantage of good strategy arises because other organizations often don’t have one. And because they don’t expect you to have one either.
A recurrent theme in the book is the relevance of concentrating resources when defining and executing Strategy:
Most complex organization’s spread rather than concentrate resources, acting to placate and pay off internal and external interest. Thus, we are surprised when a complex organization such as Apple or the US Army actually focuses its actions. Not because of secrecy but because good strategy itself is unexpected.
Despite these most organizations will not create focused strategies instead they will generate laundry list of desirable outcomes and, at the same time, ignore the need for genuine competence in coordinating and focusing their resources. Good strategy requires leaders who are willing and able to say no to a wide variety of actions and interests. Strategy is at least as much about what an organization does not do as it is about what it does.
As in a lot of aspects of management there is no silver bullet, every company is different, each industry has its own challenges so the book tries to avoid giving specific solutions but it gives general guidance as to what is the very minimum a good strategy must have. The author calls this The Kernel:
Good strategy is coherent action backed up by an argument, an effective mixture of thought and action with a basic underlying structure I call the Kernel. A good strategy may consist of more than the Kernel, but if the kernel is absent or misshappen then there is a serious problem.
The Kernel of a Strategy contains three elements:
- A diagnosis that defines or explains the nature of the challenge. A good diagnosis simplifies the often overwhelming complexity of reality by identifying certain aspects of the situation as critical.
- A guiding policy for dealing with the challenge. This is an overall approach chosen to cope with or overcome the obstacles identified in the diagnosis.
- A set of coherent actions that are designed to carry out the guiding policy. These are steps that are coordinated with one another to work together in accomplishing the guiding policy.
2. Sources of power.
In “Good Strategy” a key element is finding the critical aspects that make a difference and concentrating resources to try to make a difference, those critical aspects are referred in the book as sources of power. What are those fundamental sources?
There are extensive examples and frameworks in Strategy literature , but the author highlights in the book just a few of them (……”chosen for both their generality and freshness”)
A brief Summary (the rest of this section is mostly quoted directly from the book):
- Leverage: A strategic leverage arises from a mixture of anticipation, insight into what is most pivotal or critical in a situation, and making a concentrated application of effort.
- Proximate Objectives: One of the leader’s most powerful tools is the creation of a good proximate objective -one that is close enough at hand to be feasible. A proximate objective names a target that the organization can reasonably be expected to hit, even overwhelm. An important duty of any leader is to absorb large part of the complexity and ambiguity, passing on to the organization a simpler problem – one that is solvable. Many leaders fail badly at this responsibility, announcing ambitious goals without resolving a good chunk of ambiguity about the specific obstacles to be overcome. To take responsibility is more than a willingness to accept the blame. It is setting proximate objectives and handling the organization a problem it can actually solve.
- Chain-Link Systems: A system has a chain-link logic when its performance is limited by its weakest subunit, or “link”. When there is a weak ling, a chain is not made stronger by strengthening the other links. There are portions of organizations, and even of economies, that are chain linked. When each link is managed somewhat separately, the system can get stuck in a low-effectiveness state. Chain-link systems can be changed and made excellent. It takes insight into the key bottlenecks. Plus, it takes leadership and the willingness to absorb short-term losses in the quest for future gains.
- Using Design: Three very relevant aspects of strategy are: Premeditation., The anticipation of other behavior, and the purposeful Design of coordinated actions.
It is often said that strategy is a choice or a decision. The words “choice” and “decision” evoke an image of someone considering a list of alternatives and then selecting one of them. The problem with this view is that you are rarely handed a clear set of alternatives. Effective strategies are more designs than decisions. When someone says “Managers are decision makers”, they are not talking about master strategists, for a master strategist is a designer.A design-type strategy is an adroit configuration of resources and actions that yields an advantage in a challenging situation. Given a set bundle of resources, the greater the competitive challenge, the greater the need for the clever, tight integration of resources and actions. The greater the challenge, the greater the need for a good, coherent, design-type strategy.A more recent HBR article about the relation between design and strategy can be found here.
- Focus: Attacking a segment of the market with a business system supplying more value to that segment than the other players can -is called focus. But the truth is that many companies, especially large complex companies, don’t really have strategies. At the core, strategy is about focus, and most complex organizations don’t focus their resources. Instead they pursue multiple goals at once, not concentrating enough resources to achieve a breakthrough in any of them.
- Growth: From what is explained in this section of the book, you can see the author is not in favor of inorganic growth (through M&A) : Healthy growth is not engineered. It is the outcome of growing demand for special capabilities or fo expanded or extended capabilities. It is the outcome of a firm having superior productos and skills. It is the reward for successful innovation, cleverness, efficiency, and creativity. This kind of growth is not just an industry phenomenon. It normally shows up as a gain in market share that is simultaneous with a superior rate of profit.
- Using Advantage: In real rivalry, there are an uncountable number of asymmetries. It is the leader’s job ti identify which asymmetries are critical, which can be turned into important advantages.
Increasing Value and finding and promoting Value-Creating Changes requieres a strategy for progress on at least one of four different fronts:
- Deepening advantages: One must reexamine each aspect of product and process, casting aside the comfortable assumption that everyone knows what they are doing. Today, this approach to information flows and business processes is sometimes called “reengineering” or “business-process transformation”. Whatever it is called, the underlying principle is that improvements come from reexamining the details of how work is done, not just from cost controls or incentives.
- Broadening the extent of advantages: Extending an existing competitive advantage brings it into new fields and new competitions. Extending a competitive advantage requires looking away from products, buyers, and competitors and looking instead at the special skills and resources that underlie a competitive advantage. In other words, “Build on your Strengths”. The basis for productive extensions often resides within complex pools of knowledge and know-how.
- Creating higher demand for advantaged product or services: A competitive advantage becomes more valuable when the number of buyers grows and/or when the quantity demanded by each buyer increases. Note that higher demand will increase long-term profits only if a business already possess scarce resources that create a stable competitive advantage.
Because son many strategy theorists have mistakenly equated value creating strategy with “having” a sustainable competitivo advantage, they have largely ignored the process of engineering increases in demand. Engineering higher demand for the services of scarce resources is actually the most basic of business stratagems.
- Strengthening the isolating mechanism that block easy replication and imitation by competitors: An isolating mechanism inhibits competitors from duplicating your product or the resources underlying your competitive advantage. If you can create new isolating mechanism, or strengthen existing ones, you can increase the value of the business. The most obvious approach to strengthening isolating mechanisms is working on stronger patents, brand-name protections, and copyrights. When a new product os developed, its protection may be strengthened by stretching an already powerful brand bane to cover it.
Another broad approach to strengthening isolating mechanisms is to have a moving target for imitators. If you can continually improve, or simply alter your methods and products, rivals will have a much harder time with imitation.
- Using Dynamics: In classical military strategy the defender prefers the high ground. It is harder to attack and easier to defend. The high ground constitutes a natural asymmetry that can form the basis of an advantage.
Much of academic strategy theory concerns more and more intricate explanations for why certain types of economic high ground area valuable. But such discussions sidestep an even more important question: how do you attain such an advantaged position in the first place? One way to find fresh undefended high ground is by creating it yourself through pure innovation.You exploit a wave of change by understanding the likely evolution of the landscape and then channeling resources and innovation toward positions that will become high ground, become valuable and defensible as the dynamics play out.
When change occurs, most people focus on the main effects -the spurts in growth of new types of products and the falling demand for others You must dig beneath this surface reality to understand the forces underlying the main effect and develop a pint of view about the second-order and derivative changes that have been set into motion.There is no simple theory or framework for analyzing waves of change. Working with industry-wide or economy-wide change is even more advanced that particle physics -understanding and predicting patterns of theses dynamics is difficult and chancy. Fortunately, a leader doe not need to get it totally right -the organization strategy merely has to be more right that those of its rivals.
- Inertia and Entropy: Even with its engines on hard reverse, a supertanker can take one mile to come to a stop. This property of mass -resistance to a change in motion- is inertia. In business, inertia is an organization’s unwillingness or inability to adapt to changing circumstances. Even with change programs running at full throttle, it can take many years to alter a large company’s basic functioning. But, another force, entropy, is also at work. In science, entropy measures a physical system’s degree of disorder, and the second law of thermodynamics states that entropy always increases in an isolated physical system. Similarly, weakly managed organizations tend to become less organized and focused.An organization’s greatest challenge may not be external threat or opportunities, but instead the effects of entropy and inertia. Leaders must diagnose the causes and effects of entropy and inertia, create a sensible guiding policy for effecting change, and design a set of coherent actions designed to alter routines, culture, and the structure of power and influence.
- INERTIA: Successful strategies often owe a great deal to the inertia an inefficiency of rivals. Understanding the inertia of rivals may be just as vital as understanding your own strengths:
- Inertia of Routine: An organization of some size and age rest on layer upon layer of impacted knowledge and experience, encapsulated in routines -the “way things are done”.
If senior leaders become convinced that new routines are essential, change can be quick. The standard instruments are hiring managers from firms using better methods, acquiring a firm with superior methods, using consultants, or simply redesigning the firms routines.
- Inertia of Culture: The first step in breaking organizational culture inertia is simplification. Strip out excess layers of administration and halt nonessential operations.
- Inertia by Proxy: A business may choose to not respond to change or attack because responding would undermine still-valuable streams of profit. Inertia by proxy disappears when the organization decides that adapting to changed circumstances is more important than hanging on to old profit streams (Studied in detail by Clayton Christensen in his seminal book: The Innovator’s Dilemma)
- ENTROPY: It is not hard to see entropy at work. With the passage of time, great works of art blur and crumble, the original intent fading unless skillful restorers do their work. Despite all the high-level concepts consultants advertise, the bread and butter of every consultants business is undoing entropy -cleaning up the debris and weeds that grow in every organizational garden.Planning and planting a garden is always more interesting and stimulating than weeding it, but without constant weeding and maintenance the pattern that defines a garden -the imposition of a special order on nature -fades away and disappears.
3. How to Gain Proficiency and Think like a Strategist.
The last section gives some advice about how to improve and gain proficiency when working with Strategy Development. I liked the idea analogy of treating Strategy as a hypothesis, An educated prediction of how the world works.
A good business strategy deals with the edge between the known and the unknown. Again, it is competition with others that pushes us to edges of knowledge.
Given that we are working on the edge, asking for a strategy that is guaranteed to work is like asking a scientist for a hypothesis that is guaranteed to be true -it is a dumb request.
A good strategy is, in the end, a hypothesis about what will work. Not a wild theory, but an educated judgment. An educated prediction of how the world works. Good Strategy work is necessarily empirical and pragmatic.
Science is a method, not an outcome, and the basic method of good business people is intense attention to data and to what works.
In the last years the role of cognitive bias in decision making has become very relevant. The author also recognizes this fact and suggest that a good strategist should try to improve its “own cognitive limitations and biases” .
Today, we are offered a bewildering variety of tools and concepts to aid in analysis and the construction of strategies. Each of these tools envisions the challenge slightly differently. For some it is recognizing advantage; for others it is understanding industry structure. For some it is identifying important trends; for others it is erecting barriers to imitation. Yet there is a more fundamental challenge common to all contexts. That is the challenge of working around one’s own cognitive limitations and biases – one’s own myopia. Our own myopia is the obstacle common to all strategic situations.
Being strategic is being less myopic – less shortsighted – than others. You must perceive and take into account what others do not, be they colleagues or rivals. Being less myopic is not the same as pretending you can see the future. You must work with the facts on the ground, not the vague outlines of the distant future. Whether it is insight into industry structures and trends, anticipating the actions and reactions of competitors, insight into your own competencies and resources, or stretching your own thinking to cover more of the bases and resist your own biases, being “strategic” largely means being less myopic than your undeliberative self.
Finally the author gives some broad advice to guide your own thinking.
In strategy work, knowledge is necessary but not sufficient. There are many people with deep knowledge or experience who are poor at strategy. To guide your own thinking in strategy work, you must cultivate three essential skills or habits. First, you must have a variety of tools for fighting your own myopia and for guiding your attention. Second, you must develop the ability to question your own judgment. If your reasoning cannot withstand a vigorous attack, your strategy cannot be expected to stand in the face of real competition. Third, you must cultivate the habit of making and recording judgments so that you can improve.
This las point (recording judgments in order to evaluate and improve) is also suggested as one of the methods to improve the decision making process in Thinking in Bets.
4. Conclusions and Additional Resources:
So, What is Strategy? How does strategy forms within a company?, Who defines strategy? No doubt it is a broad , complex and fascinating subject. Surely there is a lot more to learn than what is covered in this book, but it is definitively a good starting point and I highly recommend reading this book.
I found particularly interesting the following topics/insights:
- The profound analysis of the CBSA “Regaining Strategic Competence” study , is a very illustrative Analysis of Strategic Analysis applied to National Security. The section of What is Strategy is a good Starting point.
- The relevance of Business Process Management excellence as an strategic advantage.
- The section of Inertia and Entropy: The following comment is one of my favorite quotes from the book: “the bread and butter of every consultants business is undoing entropy -cleaning up the debris and weeds that grow in every organizational garden.”
Finally, here is a list of references I found very concise and insightful, not all of them are available for free on line but if you can get them, I am sure you will find them useful too:
Henry Mitzberg on How Strategy Emerges, The Role of Design in Strategy and How Strategy can emerge Bottom Up rather than Top Down:
Patterns of Strategy Formulation
Of Strategies, Deliberate and Emergent
Fall and Rise of Strategic Planning
The role of the Strategy Officer and the creation of the Office of Strategy Management:
Robert S. Kaplan and David P. Norton , The Office of Strategy Management
Creating the Office of Strategy Management
Michael Porter Five Forces and Competitive Advantage:
Michael Porter – What is Strategy and Andrea Ovans – What is Strategy, Again
Understanding Michael Porter.