You need to know the rules in order to break them successfully

Strategy

There is no criticism in the corporate world more damning than to say someone ‘is not very strategic’.  It suggests someone’s scope for advancement is limited.  If strategy is what senior people do, you better know how to do it, right?  This is tutorial offers advice for developing strategy.  It emphasises the practical tools available because, when it comes to strategy, there is too much talk and not enough trousers.

What is Strategy?

Substituting the word ‘strategy’ with ‘plan’ is a perfectly serviceable replacement for everyday use, although it lacks the same cachet.  Trouble arises because the word strategy is so horribly over-used.  Planning is something you do when you are in control of events, suitable for projects such as building a bridge.  In strategy, there is someone else involved. There is conflict.  There is competition.  The boxer Mike Tyson put it like this, ‘Everyone has a plan until they get punched in the mouth’.  What makes planning ‘strategy’ is the calculation of what others will do.  You might plan to build a bridge, but you need a strategy for defending it.

Strategy and Tactics

Strategy and tactics are easily confused because both involve planning against an opponent, but the difference is simply one of optics.  Sun Tzu puts it poetically in the Art of War as ‘All men can see my tactics…, but what none can see is the strategy’.  You never see another’s strategy.  It’s invisible.  You only see their action.  From this you can guess what their strategy is, but you can’t know it.  And they don’t know yours.  In Sun Tzu’s example, tactics are the troop movements within your field of vison.  In chess, tactics are the moves; strategy is the reason the moves were made.

I was once standing among some senior work colleagues listening to one of them tell a story about another colleague.  At the end of story, one wag said ‘I think he’s confusing tactics with strategy’.  The comment got big laughs.  I recall the remark sounded clever but at the time I had no idea why it was funny.  Now I realise the colleague’s actions must have appeared aimless and lacking any guiding purpose.  Twenty years later, I get the joke.

Winning

To develop strategy successfully, you must first want to win.  The role of motivation is often over-looked when discussing the outcome of our plans.  If you are struggling with strategy it might be because you are not really in the game to win it.  And that’s ok, as the example below from my childhood illustrates:

Monopoly Money

On rainy days, my two best pals and I would play card and board games indoors.  There was a distinct pattern to these games.  The same boy (we were all called David) usually won, with my other pal usually coming second.  I was always last – whatever the game.  Reflecting on this years later I asked myself how was it in games involving a high degree of chance, such as Monopoly or cards, this same pattern emerged.  After all, we were all of similar abilities.  I came to realise the outcome had little to do with luck or intelligence, but reflected the level of competitiveness we had when playing against each other.  The boy that won simply wanted to beat us much more than we wanted to beat him.  Fool that I was, I just thought we were playing for fun.  And my other pal was in the middle.  There must be winning strategies for playing Monopoly, but I never took the trouble to find out what they are.  My playing style was opportunistic and haphazard.  Even had I made the effort to try, I wouldn’t have been able to sustain the concentration needed to win.  I simply didn’t care enough.  We were friends but the boy that won was plotting against us.

What are the lessons for strategy?  The man with the plan usually beats the man without one.  Developing the plan requires effort.  Implementing it requires sustained concentration.  Achieving these things means you have to really want to win.  You must be highly motivated.

Assuming you want to win, what are the practical approaches to developing strategies that will help you?  There are three:

  1. Emergent strategy
  2. Strategic analysis
  3. Advanced strategy

 

Emergent Strategy

In many competitive situations trial and error is a perfectly respectable strategy.  There’s even a polite name for it.  It’s called ‘emergent’ strategy.  This approach is close to, but not quite, making it up as you go along.

Proponents of emerging strategy can be actively hostile to planning.  They view activities such annual budgeting, that staple of corporate life, as being as about as much use to companies as the 5 Year Plans were to Soviet Russia.   In a rapidly changing environment, such as exists for many businesses, too much emphasis on planning can be constraining.  Efforts to prepare and then achieve the plan can make companies rigid and slow to respond.  We often don’t have as much control over events as our plans like to assume.  Sometimes our successes and failures are down to luck as much as judgement.  In such circumstances it can be better to be flexible and prepare to react quickly as events unfold, in effect letting your tactics dictate your strategy.  This is emergent strategy.

Emergent strategy is not the same as no strategy.  Having no strategy means no sense of priorities to dictate how you should react to events.  Having no strategy is worse than making it up as you go along.  It’s randomness.

An example of an emergent strategy might be a shampoo manufacturer who, rather than planning to make products for what they think the consumer will want, observes fashion trends closely and when they observe that, for instance, straight hair has become fashionable is able to quickly mobilise R&D, packaging, manufacturing and marketing to bring out a product aimed at that market.

It’s my observation that emergent strategy is by far the most common form in most businesses.  More often than not decision-making is improvised around a few core beliefs or principles of how to behave.  The is because most managers have no time for anything more deliberative.

There’s a strong intellectual case to be made for emergent strategy but it is only really suitable for rapidly changing environments when, in truth, no one knows what’s going on, where it’s impossible or dangerous to ‘fix’ your view too early.  In calmer conditions, emergent strategy concedes too much advantage to other people.  It’s too passive.  This is fine if you face little competition but risky otherwise.

Strategic Analysis

A more active approach to strategy is to formulate action based on insights about your business arising from an analysis of your present situation.  The exact form of the analysis can vary from the gut instinct of an imaginative leader to a more systematic and data-driven investigation.  Either way, the telling difference in this type of strategy is the ability of analysis to reveal hitherto hidden truths about your business – to ‘see the unseen’ – allowing you to develop plans based on these insights.  A typical example would be an analysis of the profitability of a product range revealing that most of a company’s profits are made by a relatively few product lines and that some product lines may actually be losing the company money.  The strategic response could be to trim the product portfolio.

Seeing what others cannot – the big picture – is, naturally, not easy but it is not so difficult that it can’t be learned and understood.   This more deliberative approach to strategy starts with assessing your present position in two broad areas:

  • Your internal environment; the skills and capabilities of your staff, the structure of your organisation and its decision-making pathways, the leadership and motivation of your management; the condition of your finances, supply chain, and customer relationships.
  • Your external environment; market position, brand strength, the actions of your competitors, customer trends, supplier power, the economic outlook, your relationship with investors and financial markets.

 

The basic tool of this type of strategic analysis is the profitability analysis and the survey but gathering this type of evidence can be time-consuming and potentially expensive.  It may require the commissioning of external agencies with expertise in, for example, market research, although a much cheaper alternative is simply to ask your own staff for their opinion.  Companies may lack the management and accounting systems to produce the information needed, requiring significant investment to prepare a one-off analysis or an even bigger investment for new software to prepare the analysis on a regular basis.  Much bureaucracy originates from the need to feed strategy development at the corporate centre or public policy in government.

Glossing over the practical problems of collecting evidence for a moment, there is still the intellectual effort required to interpret the data accurately.  But assuming all that has been done, you have only completed step 1:  analysing your present position.  Step 2 is deciding what the future position should be and step 3 is formulating plans to achieve this future shape.  Although the strategy is developed in steps 2 and 3, the important components of this approach are the insights gained from step 1.

Given the energy involved in strategic analysis, it is no surprise it is mostly the preserve of large companies.  Only they have the resources to undertake this type of activity.

Grow, Shrink, or Maintain?

What does a strategic analysis look like?  Every strategy is particular to each organisation but in crude, general terms they frequently boil down to a choice between three separate actions: to grow, shrink, or maintain.

A strategy that prioritises action internally will eventually lead to either doing more of a particular activity or behaviour (grow), doing less of others (shrink) and keeping those activities that are performing satisfactorily unchanged (maintain).    Such strategies are relatively easy to implement because the activities are mostly under management control.

A strategy that prioritises action externally is more demanding because events are not wholly under management’s control.  Competitors will react in unpredictable ways and luck as well as execution skill will play a part.  Such strategies will involve entering new markets, developing new products or making acquisitions (grow), or exiting markets, divesting certain businesses or stopping certain product lines (shrink), or they will involve actions to defend existing positions by cutting costs, cutting prices, investing in marketing or R&D, or merging with other partners (maintain).

Above all else, a formal strategy must clearly and succinctly describe how the future is going to be different from the present.  I have sat through many presentations that contained insightful analysis and contained bold statements of ambition but absolutely nothing about how this transformation is to be achieved.

Empty strategies of this nature frequently look like this:

We want to be here

 

Expressing the desire to change is not strategy.  It is aspiration.  Insisting on the need to change is not strategy.  It is exhortation.  Many management teams seem to believe that once they have articulated the strategic objective their work is finished. ‘Big deal!’ is the typical and justifiable response of employees and investors.  It’s a bit like the cartoon where the big elephant turns to the small elephant and says ‘Tomorrow we fly.  You work out the details’.  A more complete strategy is one where, days after hearing it, someone is able to describe in one or two sentences what is going to be done differently to achieve the desired objective.  It should describe what’s going to change.

Advanced Strategy

The ‘grow-shrink-maintain’ choice is a useful framework for developing strategy but it still focuses largely on those elements of the environment that the organisation can control.  It is largely silent on what competitors will do.  In many respects, this type of strategy is just the ‘first move’.  More advanced strategy asks ‘What happens next?’ and provides tools to help you understand how your opponents might react.  These tools are:

  • Scenario planning
  • Decision tree / game theory
  • Simulation / modelling
  • Red team / war gaming

 

The key point in more advanced strategy development is recognising there is uncertainty in the outcome of your plans and preparing for it.  Because there is uncertainty there is no magic bullet that ‘solves’ the problem – otherwise there would be no uncertainty.  The best you can hope to achieve is awareness of where the risks lie and knowledge about what you will do if these risks crystallise.  The tools available offer different angles with which to bring these risks into the light.

Scenario planning is the first rung of sophistication in advanced strategy.  It admits that there is more than one outcome from your actions and seeks to describe what the impact will be in each case.  At the very least this sharpens your picture of what the costs of failure will be and puts you in a better position to judge what is at stake.  These scenarios tend however to be quite static such as whether the response to an action will be good, bad or indifferent.

The next rung up is decision tree analysis which creates a more multi-dimensional picture.  By breaking a strategy into critical decision points, it improves your understanding of where the contingencies in your plan exist, allowing management to focus attention on these areas.  Game theory techniques can be applied to model the interaction of your decision tree with similar decisions of your competitors allowing greater insights into the dynamics of a given situation.

The next rung again, calls for probability distributions to be assigned at key points in the decision tree and simulates dozens of scenarios to really interrogate the range of possible outcomes and to more accurately assign probabilities to these.  This approach to strategic development provides a powerful way of handling the complexity in your strategy.

The ultimate way to test your strategy is to set up a ‘red team’ and war game your strategy.  This technique addresses the biggest weakness in all the techniques previously discussed:  human frailty.  It is often the case that we become so involved in our own thought processes that we do not give proper weight to alternatives or completely overlook certain scenarios.  A typical example is that no matter how bad your ‘bad’ scenario is, often reality can be much worse.  The purpose of a red team is to give you exactly the outside perspective that is missing from all the other techniques.

The red team technique, which borrows heavily from the military, is a particularly useful way to achieve insight into how the competition may respond to your strategy.  It is relatively easy to set up.  A team is placed in the role of direct opposition to you and then you run through your strategy as a ‘war game’.  If you are lucky, the red team will respond in ways that go far beyond what you imagined and allow you to observe their thought processes and develop your own counter measures.

The central aim of more advanced strategy development is to recognise that your opponent will react to your strategy and to prepare you in advance.  In this respect we’ve come full circle, because, like emergent strategies, the key point is to maintain flexibility to react quickly as your strategy develops.  The difference between emergent strategy and more advanced techniques is that with the advanced techniques you should be ready for the counter-attack coming, but in both cases you need to react quickly.

Communicating a Strategy

It takes such intellectual effort that once you have developed your strategy, it’s tempting to feel you have done the hard part, but finding the language, metaphors, stories and symbols to communicate it is just as difficult.

How many strategies have you heard along the lines ‘We want to be world class …’ or ‘We are passionate about ….’ or ‘Our vision is …’  No one pays any attention to these strategies because they are not honest.  World class is a high hurdle.  One day I’d like to hear the strategy that runs ‘We want to be world class but right now we’re off that pace.  To get there is a tall order.  We’ll need to do …..  It’s going to be a demanding, scary ride, but exciting too.’

The best advice I’ve heard about communicating strategy is to turn it into a narrative.  Examples would be ‘The plucky underdog takes on the established giant’ or ‘The grand old dame learns some nimble new dance moves’ or ‘The two grizzled old boxers slug it out in the ring’.   Never mind the cliché, the aim is to turn your strategy into a plot of a movie yet to be made.  Conflict is the basis of all good drama and turning your strategy into a narrative provides your staff with an easy shorthand with which to absorb the message and the need for change without too much heavy exposition from you.

Theory and Practice

I find military analogies transfer awkwardly to the business environment, lethal force being just a tiny bit different from your average sales conference or VAT return.  However, much thought on strategy originates from warfare as conflict and strategy belong together.

No post on strategy could get away without mentioning Carl von Clausewitz.  Among his many contributions to strategy is his concept of ‘friction’.  This he describes as ‘Everything in war is simple but the simplest thing is difficult.  The difficulties accumulate and end by producing a kind of friction…  Countless minor incidents – the kind you can never foresee – combine to lower the general level of performance, so that one always falls short of the intended goal’.

This concept of friction applies to business as much as warfare.  All strategies should factor it in.  At the very least it is the reason the changes you are seeking to effect will likely take twice as long as you plan.

Clausewitz developed a theory of war as the interaction of politics, violence and chance.  If we look for a theoretical model of business to help us develop strategy then Charles Darwin’s theory of evolution through natural selection is available.  It demonstrates the role of environment in shaping the evolution of species.

It’s worth spending a moment considering how the force of natural selection works.  Take a species of beetle where half the population is red and the other half is black.  All it takes is for a predator to have a slight preference for red beetles for the population of beetles to eventually become all black.  Note, there is no difference in evasion skills between the red and the black beetles.  They are equally good at finding food, mates and have equal numbers of offspring, but over time, the environment shapes the population creating an ecological niche in which only black beetles thrive.  Coming across this population of beetles, you would not realise how this had happened.  You might assume the black beetle was clever in some way or had developed some superior survival skill, where in fact they hadn’t.  What’s the lesson for strategy?  The environment will change at some point and, if you can’t adapt, you’ll go the way of the red beetle.  Darwin concluded ‘It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change.’

This is a theme that has been running through the discussion of strategy.  It emphasises the importance of flexibility and speed of response.   These are practical not theoretical skills, suggesting too deliberative an approach to strategy is unlikely to succeed.    Napoleon made exactly this point when he described the art of war as ‘all in execution…nothing about it is theoretical.’

If there is a practical conclusion to be drawn from the theory of evolution it is to direct most of your strategic energy towards the external environment.  This is where the real danger lies.

Words of Warning

Developing and implementing strategy is difficult to pull off.  It takes intelligence to avoid being caught in the headlights of all the possible things you can do.  It takes decisiveness to select one single course and – correspondingly – leave other pressing matters aside.  It takes leadership to press on if the necessary action is unpleasant (almost all change is).  It takes communication skills and personality to articulate the strategy in a way that people remember.  It takes experience to formulate implementation plans that are practical and credible.  It takes persistence to keep going when faced with resistance, misfortune and difficulty.  And finally, it takes humility and flexibility to change direction if you see the strategy is not working.

It is for these reasons that strategy is rightly regarded as among the ‘higher’ management skills and being thought ‘strategic’ is a compliment and ‘not being very strategic’ is career-limiting.

Summary

Individuals are not naturally strategic, so if you are finding strategy difficult don’t beat yourself up.  Strategy is definitely one of these areas which benefit from experience and coaching.

Good strategy starts with a diagnosis.  How you arrive at that diagnosis is up to you.  While there are analytical tools available, hunch, intuition and instinct may be more than adequate and at can produce better results than more systematic deliberation.

While it is possible to succeed without a formal strategy, relying instead on your tactical ability, generally the man with a plan beats the man without one.

Underpinning all strategy however is the importance of being flexible and adapting to change.  No plan survives contact with the enemy unchanged.

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