Strategy development has already become an integral part of business tools. All managers are aware that strategy is important. At the same time, almost everyone thinks it is scary, as it makes them face the future they can only guess at. Worse, the real choice of strategy entails making decisions that cut off opportunities and options. A leader may also experience fear that such decisions will ruin his career.
A natural response is to make such a challenge less daunting, transforming it into a problem that can be solved with proven tools. This almost always means spending a few weeks, or even months, to prepare a detailed and comprehensive plan of how the company will invest in current and future assets and resources to achieve its goal – say, to increase the share of an existing or new market. Such a plan typically supported by detailed tables that project costs and revenues quite far into the future. At the end of this process, everyone feels significantly less scared.
This is really a terrible way to develop a strategy. It may be a great way to deal with the fear of the unknown, but fear and discomfort are an essential part of strategy development. To be sure, if you are completely satisfied with your strategy, there is quite a good chance that it is not too good. It is possible that you have fallen into one or more of the traps discussed below. You need to feel uncomfortable and wary: betting and making difficult choices is what a real strategy is. The goal is not to eliminate the risk, but to increase the probability of success.
In such mindset, leaders agree that a good strategy is not the product of hours of meticulous calculation and modeling, leading to inevitable and almost perfect conclusions. Instead, a strategy is the result of a simple, sometimes rather rough, “tinkering thinking” process of considering about what needs to be done to achieve the desired and, then, to carefully assess how realistic it is. This does not mean abandoning research and analysis. Thorough analysis of statistical data, both inside and outside the company, is the best fuel for such a process. If managers accept this definition, then perhaps – only perhaps – they can put the strategy where it should be: outside the comfort zone.
Comfort Traps in Strategy Development
1st Trap: Strategic Planning
Literally every time the word “strategy’” is used, a “plan” is added to it in one form or another, as a process of “strategic planning” or as a result of “strategic plan”. The subtle shift from strategy to planning is due to the fact that planning is a carefully executed and quite comfortable exercise.
All strategic plans usually look quite similar to each other. Usually there are three large sections in each. The first usually contains a vision or mission, setting relatively elevated and inspiring goals. The second contains a list of initiatives (e.g., launch of new products, geographic expansion, construction programs, etc.) that the organization will implement in pursuit of its goals. This section of the strategic plan tends to be well organized, but also very long. The length of the list usually limited by the financial capacity of the company only.
The third section is usually to translate initiatives into financial parameters. The plan very well linked to the annual budget. A strategic plan becomes a descriptive, clear external interface to the budget, often reflecting five years of financial parameters in order to look “strategic”. But management usually only commits for a year. For years two to five, “strategic” actually means “impressionistic”, i.e. based on unsystematic subjective experiences and impressions.
Such an exercise can be a use, though quite controversial, for a more thought-out and thorough calculated budget. However, it should not be confused with strategy. Typically, planning does not clearly define what the organization will not do and why. It does not examine the assumptions. And the logic that dominates it, is the capabilities of the company, i.e., the plan is filled with any initiatives that fit the available resources.
Misperception of planning as a strategy is a common trap. Even board members and shareholders (often minority shareholders), who should support the strategic process as efficiently as possible, often fall into this trap. This is not surprising, as they are mostly executives (past or present) who find it safer to look after planning than to support and encourage strategic decisions.
2nd Trap: “Cost” Thinking
Focusing on planning easily leads to cost-based thinking. Costs can be miraculously planned because, in general, they are in a company control. For the vast majority of costs, the company plays a customer role. It decides how many employees to hire, how much space to rent, how much equipment to buy, how much advertising to place, etc. In certain cases, the company can, like any customer, decide to stop purchasing specific goods and services, so that even the cost of reducing staff or stopping production can be controlled. Of course, there are exceptions. Authorities can change tax rates and oblige to license activities. But the notorious exceptions confirm the rule: costs controlled by others are only a small part of the total cost structure, and most of them are derived from costs controlled by the company.
Costs are comfortable because they can be calculated with rather high accuracy. This is an important and useful exercise. Many companies have suffered or even ceased to exist when they let costs get out of control. Difficulties begin when planning managers start to apply a familiar and comfortable, cost-based approach to revenue. When, like cost planning, they start to treat revenue planning in a literally identical way. Too often the result is a hard work to build up revenue plans consistently, seller after seller, product after product, channel after channel, region after region.
When there is no planned revenue, managers look embarrassed and even somewhat offended. They are surprised: “What else could we have done? We spent thousands of man-hours on strategic planning.”
There is one simple reason why revenue planning does not lead to the same desired result as cost planning. The decision on costs is made by a company. But for the decision about the revenue (i.e., whether to pay or not) the main responsible is a customer. Except for rare cases of monopolies, customers can decide on their own whether to pay money to your company, your competitors, or no one at all. The company may be under the illusion that the revenue is under control, but since it is impossible to know or control it, planning, budgeting and forecasting is an exercise in impressionism.
Of course, short-term revenue planning is much easier for companies that have long-term contracts with customers. For example, a metallurgical company that has a contract to supply pipes for pipeline construction will receive revenue for several years. Or a cable or satellite network operator will get a lot of revenue from subscription for several years. The only variable component in terms of revenue is the difference between sales of new subscriptions and the end (cancellation) of existing ones. The situation is similar if a company has a long history of orders, such as Boeing, which allows predicting the revenue more accurately. At the same time, accidents with Dreamliner or Superjet Sukhoi demonstrate that even “firm contracts” not translated into future revenue automatically. In the long term, all revenues controlled by customers.
To sum up: a predictability of costs is fundamentally different from a predictability of revenue. Planning cannot predict revenue and will not make it a reality. Efforts to create revenue plans distract the strategist’s more difficult task: to find ways to attract and retain customers.
3rd Trap: Self-Referential Strategy Structure
This trap is probably the most insidious, as it gets the managers who try to build a real strategy and successfully avoided the traps of planning and “costs” thinking. When searching and broadcasting a strategy, most CEOs use one of several standard approaches. Alas, two of the most popular approaches may lead a careless manager to create a strategy away from what the company can control.
In 1978, Henry Minzberg published an important and landmark article in the scientific journal Management Science, which introduced a new concept of “emergent strategy”, a concept that the author later popularized for a wider non-academic audience in his famous book The Rise and Fall of Strategic Planning (1994). Minzberg’s ideas were simple, but very powerful. He distinguished between an “intended” strategy, which was the result of purely ambitions and reflections on their implementation, and a new, “emergent strategy”, which based on not only assumptions and intentions, but instead consists entirely of the company’s response to a variety of unforeseen events.
Minzberg’s thought based on his observation that managers overestimate their ability to predict the future, and to plan for it (future) in a precise and technocratic way. By differentiating between “intended” and “emergent” strategies, he sought to encourage leaders to observe changes in their external environment closely and to adjust course in their “intended” strategies accordingly. In addition, he warned about the danger of following a fixed strategy in the face of significant changes in the competitive environment.
All of this is highly sensible advice that each manager would be wise to follow. Alas, most managers ignore it. Instead, most adhere to the idea that strategy “emerges” as events evolve as an excuse to declare the future so unpredictable and volatile that it makes no sense to make strategic decisions until the future is sufficiently clear. Notice how comforting this interpretation is: there is no longer a need to make worrying decisions about unknown and uncontrollable things.
Shortly digging into this logic, you can clearly see certain gaps in it. If the future is so uncertain and volatile for making strategic decisions, what makes a leader believe that it will become much less so later? And how does a leader determine the moment when predictability is high enough and volatility is low enough to make a strategic choice? Of course, the premise is wrong: the moment when anyone can be sure that the future is predictable will never come.
As we can see, the concept of an “emergent” strategy has simply become a convenient excuse to avoid making strategic decisions, either to repeat decisions of others as a “fast follower” who seem to work from the success of others, or to reject any criticism for not moving in a bold direction. Simply following the decisions of competitors will never create a unique or valuable advantage. Minzberg did not want any of this, but it was the overall result of his proposed approach, as it allows managers to be in a comfortable zone.
In 1990, two authors, an academician and management practitioner, published one of the most readable articles of all time on management issues. The article titled “Core Competence of the Corporation”, which popularized the view of the company as a set of resources, known in Russia as “resource approach” (RA).
RA includes a statement that the key to a company’s competitive advantage is its possession of valuable, rare, inimitable and irreplaceable capabilities – resources, capacities, etc. This concept has become extremely attractive for directors because it seemed to suggest that a strategy is the identification and building of “core competencies” or “strategic opportunities”. Notice that such a view is convenient for being in a realm of known and controlled. Any company is able to hire an army of salespersons, or open a department for software development and implementation, or build a distributed sales network and declare it a core competence. Directors are able to quietly invest in such opportunities and control the whole process. Within reasonable bounds, they can guarantee success.
Of course, the problem is that such created opportunities in themselves do not force customers to buy. Only those who produce a set of values for a particular group of customers can do so. But customers and the environment are incomprehensible and uncontrollable. Many directors prefer to focus on opportunities that can be built – with confidence. If this is not successful, one can blame whimsical customers and irrational competitors.
How to Avoid the Traps in Strategy Development
It is quite easy to identify companies that are trapped. In such companies, as a rule, directors spend a lot of comfortable time with those who plan, check and approve their work. The main thing in discussions (with management, managers, directors) is more often to get more profit from the existing revenue than to find ways to generate new revenue. A company’s key metrics reflect its finances and resources; those that work on customer satisfaction or market share (especially fresh ones) sit at meetings in the far corner.
How does a company avoid such traps? Since the root of the problem is a natural human aversion to discomfort and fear, the only way is to discipline yourself when creating a strategy: to accept that there will be some anxiety. This includes the obligation that the process of strategy creation complies with three basic rules. Following them is not easy – the comfort zone is always seductive – and they don’t necessarily lead to a successful strategy. But if you follow them, you will at least be sure that your strategy is not a bad one.
Rules for strategy development
No. 1: Formulate Strategy Simply
Target your energy at the key decisions that affect the revenue decision maker – the customers. They will decide to spend their money with your company if your value proposition outperforms your competitors. Two choices determine success: “where to play” (which clients to target) and “how to win” (how to create a compelling value proposition for these clients). If the customer is not in the segment or territory where the company has decided to play, he may not even know about the existence and nature of such an offer. If the company has made contact with such a client, the decision “how to win” will determine whether the client agrees that the target value equation is compelling.
If there are only two such decisions, the strategy will not need to include long and tedious planning documents. There is no reason why a company’s strategic decisions cannot be presented on one page with simple words and ideas. By characterizing key decisions as “where to play” and “how to win”, you will keep the discussion in focus and be more likely to involve management in the strategic challenges the company faces – otherwise they will more likely fall back into the comfortable planning zone.
No. 2: Acknowledge that Strategy Is not an Exercise in Flawlessness
As noted earlier, managers unconsciously feel that the strategy must achieve precision and the prophetic power of cost planning. In other words, it must be close to perfection. But provided that the main thing in the strategy is revenue, not costs, perfection – a standard that can not be achieved. Therefore, in the best case, the strategy will reduce the probability of bets that the company makes. Managers should learn this fact if they don’t want to be scared by the strategy creation process.
For this to happen, shareholders, boards should not destroy, but support the view that the strategy involves bets. Every time shareholders or the board asks managers if they are confident in their strategy and make them vouch for the thoroughness and sophistication of the strategic plans, they actually weaken strategy creation. As much as shareholders and boards want the world to be predictable and controlled, it is simply not the case. Until they agree, they will get planning instead of strategy. And in the end, there are many excuses why there is no revenue.
No. 3: Logic Have to Be Transparent
The only reliable way to improve the probability of winning your strategic decisions is to check the logic of your reasoning. For your decisions to make sense, what do you need to know with confidence about your customers, industry evolution, competition, company resources? It is critical to record on paper the answers to such questions. The human brain is by nature inclined to rewrite history, and in the future will be more likely to claim that the world has changed much more than expected, rather than remembering what strategic stakes were actually made and why. If the logic written down and then compared to the reality that has occurred, managers will be able to quickly see when and where the strategy is failing, and they will have the opportunity to make the necessary adjustments – just as Minzberg imagined. In addition, by observing with some rigor what works and what does not, leaders will be able to improve their strategic decisions over time.
Applying these rules, managers will reduce the fear of making strategic decisions. It is good, but until a certain moment. If the accepted decisions are completely comfortable for the company, there is a serious risk that something missed in an external environment.
I argued that planning, cost management and focusing on company resources were dangerous traps for a strategy creator. At the same time, such functions are necessary and essential, and no company can ignore them. Thus, if the strategy convinces customers to give the company revenue, then planning, cost management and resources determine whether this revenue will be received at a price profitable for the company. Human nature is what it is, so planning and other functions will dominate rather than serve the strategy. Unless this is prevented by a conscious effort. As long as you are comfortable with your strategy, good chances are that you will not make such an effort.