August 29, 2017

Check out our Latest White Paper: If the Balance Sheet provides a “Window to the Company”: What is the Purpose of Strategy?

In this white paper, we explore the purpose of strategy and its effectiveness in the delivery of change in organisations. We introduce the topic with an overview of the structure of strategy in the form of a Strategic Architecture and then a derivative of that construct; the SMI Dynamic Model of Strategic Equilibrium. We then identify five key measures of effectiveness that relate to the purpose of strategy, they include: Control over destiny; Confidence in robustness; Effective, focused, meaningful leadership; Fuel for growth and continual organisational renewal, and; Realisation of results. We invite you to read the content contained herein, and to then provide us with your views on the validity of the observations through either of our LinkedIn discussion group or here on our blog.

Balance sheet

If the Balance Sheet provides a “Window to the Company”: What is the Purpose of Strategy?

For those who are well versed in the science of accounting, you will be aware of the terminology made popular by John Cleese who in an amusing way likened the Balance Sheet to the “Window to the Company”. Although powerful, the insight offered by a Balance Sheet carries with it three inherent limitations. Firstly, it is purely a reflection of the past, second is that it is wholly financial in nature and thirdly it captures a very specific period, an aspect of reporting that can be very subjective. The limitations of the Balance Sheet and other historically focused accounting and performance reports matter. No company plans to go backwards, so it doesn’t make a lot of sense to concentrate on a window that is more of a rear-view mirror than a progressive view of the future.

In contrast, the intent of strategy is to articulate, project and provide boundaries upon which expectations of the future can be met. Its objective is to define ways in which an organisation can ensure it has the capacity to optimise its performance at any time into the future. The problem with imagining such an outcome however is just that. Just as the future doesn’t physically exist so are strategy practitioners forced to engage in a game of imagination and anticipation based on assumptions, guesstimates, and estimates when exploring alternative envisioned futures applicable to a business.

Strategy is sometimes considered to be an art and sometimes a science. Business strategy to me is about the articulation and realisation of a rich tapestry of expectations, opportunity, hope, challenge, ruthlessness, and celebration.  The management of that tapestry is one that can most effectively capture an organisations inspirations, aspirations, cautions, values, purpose and desires – all at once. To live this tapestry in its entirety, a business must understand the five key elements of getting things done; the who, what, how, when and why of it all. In today’s business environment, that is an increasingly difficult challenge. It can however be definitively assessed from two different perspectives which, when combined, form a powerful construct for strategy. We refer to that construct as a Strategic Architecture as (Illustration 1). It is made up of four primary elements:

The first two primary elements are encapsulated within an Inside Out, resource focused perspective of strategy. This outlook defines the way in which a limited, but ideally uncopiable/unique set of resources can be deployed to outshine, outperform and outwit competitors. The first element of an Inside Out perspective is a firm’s resource base. The second is concerned with what it does to deploy these capabilities (Transforming Activities) that provide the firm with the means to one; improve its resource base, two; refresh and augment its resource base, and three, continually improves the way it improves its resource base.

Illustration 1

The next two primary elements are encapsulated within an Outside In, market focused perspective of strategy. We have long understood the importance of market share as a basis for competitive advantage – sustainable or otherwise. While it is not our purpose here to explain the nuances of market positioning in detail, suffice to say that long term strategy is concerned with decisions about which markets we choose to participate in, whereas short term strategy is concerned with how we will compete in those chosen markets. Accordingly, just as a market position is something a firm has, the way in which a firm differentiates itself can be described as something a firm does, that is, a description of its differentiating activities.

The Strategic Management Institute in Australia (SMI) has combined each of these two perspectives of strategy to form the SMI Model of Dynamic Strategic Equilibrium. This model identifies optional positions that a firm can adopt from the combination of an Inside Out and Outside In perspective of strategy – or a position located somewhere within the outer limits of each (Illustration 2).

Illustration 2

Inside Out vs. Outside In?

There are no hard and fast rules as to the positioning of a strategic equilibrium.

Outside In: Red Bull (Upper Left) is purely a market focused company. It deploys the use of differentiating activities via its sponsorship of high profile, extreme sports.

Inside Out: Honda (Bottom Right) enjoys a competitive advantage in many markets (gardens, marine, motor bikes, cars) through utilisation of its competencies in engine and power delivery as well as the conduct of transforming activities that it adopts to continually improve its resource base.

In establishing the real purpose of strategy therefore, it is my belief that in order to be sufficient to provide a window the company’s entire/foreseeable future it must instil in the leadership team, a degree of strength and confidence that will allow it to take on the world through the prompting of actions that can be both adaptive and inventive in nature:

  • Adaptation: enactment of appropriate responses in the event of any unforeseen, unexpected change or threat (accommodating feat), while at the same time applying notions of,
  • Invention: a preparedness to seize the day. Literally creating an ‘envisioned future’ that is achieved through a capacity for ‘prosponsive’ strategic thinking (directing desire).

From these observations, a purposeful definition of strategy can also be defined. It is: The design and renewal of a strategic intent that will be implemented over time, and the determination of an appropriate response to unforeseen trauma that must be enacted in the here and now. Through this empowerment we can now surmise in broad terms, five key elements that describe just what the purpose of strategy is. They are identified as follows:

  1. Control over destiny: No one can predict the future, but we can influence it. The ‘feeling’ of an inspiring envisioned future is captured through: a description of a vision; an articulation of its purpose or mission; and, a definition of its long term (10+ years) strategy presented within the construct of a Strategic Architecture (described previously). I recognise that the idea of ‘vision and mission’ is being increasingly treated with derision, their dismissal however is in my view misplaced. In addition to the foregoing, I have also found it useful to capture the underlying meaning of a long-term strategy; it is a fifth component of the Strategic Architecture (Illustration 1), which I refer to as a Strategic Intent. This is not a trivial catch phrase either. Rather, a Strategic Intent is a short description of the underlying purpose of the specific organisations strategy. An example is the Cadbury Chocolate company’s philosophy at the time of its start-up (1832) portrayed an honesty of intent that is hard to find today. Grounded in intense religious beliefs (Quakers), Cadbury founders (Richard and John Cadbury) sought to found a business whose intent was to “provide an alternative drink to alcohol”.
  1. Confidence in robustness: A simplistic interpretation of this aspect of strategy suggests that an effective strategic plan is the mechanism by which long term strategy is implemented in the short term. In today’s business environment, one plagued by volatility, uncertainty, ambiguity and complexity (VUCA), a static strategic plan is now a less than effective strategy tool. It is my proposal that a planning process should now be replaced with a dynamic system, one that is based on the format of a program of continual strategy renewal. Such a program takes the form of a dynamic reporting mechanism, one that enables the review and renewal of long and short-term strategy; and the assumptions and guesstimates that contributed to its makeup on a continual basis. Through this format, a continual review of strategy can be effected on a regular basis depending on the management practices of the firm involved.
  1. Effective, focused, meaningful leadership: At the highest level, effective strategy legitimises an understanding and explanation of the reasons why networks, teams and individuals should collaborate to realise generally agreed strategically aligned imperatives, goals and objectives. When applied to issues of competitiveness, Michael Porter confirms strategy’s role in leadership:

“Competition is one of society’s most powerful forces for making things better in many fields of human endeavour. Today, organisations in all spheres must compete to deliver value. Value is the ability to meet or exceed the needs of customers, and do so efficiently. Leadership is needed to achieve superior value creation”.

“For any organisation, developing a strategy is an act of leadership, and strategy represents perhaps the most powerful tool available to leaders to get all the individuals in the organisation aligned around a common purpose and direction”.

  1. Fuel growth and continual organisational renewal: Just as organisational structure follows strategy, so does organisational change follow strategic change. As suggested previously, firms seek to grow into the future, some more aggressively than others. Most business strategy is grounded in a philosophy of growth, but it should be noted that strategy renewal is not the same as organisational renewal. Each are complex beasts, but strategy renewal is an absolute precursor to a program of organisational renewal.
  1. Realisation of results: There’s no problem like a complex problem. Similarly, an operational problem is generally less complex than a strategic problem. The mother of all problems is a wicked strategic problem where, just like the (many) heads of a hydra, “the more you try to tame them, the harder they are to tame”. Good strategy deploys a mix of strategic thinking methodologies and ideologies. Strengthened by a consciousness of organisational learning it includes the use of design thinking, futures thinking, reframing, habit breaking and more. The purpose of strategy practice is to address and resolve wicked strategic problems, not file them in the ’too hard’ basked, as is all too often the case. Examples of a wicked strategic problem are the management of the Western Worlds relationship with North Korea, Iran and Russia. Another is the challenge the United Kingdom faces in grappling with its exit from the European Union. In many cases there are seemingly no answers to wicked strategic problems. The longer they are left to fester however, the worse the problem becomes.

How purposeful is your strategy and how useful is it in its application? Does it address the five purposes identified above? If yes, that is great. If not, that is a problem. Either way, we will be delighted to receive your views on this topic and include them in our upcoming conference.