Strategy. The word abounds in the titles of journals and consultancies; careers are built upon it and university departments grow and prosper around it. Yet, this little word often conveys more ambiguity than meaning.
The ambition of this text is to provide the reader with a new way of thinking about strategy. It describes the steps necessary in strategic management and notes the common problems which arise when these steps are absent or misapplied. It does not, however, offer a single blueprint, for organisations are complex, and no one template could adequately fit even a few, let alone all. The text is organised into three chapters:
First, we note that strategies consist of a large number of things, all of them present. When organisations lack any one of these, they feel themselves to lack a strategy. These elements fall into three blocks of activity, and so we discuss three characteristic sources of strategic vacuum.
Second, we consider the basic elements and process way stations that are entailed in having a strategy.
In closing, we consider pathologies commonly associated with strategic processes.
Readers will, of course, need to tailor these views to match their own specific needs. The text has, for example, been written from the perspective of a complex, established organisation. Start-up, small or rapidly changing organisations will need to consider different factors. The basic issues are, however, constant. A stategy is the means by which an organisation probes its circumstances and manages its information base. Once the 'higher brain functions' are installed, the organisation can identify options. It can manage internal and external communications. It can set targets and critieria. It can identify new knowledge that it nees to acquire. Above all, it possesses a sychronising rationale which tells junior staff what senior staff need to hear, or might wish to hear. It is the profound structure on which knowledge management and renewal develops.
The organising principles of the Prussian Army are said to have been the origins of much early thought about business structure. Whatever the truth of this, the prevalent image was that of a hierarchy, in which orders flowed down from the top and where matters that could not be handled by the operational units were passed up to the top. We suggest that a model which more closely matches modern needs is, however, that which sees the organisation as having 'outer' and 'inner' layers. In commerce, the 'outer' components deal with the interests of, for example, suppliers, partners and customers, whilst in the public sector, the outer layers address the representatives of other nations, the interests of specialist or expert groups, the concerns of tax payers and the like. The 'inner' part of the organisation, by contrast, creates and maintains the structures by which these things are rendered possible.
Most individuals, like the organisations in which they may work, also have "inner" and "outer" aspects to their working lives and accordingly they operate in differing time spans of decision-making depending on the situation. In each case, the individual uses a rationale by which to make choices. Some aspects of this might be quite explicit, based on numerical factors. Many choices are, however, made against a complex mix of quantitative and qualitative criteria which may be difficult to articulate.
The quality and nature of these complex choices are quite distinctive in the outer and inner portions of the organisation. The absence of an appropriate structure often gives rise to three equivalent and distinctive ways in which people in an organisation sense a strategic vacuum.
Local (e.g. operational unit) freedom to act must, however, be balanced by goals, criteria and targets. It must be set against systems of oversight and scrutiny. To be meaningful, these targets must themselves be relevant to the issues which the operating unit faces. That is, the operating unit needs to help to set its own targets in all but the most stereotyped of occasions. Some of these may be explicit criteria or tightly defined financial expectations, whilst other limits may be more complex, articulating common balances and dilemmas. We refer to this setting of parameters as "book ending". We feel competent - empowered, enabled - to act when these limits are set, however, and when we have an intuitive sense of what is appropriate. In the absence of a self-correcting set of procedures and balances, huge amounts of energy need to be expended in holding things together. Great effort that has to go into what should be automatic, as anyone who has managed a start up will testify. In this sense, therefore, 'strategy' is the name that we give to that which has allowed us to form our own opinion, and to trust and act on it.
These systems of assessment set much of the future shape of the organisation. It is often the case that at least by implication, they embody assumptions that the future will be a smooth extension of the past. An organisation will drift if it builds its plans for the future by assembling many local plans which are, themselves, driven by assumptions about the past. Organisations which are driven entirely by financial criteria will find this a very hard fate to avoid.
The nature of what would constitute an acceptable outcome is often obscure: a document? A re-organisation? Additionally, the means by which to reach this goal is also cryptic, as to who should work with whom, as to the terms of reference under which they should operate, and following what kinds of oversight and control, for such an enquiry has the potential to run away with the organisation. It is clear to most, however, that these issues are best approached through iteration. Knowledgeable people, from many interests, need somehow to be in a position to bring to bear what they know. Commitment to process is important. Senior management 'ownership' is significant. How all of this is to be organised is not always clear. Indeed, the half-perceived difficulties - and the sensitivity of the issues - may mean that the matter is side-stepped. It may often be easier to study a non-contentious issue - such as the business environment - rather than to open up a full enquiry. If this is the case, then neither of the two previous difficulties which we have already mentioned can easily be improved. This is the void from which other vacuums take their source.
People may sense a lack of resilience or coherence in any of these areas. The issues may emerge when making choices, when trying to understand what other people are doing or when making a case to outside interests, such as shareholders. This lack of clarity may also surface when people are trying to see the general shape of what an organisation might become. They reach for an answer to their problems and, when they grasp air, find themselves wishing for "a strategy". In the broadest sense, therefore, the sense of having a strategy must offer solutions to all of these issues. As a result of the complex interactions which all of this entails, this cannot be a static, closed state. It must be done through a complex and predictable pattern of interaction, operating at many levels and often across the operational boundaries of the organisation.
We explore what these elements are likely to be in most organisations in subsequent sections. We then turn to some common pathologies. It may be helpful, however, to note one of these, as it tends to colour subsequent discussions.
The literature of pop strategy is filled with "visions" and "mission statements". It tends to assume that the overall goals of an organisation can be dreamed up, often by an inspirational CEO, and then are cascaded down the organisation as a strategy. This is seen, essentially, as a corporate business plan, but when the relevant numbers are not available or the ideas entirely clear, it gets called a 'mission statement', which finally gets translated into tactics by agile but ignorant minions. Ambrose Bierce, who wrote The Devil's Dictionary in which common ideas were redefined in cynical terms, might give the following description of vision, strategy and tactics:
Vision: We want this.
Strategy: You tell us how you are going to get it for us.
Tactics: Now let's argue about resources.
Clearly, this linear process begs most of the important questions. How do the visionaries acquire their vision? How is this tested and developed: indeed, how can a small group synthesise and access all that the organisation knows, has as a resource base or has to bear as liabilities? How is this to be set in the context of the changing world and the shifting competition? This said, the pop prescriptions represent concern around the three areas which we have noted as giving rise to strategic 'pain' when deficient. The problem with the pop description is that it gives no sense of how to arrive at a useful answer. It reinforces the tendency towards hermetic, 'inspirational' responses from senior staff.
The three areas of concern are:
First, where the operating units feel the need for a clear conceptual and numerical framework in which to operate. This corresponds broadly to the 'tactical' area, but is by no means a consequence of a top-down, prescriptive approach. Indeed, almost any organisation which is not dominated by numerical criteria uses some form of interactive, negotiated target setting.
The second was that of conceptual and numerical guidance which is required where balanced choices need to be made about the overall portfolio, both in respect of the proposals coming forward from the business units and in terms of where the organisation should be at the end of the planning period.
Third, the organisation needs to get itself into a position where the dynamical, whole-organisation version of a "vision" is articulated, often at several levels and invariably in terms of the logic and facts from which it emerged. Once again, it can be asserted that few organisations which are strategically confident expect the definition to this to arise either in a single pass through the issues, as a result of a single perspective upon the problem, or without formal analysis, the pooling of insight and the constructive testing of ideas with - for example - operational staff.
These three elements are not independent of each other. Indeed, they create the foundations on which the others stand. There is a need for the system to engage in iterative processes for this to stabilise. One cannot say a great deal about the options open to an organisation, for example, until one has a good sense of what it will be doing over the next five or so years. Furthermore, one cannot say much about the correct criteria for the immediate projects which make up this composite of operating unit plans until, for example, one gains some perspective on the generic forces and options which might be exercised and the constraints and predetermined factors which have to be acknowledged at the corporate level.
Complex, iterative procedures do not 'just happen'. They need to be designed, both with an eye to the nature of information flows - and their participants - and also to when information is required. Some aspects of the overall cycle will run quickly - perhaps quarterly or annually - whilst others may have a longer natural frequency. Not even the majority of these activities will flow through the core of the organisation. Most will occur within the internally-focused network, but particularly at the operational unit level outside interests may play an active role: suppliers and customers, for example, may help to set research targets or to modify procedures. Knowledge is, however, pooled slowly. There is often a major task of mutual education to be undertaken, particularly where specialist areas need to interact. Premature closure - when a process is terminated before the debate has matured - can lead to a repeated failure to communicate. The importance of predictable reporting dates within such processes cannot be overstated.
All of this is likely to take considerable organisational planning. It also requires certain analytical skills which are not always present in an organisation. Much of the analysis is strongly connected to the art of representing knowledge in the form of recognisable models. This can be done explicitly in saying how, for example, the dynamics of an industry is changing. It can also be handled implicitly, as for example, when an independent hospital comes to cohere around the attitude which it has to a variety of value systems: cost effective, impersonal mass treatment versus individual attention and specialisation, curative intervention versus preventative medicine, acute treatment versus chronic support and the like. Arriving at and communicating such a view is quite difficult to do, requiring specific skill sets and access to data. It also requires the individuals and groups which are concerned to be comfortable with operating at this level of abstraction, not least when deciding costly and contentious matters. Clearly, habituation, training and regular exposure has much to offer in taking this forward.
Figure 1: Expanding the three areas of concern.
Strategy is, we have seen, most noted by its absence. We have discussed three main areas of activity which most acutely feel such a strategic vacuum. The solutions which can be advanced for any one of these areas are, however, intimately bound up with solutions in each of the other areas. This section begins by defining some of the key aspirations connected with these 'strategic gaps'. We look at what is required to satisfy these aspirations, and trace the flows which these generate between the areas of concern. This is consolidated into a generic flow of activities in the section which follows. The closing section is concerned with the common modes of failure in such a flow.
Figure 1, therefore, expands each of the three areas of strategic concern. Each of these is identified in bold type and is surrounded by a box. Five "clouds" are also shown, connecting the boxes together or - in one instance - linked by tenuous pipelines. It is immediately and overwhelmingly clear how complex a set of tasks is involved in each of these boxes. Informed readers may care to outline the areas in which well-known consultancies tend to fish.
The content of most of the boxes has already been mentioned. The list is, however, far from complete. Next to nothing is said as to how a goal is to be achieved, for example. The difficulty of this may be compounded when the ownership of any one of these issues - let alone any one of the boxes - is diffused across many units and individuals in most organisations.
This is particularly the case with the "multi-layered decision taking" box. Its activities are chiefly concerned with internal process within the organisation, whereby - for example - scarce resource is allocated between rival proposals, criteria and targets are set, internal processes and procedures are established and managed, information flows and project-related practicalities are taken in hand. Many of these issues have their agendae set for them, by practical demands, by past example and by common sense. Others - such as portfolio choice - should be (and, occasionally, actually are) informed by general thoughts about options and goals, developed elsewhere in the Figure. This intricate dance is the stuff of power in many organisations. Learning how to navigate in these cross cutting streams and accessing the relevant information may be as or more important to managers than the understanding that they have of the basic logic of the business.
This was especially evident in large, conglomerate organisations of the Sixties and Seventies, when bureaucratisation had advanced hand in hand with early data processing, often to the detriment of any clear business logic. The shareholder revolt of the Eighties established the need to make a clear case to markets for assets, and with it, the need to organise internal systems around some ordering principle. Early models - such as "customer focus" - took a more or less arbitrary area of concern and allowed its logic to redefine all internal processes and procedures: process re-engineering. More sophisticated models will, however, take account of the fact that there are many such foci - customers and shareholders, renewal processes and quality, resource development and the environmental impact of what is being done - and seek a set of procedures which allow these issues to be addressed in a balanced manner. This places stress on the need for analysis of matters such as the operating environment and the business logic, the positioning of the firm and the values which it represents, both now and in prospect.
The "clouds" represent the machinery by which these 'cross-domain' activities are enabled or brought about. Some of them seem, at first consideration, to state the obvious: that, for example, complex issues come to inform local judgement through a process of two way communication. We have noted, however, that one of the areas in which the absence of "strategy" is most keenly felt is precisely in this area. This void is brought about by any combination of the following: failure to give due consideration of the complex issues, a lack of readiness of those exercising local judgement to make the effort to take these issues on board, and the lack of appropriately designed or managed two way communication. Indeed, if there is communication, the lack of application in the other two areas will swiftly become apparent. What constitutes effective communication in these circumstances is, however, a complex matter. We shall look at this in a subsequent section.
Let us focus on the individual 'clouds', the bridges between the areas of strategic concern. The cloud which lies at the centre of Figure 1, for example, connects all three of the areas of concern. It includes, but is by no means limited to, the financial reporting cycle. This is present in virtually all organisations. Typically, there are units or individuals who have responsibility for its completion. By contrast, the means by which the organisation gains oversight on assets such as human resource, brand and customer relations, environmental and less tangible assets or liabilities is, however, less well established. There are seldom units assigned to such a task. Change management programs are relatively uncommon, and quality programs which operate at the level of corporate processes are extremely rare. Where all of these exist, they seldom have a single sponsor or agent, and may be completely 'orphan', the product of momentary enthusiasm. They are also, almost invariably, carried out at many levels in the organisation. The way in which such matters are addressed at the unit level - or at the corporate level - may be quite different and, on occasions, quite incompatible. They may have different implicit goals: for example, safety promulgated at the corporate level with the best of intentions may fit poorly with considerations of cost cutting, on which operational attention may be riveted.
The lowest of the central three clouds bridges 'local judgement' and 'networked decision taking'. It contains activities which are concerned with assigning responsibility, setting targets and criteria. Its agents assess projects and proposals for their internal credibility, but also for their fit with overall goals, even assuming that these are set out in an unambiguous way. Once again, if this is to be done well, it needs to be the product of tightly designed procedures into which many interests have something to offer. Where it is badly done, in the main, single individuals or isolated cadres dream up targets and impose these on units and managers, often without the backing of comparative data, much oversight on the implications of this and with the eye focused on only one set of criteria at any one time. It may be an approach that works in organisations where all else has failed, or where the task is utterly routine. Where ingenuity and agility is required, however, relatively complex understanding is required from both parties.
The upper of the three central clouds brings in a new connection to the organisational 'knowledge base'. Some members of this are to be found in the 'middle network', others at the core of the company. Some exist in specialist functions, such as information management, human resource, research, marketing or finance. Others have operational insight, which needs to be drawn in, often as a pragmatic reality test upon ideas. The operational units additionally need to be able to draw on the corporate base for expert advice, but also to work with external sources of expertise in order to generate innovative, unit-specific ideas which reinforce the goals of the entire organisation. This is concerned with the management of conceptual exploration: with developing the issues listed in the box, but doing so in conjunction with the fifth and last cloud, the internal knowledge base of the organisation.
The knowledge base can be seen from a number of angles. Knowledge can be seen as simply that which can be written down: does the organisation have access to this information? By contrast, it is fashionable to speak of distinctive competences: of those things which an organisation knows how to do (or skills which it needs to use) which render it different from its competitors and, indeed, from a 'virtual' company that could be assembled from a partnership or web of sub-contractors. Much of this competence is concerned less with explicit chunks of knowledge than in 'knowing how to operate', with access to experience and creative talent. Experience can, however, be a two-edged sword. Although it helps to cut through complexity, it can, however, table habit and caution - "We tried that in 1985 and it didn't work" - where it ought to offer guidance. Creative talent, when unhampered by guidance or control, can also distract, not least by pursuing or over-emphasising minutiae when it should be informed by grander oversight. It is worth mentioning two aspects of this:
Self-evidently, the way to overcome these difficulties is through a feed-back process of iteration and self-education. For example, the organisation can use workshops to address the challenges, taking what emerges from this process to modify its views. This process will, in time, overcome most of the blocks described above.
We have already noted that the 'knowledge base' has a branch which leads both to and from the operational area, in which local judgements about balances are to be made. The people who are close to customers, who are managing operational matters or who have oversight on projects know a great deal about their field. However, what they know is not always easy to access. Such people may find it hard to enter into the style in which debate of this sort may be carried out. They may resent the redirection of their time and that of their subordinates. When the issue is properly framed, however, quite the opposite often proves to be the case: they find discussion liberating, exciting and helpful in their core task. It is almost always necessary to translate the issue into the context in which the individual feels at home.
If a member of a consumer focus group is asked - without warning - to think of a new labour saving device, they will tend to look blank. If they are first taken through the changing nature of how meal preparation has changed, and are then asked to focus on improving one small part of the overall process, they may often come up with a good idea. If, in addition, they are also presented with a relevant but partly baked idea, then they will almost certainly have useful improvements to suggest. The implication of this is, however, a considerable amount of work. It would, for example, be very reasonable to ask sales people about the best way to position the changing brand. Those working with them would have to know enough about the topic to brief the team on those areas where key insights and choices are to be found. They would need examples, war stories from other companies, step-by-step procedures and - perhaps - ways of visualising what is proposed. Some organisations employ cartoonists for just such a process. Others offer a sort of toy box, from which people can select those items which seem to them to exemplify the brand values that they would like to develop.
We passed quickly over one 'cloud', that in the upper central area. This links the knowledge base with the box in which new, complex issues are debated at the level of the organisation as a whole. The activities which occur under this heading are sketched in the box: they include, for example, understanding the business environment.
Figure 2: The chief flows associated with commercial strategic management.
Such discussions, expanded by inputs from many parts of Figure 1, may be expected to generate options for change. Such options are not, however, statements of intent, but rather an analysis of the chief drivers and competitive forces which set the industry logic, the competences and values which the organisation can deploy and the consequent dilemmas which it faces: should it, for example, seek growth or not? What will fill the gap in its profit portfolio in a decade's time? How can younger managers be motivated to stay in the firm and grow with it? The answers to these dilemmas come from a wide range of potential sources: from the general knowledge base and from ideas implicit in projects which are now seen as internally viable by their proponents, from deals created at the operational focus and from internal restructuring. As Professor Mintzberg remarks, one can see "strategy" as the history or track record of consistent behaviour in an adaptive organisation, not as a document written down before the event. Chance favours the prepared mind, and prepared minds undertake a myriad of unexpected things, which often all together create a direction and a new business logic.
We have so far developed a partial audit of the components within a strategy process. Such a process is, necessarily, that which is happening in the background when people feel that there is an overall logic and direction to their organisation. We have noted three situations in which the absence of this dynamic is keenly felt.
Organisations vary in their complexity. The activities which they undertake may have a natural cycle time of weeks or of decades. They may have a single customer or a world wide customer base, may be concerned with their single customer or with a plethora of rival stakeholders, may have one activity or a dozen. It is, therefore, difficult to generate a blueprint for an overall process which is more than generic, for what might work within the checks and balances of an agency of state would seem overly cumbersome in a technology-focused start up. This said, the tiny company and the complex organisation both need to have precisely the same elements in play as were outlined in Figure 1. The small company carries them out tacitly, relying on the common sense and communication amongst its staff, and on their personal, hard won insight into technology and their industry. The large organisation needs something more structured, however, not least as the easy exchange of complex information becomes a major labour when hundreds of people are engaged. Many individuals within a larger organisation may have limited interest in or understanding of the overall agency, at least at the outset. They may have their own agendae, based upon local hierarchy and operational reality, upon their individual careers and the criteria which drive these.
How might one think about this? A naive perspective starts from inspirational goals, filtering this down into tactics. Others prefer to avoid direction altogether, rewarding things which 'feel right' and managing through financial and related results. More complex structures note the independent time cycles of the three areas which generate strategic concern, offering a three layered structure. In this the diffuse, general issues are addressed in their own cycle, often with a two to five year period to it or driven, perhaps, by irregular bursts of attention. The business planning processes operate within their own isolated and usually annual procedure. Operating unit plans are set in a framework which iterates within and is driven by the annual planning and reporting cycles. Whilst this is a common sense approach which is followed in many large organisations, it does have a number of deficiencies. It does not, for example, offer a role for the internal network or the knowledge base. It has little to say about change management or internal communications. Indeed, it assumes that 'line' activities are so routine as to be ignored entirely.
Figure 2 overleaf appears at first glance as a churning bewilderment. It is, however, very much less complex than are many of the process control flows, project plans or other structures which abound in practice. It is best thought of as being three closely interwoven processes, which are then shown as grey rings on Figure 3. (Figure 3 is otherwise identical with Figure 2.)
The three grey loops define the general bounds of the activities which, when they fail, give rise to the three areas of strategic disquiet with which we began. They are directly compatible with the boxes on Figure 1, and most of the issues located in the vague connecting clouds on that figure are now set in context in the chart. The upper loop, therefore, addresses the means of debating new, complex issues to which that figure referred. It includes, however, the overall synthesis of matters such as the nature of the business environment, generating options for adaptation and change. The loop on the lower left is chiefly concerned with local judgement about operational balance and renewal. The range of concerns which are involved go far beyond the usual operational remit. The third loop, on the lower right, addresses the issues of co-ordination within the multi-layered internal network. The matters that it handles are chiefly focused upon resource flows and on the financial and other forms of asset that the organisation should protect, develop and husband.
Figure 3: Three centres of activity within the complexity of Figure 2.
We have, therefore, begun to name the specific elements which lie behind these three areas and the relationship which they have with each other. The section which follows identifies the key inputs and outputs of the stages of this process, arriving at a generic map of a minimal process of strategic management. We shall find this to be more than a simple bolt on to traditional management techniques, although no more complex than, shall we say, a quality management program. In the closing section of this paper we shall then look at the most common pathologies which, as we have seen, give rise to the complaint that the organisation 'has no strategy'.
The risk to which the organisation is exposed and its relative financial performance, as compared to similar portfolios of activity, are important variables in deciding the approaches to be made to financing. The balance ought to set out explicitly the discount rate against which the cash flow of individual projects should be judged. Indeed, the cost of capital to the organisation ought to set - and, in publicly quoted organisations eventually does come to set - a minimum discount rate, which is then augmented by any additional uncertainty which is thought to be latent in the project. Public sector expenditure has explicit screening rates and, on occasions, undergoes procedures such as market testing which are intended to create equivalent common criteria. Necessary expenditure which does not meet the cost of capital - such as regulatory requirements or 'strategic' expenditure - has an opportunity cost when resources are scarce, as better projects are deferred. Activities in the portfolio which consistently fail to meet the risk weighted cost of capital destroy shareholder value. Further investment in them is usually met with dubiety by the market. Activities which increase returns - or reduce risk - are, by contrast, greeted with enthusiasm, often expressing itself in ways which actually reduces the cost of capital and allows the organisation cheaper financing. Managing this situation is, therefore, an often critically important part of the strategic cycle, and done which combines abstract and objective criteria with aims and ambitions which the organisation sets for itself. These nuances, therefore, set many of the bounds within which the choices about the portfolio have to be made. They are insufficient to set all of them, however, and the third ring, shown in the upper part of Figure 3, contributes the logic which guides this. We come to this in a few paragraphs.
Let us break into Figure 2 by way of the lower right hand ring, as sketched in Figure 3. Figure 4, which is shown below, cuts this segment out of the complexity of these two figures and shows the area of interest in isolation. Operating units produce financial results. These are, for the main, accompanied by proposals for action and investment. The aggregate of these are somehow consolidated and the resource flows are quantified. Virtually every organisation does this, not least to assess the prospective source and disposition of funds. At a more detailed level, most have to make explicit choices about how much resource is to be used as investment, as reserves, as payment to stakeholders in the form of wages, dividends and improved quality. Some organisations also consider the people, knowledge, brand and other intangibles which they may need in order to proceed. Clearly, whilst the financial variables can be considered in virtual isolation, the broader matters cannot. We come to how these are addressed in a moment.
Figure 4: The "portfolio" component of Figure 2/3.
An additional factor which is, however, carried across from the 'operational' area of concern is that many choices are circumscribed by the inertia of the system under consideration. It may simply take too long to carry out some of the options for them to be viable. It is also commonly the case that past investments, political promises or consumer expectations predetermine what can or cannot be done. In capital intensive industries, for example, maintenance and replacement costs may eat up half or more of the proposed investment budget. Regulatory requirements may further limit the amount of cash which can be spent on new projects.
From these considerations emerge, however, both a range of approved projects (of which more in a moment) and an expenditure plan. This may refer only to the forthcoming year, but is - in organisations of any scale - an attempt to look forward to the sources of income and the expenditure which can be expected to occur in the next 3-7 years. The income projections depend, of course, on what the individual operating units have anticipated, on what central functions such as treasury and trading may expect to offer, all - it is hoped - subject to critical review by suitable scrutineers. The nature of the portfolio under this plan may change and with it, the operational risk which is expected. Both the returns which are foreseen and the measures which are designed to abate the risks can be the focus of communications aimed at the external stakeholders of the organisations, such as shareholders and regulators, pressure groups, customers and other independent scrutineers.
As has already been mentioned, this "portfolio" loop draws upon some formal statement of corporate targets. This is generated from considerations which inform the upper loop, which we have yet to explore. This statement will, however, consist of numerical criteria such as returns on investment. It may contain decisions about the shape of the portfolio of assets which the organisation holds or intends to hold, both geographically and as defined by operational segmentation: for example, more in Asia, less in car leasing. More ambitious criteria may, for example, suggest what kinds of people the organisation should employ. These last are, of course, only a meaningful part of this process insofar as they can be measured and choices can be made about them. Those charged with managing the assessment process will, in the course of events, hold discussions with senior management. There will, inevitably, be 'central adjustments' to the aggregate figures, reflecting the judgement that these people may have as to the credibility of individual unit plans. They may also make seemingly arbitrary interventions over projects and other proposals, perhaps so as to capture these general areas of intent.
Figure 5: The "operational" aspects of Figure 2/3.
Many lines flow out from the portfolio-related procedures to the loop, shown on the lower left of Figures 2 and 3, which is concerned with operating unit performance. This section is shown as a 'cut out' from those figures, as Figure 3 above. The results which a unit generates are usually benchmarked in a number of ways: against others, against the targets set for it and against the rates of return achieved in similar activities. The issue of shareholder value (and of benchmarked rates of return) permeates much of the lower part of this Figure.
The organisation itself may, however, apply distinctive criteria, perhaps on top of, perhaps in isolation from these considerations. The outcome of the application of such criteria, of judgement about the credibility of the operating unit as a whole and a range of more or less explicit 'corporate' considerations leaves the business unit with a range of approved projects, with criteria and targets, with benchmarks that it will have to track. These set an important range of "truths" against which it has to operate.
We noted in an earlier section how business units benefit from what we called 'book ends', the limits to local discretion which form a tacit agreement across the firm as to its natural trade offs. For example, attitudes to employee safety, to the balance between cost and quality and the like are sometimes distinct as between the operating units of a major organisation. If this distinction becomes too great, however, then unity of the organisation as a whole may be challenged. The way that these "book ended" values are generated is something that we shall examine in a little while.
Two other factors flow in to define the reality within which the operating unit is to function. The first are those sets of activities by which it is scrutinised for quality, performance, safety and other criteria which have been set out for it. The second, informed by broad analysis of the operating environment and the logic of the sector in which the organisation as a whole operates, generates a sense of external limits and potential. There are, perhaps, three central elements of this:
These 'truths' and considerations deliver what might be called the operating unit logic. This set of ideas, values, facts and suppositions define how the unit managers and others interact with the internal knowledge base of the firm - perhaps specifying research targets- and how they are able to pick up good ideas which may be encountered outside of the organisation. Chance does indeed favour the prepared mind. They are also in a position to work with suppliers and with customers, jointly developing useful possibilities.
These ideas and possibilities, deals and joint ventures, informal networks and formally commissioned work all flow into a range of adaptive measures which the unit can put in place. Some of these are dramatic and discontinuous, but the huge preponderance are gradual, accretional changes which - provided that there is a unifying sense of direction and logic behind them - will all lead in roughly the same direction. The operating unit will, through many small activities, gradually but purposefully move to a more adaptive position. It will, of course, be able to do this to the exact degree to which it is enabled by clear logic, by delegated authority, by a flow of appropriate, approved projects and by the absence of inertia in key aspects of the operating environment. Indeed, it is by the rethinking of such barriers - or their removal by liberalisation, rational regulation or technological change - that many formerly stable agencies are sunk.
Figure 6: The "direction setting" loop in Figures 2/3.
The upper loop, isolated above in Figure 6, also centres itself around the concept of adaptive options. To what an organisation should be adapting itself is set by most of the things flowing in from the left. The tools by which it adapts are, essentially, threefold:
The adaptive options do not, however, arise spontaneously: they have to be created. Many of the considerations which apply in the lower left loop, operations, also apply here. On the upper right of the Figure 2, three factors interact: the operating environment, the industry or sector logic and the attitudes set by the external stakeholders of the organisation. Clearly, these elements are not independent and they are, therefore, enclosed in a grey cloud to symbolise this.
Stakeholders can be addressed directly, whilst neither of the other two elements in the figure are open to direct appeal. This is important, for the way in which the shareholders see a company, for example, sets its cost of capital, which in turn sets the things which it can and cannot do and the time horizons within which it works. A company with a good story to tell, for example, may be relieved of the need to pay significant dividends, because shareholders believe that its management can do better things with the money than they can acting on their own behalf. A firm which has managed its market volatility - with or without a good story - will, all other things being equal, have a lower pay out ratio than a firm with a high beta. It gains real competitive advantage as a result of this. Similarly, a firm which maintains a fine brand presence, or a Government department that is seen to be a stable and well-considered custodian operates with a stock of good will that will carry it across the shoals on which less well-prepared organisations founder.
The operating environment is often thought of as being little more than an assortment of macroeconomic variables which together define consumer expenditure and thus market size. Exchange rates, levels of taxation and a variety of regulatory issues tend to round out this perspective. Anyone with an economic training, however, will note that these variables interact with each other, presenting as syndromes, rather than symptoms. It is impossible to predict the outcome of any one variable, but one can with some confidence predict the range implied by alternative syndromes. By catching the syndrome as it develops, one can get something of a handle on the outcome.
Discontinuous change - such as new legislation, new administration - is often less unheralded than it surprises those who did not know where to look. Every industry or sector of organised activity has an internal logic to it. Personal computers were once highly profitable because there were supply bottlenecks that restricted manufacture to a few firms. Software, by contrast, was relatively simple, the domain of individual programmers. This logic changed, as the supply bottlenecks eroded and as customers were prepared to buy from smaller companies. Faster processing power and cheaper hardware shifted the emphasis to software, which is now hugely profitable but generated by the co-ordination of huge teams, through the provision of support and through massive distribution channels. The software language called Java may be about to change this structure for the third time in a generation. Those who understand the changing logic of the sector know where to look for change. Those who knew, in 1985, that the only reason that the price of oil was high because OPEC was restricting supply - but that their financial capacity to continue to do this was hugely stretched - were also able to foresee at least the possibility of a major price fall. They could take anticipatory action, and avoid corporate panic when sudden events arose.
Oversight on the interaction between the business logic and the operating environment is a critical factor, therefore, in the generation of adaptive options. These interactions can be seen as being a mixture of syndromes - whereby things move together presenting, perhaps, a scenario view of the world - and of discontinuous change in critical variables. The breakdown of oligopoly control on RAM manufacture was, for example, a discontinuous change for the PC industry. A catalyst that could take natural gas to a transportable liquid at the well head would be a similar discontinuity for the energy industry. Typically, however, most change is continuous: consumers may be radically different in what they expect and seek after a decade has passed. This occurs through a ratchet effect, where ever-more optimised and convenient retail outlets set, for example, a standard which is noticed only where it is suddenly absent, such as when on holiday. Major alarms can cause them to reject certain product lines, but wholesale shifts of behaviour - such as ceasing to smoke or eating saturated fats - are usually slow, predictable processes.
One understands these syndromes and the chief sources of discontinuous change through managed analysis. One understands stakeholder interests in much the same way: through analysis, data collection, intuition born of long association and by asking those involved how they feel. This leads to the generation of "adaptive options", as described in the Figure 2
Adaptive options also emerge from active attempts to consult the knowledge base which the organisation can access. There are two groups of individuals who have much to contribute to this but who are often excluded from it:
One important source of insight can come from the operating units. The managers of these, taken out of their daily context and set in the broader framework of the organisation as a whole, have much to contribute and much to gain. Their contribution is self-evident, for these are the people with the hand-on knowledge of the chief stakeholders and the unit-level business logic. They have much to gain in two ways. The first of these comes from learning to think in what is often an unfamiliar mode: that of the general analyst, trying to see beyond the tactical details to the broader structure. These are skills which most have no opportunity to gain and which, once acquired and practised, can stand them in good stead in the 'operational' loop. The second area in which they gain is, of course, in becoming familiar with the overall logic of the organisation and thus being in a position to frame their proposals in terms which make sense within it. The 'book end' issue (of balancing common dilemmas) can often be resolved through such dialogue. They have a chance to add their perspective to the options under development, suggesting that these will be relevant to their unit when they emerge. They also have a chance both to build networks across the organisation but also to seek help with ideas and options which may surface at the operating unit level, but need development before being brought forward for scrutiny.
The second source of insight lies in bringing together all of those who might contribute - marketers and scientists, finance people and operations specialists - in seeking innovative solutions to issues identified at the corporate level. Many of these will draw on a subset of these, as when the issues are, for example, connected with under-performance in the portfolio. Very similar groups need to come together to address business unit options (as we have described) and at the corporate level, the tasks are as much to define the questions that need to be asked as much as to answer them. The fruitful areas of debate are, however, those which centre around the industry logic and the reaction of the corporation as a whole to this. A team of marketers, researchers and cost engineers from a firm which makes electronic parts for cars who are told that, let us say, car manufacturers will be unable to sell vehicles which do not meet certain emission criteria, needs to decide in which way to shift its own portfolio. They have had a useful question posed to them and they might want to develop thoughts with vehicle manufacturers, but they might also think about alternative uses for the distinctive competence of the firm.
We have missed one important feed into the development of adaptive options, however, and this has just been touched upon. Figure 2 shows that the facts of the portfolio (and corporate targets, certainly the business plan) can lead to an analysis of the assets and liabilities, capabilities and competence which the organisation currently deploys and may in prospect deploy. The gaps between what is needed and what exists, now and in prospect, are highlighted by such an assessment. Analysis can point to everything from human resource needs to environmental liabilities, from the portfolio of operational and financial risk to which the organisation is exposed and from the high performance "stars" in the organisation to the beached assets which it is impossible to close or sell. A very important (but difficult) form of assessment is, however, to register what the organisation can do that makes it distinctive. Some of these sources of distinctiveness are to do with intangibles - such as knowledge, team work, organisation - whist others are more concrete, being patents, distribution systems, data bases, low cost facilities, brand and the like.
These facts about the capability of the organisation mesh with the distinct set of facts which are concerned with the industry or sector and its operating environment, something which we discussed earlier. Indeed, it is arguable that without a good insight into the industry logic, there is not much that can usefully be done to assess the distinctive capabilities of the firm. In the presence of both of these, however, and subject to the sorts of consultation that we have already discussed, the organisation is in a position to articulate a guiding logic. Such a statement also needs to take account of shareholder value and stakeholder interests, a matter which we have also already discussed. These statements are transitional and temporary, designed to stand until something better comes from the seeds which they sow. When written down or otherwise articulated - as opposed to being shared across a team - the statement tends to be along the lines that: "this is the way that we see the situation; and from this, here are the major choices which have to be made. We see the following ill-understood areas to be of great importance. They need to be explored. Here, by contrast, are positions which are either fixed by hard fact or upon which we have decided to take a stand."
The guiding logic (rather than any statement of it) leads to three outcomes.
It will be noted that these three outcomes offer a solution to each of the three areas of difficulty with which we began.
The swirling system of Figure 2 (or the vague aspirations of Figure 1) tells us what needs to be done, but not how to do it. The three loops - set out in Figure 3, and subsequently defined in the text - are, however, the basis of how much of this system can be operationalised. The three loops, as the reader will recall, are as follows:
The corporate planning loop feeds into the third grand loop. This is concerned with oversight upon the internal logic of the sector, with the realities which the organisation itself faces within this and with the options which this presents. This loop draws on three distinct inputs and, in turn, generates three outputs. The inputs are conceptually straightforward, although they require considerable and repeated work if they are to be built up and maintained.
The three following outputs are, by contrast, relatively simple to develop once the underpinning work has been done; but each generates a very powerful impact. There is a fourth output, which has already been discussed, but which is indirect: the results of sharing these processes through the organisation leads, as we have seen in (3) above, to improved communication, to the confidence to assert ideas about change, to the more widely distributed skills and habits of thought which are associated with strategic management.
We have named three large processes and pointed to some of the requirements upon them and some of the difficulties and limitations which they face. We can begin to name some of the way stations which each such process has to follow, noting the connections which exist between these.
Figure 7 draws upon the inputs and outputs that we have described in this section. It links these together, showing how they flow into each other. What the figure does not show - and what no diagram or, indeed, planning system can capture, however - are the informal links which lie across and around these steps. In addition, many of the inputs and outputs - and virtually all of the key processes - involve considerable iteration. One way arrows greatly oversimplify what actually may occur in typical practice. A caveat is that none of these activities are the exclusive purview of any one box on the typical organisation diagram, particularly in organisations of any size that wish to operate strategically. Senior management, for example, will often want to intervene in early stages of the financial consolidation, which may be the formal interest of the finance department and the operating units. Trapping activities within such boxes may lead directly to the three strategic gaps with which this paper began.
Figure 7: The flows associated with the deliverables which the text discusses.
Many of the processes are decoupled in time: they have different natural cycles and need to interact only occasionally. This paper makes no attempt to prescribe what the implementation of this might look like, as it will differ very considerably between the public and private sector, between large and small activities and between agencies which have different operating environments. This said, the exploration of the operating environment can, for example, typically afford take a gradualist approach. Operational tuning, by contrast, is usually immediate in its effects. In general, the operational loop that defines the operating logic and brings forward formal proposals to meet this typically operates on an annual cycle, ideally with a forward horizon at least equivalent to the development time of a capital investment. The pathway that consolidates results may, in fact, operate quarterly, but the planning aspects of this - looking forward, considering the overall shape of the portfolio, testing whether targets are being met - is, typically, an annual or sometime biennial event.
Informed flexibility creates the grounds for adaptability. This said, the importance of a recognised and predictable system by which to address these issues cannot, however, be over-emphasised. It is reasonably easy to organise such a system: many use a biennial cycle for the items which flow around the "articulation of a shared logic" on Figure 7, such that alternate years bring forward a sweeping review of the operating environment and of the options for change which parallel analysis may suggest. This system feeds the annual production of corporate targets and criteria, itself based on an annual assessment of the issues - such as cash flow - outlined on the left of Figure 7. The operating units, too, need to focus upon an annual cycle of results and budgets, which lead into an assessment process, followed by the overall consolidation. The parallel and often episodic business of project approval and tactical manoeuvre may well lie outside of this formal process, but needs to be captured within its findings and the data which it reports.
Most organisations have, therefore, an annual appraisal, budget and consolidation process. Most take lessons learned and apply these to annual criteria and targets, either issued at the corporate level and interpreted into the frame of reference of the operating units or, as is sometimes the case, set by the operating units individually or, upon occasion, by the operating units for themselves. Either way, clarity and accountability are key elements in generating action.
Supplementing this, some organisations have a biennial system or some episodic spurts of analysis upon which to draw when supplementing operating results with operating logic. The key, here, lies less in what is produced than in the shared awareness amongst all of those who are involved as to what an answer would look like. This is hard to spell out: there are a plethora of tools - rent analysis, competitor analysis, cost and process profiling, customer focus, stakeholder analysis, economic and social considerations - all of which have something to contribute. The key issue is, however, less how things are to be done and more what the nature of an outcome would satisfy.
People with a science background usually take easily to the answer of the latter issue. Just as a scientist tries to understand the factors which are operating in a given domain - the plants and animals that exist in an ecology, for example - so the assessment of the operating logic is also trying to define what matters. In the case of the ecology, however, many of the agents are self-evident to the scientist. This is, however, far from the case where the agencies are often intangible. Many of the tools by which to grapple with these issues are, therefore, ways of seeing: of seeing economic and social agents, of seeing competitors and technologies, of perceiving the web of interactions which may exist between all of these. Once this web is recognised, subjected to critique and in other ways tested for robustness, it can be made more accessible to busy people by consolidation into, for example, scenarios, case studies which table poignant examples, workshops that investigate the implications of what has been found and the like.
Analysis is not enough, however, for two additional things need to be pulled out from the complexity. One of these is an inventory of the practical things which the organisation can do about these issues. The other is an audit of the match between the organisation's portfolio of assets and liabilities and the general challenges that it faces. It is here, in particular, that the operating unit skills and the general research base of the organisation have much to contribute. The aim is threefold:
The outcome of some parts of this may be embodied in a document. The document may be important for the dialogue which its composition forced upon people. It is a mistake to believe that the written word is "a strategy" or that one can write down a mission or a vision and expect this to mean something to anyone who is not immersed in the process which gave it birth. The vision statement of an island ecology - or a species of tree within it - would be as banal as the typical product of a corporate planning department. The realities of adaptive survival, however, are greatly enhanced when one understands something of what is going on, which is why hairless humans, devoid of poison, fang or claw, emerged as the planet's top predator.
There are, clearly, a myriad of ways in which a complex system can fail to operate, not the least of which is the absence of several key components of it from the operational landscape. Corporate Alzheimer's may well most affect those organisations which have been through a process of restructuring that has focused exclusively on getting the present right, with little consideration given to further change and development. Indeed, redesigning the mechanisms which worked through informal channels and social interaction is becoming a significant consultancy practice.
This said, many organisations do make an attempt to undertake every aspect of the processes outlined in Figure 2 and in Figure 7. They do this, however, without any sense of how these elements are to fit together, either tactically or in respect of what a useful synthesis would look like. The various chunks of activity are turned into documents, perhaps presented here and there, and often distilled into bland, generic messages. The chief understanding that could have been gained comes, however, from sharing in the process of development of the idea - something far more complex than simply 'buying into' what has been said - and when such interaction is absent, then both the richness of the message and its impact are vitiated.
The chief feature of this pathology is twofold. The first is a diffuse sense, throughout the organisation, that "we do not have a strategy", which takes us back to the introductory section of this text. We discuss this in a moment. The second, however, is a defensive stance on the part of senior managers, who can point to processes, targets, vision statements and all of the other paraphernalia: "we do have a strategy. It is just that you are too junior / ill informed / stupid to recognise it as such." As the critics seldom see the problem as one of integration, they are unable to rebut this; even when they do, the issues of what is wrong are too complex to be captured in a simple message. Senior managers, in this pathology, are simply unaware of what is involved in "articulating a shared logic" (Figure 7) and, for want of a model, see no reason to change what is on offer.
A subset of this pathology is that of an exclusively numerical focus or a monomania about one - out of many possible - dimensions which must be satisfied. The concept of "parenting" is, for example, the results of taking the idea of shareholder value to its particular logical conclusions. If the sole concern of an organisation is to generate the highest possible return-to-risk ratio on its assets, then the sole task of a head office must be to oversee this. It serves as a cold parent to its dependent business units, which are to be seen as tradable assets, having risk that can be mitigated and returns to be increased. Assets are traded and resources are allocated in strict accordance with the implications of shareholder value. All of the issues that this text has addressed - such as the generation of shared understanding of the issues and opportunities- are then seen as subsets of this problem. Clearly, it is hard to make an absolute case against this, insofar as it is far better to have a parenting approach than to have no attempt to manage portfolio. Much that it proposes is perfectly on target, not least where shareholder value has been neglected. It is, however, an insufficient response to the complexities of the real world, particularly in respect of the need for the firm to differentiate itself in an era of convergence and commoditisation. Applied as a formula to a dozen companies, the end product would be twelve organisations far more like each other than they were at the outset. One needs a more complex and idiosyncratic set of tools, used by aware managers with a sense of discrimination and balance.
Another subset of the problem is that of mistaking a tool for a solution. The Boston Consulting Group offered their famous 'menagerie' matrix as their prime product for nearly a decade: all that was corporate governance could, by implication, be reduced to a simple taxonomy of the business units as promising or disadvantaged, cash absorbing or cash generating and, once this was done, to stereotyped recipes by which to address the configurations which emerged. Shareholder value, information networks, customer focus, supply chain integration and just-in-time, re-engineering, competence analysis, out sourcing, managed core migration, benchmarking, de-layering, total quality management are, similarly, examples of tools by which analysis is carried out, frameworks against which results are judged or mechanisms by which a particular set of decisions are enacted. They inform and they help as agents, but they do not replace the balanced choices which informed minds, working in concert, are able to deliver.
The chief symptoms of an organisation which lacks the features of strategic management are captured in the land of Dilbert. Jargon abounds, but nobody is quite sure what the words mean. Aspirations and implementation never seem to be coupled together. Decision-taking appears arbitrary. A drift into joint denial - whereby the management group as a whole refuses to recognise problems as being significant - has been noted in many organisations under stress, particularly in a military context. Office politics - and massaging the system - usually become of increasing importance to achieving results, and all projects need senior stewards, who drive them over obstacles and occluded ground through personal championship. Critique becomes, therefore, grounds for personal offence.
Above all, however, there is a loss of potential: those who could contribute do not know what is wanted of them. They have no legitimate framework in which to make such a contribution and they are seldom developed in ways that would let them contribute. The organisation is dominated by crisis management, not least because the instruments with which to perceive the operating environment have not been put in place. Managers lack a common language of debate, for the operational logic is seen only partly or is occult. The tendency to retreat to baronies, defended at all costs, or to systems of impersonal management by ratio, whereby the difficult questions are swept away, both fragment what should be a rational, corporate whole.
We began this paper by defining three areas in which the absence of strategy is most painfully noted. These were:
a: At the operational level.
b: Within the procedures by which the portfolio was managed and business plans approved.
c: At the level at which the broad logic of the organisation and the options which it could follow were tabled and discussed.
In the absence of the third of these, the other two areas of concern are thrown into disarray. As we have already noted, they can be managed by arbitrary targets and benchmarked rates of return, but they cannot act purposefully in ways which lead to a cohesive, organisation-wide response. The organisation can, therefore, set about curing glaring faults and pursuing obvious virtues, but the higher functions of adaptive flexibility and change are quite beyond its capabilitites. It is lobotomised.
Many organisations may, by contrast, seek out these higher functions. We note, however, that to achieve this, they need to have both (a) and (b) in place. Many organisations, by contrast, see high-order strategy as something to be done as a bolt-on task for senior management, occasionally briefed by consultants and staff workers. They may go about this either in what we have suggested to be a rational order, or by working back from a preferred option to an interpretation of the business environment and a sheaf of lobby proposals to, for example, Government, to make the world a fit place for them.
However well or badly the delivery of (c) is carried out, it is meaningless if there are no useful handles by which it can be interpreted into operational change. That is, there is a syndrome in which attempts at (c) are made, but for lack of - in particular - (b), the system fails to reinforce these signals and the procedure is seen to be useless. It is then usually dropped, as discredited.
It is extremely unusual that the primary failure will be found in (a). That is, the organisation has an excellent and evolving overview, has set up consultative and directive mechanisms which re-enforce this, but despite all of this, the operating units somehow fail to respond. There can be instances - such as periods of rapid, choppy change, or after a change in management - when this may temporarily be the case and it may be that some units are so badly managed for it always to be their particular case. In both instances, the route to betterment is clear.
This analysis of pathologies is, without doubt, far from complete. The point which this section tries to make is, however, the significance of the entire process, rather than the way stations within it. An excellent component of the overall system is a fine place from which to build, but it cannot of itself deliver anything useful until the other elements are in place, informally or through managed procedures. The conception of what strategic management strives to achieve is, however, paramount; for as long as senior staff believe that a 'strategy' is a set of ratios or a working document (as opposed to a dynamic process of structured debate), then no amount of process or analysis will take the organisation to fulfil its potential.
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