The Future at the Crossroads: Recognizing and Overcoming Strategic Path Dependency
A comment by Alexander Zimmermann,
CEO & Partner of SOLYP Informatik GmbH
We must learn from the past in order to shape our future successfully, they say. But are we not slaves of the past rather than its disciples? Every decision we take determines the tomorrow: With a law degree I'll never be a physician, even if later on my happiness will depend on the new calling.
In marketing, it is called successful “lock-in” when a customer, for instance, can purchase only certain cartridges for a printer. In economics, the concept of path dependency describes the self-reinforcing effects of strategic choices that have been taken. If these turn out to be incorrect later on, it often takes lots of resources to undo them, if at all possible...
A flexible and solid corporate strategy should be as path-independent as possible in order to allow for re-adjustments and to ensure the lasting success of the company. In my 7th and final blog post on the success factors of strategy work, I would like to focus on the future.
Limited Resources – High Time and Cost Expenditure
All resources are limited. Nevertheless, they need to be developed for the company's success, if such a strategic decision was made. Whether it is raw materials, foreign markets, alternative distribution channels, "improved human capital," or new subsidiaries – mobilizing these resources requires a straight strategy process and costs time and money.
Jörg Pelk, Head of Strategic Planning, describes the strategy work of Winkelmann Powertrain Components GmbH + Co. KG in exactly these areas:
“In successful companies, strategic planning is, more than ever, one of the pillars ensuring the robustness of the mid- and long-term future activities. Process-based planning that takes into account internal know-how and the results of the external corporate environment analysis—differentiated according to qualitative and quantitative variables—forms the basis for taking future-relevant, market- and customer-oriented decisions regarding strategy, sales, development, or human resources.”
At first glance, Pelk’s statement sounds like an ideal world of strategic planning; at second glance, it becomes apparent which responsibility the strategy process assumes: it needs to manage the "long-term future activities" of the company and take "future-relevant (...) decisions." With the high costs of developing limited resources, the strategy process runs the risk of falling into the path dependency trap. The sword of Damocles of the irreversibility of the once chosen path is hanging over the ideal world.
Martin Damm, Head of Corporate Strategy & Development, specifies the strategy process for Otto Group GmbH&Co.:
"For the Otto Group, the core objective is to strategically manage the decentralized group companies. The results of decentralized strategy work and budget planning are collected centrally enabling the derivation of portfolio-strategic and operational issues; thus, creating the foundation for an effective, overall management. The IT support reduces the complexity of data collection and documentation, creates transparency for the evaluation, and allows for targeted communication of the results. The result is a highly efficient strategic planning process."
Damm accentuates the interplay between "decentralized strategy work" and the central "portfolio-strategic" management of the group companies which prepares market entries, opens up new distribution channels, etc. Again, there is a risk of a strong lock-in once the adopted path is followed.
How can strategists avert the great dangers of path dependency of group-wide, rolled-out strategies? Which tools allow taking into account changing environmental conditions into corporate strategy development enabling strategy to respond to such changes as flexible, agile, and sustainable as possible? The statements of Pelk and Damm already hold the answers to these questions. I would like to take a closer look at this.
Strategy Process as „Infinite“ Resource
Should strategic decisions be kept open as long as possible to avoid any fatal consequences in the future?
No, of course not. In times of rapid market developments, technological quantum leaps, and war for best talent, laissez-faire means entrepreneurial suicide. Rather, what we need is a strategy process which recognizes its own path dependency, reflects on it, and integrates it into the process itself. It's not about pushing decisions on the back burner, but about recognizing and analyzing crucial crossroads of corporate strategy and the supposedly “save paths” they lead into. What should such a strategy process, which reflects on its own path dependency, look like?
Pelk underlines the importance of the "results of the external corporate environment analysis—differentiated according to qualitative and quantitative variables —" to take informed strategic decisions about the future. I’d like to focus on the qualitative variables, so-called soft data, as it is particularly sensitive to environmental influences that can marginalize entire industries.
Soft data is essential for strategic foresight. It helps to detect events that may influence the company's strategy. Like radar, it catches "weak signals" that may have a strong impact on the company's future. Two recent examples: Who would have thought that vegetarianism puts the U.S. fast-food industry under such pressures? Or that the turnaround in energy policy would deconstruct the business model of the European energy giants?
A future-proof strategy process needs to collect such soft data from all strategic business units and link it intelligently to hard data, such as balance sheet figures. Also successful risk management combines qualitative data with quantitative data to enable plausibility checks which help in assessing risks. Only an IT-based strategy process can manage the complexity of this task.
Damm mentions other performance parameters of such a process; I would like to highlight two of them: the reduction of complexity and increased efficiency due to a digital strategy process. Here are two practical examples:
By linking hard and soft data, SWOT analyzes gain new predictive power and allow for a more realistic assessment, for instance, of the levels of competitiveness in certain markets. Thanks to the digital, top-down/bottom-up approach to data collection, as facilitated by SOLYP3 questionnaires, also “soft" assessments, opinions, and forecasts of the decentralized business units are considered and reflected in central corporate strategy. Within the digital strategy process, this allows you to develop detailed scenarios of various environmental conditions, such as a planned market entry.
With an IT-based process, you transform the strategic planning of your organization into an infinite resource, so to speak, that is available to you at any time through the use of your strategic creativity: efficient, agile, and with the highest predictive power. This resource opens up the future for you, which is now in your hands.