As business environments have grown more diverse in recent decades, picking the right approach to strategy for each context has become increasingly important. We believe there are five broad approaches to strategy:
But despite this broadening array of approaches, the process of developing and realizing strategy within most companies follows still the “strategic planning” mostly associated with classical strategy:
An initial direction from the executive team is followed by various kinds of analysis, like market modeling (projecting category growth and future share) and financial forecasting. This process takes some time because ideas have to be analytically verified and consolidated, with the final call made by the executive team. An example is the strategy process in the core business of Mars. As past president Paul Michaels noted, “We plan because we operate in relatively stable markets.” After consultation, plans are set from the top by a small group: “That’s me, the CFO, and a few others.”
Such a planning process is ill-suited to less classical environments – there, other strategy processes are needed:
Experimentation happens in short cycles of testing and picking winners. Key ingredients of the process are the ability to collect and read signals to detect business opportunities; free flow of data throughout the company, enabling teams to identify opportunities with little central supervision; and the culture and organizational mechanisms to enable failures to be easily discontinued and successes to be scaled. Zara enacts its adaptive strategy in this way, identifying emerging trends via real-time market experiments with its clothing styles and making small commitments that can quickly be scaled up.
Imagination works in iterative cycles, taking a starting point – often a desire, or a frustration that a need is not being met – and elaborating it into a worked-out proposal or prototype. In popular stories of imagination, like that of Steve Jobs, this process is assumed to occur in the head of one person. But in fact it is a social process: at Apple, Steve Jobs elaborated his ideas by iterating with Jony Ive and others. Key ingredients of this process are the richness of mental models brought to bear on the initial ideas; a willingness to be patient with ideas still in formation; effective learning from prototypes; and a determination to persist until a market has been created.
When an environment is malleable yet unpredictable – meaning it would be unwise to commit to a long-term visionary effort – an ecosystem or platform-based approach is appropriate. The strategy process here is about supporting effective collaboration to shape an unpredictable environment to the advantage of the company and others whose interests coincide. This requires building a highly responsive organization; Alibaba leads here, aiming to become a self-tuning organization, with “as many operating decisions as possible made by machines fueled by live data” drawn from its ecosystem.
When the environment becomes so harsh that the company’s viability is threatened, immediate corrective actions are required. There is little scope for comprehensive analysis or engagement, internally or externally. Rather, a few critical turnaround initiatives must be driven from the top. An example is American Express in the harsh environment from 2008 to 2009. “First we had to deal with the cost issue...we had to act immediately,” explained then-CEO Ken Chenault, emphasizing the need to analyze the firm’s cost structure as a basis for quick cost-saving decisions, followed by “selectively investing in growth.”
Large companies almost always face multiple business environments, across time or simultaneously in different parts of the organization. Strategy departments cannot just pick one of the processes described above and stick with it – they need to manage all five variants, deploying them across business units as needed.
When the diversity of environments is high (the business faces many kinds of environment at once) but dynamism is low (the set of environments stays the same), it makes sense to run separate strategy processes in parallel, overseen by corporate leadership.
When diversity is low but dynamism is high (the firm faces just one kind of environment, say, but it changes over time), it makes sense to switch processes along with major shifts in the business context. This requires business leaders to regularly reassess the environment and be ready to change the strategy process as needed – even if this involves disruptive top-down interventions in existing ways of working.
In diverse and dynamic situations, top-down management becomes too complex to be tenable. The executive team should instead leave room for business units to self-organize, determining the most suitable strategy process given the environment that each faces at any given time.
Would you like to know more about this topic? The more detailed version of this article can be found on the Boston Consulting Group website.