What happened? What became abundantly clear after 2008 was that what was critical was not to predict the future, but to respond effectively to whatever happened in an inherently unpredictable future. As punches came, and markets were turned on their heads, those rigid strategic plans did not bend with the dysfunction. Academics and consultants went back to the drawing board.
Should your organization still create a strategy? Of course. The key is to understand why traditional strategic planning failed and what it takes to create a quality strategy that effectively coordinates people’s actions toward a common purpose.
Business Is a Complex Phenomenon
Traditional strategic planning dealt with the market as a predictable, complicated phenomenon, but markets are an unpredictable, complex phenomenon. Like the motion of a Swiss watch, stars in a galaxy, or electrons in a microprocessor, traditional strategic planning assumes that with enough data, the market’s movement is predictable. In the 1970s, scientists and mathematicians discovered within chaos theory that the universe has a type of system that is inherently unpredictable: complex systems. Markets are complex systems. Like the diffusion of ink in water or the path of a flock of starlings, they actually cannot be predicted. It is not that complex phenomena are difficult to predict, they are inherently impossible to predict by their chaotic nature.
In complex systems, small unlikely changes have huge system-altering effects. Examples of such complex systems are all around us: immune systems, automobile traffic, global weather and ant colonies. Business executives deal daily with three other complex phenomena: human beings, organizations and markets.
Human beings are a complex phenomenon. On Monday, you say something to your direct report, and it works fantastically. You say the same thing to someone else or to the same person the following month, and they get pissed off and dig in. Put thousands of chaotic human beings into an organization – more complexity. That’s why hugely successful initiatives at one company often fail miserably when brought to another company. A market has multiple organizations cooperating and competing with one another resulting in even more complexity. (Note: it gets worse. Markets are a type of complex system known as a complex adaptive system. Adaptive simply means that the market adapts to the business and the business adapts to the market. If your business makes a move, that alters the market, and vice versa.)
How can we possibly hope to predict what will happen with any certainty?
Emergence: Strategy in a Complex, Unpredictable Market
How do you plan and execute if your people, your organization and the market in which you compete are all complex and unpredictable? The science of complex systems provides the answer: emergence. Complex systems exhibit emergent properties. For instance, geese generally fly in a V formation and hurricanes tend to form in the North Atlantic under the right conditions. Although one cannot predict what will happen, one can shape what emerges over time by setting the initial conditions like a farmer shaping an ecosystem.
Eisenhower and Mike Tyson: Why Traditional Strategic Planning Fell
The problem lies not with strategy, but with traditional strategic planning. Even before the financial crisis, there were murmurs in academia and business that something was wrong. In 1994, management professor Henry Mintzberg said, “Strategic planning is not strategic thinking. Indeed, strategic planning often spoils strategic thinking, causing managers to confuse real vision with the manipulation of numbers.”
In traditional strategic planning, the purpose of the plan is to analyze, understand and predict the landscape well enough to figure out how to get from here to there, where there equals profitable winning in a competitive playing field. The fundamental commitment of traditional strategic planning is to know, understand and predict. The paradigm is to identify there (a future state) and design a plan to get from here (the present state) to there.
Advances in analysis and computing made it possible to create more and more precise forecasts, and people became fixated on coming up with better forecasts and more precise plans. The best companies in the world were thought to be those who created the most-researched plans and then effectively and efficiently tracked and executed against those plans.
Dazzled by the ability to accurately forecast and track progress using new analytics, many forgot the fundamental rule of planning: it is the planning that is important, not the plan. President Dwight Eisenhower, an expert in the practice of strategy, told a conference of defense industry executives in 1957 that “Plans are worthless, but planning is everything. There is a very great distinction because when you are planning for an emergency you must start with this one thing: the very definition of ‘emergency’ is that it is unexpected, therefore it is not going to happen the way you are planning. So, the first thing you do is to take all the plans off the top shelf and throw them out the window and start once more. But if you haven’t been planning you can’t start to work, intelligently at least.”
Good management means sticking to the plan, but when the unexpected happens, as it did in 2008, sticking to the plan hurts, not helps. As the great American philosopher and pugilist Mike Tyson quipped, “Everyone has a plan ‘till they get punched in the mouth.” What became apparent in 2008 was that the future was too difficult to predict, and trying to do so could leave an organization at a disadvantage.
As Accenture’s Walt Shill said, “Corporate clients decided that increased flexibility and accelerated decision making are much more important than simply predicting the future.” In the same article, the Wall Street Journal reported the following:
“During the recession, as business forecasts based on seemingly plausible swings in sales smacked up against reality, executives discovered that strategic planning doesn’t always work … For Spartan Motors Inc., a maker of specialty vehicles, the recession triggered a massive overhaul of strategic planning. Officials used to draft a one-year strategic plan and a three-year financial plan and then review each one every quarter. Chief Executive John Sztykiel says, “That relatively inflexible method bears some of the blame for Spartan’s sharp drop in sales and gross profit during the first nine months of 2009.” The Charlotte, Mich., manufacturer didn’t respond quickly enough to shifting demand.”
The main point: companies with excellent strategic plans were slower to respond and adapt when the future did not follow their plans. Sticking to the plan actually put them at a disadvantage, flat-footed in the face of changing circumstances.
Setting strategy in a complex world is not about deciding what to do. Strategy is about designing a framework that guides how to think about what to do in any circumstance.
Strategic Frame: A Framework for Making Choices and Decisions
Such a strategic frame is a radical departure from traditional strategic planning, but prepares an organization should it be “punched in the mouth.” It accounts for what it takes to fulfill on intent in a complex adaptive system. The development of a strategic frame offers an effective method for establishing a compelling future for an enterprise and, at the same time, elevates organizational performance in the present. With a strategic frame, all employees can be engaged in and contributing to a bold, exciting, challenging future, without being tied to a fixed, linear path. A strategic frame deals with the future as it is – un-knowable and an emergent phenomenon. The strategic frame establishes the conditions for the desired future to emerge. As the future unfolds, the frame gives management and other leaders a place to stand and a lens through which to view real-world dynamics to quickly make choices and decisions for both the near- and long-term.
In designing a strategic frame, the leaders of an organization design and align on the answers to these critical questions:
• What is our purpose? For what purpose do we exist?
• What promises must we keep to specific stakeholders as we pursue our intentions?
• On what trends, beliefs, and perspectives are we betting our future? How will we monitor these?
• Whom do we serve? If they did not choose us, whom would they choose? With what assets do we have to compete? What is our investment level for these assets? Which assets are we missing that might give us a competitive advantage?
• What is our ambition? To what strategic out comes are we committed? What are our interim objectives?
• What specific projects and practices do we need to develop to fulfill our objectives?
• What sort of culture would support and pull for the fulfillment of our objectives?
The result? A strategic frame that provides context for making powerful and appropriate choices and decisions—strategy implementation at every level of the enterprise (annually in an operating plan, but also ad hoc with quick, immediate and intelligent responses) as the future emerges—allowing the enterprise to accomplish its objectives while navigating changing seas.
What Is Strategy?
The term strategy is often misused in everyday language. We talk about which strategies to use to accomplish outcomes, but those are tactics. A strategy is anoutcome (or series of outcomes) that, if realized, represents the fulfillment of the organization’s purpose. Put simply, strategy is how the organization defines winning. Classic examples include Microsoft’s “A PC on every desk and in every home,” Coca-Cola’s “A Coke within arm’s reach,” and Komatsu’s “Surround Caterpillar” (see Hamel and Prahalad, “Strategic Intent” Harvard Business Review, 2005). Strategic planning is the formal consideration of an organization’s future objectives. Strategic planning answers the question, “What?” separate from “How?” yet these are often not distinguished in practice. Creating the “What” separate from “How” frees an organization to pursue multiple paths toward its strategy and change course to reach its objectives, even when it gets “punched in the face.”
Nate Rosenberg, Jr. is a consultant with Insigniam, a management consulting firm with offices in Asia, North America, and Europe. He recently worked with a hospitality REIT to increase gross operating profit at its properties by $17 million using strategy innovation. For over 30 years executives around the world have used Insigniam consultants to generate and execute new growth opportunities, install powerful corporate cultures, develop transformational leaders and produce breakthrough results.