Martin Ashcroft traces the development of strategic management into the 21st century.
One of the quotes attributed to the infinitely quotable American baseball icon Yogi Berra, is that “success is half strategy, half execution, and half culture.” While Berra had the oddest way of putting things, there was usually a fundamental truth trying to escape. Many column miles have been written about strategy in the last fifty years by academics, business leaders, journalists and management consultants, but few have been as punchy as this.
Strategy, in its basic definition, is simply a plan of action. In the business environment, strategic management has been defined as “the analysis, decisions, and actions an organization undertakes in order to create and sustain competitive advantages.” In other words, where are we now, where do we want to be next, and how do we get there?
Approaches to strategy fall into two main camps. The traditional view, known asthe industrial organizational approach, is one of a rational, planning based, “top-down” activity in which information is accumulated and analyzed, forecasts are made, and an action plan produced which is passed down the organization for implementation. Strategy formulation was traditionally the task of the CEO and the senior management team, with little consideration given to workforce commitment or involvement.
If this can be characterized as a content approach, based on facts and figures, the other, known as the sociological approach, is more about the process of management and the culture of the organization. Aspracticed by Google, among others, this approach deals primarily with human interactions. Based on the premise that the future is unknowable and that forecasting is, at best, inspired guesswork, the key to this approach to strategy is to put in place a system of management that will allow the organization to respond to an unpredictable business environment that is not conducive to planning.
In their book Strategic Management: Issues and Cases (Blackwell Publishing, 2004), Paul Dobson, Ken Starkey, and John Richards argue that these two approaches are not necessarily mutually exclusive. “Our own view is that good strategic management actually encompasses elements of each perspective,” they say. “There is no one best way of strategy. The planning approach can work in a stable, predictable environment. Its critics argue that such environments are becoming increasingly scarce, events make the plan redundant, creativity is buried beneath the weight and protocols of planning and communication rules. Furthermore, those not involved in devising the plan are never committed to its implementation. The second approach emphasizes speed of reaction and flexibility to enable the organization to function best in an environment that is fast-changing and essentially unpredictable. The essence of strategy, according to this view, is adaptability and incrementalism. This approach has been criticized for failing to give an adequate sense of where the organization is going and what its mission is.”
Whichever camp they came from, the most successful companies seem now to be combining these two approaches in their 21st century strategies. The rigid sounding top-down economic approach has evolved as performance initiatives like lean and continuous improvement take hold. With the emphasis of these initiative being on workforce empowerment, enlightened CEOs have begun to realize they may not have a monopoly on ideas. Companies are increasingly adopting a collaborative approach to strategic ideas, where contributions can be passed up the managerial chain from the bottom.Not only does this capture ideas that may otherwise have been missed, but as the most brilliant strategy can succeed only if it is properly executed, gaining workforce commitment to the organization’s future strategic direction can only contribute to its success.
Dobson et al propose their own definition of strategic management thus: “all that is necessary to position the firm in a way that will assure its long-term survival in a competitive environment. A strategy is an organization’s way of saying how it creates unique value and thus attracts the custom that is its lifeblood.”
With growing uncertainty in the economic environment, organizations had to be more adaptable to the demands of customers and markets, introducing internal and external stakeholders into the strategy process, and bringing about a boom for management consultancies, who enjoyed an industry growth rate exceeding 20 percent in the 1980s and 1990s.
Whichever approach to strategy is taken, strategic decisions are now being made on the understanding that the competitive advantage of value-added is a constantly changing reference point. Even the much criticized planning approach includes an evaluation phase, after which plans can be revised according to new evidence. But as the rate of change in the business environment continues to gain pace, evaluation itself can become a continuous process, as management consultancy Kepler-Tregoe points out in its approach. “Strategy formulation is an art and a discipline. It demands creative, out-of-the-box thinking and the discipline of logical thinking and flawless execution. To stay competitive, an organization's strategy must be formulated, challenged, tested, and constantly updated.
“Strategy formulation begins with strategic intelligence gathering and analysis of markets, competitors, technology, and past performance,” K-T continues. “This provides an information base for strategic decision making, agreed-upon assumptions about the future, and a profile of the environment in which strategic decisions are being made.”
The aspect of this which has come under closest scrutiny in recent years is the degree to which strategy relies upon assumptions about the future. Another global player in the consultancy world, Deloitte, alludes to this, too, in its advice on “winning in a changing world”. “The current economic downturn impacts businesses around the world. At times like these, it is important to remember that even the most dramatic upheavals are part of the business cycle. If companies focus on the basics and make informed decisions, they can manage their way through the current volatility to emerge stronger and more competitive. Companies that keep pace with market changes, staying one step ahead and managing through volatile times, will emerge as leaders.”
Information and analysis have always been strong suits for the larger consultancies, and the implication here, of course, is that if you engage their services, they will provide the necessary analysis for the client to make the best informed decisions.
While not necessarily at the forefront of thought leadership (a title that is difficult to wrestle away from the academics), external management consultants have traditionally led the development of strategic management on the ground. Their contribution to clients has often been criticized in management literature, however, for focusing on what they see as the best solution on paper without understanding the client’s capacity to change, and also for lacking accountability for the execution of the solution.
External consultants have also been criticized for having little interaction with the client’s line managers, and for having an unfortunate tendency to walk away after delivering the strategy, leaving the company on its own to execute it. More recently, however, their approach has been praised for a higher degree of line manager involvement, a stronger appreciation of the client’s ability to change, and greater consultant involvement in implementation. To illustrate this, PWC now promises prospective clients: “We help you to assign your resources to the activities that maximize value and are best aligned to your strategic objectives.”
The consultancy with the strongest case for thought leadership is the industry No. 1, McKinsey & Co., whose own academics Tom Peters and Robert Waterman developed the 7-S model in the late 1970s, dividing management into seven aspects: strategy, structure, systems, skills, staff, style and supraordinate goals (now referred to as shared values). In 1981, Richard Pascale and Anthony Athos claimed in The Art of Japanese Management that the main reason for Japanese success was their superior management techniques. Using the 7-S framework, they described the first three aspects as “hard” factors in which American companies excelled. The remaining four aspects (skills, staff, style, and shared values) were called “soft” factors, which, they alleged, were not well understood by American businesses of the time.
These early writings were hugely influential in the growing importance of culture as a strategic tool, and owed much to the study of the Japanese approach. In 1982, The Mind of the Strategist was released in America by Kenichi Ohmae, head of McKinsey & Co.'s Tokyo office. (It was originally published in Japan in 1975.) Ohmae claimed that strategy in America was too analytical. Strategy should be a creative art. He said that Americans constrained their strategic options by thinking in terms of analytical techniques, rote formula, and step-by-step processes.
Also in 1982, Peters and Waterman (of 7-S fame) released a study that would respond to the Japanese challenge head on. Asking “what makes an excellent company?” they examined 62 companies they thought were successful. To classify them as an excellent company, they decided they had to be above the 50th percentile in four of the six chosen performance metrics for 20 consecutive years. Forty-three companies passed the test. The authors then studied these successful companies and interviewed key executives, concluding in their book In Search of Excellence that there were eight keys to excellence that were shared by all 43 companies:
- A bias for action: Do it. Try it. Don’t waste time studying it with multiple reports and committees.
- Customer focus: Get close to the customer. Know your customer.
- Entrepreneurship: Even big companies act and think small by giving people the authority to take initiatives.
- Productivity through people: Treat your people with respect and they will reward you with productivity.
- Value-oriented CEOs: The CEO should actively propagate corporate values throughout the organization.
- Stick to the knitting: Do what you know well.
- Keep things simple and lean: Complexity encourages waste and confusion.
- Simultaneously centralized and decentralized: Have tight centralized control while also allowing maximum individual autonomy.
Since these early attempts to catch up with the Japanese, a myriad different theories have been applied, all adding new terms and concepts to business lexicon, some of which have stuck, like core competencies, and the value chain.
In 1993, Scottish economist John Kay took the idea of the value chain to a financial level claiming that “adding value is the central purpose of business activity.” Borrowing from Gary Hamel and Michael Porter, Kay claims that the role of strategic management is to identify your core competencies, and then assemble a collection of assets that will increase value added and provide a competitive advantage. He claims there are three types of capabilities that can do this; innovation, reputation, and organizational structure.
A decade after Peters and Waterman, James Collins and Jerry Porras undertook six years of empirical research on what makes great companies, concluding that a key underlying principle behind the 19 successful companies they identified was a “core ideology.” Even though strategy and tactics changed daily, the companies were still able to maintain a core set of values which encouraged employees to build a sustainable organization. In Built To Last (1994) they claim that short term profit goals, cost cutting, and restructuring will not stimulate dedicated employees to build a great company that will endure.
Thus the idea of corporate culture began to seep into strategic thinking, to the extent that it has now embedded itself in the global boardroom. Executives who have shared their accounts of continuous improvement with Business Excellence in the last few years invariably talk of culture change as the catalyst for the effective implementation of their improvement initiatives.
During the 1980s and 1990s, American manufacturers struggled to adapt the Japanese idea of kaizen to their own culture. Masaaki Imai, founder of the Kaizen Institute, who first coined the term, told me in a 2003 interview how frustrated he had been by this. “In the edifice of a world class company, kaizen is like a brick,” he said. “You need many hundreds and thousands of bricks.” What frustrated him was the way Western manufacturers liked to pick a brick or two here and there, then convince themselves they could build a world class company with them.
But it’s a different story today. Many of the world’s (non-Japanese) leading companies now have director level executives responsible for improvement programs. One such is Gary Thomas, director of global continuous improvement and risk management at HJ Heinz, which is implementing the Heinz Global Performance System (HGPS) to drive sustainable continuous improvement in its 74 plants around the world. “HGPS is a five to seven year journey that never ends,” he told me earlier this year. “We’re trying to shift away from project-based productivity to a process-based system. Our employees are solving the problems on the floor, so they don’t have to turn them into projects.”
HGPS is a management led initiative, of course, inasmuch as it derived from the boardroom, but the key to successful implementation is the culture change that will sustain it. HGPS is intended to drive the organization towards a collaborative, continuously improving culture as the process matures. “I would describe it as ‘just in time’ continuous improvement,” said Bob Ostryniec, global supply chain officer for Heinz. “It might sound fundamental and simple to some, but our performance system is all about the people. If we focus on developing the capabilities into our people by empowering them to lead change at all levels of our organization, the process improvements will come.”
Most recently, I was attracted to a blog from Jim Heskett of Harvard Business School, published on June 2nd this year, entitled How Do You Weigh Strategy, Execution, and Culture in an Organization’s Success? After posing the question, Heskett threw it out for comment, receiving 77 responses, overwhelmingly in favor of culture.
One of my favorites was this by Bob Legge, president of management consultancy Legge & Company, LLC. “Culture is a key part of execution. If the strategy or execution conflict with the culture, bet on the culture.”
“Culture is a soft issue that must never be ignored in the formulation and implementation of strategy,” commented Carl Abruquah of Ghana Commercial Bank Ltd. “A culture that is resistant to change will relegate strategy into the dustbins of the organization.”
“Another way to view this is how many businesses (and managers) were extremely successful, then tried to execute the same strategy in a different country without taking into consideration the local culture,” suggested David Broderick, director, global services delivery, for consulting group, CAI.“Businesses and business schools do a great job teaching strategy and execution as a discipline. For long-term global success, however, we need to better understand and teach about people, cultures, and their effect on an organization’s success. This discipline is just as important as understanding a P&L, since it will ultimately determine the bottom line.”
Finally, Yan Song, program manager for Abbott Laboratories, responded thus: “In the type of work that I do, it is still fundamental that we articulate a clear strategy, build an adaptive execution team and nurture an innovative culture.” Back to Yogi Berra’s three halves, then, but not quite as succinct.