How does a firm keep its strategy on track?
11 January 2022
By Loizos Heracleous
The first step in maintaining strategy is clarifying the type and level of strategy. A strategy will have different goals at corporate, business, and functional level.
For multi-business entities the corporate level strategy should be designed to maximise returns from the mix of businesses and create synergies where possible – such as the sharing of technology or distribution networks – to provide an advantage.
This overlays the business strategies of each division, which will be focused on making the particular business as competitive as possible. And within each business there are functional strategies (production, finance, supply chain, marketing, etc) that should complement and be in line with the business strategy. Clarifying this structure and how to keep tabs on each level is the first step towards keeping the strategies on track.
From here, monitoring can be effectively applied – which is the key internal element to keeping strategy on track. Monitoring largely takes the form of periodic performance measurement. To make this effective, the strategy’s desired outcome needs to be translated into measurable goals – an approach first set out in the Balanced Scorecard model developed by Harvard Business School's Robert Kaplan and David Norton in 1990.
In this model, measurable goals are divided into four 'perspectives': two external – the financial and customer perspective; and two internal – business processes and learning and innovation.
Many companies have adapted this scorecard approach, depending on their situation, to include more perspectives with different emphases. Each measurable goal is translated to indicators that are influenced by critical success factors, which can be managed.
For example, for an airline with a strategy to be a cost leader and increase efficiency through better use of fixed assets, a key internal business process indicator is aircraft turnaround time. The lower the turnaround time the closer the business is to its strategy. To get this number down, the critical success factors include staff training in speedy turnarounds. So, getting a target percentage of staff trained is one lever management can use in this situation.
Another broader approach to monitoring strategy is the 7S Model developed by consultants McKinsey & Co. It includes seven aspects – three hard ones (strategy, structure, and systems) and four soft (culture, capabilities, values, and style). All aspects must be in line with and support strategy for the strategy to be maintained. Monitoring indicators in each of these dimensions provides insights to whether the strategy is on track.
The more recent ESCO (Envrionment, Strategy, Core competencies and Organisation) model links strategy to developing the right underlying competencies; themselves developed over time via particular organisational choices.
These need to be monitored over time. For example, in the future NASA’s human missions to Mars will take two years. A required competency for success is knowing the effects of long periods in space on human health, a work in progress. This, and many other competencies are needed, and without them NASA’s Mars strategy cannot be initiated and maintained.
These three tools – the balanced scorecard, 7S Model and ESCO – offer different ways of keeping strategy on track through implementation and monitoring. However, this is the easy part. The difficult part is deciding on the right strategy in the first place, and when it might be necessary to change your approach mid-flight.
A technician can maintain strategy from an internal perspective, but a leader must have a broader understanding of the external environment and be able to think critically, admit mistakes and adjust when needed. The philosophy of this balanced approach is encompassed in the field of cybernetics, the core concept of which is feedback and can be summed up in the analogy of a ship’s captain, where they move the wheel in response to, and also in anticipation of, changing conditions.
Leaders must also recognise cognitive biases, such as the escalation of commitment – where once resources are already committed it becomes increasingly difficult to pull out; more resources are thrown in and a company can end up losing the lot. The now defunct Blockbuster is a classic example, having rejected an approach from Netflix to buy the young company when it was a fraction of its current value, while simultaneously investing in a streaming venture with the soon-to-be disgraced Enron. Blockbuster decided to expand its physical outlets as the world turned digital, after appointing a CEO from convenience store 7-eleven. These strategic moves ultimately destroyed the company.
So, while all aspects in the 7S Model need to be aligned to strategy, they must all change in line as well – as the strategy adapts to the changing external environment. Another example where this did not happen is photocopier firm Xerox. Its Palo Alto Research Centre (PARC) produced many ground-breaking innovations, but the company did not introduce most of them to market. Some PARC-developed technologies such as PostScript, commercialized via Adobe, have led to companies worth hundreds of billions of dollars. Because these amazing innovations were not about photocopying, they did not register with the strategy or mindset of management, who were narrowly fixated on copiers.
Xerox maintained a faulty strategy that paid little attention to the changing technological environment outside the company, which has left it a tiny husk of what it could have been. The example highlights the importance of 'ambidexterity', or the ability to create new products and business for the future, as well as making the best of the current business. Such an approach needs to be a key part of any strategy.
The link between external environment and strategy is heavily emphasised in the ESCO model, which highlights the relationship between the two as key to the right strategy. Leadership oversight of the ESCO model structure must be externally orientated to read the market and be able to take corrective action, while also being on the ball with performance metrics to ensure efficient internal application.
There are valuable techniques for keeping strategy on track, but a wise leader should also know when strategy needs adjustment or a major revamp. And even when a strategy is effective, companies still need to strike a balance between efficient exploitation of current businesses and exploration for future ones to enable a company to thrive in the long term.
Heracleous, L. T., Terrier, D. and Gonzalez, S. (2018) "The Reinvention of NASA", Harvard Business Review.
Heracleous, L. T., Yniguez, C. and Gonzalez, S. A. (2018) "Ambidexterity as historically embedded process: evidence from NASA, 1958-2016", Journal of Applied Behavioral Science.
Heracleous, L. T., Papachroni, A., Andriopoulos, C. and Gotsi, M. (2017) "Structural ambidexterity and competency traps: insights from Xerox PARC", Technological Forecasting and Social Change.
Loizos Heracleous is Professor of Strategy and teaches Strategy and Practice on the Executive MBA and Executive MBA (London). He also teaches on the Warwick Executive Diplomas and is author of the Janus Strategy.
Follow Loizos Heracleous on Twitter @Strategizing.
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