Strategy is a slippery word. Familiar to all, used by many, written about in countless volumes, it is acknowledged as important as it is misused. Part of the fuzziness results from the coupled evolution of both the concept and the realms in which it is used.
Strategy used to be a (military-like) plan. Already in the 1970’s it was however pointed out that actually there is a process involved: there are processes leading up to formulating the plan, and processes responsible of how things ultimately play out – the plan is but one part. From 1990’s onwards an additional viewpoint was added. The processes were dug into deeper, and it was understood that the firm level outcomes do not magically appear from the firm level strategies, but actually result as aggregations of individual level practices responsible of the actual ongoings within and therefore of the firm.
There are vast literatures of strategies as plans, as processes, as practice. In this posting I’ll discuss yet a fourth step in its evolution: strategy as a projection.
In 2006, a team of scholars working on a novel perspective emerging in the field of entrepreneurship, made an extensive literature review (for the academically inclined readers, here’s the link to the Strategic Management Journal paper) of the corner stones of strategy literature. (The then new perspective is called effectuation, and I’ll come back to it shortly.) They found out that there were actually two underlying dimensions onto which the basic assumptions of diverse approaches to strategy could be positioned. Ten years later their thoughts were built on and managerialized by another team, in a book and subsequently in an article published in HBR.
The first dimension: prediction
The first dimension is the perceived predictability of the environment. To what extent does strategizing build on the possibility of anticipating the future events, demands, trends and trajectories? At the one end of the continuum we have planning approaches to strategy, and in the other, adaptive approaches to it.
There used to be a time when there used to be industries in which it was relatively feasible to assume such a level of stability that at the moment of engaging in strategy work, it was possible to define what would be such an outcome, say, in five years, that would still at the time of reaching that outcome still be desirable.
If it was possible to identify a future goal, and map some potential paths towards it, the planning approach to strategy would be sound. This approach requires faith in the trajectories in the industry – not only should the desirability of the goal not change in between setting and reaching it, but there also should not be too many such surprises introduced along the way that would notably change the possible ways of pursuing the goal.
This is by far the approach to strategy that remains the most familiar and comfortable for most companies. Let’s come back to its sanity a bit later.
In late 1990’s, when the ICT industries were starting to accelerate the speed of introducing new innovations, the concept of dynamic capabilities was introduced. Underpinning the concept was the understanding that as it was beginning to look like the industry could churn out game changing innovations with surprising frequency, the actors within the field had to develop capabilities with which they could rapidly change their actions to accommodate the new technologies.
A bit later, the notion of agile popped up. First in the ICT sector and subsequently creeping into almost all sectors, many firms understood that as it is really not possible to predict the future, they have to take this into account in their strategizing: they have to become adaptive, quick to react, to respond, to rethink and change their activities.
Few are the firms today who do not at least entertain the idea of becoming agile. The adaptive approach to strategy is on the rise – and for a very good reason. With the advancing digitalization few firms are ‘safe’ from such disruptive innovations that have the potential of radically altering the business landscape. Routinizing the agile skill sets is a formidable insurance.
The second dimension: control
What both of the aforementioned approaches have in common, is a sense of fatality: environment happens to us. We can only either predict it or react to it, but we cannot have an impact on it. The second dimension highlights this assumption and questions to what extent is that really the case. Both the planning and adaptive strategizing exist at the one end of the dimension of control, whereas the other end is not a complete void either. The logic of that end states that “what we can control, we do not need to predict (or react to)”.
Transformative and visionary
Apple and its introduction of the iPod and iPad are good examples of the outcomes of transformative strategizing. Instead of trying to predict what the future markets might look like, or to respond to innovations appearing elsewhere, they went about creating a whole new market that at least initially they had a supreme control over. The famous quote by Henry Ford highlights the point: “Had I asked what the customers want, they would have wanted faster horses”.
The transformative approach to strategy is about creating and shaping the markets in which the firm operates. Many of the firms we now view as having seeded disruption have embraced this approach: AirBnB transformed the hospitality business, Netflix the movie rentals. Über, regardless of how things turn out in terms of its profitability, made a lasting impact on the taxi markets.
Firms adopting the transformative approach create and shape the markets of today. Going beyond that, there is at least a theoretical possibility of visionary strategic approaches. The difference between transformative and visionary strategizing is the duration of control the firms exert over the markets they create and shape. While all of the firms mentioned above have enjoyed notable first mover advantages in creating or shaping markets to their liking, the companies pursuing adaptive strategies have been quick in joining the game. Following through with a visionary strategy would mean that for the duration of the foreseeable future, a visionary firm could exert supreme control over its markets.
Examples of visionary firms are harder to come by, but maybe Alphabet comes close. Not only did Google revolutionize how we search for information from the internet, but it has since been at the forefront of sourcing and processing data that can be sold to entities interested in accessing our personal preferences and aptitudes. Few of us can escape viewing the world through the curated viewpoint personalized to depict the world as the algorithms anticipate us wanting to.
If the coffin of planning strategies needed another nail, the corona disruption surely provided one. If you are a member of an organization still believing in its ability to predict the future – or worse still, one that does not even attempt to predict but simply believes the future to be a carbon copy of the past – do something or get out.
Instead, both the adaptive and the transformative strategies make a lot of sense. Choosing between them is partially a question of the genuine possibilities your organization has or could have over the markets it operates in, and partially a question about the assumptions and logics followed in your organization. For many companies, the adaptive, or agile approaches are indeed sound choices, as not everyone can be the first, and there are notable benefits of entering the game when the faster movers have first made the mistakes you can learn from. Developing the dynamic capabilities, such as modularity of resources and offerings, quicker information flow through the organization, and the skills of sensing and scouting the environment for opportunities that can be seized, is no mean feat, and holds keys to solid and long-lasting performance.
As said, there are a number of good reasons for adopting an adaptive strategy. However, there is also at least one bad reason for choosing it instead of the transformative approach.
Effectuation logic and its benefits
Yes, sometimes the environment indeed happens to us. But sometimes it doesn’t: we just assume it does and cannot change our thinking in ways that would enable us to exert control over it. Transformative strategizing is a projection: we take what we have now and project them into the future of our making. Underpinning the transformative approach to strategizing is the entrepreneurial logic labelled effectuation.
Effectuation logic is often explained with a cooking metaphor, where it is contrasted with a more traditional logic of causation, prominent in management. Cooking with causation logic goes as follows: we choose a recipe we want to execute (goal), write down the list of ingredients we need and go grocery shopping (resources). Then we follow the recipe (execution) to the t, and are rewarded by the dish of our desires, or something less palatable, depending on our skills (outcome). The potential problems in the process are a) are we sure we like eating what looked appetizing in the pretty picture of the recipe, b) what do we do when we cannot source the right ingredients, and c) do we have the skills to actually execute the recipe?
In turn, cooking with effectuation logic proceeds differently. We enter the kitchen, open the cupboards and figure out what ingredients we have (resources). Then we think about what we could make out of them, which of the ingredients we enjoy cooking with the most (goal). We start cooking, tasting as we go, and adjust the flavor as we go along with what we have (execution). If we end up with something inedible, we throw it out, and start the process anew, aiming at something else, learning through our mistakes and at some time managing to put together something we want to eat (outcome). The potential problems in this process are a) the limitedness of resources (do we run out of ingredients before we’ve managed to make something edible), and b) our cooking skills. If we just suck at it, there’s little to be done but order-in.
The firms that have successfully carried out transformative strategies employ people who can utilize effectual logic. Instead of lamenting the lack of resources to make something predefined, they make the most of the resources they have or can access. They are governed by what they like and can do, and do not care about the external food fads: when successful, they can come up with the next one.
To wrap this post up, three points to take away.
- Planning approach to strategy is insanity
- Adaptive and transformative strategizing is sane
- Sometimes the difference between being able to control the environment or not is a question of whether you believe that you can control it or not.