The Adaptive Strategy system
Mihai Ionescu, Senior Strategy Consultant, Owner Balanced Scorecard Romania, Author
The strategic hard-turn
The navy officers have a specific term for a large ship making a strong side turn, at high speed: hard turn. This maneuver requires powerful engines and good size rudders (although many modern ships also use other direction-changing systems, besides the traditional rudders). Such maneuver is more spectacular the larger the ship, the higher the speed and the smaller the turn radius are. For smaller or slower ships this is not seen as an extraordinary maneuver, because either the small size or the low speed should allow them to turn quickly enough.
In the analogy with the business world, the size of the ship is the size of the organization and its speed is the industry clockspeed. The engines' power and rudders' efficiency are the organizational capability to quickly and effectively change the Strategy, even when its execution is at mid-course.
So, how to avoid getting locked-in for one or more years in executing our Strategy, finding it difficult to make a 'strategic hard turn', in case the Strategy becomes invalid at some point in time (entirely, or partially), along its execution cycle? Or, even more: How to go back to the drawing board, if we discover that some of the hypothesis and assumptions the Strategy was based upon were wrong, and ultimately, how do we know when should we do this?
Some people might say that it's piece of cake to do all that in small organizations that use simple, intuitive, straightforward strategic choices, plans and execution tools. And they would be right. But more and more strategies and strategic plans tend to become complicated, in an attempt to model the increasingly complex and faster changingbusiness environment, mainly due to the VUCA context (Volatility, Uncertainty, Complexity, Ambiguity).
When a good Strategy becomes wrong
The more frequent phenomenon is that of a well-designed Strategy becoming inappropriate, due to the invalidating effects of the unfolding business reality upon some of its hypothesis and assumptions. But why and where do we need to make these hypothesis and assumptions for our Strategy?
Actually, there is no other way, because the Strategy Formulation and the Strategic Planning processes are all about the future, therefore we need to use certain hypothesis and assumptions within these processes. Otherwise, we wouldn't be able to make any judgement about what changes do we believe that will be needed for exploiting what we anticipate to be opportunities and for avoiding what we think that may be future threats.
Let's look at the Strategy Formulation process. Where, along this process, do we need to use hypothesis and to make assumptions and why?
* larger-resolution image: https://pinterest.com/pin/114701121739101543/
The quick answer to the question above would be: "Wherever we need to make judgements about what will happen in the future, because we need to turn the randomness of the future into an ordered and logic future evolution construct, on which we can build a Strategy". At a higher detail level, it would go like this:
We have to hypothesize about future opportunities and threats, about their magnitude, probability and timing. Furthermore, we have to estimate the trends of various Influence Factors that have a significant, strategic impact upon our industry or upon our business type & model (think of PESTEL and Porter's 5 Forces, for instance). Then, we have to assume that they will vary within certain tolerance ranges, within which our strategic hypothesis would remain valid.
We have to estimate the future impact of the Influence Factors considered upon our business results, should we select one Strategic Choice or another, from the possible ones. They are regarding both the Competitive Factors (how-to-win) and the Market Boundaries (where-to-play). Based on such analysis, we'll select a mix of Strategic Choices that will define our Strategic Positioning and allow us to build a new/updated Competitive Advantage.
Because we can only employ a viable Business Model, we have to anticipate the financial bottom line of our Strategic Positioning.
Will the Strategic Choices that we've selected support a viable Profit Model (or a Value Model, for public/NGO organizations)?
Will our target customers prefer our product or service to other propositions existing in the marketplace?
Will they find it convenient to buy it through the sales channels that we have considered?
Will they regard our product/service as fit for their 'Job-to-be-Done', as Clayton Christensen defined it?
Ultimately, will the customers agree to pay the price that will profitably cover our costs, in order to allow us to meet the Success Aspirations of our Strategy?
Our next set of hypothesis regard the set of capabilities, the so-called Capabilities System, that is required to support our Strategic Choices and turn them from declared into fully effective ones, bringing them to life. Our past experience usually helps us here, but in some cases, more specifically for choices that have not been part of our Strategic Positioning before, we can only use our best judgement (based on the experience of others, if available) about what new processes, channels, tools, resources or competencies will be needed and about their levels and configurations.
Once our Strategic Choices are evaluated & rated and the required Capabilities System assessed, we have to see if all this is doable/feasible, in other words, will we be able to close/bridge the corresponding Strategic Coherence Gaps/*, with the resources that we'll have available and within the Strategic Horizon considered? /* download The Coherence Premium, for a more insightful view on the strategic coherence.
The next two hypothesis points are looking more into the Strategic Planning process, or at least into the summarized multi-annual Strategic Plan, that we have to build before actually entering the Strategic Planning process. We have to assumethat we'll be able to close/bridge the Strategic Gaps with a certain deliberate, but logical, breakdown on annual cycles and in a certain sequence along the multi-annual horizon. That may be confirmed by reality, when the execution process unfolds. Or not.
Further on, we have to look deeper into the projects that we have to plan, in order to make the changes required for closing/bridging the Strategic Gaps. Because they are projects, we can estimate their costs, duration and resources required (people, tools, information, etc.), allowing us to assess their feasibility, with the means that will be available to us and within the time-frame when we need them to produce the desired effects.
An entirely complementary set of hypothesis and assumptions are used further, within the Strategic Planning and Alignment processes, but they are under a closer loop monitoring by the scorecards structure, therefore they can be corrected much faster, if proven invalid, along the execution cycle.
So, why does a good Strategy become a wrong one? We can probably respond more accurately now, after we've sliced the strategic hypothesis & assumptions matter, along the Strategy Formulation process.
Any of the Strategy Formulation workflow steps 1-7, mentioned above, may initially produce some credible and valid foresight. But they are also the hidden anti-Strategy mines that are placed along the execution path.
"No battle plan survives contact with the enemy" - Helmuth von Moltke the Elder
That is because any of our hypothesis may prove wrong, at the soonest moment in time when we we'll be able to validate them. Those are the moments when any of our assumptions about certain Influence Factors with strategic significance may not be confirmed by reality, as they may go outside of the tolerance ranges within which our Strategy remains valid, ... within which our value proposition will continue to be preferred by our target customers and produce the expected financial results.
So, this is how our initial good Strategy may become wrong, along its execution.
Preventing a good Strategy from getting wrong
Invoking our naval analogy, the question is: How can we effectively make the 'strategic hard-turns', when needed, and how can we spot the imminent triggering of the 'anti-Strategy mines' that are potentially placed along our path, by every hypothesis we have used and by every assumption we have made?
Many strategy practitioners have learned that we cannot design a Strategy and build the subsequent Strategic Plans that are future-proof, no matter how hard we try. That's because sooner or later, something will go otherwise than we've anticipated and our Strategy may quickly turn from being a good one to being wrong or, at least, no longer good enough for reaching our Success Aspirations.
How to make strategic hard-turns?
We might agree, first of all, that the 'strategic hard-turns' are mandatory, because making some sort of 'soft-turns' instead may be equivalent to continuing for some time with the same Strategy's execution beyond the point where we've found out that it's no longer a good one.
The worst thing is to continue executing a Strategy, once we realize that it is no loner a valid one.
But going again, at mid-course, through the whole Strategy Formulation, Strategic Planning and Alignment processes may take as long as when we've initially gone through these processes. So, this will certainly slow-down our intended strategic hard-turn. Well, this is not entirely true. At least, most of the time, because the events that will cause our entire Strategy to be wrong are not that frequent. In most of the cases, only a part of our hypothesis and assumptions are invalidated, or only a few of the Influence Factors trip our preset strategic tolerance ranges.
There is an important caveat to this. Irrespective of how much of our Strategy we change, we require a fully functional Strategy Management System to be in place, with a clear framework of building blocks, logical correlations and well mastered methodology.
One of its core functions is to ensure that all the strategic processes are fully traceable, from hypothesis & assumptions, to all the components and the correlations between them. Within such a system, any changes are affecting only what is strictly necessary and the changes are propagated quickly and accurately throughout the entire organization.
This is like equipping our virtual ship with powerful engines and big rudders, enabling it to make strategic hard-turns as effectively as possible. One example of such a system is the Kaplan-Norton BSC Framework (the Execution Premium Process - XPP):
When do the strategic hard-turns become necessary?
The fact is that we will eventually realize, sooner or later, that a strategic hard-turn would have been necessary. But if that happens late, we are no longer talking about a strong, quick and accurate change of Strategy. In some cases, it may bee to late, as the damage caused by the slow strategic reaction can be substantial for the organization.
The only thing worse than bad news, is bad news late.
These words are attributed to an anecdotal army general who had them written on a poster placed on the wall behind his desk. The same concept applies to the Strategy Adaptation process. How can we address this?
Here is where the Strategic Warning System (SMS) comes to the rescue. It is designed to monitor the validity of all hypothesis & assumptions used within the strategic processes and to measure the strategically-relevant Influence Factors, triggering an alarm every time an invalidation occurs or a tolerance limit is tripped by the monitored parameters.
The trace-ability of the hypothesis & assumptions and of the tolerance ranges we have used throughout the strategy processes are entered into two registers, one for validity/invalidation monitoring (the Strategic Assumptions Register - SAR) and one for strategic parameters monitoring, related to their preset tolerance ranges (the Strategic Tolerances Register - STR).
The SWS facilitates the accurate propagation of any changes of the Strategic Choices mix and of the required Capabilities System to the Strategic Plan, through the correlations defined between the Strategic Gaps (on the Strategy Formulation side) and the Strategic Objectives / Measures / Initiatives (on the Strategic Planning & Alignment side).
Furthermore, the SWS is easily correlated with the Strategic Scenarios and the Scenario Planning system, due to the scenario triggers that are linked to the most relevant & probable clusters of associated events monitored by the SWS. But the Strategy Adaptation process is even more comprehensive than that. For instance, the diagram below also illustrates how the Strategy adaptation process is enhanced through Strategy Testing (war-gaming).
* larger-resolution image: https://pinterest.com/pin/114701121738420782/
Strategy Adaptation is not limited to just a generic concept, or an ad-hoc process. It goes much further than that, becoming instrumental when used as a structured system that keeps track of all major hypothesis & assumptions of the Strategy and of all the strategically-relevant Influence Factors, being equipped with the corresponding validation/invalidation points and tolerance ranges triggers. A system that is tightly integrated with the Scenario Planning process and with other Strategy testing methods and tools.
Your feedback is more than welcome, as always.