Mihai Ionescu - Senior Strategy Consultant, Owner Balanced Scorecard Romania, Author.
Where do our Strategic Objectives come from? Of course, not from the magic hat :) Nevertheless, in much too many cases, this is how they seem to appear in our Strategy Map, because the methodology for building it looks like some sort of intuitive, ad-hoc magic process. And yes, we often pay consultants to help us with this, because they seem to be some sort of ... magicians of Strategy (or, at least, they have performed this magic trick many times before).
1. The usual magic hat
I have to admit that every time I open a new Strategy Management book I keep my fingers crossed, hoping not to find the word S.W.O.T. in the title of any chapter or sub-chapter. Because this was the case for a pile of such books I've read, so far.
So, how does this usual magic hat look like? In most of the cases, like this:
You probably know how this happens. An analysis team looks at the external and internal Influence Factors and prepares a Strategy workshop in which people validate or add to these factors, hypothesizing about what may represent future Opportunities and Threats. Then the discussion focuses internally and a new set of hypothesis is created about which existing (or sufficiently developed) capabilities (the Strengths) may help the company (or the business line) harvest the Opportunities and avoid the Threats. The same logic is applied for identifying missing (or insufficiently developed) capabilities (the Weaknesses), which should be built, enhanced or acquired.
Now, comes the 'magic' part. From this S.W.O.T. analysis, the entries in the four quadrants are morphed into Strategic Objectives, figuring whether they belong to the Financial, Customer, Internal or Learning & Growth perspectives. Simple, isn't it?
Simple, but wrong. Going from the S.W.O.T. analysis to the Strategy Map cannot be but subjective, ad-hoc and approximate, leading to a Strategic Plan that doesn't have much to do with what is supposed to be the best possible Strategy. Why? Because this 'magic trick' is leapfrogging over some fundamental Strategy decisionsthat have not been made in a clear, logical and deterministic way. Such decisions are just replaced by a mix of intuitive hypothesis & judgement made within the head of each Strategy workshop participant.
Take a look at what fundamental Strategy decisions* are bypassed or downplayed whenever this type of magic hat approach is used to produce the Strategy Map:
* we'll clarify further below the details of these fundamental Strategy decisions.
The above diagram shows what happens when a descriptive tool designed for assessment (S.W.O.T.) is forcibly used for prescriptive purposes (formulating the Strategy and building the Strategic Plan). No matter how tempting 'simple' might it look, don't do this!
2. The enhanced magic hat
Some of you are familiar with a 'sister' of S.W.O.T, named T.O.W.S. and considered an 'enhanced' version, because it creates a prescriptive illusion for what our Strategy should focus on and what Strategic Objective should we include in the Strategic Plan.
Although the four resulting quadrants (SO, ST, WO and WT) seem to indicate on what should our Strategy focus, this 'magic trick' is also leapfrogging over some fundamental Strategy decisions that have not been made in a clear, logical and deterministic way. Its four 'Strategy quadrants' are a generic surrogate of how the Strategy should be formulated. No wonder that the resulting Strategic Objectives are nothing more than a magic translation of assessment into planning.
Again, however tempting 'simple' & 'enhanced' might it look, don't do this!
3. The magic hat, with a BSC twist
For those who are aware of both the S.W.O.T. and the BSC perspectives, a different magic hat is often used: the S.W.O.T. that is layered on the BSC perspectives. It looks like this, but such 'magic trick' makes the same mistake of leapfrogging over some fundamental Strategy decisions that have not been mad in a clear, logical and deterministic way.
Many BSC practitioners still use this, as it has been initially included even in the Kaplan-Norton BSC Framework. But this cannot be an excuse for avoiding to use the fundamental logic & methodology required to formulate a rational Strategy.
Since we've mentioned the Kaplan-Norton BSC Framework, we should also mention the Case for Change / Change Agenda that has been often used in laying the building blocks for defining the Strategic Objectives of the Strategy Map. It looks like this:
Unfortunately it doesn't really address the problem of the fundamental Strategy decisions that have to be made in a clear, logical and deterministic way, either. It assumes that we have defined (somewhere upstream) the new Strategic Choices our Strategic Destination is based on and the required Capabilities System that we need to build.
In consequence, the Strategic Gaps resulting from the Case for Change, gaps that we have to close by executing our Strategy, cannot be correctly aligned with our Strategy, as they require some 'external' logic to be used behind the stage where the magic trickis performed. However, it's even worse, as the Case for Change is often drawn directly from the S.W.O.T., with no back-stage logic, so the Strategic Objectives still look like popping-out of a magic hat.
Now, after we've looked at the most popular magic hat alternatives for defining the Strategic Objectives, let's start from a clean plate and clarify what do we mean by these fundamental Strategy decisions that have to be made in a clear, logical and deterministic way and describe how should we define our Strategic Objectives in a more rigorous and traceable manner.
The Basic Tension in Strategy
In the article The Right to Win, published back in 2010, Cesare Mainardi reminds us that there is a Basic Tension in Strategy, something that has been highlighted as one of the three tensions in 2006 by Dominic Dodd and Ken Favaro in their HBR article Managing the Right Tension, followed by their 2007 book The Three Tensions.
Of all the competing objectives of every leader, in every company, three pairs stand out: profitability versus growth, short term versus long term, and the whole organization versus the parts.
The solution for the Basic Tension in Strategy is the focus that shouldn't be the performance in the short term, but the results of today (or of the near future) AND the construction of the foundation for the longer-future results, at the same time.
In terms of Competitive Advantage, this translates into the simultaneous focus on improving the current [transient] Competitive Advantage that may still produce results on the short term and change to the future Competitive Advantage that will produce results on the long term.
The diagram below highlights the fact that, at any point in time, the strategic resources that we allocate (Strategic Initiatives that get financed) should be divided between the objectives of harvesting the full potential of our current Competitive Advantage, which is always a transient one, and the objectives of developing our futureCompetitive Advantage, which will have to takeover the job of producing our economic results when the current one will no longer be able to do that. See The Competitive Advantage Cycle for a description of how this works.
Well, this creates a tension. Some people in our executive team might want to focus on continuing to invest in extending our sales channels or partners network, or in releasing some improved versions of our core product, or in enlarging our existing logistic fleet and adding more storage locations, or on pushing more dollars into advertising and direct marketing, in order to reach more customers than our competitors, ... and so on.
Will such focus produce more economic results tomorrow that today, as we improve our current Competitive Advantage? In most cases, yes, that's what will happen. But only for a while, maybe for another year or two. Why? Because our competitors will most probably do the same thing and even new competitors will enter our market, in the mean time, to mention only two of the factors that will limit the sustainability of our current Competitive Advantage. Read Rita Gunther McGrath's book The End of Competitive Advantage, published in 2013, to find out more about what makes our current Competitive Advantage a transient one.
But can't we delay the investment into our next Competitive Advantage for later, when we'll see that our current one has reached its limits? We'll have no more Strategic Tension, isn't it? Yes, we could, but at a cost. And the consequences may sometimes put at risk even the survival of our company, as the gorge of economic resultsbetween our current Competitive Advantage and our next one may bee too large and too deep for us to cross successfully.
Important Observation #1: The Competitive Advantage may be based on multiple business/product lines, each having its contribution to company's economic results and its specific mix of Strategic Choices and required Capabilities supporting them.
We might argue that we have no other choice than to delay investing in our next Competitive Advantage due to the VUCA context of our business environment, as the decisions relating to a future that's difficult to predict may be too risky. Well, if the way we formulate and plan our Strategy is the same as it has been for the past decades, such argument may be valid. Unfortunately, that's a trap, as no Strategy may be managed today otherwise than by using an Adaptive Strategy system that allows us to react in due time to any major changes in our business environment and adapt our Strategy and its execution accordingly. So, there should be no VUCA deterring us from formulating a new Competitive Advantage. Actually, that's exactly why we should do so.
From Strategic Gaps to Strategic Objectives
In going further, I'll assume that you have read Playing to Win, by A.G. Lafley and Roger Martin (2013), The Delta Model, by Arnoldo C. Hax (2009) and The Essential Advantage, by Paul Leinwand and Cesare Mainardi (2010), although the extended required read list would be much longer. The quick video below describes the Strategic Business Model and its canvas. It doesn't compensate for the recommended reading, but it will help. More reading resources are listed at the end of the video.
And, since we are talking about essentials, don't embark on making any Strategic Choices if you're not entirely sure that you've understood your customer's Job-to-be-Done. Read Clayton Christensen's new book Competing Against Luck: The Story of Innovation and Customer Choice (2016), to clarify this essential topic.
You can download the above slides from: SlideShare.
Our scope is to define the Strategic Objectives, by attaching to each of them a specific set of Strategic Gaps that have to be closed during the execution of our Strategic Plan. This means that a Strategic Objective will be achieved only when the Strategic Gaps attached to it will be closed. Does it make sense?
What is a Strategic Gap? Whatever denies us the possibility to reach our Strategic Destination(s) tomorrow morning and achieve our Strategic Aspirations by the end of next day. No Strategic (re-)Positioning can be performed overnight and no required Capability can reach its designated maturity level by the press of a button.
Step #1: The Competitive Advantage
Let's start from the beginning, from the Competitive Advantage (the existing and the new/future one) and from the Strategic Destination(s) we have to reach.
What is a Strategic Destination? The future snapshot of our fully-achieved Competitive Advantage (the 'to-be' state, in PM language) and of our effective Strategic Business Model (see the Strategic Business Model Canvas), where our Strategic Aspirations are successfully achieved, where our Strategic Position is fully confirmed by the market and where the required Capabilities System is complete and mature. That's where the Strategic Objectives in our Strategy Map and the actions to achieve them have to lead us!
Important observation #2: Since we will work, most of the time, to improve our current [transient] Competitive Advantage (A), until harvesting its full potential and, at the same time (remember the Strategic Tension), to develop our new/futureCompetitive Advantage (B) that will replace the current one, we will have more than one Strategic Destination.
Now, read again the Important observation #1: we might also have more than one business/product line. What's important to note is that some of the Strategic Choices and their supporting required Capabilities will be common to our multiple business or product lines and to both the current Competitive Advantage and to the new one (especially if we are using a Capabilities-Driven Strategy model), while other Strategic Choices and required Capabilities will be different for each of them.
Here comes something that's less intuitive: All the above considered, we'll still have a single Strategy Map, at the organizational level. Why is this possible? Because the Alignment process will take care of that multiplicity.
Step #2: The Strategic Choices and Capabilities
We'll only briefly describe here the logic and the process of defining our Strategic Choices. Due to the high interest in this topic, we'll elaborate on it in a future article that will discuss in detail:
The Portfolio of Strategic Choices (where-to-play and how-to-win) from which we have to select the ones that define our Strategic Positioning for our next Competitive Advantage
The Strategic Analysis for identifying the relevant Influence Factors and the selection methodology, including the Impact Analysis of the Influence Factors upon the available choices, over the Strategic Horizon considered
The Capabilities System and its categories of Capabilities that include those required to support the selected Strategic Choices
Since this article was published, two new articles have been also published, so you can find more details on the Portfolio of Strategic Choices in What Strategic Choices Do We Have and on the Capabilities System at the end of the article Linking Jobs-to-Be-Done to Strategy.
This is the workflow diagram of the process that will lead us to the Strategic Gaps that we need for defining our Strategic Objectives:
The Strategic Analysis needs to identify the Influence Factors that are relevant for our business, over the Strategic Horizon considered, using tools like PESTEL and Porter's 5 Forces. The workflow doesn't include a separate step for defining the Strategic Horizon, but you can find out more about it in this Strategic Horizon article.
The Impact Analysis needs to rate the possible Strategic Choices (where-to-play and how-to-win) that are included in the Portfolio of Strategic Choices (see the Delta/Penta Model), customized for our business specifics. The result is a ranked mix of Strategic Choices, listing down the top ones that may allow us to best exploit the Opportunities (determined by the favorable Influence Factors) and best defend against the Threats (determined by the unfavorable Influence Factors).
The two Strategy Feasibility Validation Gates are allowing us to check if:
(I) closing the resulting Strategic Coherence Gaps (between the existing and required Capabilities System) is a challenge that we can successfully overcome or not, taking into consideration our specific constraints (including those related to our Organizational Culture), over the Strategic Horizon considered
(II) the main Strategic Initiatives are doable, considering the human, financial and technological resources at our availability, or which can be obtained, over the Strategic Horizon considered
If any of the two Feasibility Validation Gates give us a negative result for the mix of the Strategic Choices selected and their required Capabilities, we have to go back to our selection step and eliminate from our mix those Strategic Choices whose required Capabilities cannot be created, developed or acquired successfully, given our constraints and resources that can be available to us, during the given time frame.
Once the Feasibility Validation Gates are passed, we can confirm the Corporate Goalsthat quantify our Success Aspirations, which may be different from the initial ones that may have turned out to be too demanding after the feasibility analysis. The Corporate Goals are also the roots of the Targets Tree that allows the allocation of Value Gaps to each Strategic Objective, leading to the Targets of each of the KPIs in our Scorecards.
Does this look like a process for making the fundamental Strategy decisions in a sufficiently clear, logical and deterministic way?
Step #3: The Strategic Gaps
The Strategic Gaps are placed at the foundation of our Strategic Plan and of its execution, because they represent the tangible and quantifiable materialization of our Strategy, allowing us to focus on what determines its successful accomplishment, resulting from our decisions about the Strategic Choices, made in a clear, logical and deterministic way. The Strategic Gaps represent the 'glue' of our whole Strategy Management System, ensuring the trace-ability of our Strategy Hypothesis chain, from the Strategic Choices, to the Capabilities System, to the Strategic Objectives and their Lag & Lead KPIs and to the Strategic Initiatives used to accomplish them.
There are two types of Strategy Gaps. On one side, we have Strategic Positioning Gaps, which represent changes in our Strategic Positioning, as we move from our current mix of Strategic Choices to the new mix that is part of our Strategic Destination(s). On the other side, we have Strategic Coherence Gaps, which are directly related to our Capabilities System that has to change from the existing one to the next one, required to fully support our new mix of Strategic Choices. Of course, some of the Capabilities in our existing Capabilities System will be retained and used as they are today, as they can support their corresponding new Strategic Choices, without requiring any change or reconfiguration.
Remembering that we normally have Strategic Choices, required Capabilities and corresponding Strategic Gaps for both our current Competitive Advantage (A), that we have to improve, and our future Competitive Advantage (B), that we have to build, the diagram below describes the fundamental logic flow that we need to use, resulting in an initial multi-annual plan, designed to close the Strategic Gaps and to accomplish our Strategy, reaching our two Strategic Destinations, at the end of each of their corresponding Strategic Horizons.
The components of the Strategic Business Model (SMB), graphically illustrated by the SMB Canvas, are layered top-down in a way that facilitates the correlation between its components and the Strategy Map perspectives.
This is the place where we harvest the benefits of the clear, logical and deterministicway in which we have set the trace-ability, along the Strategy Formulation process, from Competitive Advantages > Influence Factors > Strategic Choices > Required Capabilities > Strategic Gaps | Corporate Goals | Strategic Priorities.
After scheduling the Strategic Gaps to be closed during each year of our Strategic Horizon (the longest of the two), according to the initial multi-annual breakdown plan, we are only one step away from defining our Strategic Objectives.
How do we do that? It's easy, although it requires a little bit of practice. Because the Strategic Gaps are already layered along the BSC perspectives, our task is to group the Strategic Gaps that regard the same processes, business areas or intangible assets and aggregate them as Strategic Objectives. The strongest temptation here (to be avoided!) is to define the Strategic Objectives as the actions of closing the Strategic Gaps they aggregate. But the fix is easy: just ask the question 'What do we want to achieve by closing these Strategic Gaps?'.
Take a look at the details of the screenshot below and I'm sure that you'll figure out very quickly how easy is to define the Strategic Objectives, once we've clarified which are our Strategic Gaps, during the upstream Strategy Formulation process.
So, what is the process for defining the Strategic Objectives, otherwise than pulling them out of a magic hat? Let's see:
Simple, isn't it? And no magic trick was involved! Every step of the process is clearly and logically correlated with the upstream and down-steam process, so we can enforce a systematic trace-ability of the Chain of Strategy Hypothesis that we have employed along the way.
As always, your questions, comments or critique are more than welcome!