Companies need an institutional capability to understand what is changing, challenge what the organization thinks it knows, and question whether the organization itself is still fit for purpose.
Companies exploit stability. They ditch activities that were there to deal with variation; they simplify and streamline to maximize efficiency; they reduce reporting time-horizons; and they eliminate complexity that had emerged during uncertainty. They do all this with alacrity or fall behind their competitors.
They are slower to adapt to instability. Their executives and organizational systems were formed in an environment in which change was steady. The current generation of leaders was promoted through a management culture built on reduction, measurement, optimization and control. They were rewarded for the speed of execution and delivery. The capability to respond to complex and unstable change atrophied.
Adaptation to stability is about stripping out unnecessary systems. Adaptation to instability is discovering how systems interact in a new environment. Companies optimized for stability are always caught out by events. In the late 1960s some big name corporations – GE, IBM and Shell, for example – decided that something must be done and others followed.
Corporate strategy departments were the ‘something’. They became fashionable after Igor Ansoff’s 1965 book, Corporate Strategy. It was believed then that clever specialists with the right information and sufficient dedication could predict future events and plot a company’s path through them. It was not to last. Several things led to their demise. Some of their predictions were shown to be spectacularly wrong. Strategic planning staff were an easy target for cost-reduction and de-layering during waves of leveraged buy-outs. Strategy consultants scaled up hugely to offer a strategy service as episodic, billable engagements. Michael Porter reduced strategy to a set of portable, analytical tools. And Finance functions persuaded executives that companies could be run on capital allocation and shareholder value, rather than market-focused strategy. Critics sarcastically likened strategy to Laplace’s Demon, or causal determination – the notion that precise information about every particle in the universe can reveal the past and the future – and the death knell came in 1994 with the publication of Henry Mintzberg’s book, The Rise and Fall of Strategic Planning.
It was not just strategy departments that faded. Strategy itself lost its former meaning in boardrooms. It became planning. In The Fish Rots From the Head (1996), Bob Garratt described how executives drift into micromanaging operational plans because it is easier and more familiar than the harder work of horizon-scanning and holistic understanding.
Companies need to learn strategy afresh, from the ground up. The strategy departments of the late twentieth century got it wrong. They modeled the world from the company outwards. That’s like having an Earth-centered view of the Universe. What is now needed is a model capable of seeing the company as one system inside many other systems, at the same time as seeing all the company’s internal systems interacting.
This can be imagined as two strategic poles. One is awareness of external change and the other is understanding organization and governance. Each can be illustrated from the author’s own experiences.
Awareness of external change
ICI’s fertilizer business grew phenomenally profitable by dominating the UK market. It had rock-bottom natural gas prices, was the world’s most efficient producer of ammonia, and enjoyed protection from continental imports through awful port-infrastructure and militant dock unions in the UK. It did not go unnoticed when all of these favourable conditions began to change, but individuals who spoke up were ignored or sidelined. There was no group with authority to raise it with the corporate board. ICI was a major global chemical company but nobody remembers it today.
Understanding organization and governance
Novartis had over a thousand employees in its Procurement function. Reporting to Finance, the only performance metric that drove it was cost-reduction. The CFO even thought it would be a good idea to include billion-dollar savings targets as ‘productivity’ in the company’s annual report. Cost-centre owners reacted to attacks on their budgets by ensuring that Procurement came nowhere near them. Sophisticated shadow procurement functions developed across IT, HR, Facilities, Insurance, Engineering, and, yes, ironically, in Finance! The dysfunction was visible. Nobody had the responsibility to see it.
Forecasting predicts outcomes by extrapolating data. Scenario planning, used by the former strategy departments, explores a range of alternative futures. The strategy that companies need today adds another dimension, systems thinking. Systems thinking sees an environment as the interaction of evolving systems within systems-of-systems - a complex, recursive, constantly changing ecosystem. The interaction of systems (their communication) can create reinforcing and balancing feedback that stabilizes some systems. These stable systems persist and replace those that decay. This creates systems-of-systems that appear organized, functional, self-correcting and, yes, designed – even though their emergence is entirely natural. The organisation we see may be the product of interactions rather than something purposeful.
Systems thinking, though established and well recognized, is rarely applied in management. It has no quick-fit tools and it does not provide the neat, short-term solutions companies prefer. There is a belief that visionary leaders are able to discern patterns and innately perceive the evolutionary path of systems. That may be the case but even if they do, it is wrong of companies to rely on a one or two executives to set direction. They need a pool of strategy talent reporting to the CEO. It would recruit a team of strategic thinkers and influencers. It would be a recognized career step into leadership. A number of companies have developed structural ways to encourage systems thinking in strategy. An example is Mars, the food group, who made the functions of Research & Development, Supply and Procurement all report through the same executive. All of these need end-to-end understanding of value chains, as well as an ability to scan political, commercial and technical horizons. These are the fields in which strategic capability is most likely to be nurtured and where unified reporting could deliver real competitive advantage through better strategy.
Systems thinking is developed by a diversity of experience that does not happen in narrow functions. Cross-functional task teams can deliver projects but can hardly challenge tenets of the organization. Development of strategic capabilities – sensing, challenging, exploring, connecting, experimenting, learning and judging – is not easy to encourage in operational units. They do not have the heterogeneity of a dedicated strategy group.
A strategy group would be delegated tasks by the CEO, that would previously have been awarded to strategy consultants. It would also, on its own initiative, challenge the organization’s operating model, not just its value chain but also the very existence of some corporate functions. Procurement is an example. Internal departments undertake supplier selection; they use vendor platforms to deliver a portfolio of services; and some have embedded vendor strategy groups. It is unclear why a dedicated Procurement function continues to exist but nobody in the organization has a remit to think about and report on it. A clear role for a strategy group.
An important feature of a strategy group is a level of autonomy in challenging the organization. In this respect, it would be unlike the internal consulting teams established to avoid reliance on McKinsey, Bain, BCG et al. This is another reason why it must report directly, at a minimum, to the CEO.
Back-to-the-future is not a return to 1980s scenario planning, but it is a call for strategy to be taken seriously.