21st Century Strategy
”Man cannot discover new oceans unless he has the courage to lose sight of the shore” wrote the French author Andre Gide. In very much the same way, we can’t manage strategy in the 21st century without discarding the comfortable dogmas of the 20th century.
Much of our strategic doctrine comes from an industrial age in which products were fairly uniform and success was highly contingent on the ability to move around men and materiel efficiently.
That’s still important, but not a source of sustainable competitive advantage. Today, we don’t produce products as much as we design them and that calls for a strategic shift. To embrace the future, we must, in a very conscious way, let go of the past and move from a planning mentality to one that integrates skills and information in an emergent context.
The Origins of Corporate Strategy
The corporation is a relatively new thing. Formally, the first one was British East India Company, but the notion didn’t really take hold until Cornelius Vanderbilt and the railroad barons. It probably reached it’s apex with Alfred Sloan and General Motors. Companies were split into divisions, each with their own leadership. Orders flowed downwards and your rank determined your responsibility.
This type of organization made sense given the organizational objectives at the time. As Ronald Coase noted in his 1937 paper, The Nature of the Firm, the reason firms came to exist was to minimize informational and transaction costs. In other words, they were originally conceived to create efficiency rather than value.
It was in this context that strategic planning took hold. The idea was that senior executives would form concrete objectives and form plans that would achieve them. Guidelines, approved techniques and checklists would be created along with budgets and auditing procedures in order to ensure that strategies were implemented faithfully.
In essence, strategic planning was about control. You worked the plan and didn’t ask questions.
The Fall of Strategic Planning
As Henry Mintzberg describes in his now classic management text, The Rise and Fall of Strategic Planning, although strategic planning came to be widely considered best practice at most corporations, by the 80’s the seams started to show,
Planning consumed more and more management time and effort while it became increasingly removed from the day-to-day practicalities of running the business. Problems not anticipated by the plan were treated as if they didn’t exist, while opportunities not anticipated by the plan were ignored.
Worse, planners tended to focus on “sexy” strategies like mergers and acquisitions that they could control and execute, rather than the increasingly abstract (to them) details of operating the core business.
Things came to a head when Jack Welch took the helm of General Electric and largely dismantled the strategic planning process. That was like the Pope giving up the sacraments. As he said at the time,”the books got thicker, the printing got more sophisticated, the covers got harder and the drawing got better,” but none of that improved how the company performed.
From Atoms to Bits
In addition to the innate problems with planning, a fundamental shift in the business environment has taken place.
We are no longer in an industrial age, but an informational one. We are less concerned with moving atoms from place to place than we are focused on the velocity of ideas. Efficiency has been devalued in favor of value creation, which emerges when the right ideas combine to solve important problems.
There is very little evidence that companies like Google or Facebook are more efficient than their rivals. Apple, a much older company, has evolved an advantage in manufacturing efficiency, but that has manifested itself in higher margins, not lower prices. Further, their products are considered premium not because they are considered more powerful, but better designed.
The trend toward design will only become more pronounced in coming years as new technologies like additive manufacturing and programmable matter come online. When we can economically “print out” objects that a design specifies (additive manufacturing) and reprogram objects to form new shapes and functions (programmable matter) efficiency loses its meaning.
Design then, is rapidly becoming the product itself and design is dependent on ideas, not atoms. Ideas, of course, can’t be controlled, but must be enabled.
Clearly, if the planning approach ran into problems in the slow moving industrial ecconomy, its flaws are exacerbated in the hyperkinetic digital age. Mintzberg summarizes the problem in this graphic.
While decision making power rests with senior management, most of the information lies much lower down. Therefore, while we must plan for the future, we must also do so with the understanding that our our strategy will be, at least in part, flawed either because it was based on incomplete information to start with or because facts simply changed on the ground.
The result is an emergent strategic process that looks like this:
Probably one of the best examples of successful emergent strategy is Andy Grove’s fateful decision to pull Intel out of the memory chips business and bet the company on microprocessors.
Although many still see this as the work of a lone genius, Grove himself describes the situation much differently in his book, Only the Paranoid Survive. In actuality, most of his factory managers had already shifted production long before Grove made the final decision. His bold move had less to do with strategic thinking than it than it did with effective listening.
So what to do? Should we just fire all the managers? As Gary Hamel wrote in this HBR article, some companies are actually going that route, but that is far from a universal solution. What we need is a more realistic view of what strategy is and what management can achieve.
First, managers need to come to terms with the fact that control, in a world where value is created by ideas, has become an illusion. The lunatics run the asylum. Senior management’s function has largely become one of imbuing the organization with the autonomy, mastery and purpose that is essential to any high performing organization.
Second, we need to face the fact that no one can “own” strategy anymore. The world has grown too complicated. Insight requires not only intelligence and expertise, but synthesizing information from disparate domains. Strategy has become, in effect, additive, where objectives must be met by a network of operational layers that need to inform one another.
The core skill of strategic management must therefore be managing the interfaces between varied groups of highly skilled knowledge workers. The strategist, then, must evolve from a master who gives the orders to a facilitator who makes the process work.
image credit: wgte.org; digital tonto.com
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Greg Satell a consultant who concentrates on media, marketing and innovation. Check out at his site, Digital Tonto and follow him on twitter @digitaltonto
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Thanks for sharing the graphics from my blog and book, Intangible Capital: Putting Knowledge to Work in the 21st Century Organization.
One clarification: I developed the triangle diagram (not Henry Mintzberg) to illustrate the contrast between the top-down communication of the industrial-era organization and the needed outside-in and bottom-up communication in the knowledge-era organization.
I look forward to seeing other comments on these ideas!
Sorry about that. I corrected the mistake on the original post, but neglected to do so when I re-posted here. A thousand pardons.
Good article Greg.
Awesome diagrams Mary.
My 2p. Fast, fluid and flat is the strategic environment now. Co-creation has also increased the necessity for organizations to step down from the strategic ivory tower and genuinely bring consumers/employees inside. They now demand it.
As an aside, I remain a huge proponent of Scenario Planning which should remain the remit of senior leaders in any organization. Creating Plan B is as crucial as agonizing over plan A.
Excellent point about scenario planning. I have no idea why it’s not more widespread.
“Formally, the first [corporation] was the British East India Company, but the notion didn’t really take hold…”
Interesting interpretation – I’d suggest that it _did_ very much take hold, even if you only use the British East India company & nothing else as a measure. It was a a monumental system, generating wealth (to owners of the company, not to those it exploited) of a kind never seen before… value extraction on quite literally a sub-continental scale. Maybe this interpretation has been made on account of it only being indirectly related to the USA?
Secondly, I’d argue that the British East India company came to being in it’s ultimate form for exclusively the reason of wealth creation – the British Empire needed it for this very puspose, as Joseph Tainters “Collapse of Complex Societies” will attest. It may have used efficiency as a tool to improve the process of wealth creation, but efficiency certainly wasn’t the goal.
Yes, that’s all true. What I meant was that the idea of the corporation didn’t take hold till long afterwards. The British East India Company itself obviously had enormous influence.
That’s for clarifying that.
A really good and useful article thanks.