Business Strategy - what is it and do you need one?
TLDR: a business strategy is the principal success theory of a company. Its purpose is to focus the deployment of resources and align the operational decision-making. It answers the question: “Why will customers choose us over our competition?”. It should always feel uncomfortable.
This text is about business strategy, which deals with aspects of running a business against competition and is usually meant when “strategy” is used as a stand-alone term. This is something different than organizational strategy, which deals with how to run an organization efficiently. If you are interested in the latter, read on here.
We really need to talk about strategy.
Having a strategy is almost universally hailed as a business necessity. Nobody wants to be caught running a business without a strategy, right?
So one would expect that a subject with so much significance is well-researched and defined and that there is somewhat of an educational standard for it. But that is not the case.
There is simply no broad agreement neither on the concept of a strategy (what is a strategy?), the purpose of a strategy (what does a strategy do?) nor the embodiment of a strategy (what does a strategy document actually look like as an organizational artifact). A lot of excellent management and leadership books leave the subject out entirely[1], or only touch it in an incidental fashion and with confusingly varied positioning of the topic ranging from purpose to planning[2]. Also the relationship between a strategy and a plan – two very different things as I argue here – is unclear. Some scholars distinguish between both[3]. Others use both words interchangeably[4]. And last but not least, in business reality the term “strategy” or “strategic” is often used colloquially to imply some sort of priority. I’m sure you have heard somebody say “This is a strategic project!” or “Let’s have a strategic discussion” and usually that does not have any deeper meaning than that the sender feels he is referring to something important.
Funny, right? It really seems as if everybody is free to do pretty much whatever under the term strategy. And that it’s more important to claim to have a strategy as sort of a hygienic undertaking than to actually have something that achieves a particular goal in business.
And if that’s the case, maybe it is not necessary to be more specific?
Well, it’s hard to argue that it’s necessary as the world has obviously been just fine without a clear concept of strategy, but I very much believe that it is beneficial. Because a strategy can be a very valuable tool, which has the power to significantly improve the chances of success for a business.
And so I invite you to follow me along as I map out a stringent concept for strategy, that is designed to improve organizational performance. I will do this by way of a 4 part series: in this post, I will explain the purpose and value of a strategy, in the next 2 parts I will talk about how a strategy document is developed and composed and in the last part I will go into how to communicate and implement a strategy. Obviously none of it is written yet, but rest assured, I’m on it.
But first, let’s be clear on the main purpose of a strategy because that will define our approach and ruleset. The main purpose of a strategy is to make sure that an organization does not spread its energy too broadly and thus too thinly. Maybe you’ve read the famous “Peanut Butter Manifesto” written in 2006 by Brad Garlinghouse (today the CEO of Ripple Labs, back then a Yahoo SVP). If you haven’t, I suggest you click the link and do it now. It contains clear thoughts and it accurately describes what happens to an organization that lacks focus. But for the lazy readers of you, here’s a short excerpt
“We lack a focused, cohesive vision for our company. We want to do everything and be everything -- to everyone. …We are scared to be left out. We are reactive instead of charting an unwavering course. … when we do talk, it isn't to collaborate on a clearly focused strategy but rather to argue and fight about ownership, strategies, and tactics. Our inclination and proclivity to repeatedly hire leaders from outside the company results in disparate visions of what winning looks like -- rather than a leadership team rallying around a single cohesive strategy. I've heard our strategy described as spreading peanut butter across the myriad opportunities that continue to evolve in the online world. The result: a thin layer of investment spread across everything we do and thus we focus on nothing in particular.
The purpose of a strategy is to focus an organization. That means a strategy must achieve two things: a concentrated allocation of resources (macro) and an aligned operational decision-making (micro). Both are necessary. If the day-to-day work and operational decisions are not aligned a concentrated deployment of talent and investments is meaningless (well-deployed people doing random stuff). And if the operational decision-making is aligned but talent and investment are deployed without concentration the focus lacks impact (people doing the right stuff but not enough of them).
Unfortunately focus never comes easy. The human brain is simply not wired this way. It wants to frequently pause from its primary focus of attention and scan the environment to see if there is something going on that might be more important – such as a predator approaching. It is not possible to shut this jumpiness of the brain down. You can merely convince the brain to let go of distractions and return to its original focus. Then there’s recency bias: what you think now usually feels more right than what you thought a week ago - even if there has been no change in circumstances. And last but definitely not least, the human psyche is much more worried about losing something than it is excited about winning something. And it hates uncertainty.[5] And so working on a lot of things at the same time seems less risky than the decision to work only on one. Even if rationally this means that you will have a much lower chance of success:
Imagine that there is a product. This product has ten potential features, all of which are about equally time-consuming to build. Some features are more important to customers than others but it cannot be known beforehand which ones. Two Companies A and B (of the same size and efficiency) compete for the market for this product: Company A works on all ten features at the same time and has feature completeness of 10% on all ten after 6 months. Company B has chosen to only build one feature and finished it in the same amount of time. So after 6 months, Company B has shipped a product to the market. A task that will take company A another 4 ½ years. And now Company B can actually find out whether this is the feature that matters the most to their customers and learn from feedback. And as Company A finishes 20% of its work Company B has another feature out and can draw from the market reaction. The approach of Company B is less risky than the approach of Company A. Not despite but because it chose to focus.
Focus increases your chance of success. Its value cannot be overestimated. It is the key driver for a company’s velocity. But also it is a very important piece of an engaged workforce. Because finishing things and seeing them in the hands of customers is hugely fulfilling and energizing. And because being clear about what to work on and knowing that your team and the company as a whole pull in the same direction is motivating and satisfying.
How does a strategy achieve focus?
Well, for one, by being as concise as possible. Your brain needs a clear and simple target for it to concentrate on something for an extended period of time and to regain focus after a distraction. The target cannot be complex and it cannot be diffuse. That is true for one person and it is even truer for an organization not only because the potential distractions multiply with headcount but also because you add misunderstanding to the equation. Every bit of communication can be interpreted and misunderstood. The more complex and nuanced a communication the bigger the likelihood that different people understand things differently and move into different directions – and out of focus.
And secondly by not only setting a goal “we must achieve this” but (also) by charting a course “this is how we will win”.
Everybody likes goals. They are great motivational anchors and they allow you to appreciate your progress. But in terms of their guiding capacities they are overestimated. Setting a goal just means that you are defining an aspiration. But if you don’t chart a course, a particular approach, or logic to follow, your experiences, your successes, and failures on the way toward your goal are events that relate to nothing but themselves. The insights they provide are neither connected to your current direction nor to each other. Consequently, you will end up following too many different leads and you will not be able to systematically learn from your experiences.
If you were a scientist and you wanted to achieve a particular success but didn’t know how to achieve it yet, what do you do? Would you just run random experiments based on your gut feeling hoping that you will somehow get lucky with one of them? Or would you formulate a theory, which you systematically test with a series of experiments and which you adapt, when your experiments come up with surprising results? I strongly assume the latter.
Business is no different. A strategy must be a success theory.
“Ok, I get the learning part” I hear you say “but must a strategy really be a theory? Wouldn’t it be better if you could prove that your strategy is right before embarking on it?”. The answer to this question might surprise you: no, it wouldn’t.
A strategy needs to be a theory because if it deals with the rights question it always deals with uncertainty. Let me explain. A goal, the future success of a company will in almost all cases be dependent on whether that company will make enough money – enough money to become profitable before it runs out of funding, enough money to be valuable, enough money to be competitive and keep investing in the future. And for most businesses the key to making enough money is that enough customers choose to pay enough money for its products or services. This is precisely the question at the core of a strategy, the question that a strategy must answer as concisely as possible: “Why will customers choose us over our competition?” And because this choice is something that a company cannot control, answering the question will always entail the risk that you are wrong, that you have misjudged the demands and motivations of your customers (this is also why you need a strategy and not a plan, read more about that here). And it is important to understand that. Actually, it’s a good litmus test: if your strategy does not feel uncomfortable, you have either failed to be concise enough or you have not made it about the choices of your customers.
So embrace uncomfortableness. Just like real change, real choice is uncomfortable. But it is rewarding!
[1] E.g. Radical Candor by Kim Scott; The Hard Thing About Hard Things by Ben Horowitz; High Output Management by Andy Grove; The Effective Executive by Peter Drucker; The McKinsey Mind by Ethan Rasiel and Paul Friga.
[2] in “Principles” p. 511, Ray Dahlio briefly talks about “strategic vision” and “strategic goals” which are “producing excellent results, meaningful work and meaningful relationships through radical truth and transparency”, which actually has nothing whatsoever to do with strategy; in “The Meaning of Work” Hubert Joly uses the term for a variety of artifacts and contents ranging from plans (e.g. p. 45-46) to purpose (e.g. p. 80-82); in “The Minimalist Entrepreneur” p. 3 Sahil Lavingia tells a story in which purpose is a pillar of a business strategy); in “Nine Lies About Work” Marcus Buckingham and Ashley Goodall briefly touch “Strategic Planning” a term that is as vague as it is misleading as we’ll see; and in “Scaling People” Claire Hughes Johnson puts “strategic planning” and “financial planning” into one basket and declares “at first, the strategy is simple: Keep pouring gas on the fire”.
[3] Roger Martin in the HBR video https://www.youtube.com/watch?v=iuYlGRnC7J8 at Minute 1:00
[4] Felix Oberholzer-Gee in the HBR Video https://www.youtube.com/watch?v=o7Ik1OB4TaE at Minute 0:14
[5] If you have never read Daniel Kahnemanns “Thinking, Fast and Slow” this is a good opportunity to do it and jump to Part IV “Choices”.