Strategy & Planning

Ranting

Friends,

Earlier this week, somewhat peeved by people speaking very loudly in certain terms concerning matters they clearly did not understand, I put out a tweet noting that there is a rather strong case for not having a formalized strategic plan. 

To some, as one would expect, the statement turned out to be about as welcome as a fart in a spacesuit. Many strategists (falsely) equate strategy with planning, so the suggestion that one would not need one was perceived as nothing short of heretical. In the magical world of traditional analysis and doctrine, you see, the companies that go bust always do so because they failed to plan ahead. To not have a plan is therefore, logically, a guaranteed path to corporate disaster.

The problem is that it is a fabricated narrative. While a number of companies undoubtedly have gone under due to their gross lack of foresight, many more have met their demise because they were unable to adapt to environmental change that they saw but fatally underestimated. In technical terms, this is called strategic drift; a gradual deterioration of the relative quality of actions taken that eventually results in a catastrophic loss of competitiveness and profitability.

Although illustrated by a very simplified incumbent-challenger relationship above, the underlying idea holds for startups too. Just as large companies can get complacent, small companies can get overwhelmed. Change is not a contrast but a constant. In other words, the further one plans ahead, and the more money one bets on the accuracy of the forecast, the larger the risk.

Consequently, as most are aware and anyone else might imagine, a lot of time, effort and resources are spent on computer modeling. Few have invested more than the U.S. government. And yet, to this day, none of the models run by its massive supercomputers has proven more accurate than the naïve forecast which states that the GNP trend over the last three months will continue for the next three months.

From previous newsletters we know why; the economy, just as individual markets and companies alike, is a complex adaptive system. This means that, to paraphrase Nobel laureate Murray Gell-Mann, the only viable model of the system is the system itself. Or to put it in plain language: it is inherently impossible to forecast anything complex with perfect accuracy regardless of how much data one manages to collect and analyze. Laplace’s demon does not exist in strategy other than in malevolent spirit.

The notion that all companies fail because they did not plan ahead is thus inherently flawed; in a complex, ever-changing environment with input-output asymmetry, one cannot know what is to come. One can guess, obviously, but the most accurate guess - on average - will be that things will remain what they are in the short-term. Since we are blind to what will happen in the long-term, the obvious conclusion is to merely keep doing more of the same. And, as most who have worked with strategy know, that is also what strategic planning often becomes. After all, why change a winning recipe?

The problem, to reiterate my earlier point, is that it leads to strategic drift. Naïve models work until they do not; at some moment in time, be it sooner or later, either something big will happen quickly (e.g. Covid) or small, gradual change will have accrued beyond a tipping point.

Unfortunately, the solution is not to merely do “better” strategic planning or hire “better” strategists. In a complex adaptive system, we cannot know precisely what will come, hence we cannot create a perfect plan except through dumb luck. This is why correlations between managers’ perceptions and objective measures have proven to be near zero and as likely to be negative as positive (e.g., Payne and Pugh (1976), Mezias and Starbuck (1996, 2003), Milliken and Starbuck (1992), March (2006)) and why the perception of variables specifically related to areas of expertise and specialization were no more accurate than others’ perceptions of those same variables. That is to say, managers with strategy experience were as inaccurate in their estimates of strategy-related variables as managers without strategy experience.

Does this mean that anyone can do strategy, there would be no value in experience, and we should do away with strategic planning entirely? Absolutely not. My point is that even as our models improve, any strategist worth their salt has to be humble and open to adaptation. The common refrain of betting big on one robust idea in a formalized strategy document simply does not hold up to scrutiny; it may create a temporary business advantage but is mathematically guaranteed never to lead to a sustainable one. There is simply too much inherent uncertainty and too many unforeseen consequences in complex environments.

While all companies begin their journey with a concept of business, subsequent strategic management must be a mix of the proactive and the reactive, not one or the other. As we proved with pace layers, it would be as wrongheaded to attempt to plan for everything as it would be to go all-in on agile throughout an entire organization. The key lies in the praxis from which this newsletter takes its name – theory-informed practice continuously updated with market insights in a perpetual learning cycle.

Admittedly, I would say so, given that my new book revolves around the argument. But, for what it may be worth, the same has showed to hold in empirical research time and again. Incremental experiments limit risks (Lindblom, 1959; Woodhouse & Collingridge, 1993), yet may induce radical change (Garud, Kumaraswamy, & Karnøe, 2010; Plowman et al., 2007). The most effective strategies of firms emerge through experiments and incremental commitments (Quinn, 1980) in a loop of exploration and exploitation (Hart, 1992; Hart and Banbury, 1994; Burgelman, 1996; Andersen, 2004; Andersen & Nielsen, 2009). Strategists must remain alert for signs that their assumptions were wrong, or the world is changing in unexpected directions (Grinyer & Norburn, 1975; Hodgkinson, Whittington, Johnson, & Schwarz, 2006; Pant & Starbuck, 1990; Starbuck, 1992). In order to not merely survive but thrive, companies should thus employ multiple experiments and meet environmental change not through robust and structural positioning strategies, but through their own variability (Beinhocker, 2006).

As we now move towards the full introduction of the ABCDE framework, it is crucial to collectively let go of the idea that strategy equals planning. It may involve planning to varying degrees depending on context, but it will never be the be all and end all of what our jobs as strategists entail.

Next week, I will start to dig into what this fundamental insight means for measurements and metrics. Until then, have a lovely weekend.

Onwards and upwards, 
JP