Message here – you can””t do strategy with 2×2 boxes, Vision statements and spreadsheets – you need rigorous and powerful models of your business and its environment. And this is not just for big boys and girls - my friend Warren Farr who runs RSC, a regional distributor of heating, ventilation and air-con equipment, built a strategy model of his market. This told him a market slow-down was not a normal cycle but a fundamental shift to an era of lower demand. Competitors kept expanding, believing growth would return – Warren held back and banked the cash. When competitors failed, he bought up cheap capacity and failed businesses, putting RSC into a strong position – much to the delight of employees who would otherwise have lost their jobs.

www.strategydynamics.com

It was not at all trivial to get these benefits - heavy input by their project mgmt experts, detailed modeling of how  projects actually work and get revised or blown off-course, then design of a powerful but usable control system that every project leader can use, and intensive training to embed it. Click here for their paper. [Any problems, it is also here.]

… but look at the benefits. So confident is Fluor in the system that they now work it through with their clients, not just as projects start, but also as changes arise. 

… which is exactly what my friends Drew Jones and Jack Homer have done with Joyce Essien of Emory University, and Dara Murphy and Bobby Milstein, both of the Centers for Disease Control and Prevention (CDC). More information on the model is available at the Sustainability Institute website.

A summary of the key structure capturing how people move between increasingly seriousness states in relation to diabetes is in chapter 6 of my book, and a detailed discussion is given in Jones, A.P., Homer, J.B., Murphy, D.L., Essien, J.D.K., Milstein, B. and Seville, D.A. (2006) Understanding diabetes population dynamics through simulation modeling and experimentation, American Journal of Public Health, 96(3), 488–494.

The background is that ‘strategy’ courses in business schools [notably Harvard] were originally called ‘business policy’ and focused on what the general managers do to direct their organizations – i.e. the practice of strategic management. This was supported by powerful case-based teaching, which reinforced the idea of strategy as a craft, to be learned by kneeling at the feet of masters – a stance still driven hard by Henry Mitzberg and his followers.

From ‘business policy’ to ‘strategy’

Then Harvard and others got worried that there was no academic rigor supporting this approach. Michael Porter came to the rescue with micro-economics to explain what ’caused’ profitability and strategy became academically respectable. This is critical, because academics only get on by publishing within a large community of like-minded scholars who share an accepted theory – a paradigm of how the world works [or at least the bit of it that interests them]. So we saw enthusiastic academic engagement with ‘strategic management’ [actually, industry analysis], and very popular strategy courses. MBAs could only get jobs in consulting and banking firms if they mastered these concepts.

Industry analysis runs out of road

There was nothing wrong with industry structure theory or the insights it offered, but two problems followed. First, research showed that it explained rather little of why some firms outperformed others – management matters! So concepts around capability and competence blossomed. Unfortunately, these had little rigorous theory-base, so proved disappointingly unreliable and lacking in much that professionals could build on.

Then, the dot-com era seemed to blow apart the whole idea of industry structure, competitive forces and profitability [it didn't, as it happens - there's a perfectly good story of how industry forces changed and drove the upheavals of the dot-com boom and bust]. Unfortunately, industry analysis still didn’t explain much about how firms won or lost, and wasn’t much use to executives wanting to work out what to do to drive performance into the future.

Then came the resource-based view [RBV]

This motivated strategy academics to look into the stronger explanations for performance – in the ‘resources’ of the business itself. Unfortunately, theoretical economists were still in the driving seat, and  dismissed simple, tangible factors, like products, capacity, cash and staff as irrelevant – they were easy to copy or buy, so couldn’t provide any sustainable advantage. The field has since spent 20 years investigating abstract and arcane concepts. I’ll get beaten up for saying this, but here goes – RBV has been useless. Just ask the top teams at any significant, successful organization or partners at the top consulting firms when they last did an RBV analysis for a business.

Strategy tools – not fit for purpose

So, that’s how we have come to this point. Students don’t like strategy courses because they don’t learn anything useful. Recruiters don’t like what students learn because it’s no use. Executives don’t use the tools because they don’t help with real-world strategy. And academics don’t join the discipline because it isn’t one – they prefer to stick to true disiplines, such as economics, finance or organizational behavior.

Why are strategy tools not fit for purpose? Two reasons:

1. Strategy tools aim to answer the wrong question - why are some firms more profitable than others? We have known since the 1950s that superior profitability is neither sustainable nor of much interest. ROA is high in pharmaceuticals, but low in basic materials, but that doesn’t mean basic materials firms have zero value. Then, would you rather have 20% ROA in a shrinking business or 12% in a growing one? The question we really need answered is why some firms deliver stronger sustained growth in cash-flows than others. For theory to be valuable, it needs to meet three criteria – being general, useful and true. ["All red-heads are quick-tempered" would be general and useful, but unfortunately is not true.] The micro-economics of industry profitability is general and true, but is simply not useful for this purpose.
2. Strategy tools deal with strategic positioning, not strategic management. Industry forces analysis says how to position a firm compared with rivals, as does the value curve. But as I’ve posted on before, the simple fact is that firms very rarely need to re-ask this question. Strategy academics don’t like the idea that strategy is a once-a-decade question, so this obsession with ‘position’ has led to a further obsession with strategic innovation, tranformation and business model redesign – all of which are nearly always irrelevant to nearly all organizations.

The available strategy tools say nothing much about how to make the continuous stream of decisions, across the entire organization, that have to be made from week to week, month to month.

By the way, a regrettable by-product of this mis-direction is that strategy had little or nothing to say of any value to non-commercial organizations – public services, charitable groups and non-governmental organizations. They may not be pursuing growing cash flows, but they are aiming for continuous improvements in other outcomes.

A way forward

The journal articles offer some solutions to the crisis in the strategy field. Professor Joseph Bower urges a focus on organizations’ values. That’s fine, but it’s another example of a one-time choice. Having decided on their values, exemplars like Johnson & Johnson, Infosys, P&G etc don’t change them every week, month, or year. So what do strategic managers actually do in between? Professors Richard Whittington and Paula Jarzabkowski urge a refocus on strategy-as-practice. But it’s not clear there’s much theory here, and identifying what managers do on strategy is not the same as working out what would be best to do. Professor Robert Grant urges a return to a solid theory-based approach – problem is that the only theory we seem to have is micro-economics, which has nothing much to say about the continuing management of strategy.

If executives, consultants and students are going to find strategy useful, we need a rigorous, theory-based explanation for why organizations perform as they do over time, and how management decisions can improve that performance. Only then can we teach students and advise management how to develop and implement policies that will deliver sustained, strong performance.

I have offered one possible answer to this challenge with strategy dynamics – a management implementation of the rock-solid, deep theory of ‘system dynamics’. I am entirely happy to subject this approach to the standard scientific test – falsification. So please, if you think it doesn’t work, please prove it. It meets the three requirements of valuable theory – it’s universally general, very useful and demonstrably true in every case.