Is Strategy Fixed or Variable?

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Posted: July 18, 2013

Ken Favaro

Ken Favaro is a senior partner with Booz & Company based in New York. He leads the firm’s work in enterprise strategy and finance.

 

 

Strategy & Leadership

 

The short answer to the question above is yes. The challenge is how to make strategy both fixed and variable at the same time, which will increase the pace and quality of your company’s decision making and execution by leaps and bounds.

Successful strategists know that strategy must be adaptable, dynamic, and flexible. This is because every strategy is a bet on a perceived future and each day brings new learning and information about how your future might unfold. Technological innovations, political movements, regulatory changes, competitive disruptions, evolving customer expectations, organizational turnover, and count-less other forces conspire to render irrelevant, out-of-date and off-the-mark even the most “fact-based,” thought-out, and well-informed strategies. Moreover, every company and its businesses are confronted by a constant stream of challenges and opportunities requiring choices that could—and should—materially change where it plays or how it wins. Thus, the true work of strategy is never done; it happens throughout the year, every year and every day.

Nordstrom is one company that has institutionalized strategy as a continuous, variable thing. At each of its executive and board meetings, leaders address specific strategic challenges and opportunities that are material to the company’s enterprise value. They tackle issues and opportunities as wide ranging as whether to create a new young women’s fashion department, how to participate in the ecommerce revolution, and how to digitize its retail floor operations. As challenges and opportunities are resolved, they are replaced with new ones that are rolling relentlessly over the horizon (as they always do for every company). This has dramatically raised the metabolic rate of decision making and execution throughout Nordstrom. And it has made strategy a living, ever-changing, adaptable, and highly effective management tool for its leaders.

As a rule of thumb, companies can make two to three major strategic decisions per year, each of which can be worth 5 to 10 percent of an enterprise’s economic value. Thus, over any five-year period your strategy might turn over completely—though certainly not all at once.

So all strategies should be considered variable, right? Not so fast. While your strategy can—and should—continuously evolve, its foundation should not.

At the corporate level, it can take years to build your own distinctive way of adding value to your company’s businesses and this will always be specific to certain types of businesses. This is why Berkshire Hathaway steers clear of high-tech companies, Procter & Gamble exited food, and Wells Fargo kept away from investment banking (until it acquired Wachovia during the recent financial crisis). You may be able to turnover your portfolio rapidly—even within a few months—but it takes years to change your way of adding value to your portfolio through the capabilities that support it. For example, Frito-Lay’s direct-to-store delivery capability, Inditex’s fast-fashion supply chain, and Toyota’s production system took years to hone into true sources of enterprise differentiation. The foundations of a corporate strategy need to be stable enough for long enough to let it work.

Likewise, at the business unit level, it takes time to build a compelling value proposition and the differentiating capabilities to deliver it. Frequently or suddenly changing your target customers or core value proposition creates a moving target. JC Penney is just the latest poster child for what happens when you abruptly change business strategy. Both its customers and capabilities system were put into shock with its sudden switch from promotion-based selling of mostly its own branded apparel to everyday “low” pricing of store-within-store branded merchandise.

Consider the difference between how Nordstrom and JC Penney manage strategy. At Nordstrom, leaders continually challenge the merchandising, store, channel, and all other dimensions of their strategies in a way that takes advantage of the foundational choices that underpin their corporate and business strategies, whereas Penney pulled the rug out from beneath the foundation itself.

Smart strategists enable companies to modify their strategies as their environment and context change. They avoid the mind-set of “We set strategy and then implement like hell.” Their mind-set is: “We implement like hell and never stop challenging our strategy.”

But the ability to do that is based on having a strong foundation. If your company is clear and consistent about how it adds value to its businesses, leaders will make better decisions about the shape of their portfolios. If a company’s leaders understand what comprises its differentiating capabilities, they’ll prioritize their growth priorities to leverage and enhance those capabilities. If the individual businesses within a company are sharp and consistent with regards to their own target customers, value propositions, and differentiating capabilities, its people will make smarter decisions on what to sell, what markets to enter and exit, how to manage new product development, how to manage costs, where to invest, and all the other choices that are inherent in winning customers and market leadership.

Your strategy must change every day or it will fail to keep up. But much of it also needs to remain constant or all those decisions and actions your organization is taking will be diluted by their lack of direction and coherence. The successful strategist knows how to manage this apparent contradiction. Do you?