The Alpha Strategies

The CEO: A Job Description

The CEO's job description is typically presented as a collection of vague, mushy sounding tasks such as setting the vision and creating culture.

This is hardly the stuff of a meaningful job description for the role of the Chief Executive Officer of start-up, let alone an established corporation, be it a hospital, a charity, or a for-profit company.

Let's move beyond the touchy-feely and look at what the CEO's job is all about through the perspective of the strategy system to be managed in any organization.

Managing eight strategies

Think of strategy as being choices of action and not just as being something about competitive advantage or value creation.

This was how Henri Fayol saw strategy on the first page of his General and Industrial Management, arguably the first book written on the newly emerging discipline of strategy management.

Fayol identified six strategies that he felt had to be managed in any organization.

Peter Drucker identified 2 more in The Practice of Management, in 1954. They were growth and business definition (which Drucker called "mission").

These 8 strategies are common to all for-profit, nonprofit, and public sector organizations.

They are the basis of the strategic plan, the starting point for all strategy implementation planning, and the foundation of all organization design.

The CEO's job is to understand deeply how each of these eight strategies are being implemented and to ensure that each is properly staffed and managed.

Managing the strategy system

 The CEO isn't just managing 8 separate strategies. These 8 form the basis of the strategy system found within any organization, be it for-profit or nonprofit.

One of the eight strategies is the dominant strategy for the organization.  It represents what has been called the core competency of the firm. This strategy creates the dominant culture of the organization.

This is what makes, for example, banks, having financial management as dominant strategy, different from retailers, typically having marketing / sales as dominant strategy. Or car companies, having manufacturing as dominant strategy, different from insurance companies, which have risk as dominant strategy.

CEO selection should be aligned with the dominant strategy of the firm to ensure that the CEO has the requisite skills to manage that dominant strategy. This is why car company CEO's don't run banks and so on.

As for the notion that the CEO has to come up with a "vision", we would point out that dominant strategy is the source of any vision for the organization as a whole. This is because we define vision as being a description of the hoped-for outcome of long term successful pursuit of dominant strategy.

Our definition of a vision makes it clear that no one can manage a company by just having a vision. Managing a company requires understanding and managing the eight strategies of the company's strategy system.

Managing strategy to address emerging external reality

It is the CEO's responsibility to ensure that choices of action and strategies are consistent with the ever-changing external reality the firm faces, including changing major stakeholder expectations.

This is the essence of strategy management: using a comprehensive understanding of factors that cannot be controlled (e.g., industry dynamics, markets, customers, trends, competitors and best practices) to set strategies that recognize the opportunities and challenges raised by those factors.

But strategy setting by itself is meaningless without implementation. The CEO's job also includes the responsibility for setting and imposing clear expectations for strategy implementation.

For instance, it's not good enough to say "We've decided to grow by entering new markets. So just get it done and don't bother me with the details!"

Managers responsible for strategy implementation need clear direction.

Expectations form the direction and constraints on what constitutes acceptable implementation of strategy. The CEO's fingerprints should be be all over these expectations.

 The CEO's job: The Takeaways:

Let's move away from the vague and meaningless notion that the CEO is responsible for everything.

Everyone knows that. It's time to get down to what a CEO really gets paid to do; which is to manage strategy.

Managing strategy means understanding the strategy framework common to all organizations, and in particular, the dominant strategy of the firm.

Managing strategy means staffing and allocating resources to the strategy framework appropriately.

Managing strategy means understanding the external factors impacting the firm and whether present strategies remain appropriate to do so.

Managing strategy means setting and imposing expectations on the organization for strategy implementation.

Managing strategy means holding folks accountable for meeting those expectations.

That's a big job with a lot of moving parts. Done right, the CEO looks like a hero. Done wrong and the entire organization is put at risk.

No wonder not everybody wants to be the CEO. With a proper job description, it is easy to see what  a big job it is and what it takes to be qualified to do it.

For more on strategy, see The Alpha Strategies: Understanding Strategy, Risk, and Values in Any Organization

 

Mission Statements: A Reality Check

You are probably reading this because you have concerns about your present mission statement or are being asked to participate in a fast-approaching session to develop one.

Either way, doing a reality check on mission statements holds some appeal for you.

It's not hard to understand why.

The simple definition of a mission statement is that it should be a clear statement of the core purpose of the organization. However, common practices then dictate that values, goals, and a host of other issues , such as markets served, products, and so on need to be included. Very quickly, mission statements balloon into something confusing.

So what is a mission statement? Let's do a reality check.

The Origin of Mission Statements

Mission statements come from the military. Unfortunately, the concept doesn't transfer well from a very, very old body of knowledge about making war to a very, very new one, business strategy, which is about staying relevant and sustainable.

Peter Drucker was the first to write about missions. In The Practice of Management, published in 1954, he writes that a mission answers the question "What is our business?"

What a delightfully clear answer. If your organization has audited financial statements, take a look a the notes to the statements. You will find a clear description of the business, at least in the opinion of its auditors.

So how did mission statements get so convoluted that they became the never-ending stuff of Dilbert cartoons?

A lot of the credit has to go to an article Dr. John Pearce wrote for Sloan Management Review in Spring 1982, titled The Company Mission as a Strategic Tool. In it, Dr. Pearce offers an approach for developing mission statements.

Unfortunately, the perspective offered by Dr. Pearce is completely the opposite of what Drucker was describing. Drucker saw mission as being an outside-in, fact-based description of the business. Dr. Pearce offered an inside-out, opinion-based approach: "What do you want the mission to be?"  And a era was born - 30 years of weekends ruined by strategic retreat discussions centered on which words to use in the perfect mission statement.

For public companies, the 2008 financial meltdown saw the end of mission statements, a process that had started with the tech wreck of the early 2000's. Too many giants, thought to be best-in-class, from Enron to GM, had gone bust. They all had fancy mission statements.

The mission statement as strategy

Clearly, Dr Pearce's "mission as a strategic tool" is no longer working. 

Or maybe Dr. Pearce was trying to do too much with one tool.

If you read his original article, you will see that he was trying to make the mission statement address much more than just Drucker's concept of mission as a business description. Pearce thought it should also cover markets, products, technology, aspirations, values, and so on.

We think Pearce's mistake was jumbling together a number of strategies. The right approach is to think of strategy as being choices of action and to describe each one separately. This way, "mission" becomes one of a number of choices of action to be made and managed.

This was how Henri Fayol saw strategy on the first page of his General and Industrial Management, arguably the first book ever written on the new discipline of strategic management.

Fayol identified six strategies (he called them activities) that he felt had to be managed in any organization.

They are Financial Management, Organization Management, Production (also known as Service Delivery or Manufacturing depending on what the organization does), Risk, R&D/technology, and Marketing/Sales (sometimes called communications in nonprofits and public sector organizations).

Drucker identified 2 more strategies in The Practice of Management. They are growth and business definition (which Drucker called "mission").

These 8 strategies are common to all for-profit, nonprofit, and public sector organizations. They are the basis of the strategic plan and the starting point for all strategy implementation planning. They are the basis of all organization design.

The reality check takeaways

1. Mission as just business description: Forget drafting mission statements. We now know they failed because they mixed together too many other strategies. Focus on developing an accurate description of the way the business is positioned today in the external environment today. For nonprofits, you can also look at the legislation which created the organization. That will set out a description of what the organization is supposed to do.

2. Don't stop with just a business description: Now that you have a good description of the business definition strategy, keep going! Try to capture descriptions of the other seven strategies.

3. Get consensus on the 8 strategy descriptions: Believe it or not, this is the hardest part in strategic planning; getting consensus on existing strategy!  This is when folks start saying things like: "But we don't have a (fill in one of the eight strategies) strategy! This, of course, is code for "I don't like / agree with the strategy we have" or "I don't think the strategy we have is working".  But those are very different issues than not having a strategy.

4. Understanding current strategy is the first step in all strategy planning: In our experience, the failure to understand current strategy is a major cause of the failure of strategic planning. How can you plan to change something if you don't known what you are changing?

5. Don't waste time doing mission statements:  If you take away one thing from this article, it is to forget working on mission statements. Understanding all eight strategies is more important. And if that is not possible, either because you can't or don't want to rock the boat, you can amuse yourself at the mission statement meeting by watching how close the proposed mission statement comes to the description of the business in the organization's financial statements and by counting how many of the other seven strategies end up in the mission! 

 

 

Value Creation: A Metric; not a Strategy

We are told time and time again by academics that strategy is about value creation. At best, we think value creation is a metric; not a strategy.

Saying that strategy is about creating value is about as unhelpful as saying strategic thinking is about "doing the right thing". It's no more than a platitude.

It is much easier to see value creation as a metric. For example, shareholder value increased by 400%.

Just for the record, we understand the value creation concept. We get it.

What we see are the very real difficulties caused by such a narrow definition of strategy.

Value Creation as Strategy Marginalizes Other Activities

The first issue we see with defining strategy as value creation is that it marginalizes all other activities of the organization.

Value creation is essentially about marketing; the defining of a compelling value proposition to a chosen target market.

The approach was made popular in the 1960's by Bruce Henderson's enormously successful consulting firm, Boston Consulting Group, the first management consulting firm to hold itself out as "strategy consultants". Then Dr. Porter came along in the late 1980's and further blessed strategy as being only about value creation and competitive advantage.

The trouble is that this trivializes all other activities of the organization.

If "strategy" is only about marketing, then the remaining activities are not "strategy". They are reduced to a grab bag of less important activities usually listed as process, structure, technology, risk, people, mission, and growth.

Value Creation doesn't Explain Organization Design

Thinking strategy is just about value creation and marketing doesn't explain organization design.

Dr. Chandler told us in 1962 in his book, Strategy and Structure, that structure follows strategy.

Everyone agrees that the first step in organization design is to decide on what needs doing and choices of action, namely strategies.

Then those strategies can be staffed with the appropriate personnel.

It is not easy to understand how to do that when strategy is defined as being about value creation.

Value Creation is Different for Nonprofits & the Public Sector

Value creation is different for nonprofit and public sector organizations.

This is because these organizations don't need to develop a value proposition. It is already embedded in the legislation or charter that created the organization.

Taxpayers and donors can get quite annoyed when they see their hard-earned dollars and donations being used for "marketing" instead of "communicating" relevant information to the organization's relevant users and clients.

Think about it. The IRS doesn't need to market. Its mandate gives it a monopoly on collecting taxes and enforcing tax law. It needs to communicate relevant information about tax law and compliance, not market itself.

Moreover, those nonprofits that become focused on trying to develop value propositions and competitive advantage as strategy are usually the same ones that forget to review the mandate that created them. As a result, they end up wandering away from their mandate, a condition known as "mission creep". See: 7 steps to warding off (mission) creep by Patty Hasselbring

Strategy is a dynamic system; not a concept

We think the biggest issue with believing value creation is strategy is that it prevents any opportunity to see strategy as a dynamic system of activities to be managed in any organization.

We all know organizations are dynamic systems. They are dynamic because of changing choices of action, our definition of strategy. Therefore, strategy must be an interconnected, dynamic system.

This, by the way, was how Henri Fayol saw strategy on the first page of General and Industrial Management, arguably the first book ever written on the new discipline of strategic management emerging in the 20th century as a consequence of industrialization.

Fayol identified six strategies (he called them activities) that he felt had to be managed in any organization: Finance Management Organization Management, Production (also known as Service Delivery or Manufacturing depending on what the organization does), Risk, R&D/technology, and Marketing/Sales (sometimes called communications in nonprofits and public sector organizations).

Drucker identified 2 more strategies in The Practice of Management: Growth and Business Definition (which Drucker called "mission").

These 8 strategies are common to all for-profit, nonprofit, and public sector organizations.

The Power of Strategy as a System v. Value Creation

There is real power is seeing strategy as a system rather than as simply being about value creation.

The 8 strategies are the basis of all organization design. There are now companies that have a "Chief" for every one of them, from the Chief Financial Officer right through to Chief Risk Officer and Chief Growth Officer.

The 8 strategies are the basis of the curriculum for every business school.

The 8 strategies are the basis of  the strategic plan and are the strategies that should be the focus of strategic plan monitoring by the board of directors and executive management.

The 8 strategy framework enables boards and management to prioritize strategy, something that cannot be done when "strategy" is one thing.

The 8 strategy framework enables boards and management to test the impact of decisions on one strategy on the other seven, something else that cannot be done when strategy is defined as one thing.

The 8 strategy framework enables construction of business models for each of the 8 strategies as well as combinations of them. For us, business models show how strategies (choices of action under our control) relate to external factors outside our control. At this point in time, too many business modeling methodologies are focused solely on developing a value proposition for the marketing strategy.

So what happens to the concept of value creation? The answer is simple. It is still very much the quest of the marketing/sales strategy. But marketing is just one strategy of 8 that need to be managed in any organization. Start thinking about the other seven and about strategy as a dynamic system.

For more on strategy as a system, see The Alpha Strategies: Understanding Strategy, Risk, and Values in Any Organization

 

 

 

Expectations v. Culture

Which is more important; expectations or culture?

Let's put it this way. If you ask employees, they are likely to say "I have no idea what 'culture' even means. But I sure pay attention to what my boss wants."

And in a heartbeat it is apparent that expectations (i.e. what the boss wants) are the driver of all strategy in any organization. They are the bricks in the wall that we see as culture. Pull out a few that are critical to the wall's  structural integrity and the whole wall comes tumbling down.

So why aren't we focused on understanding the power of expectations instead of culture. Well, for starters, Peter Drucker said "Culture eats strategy for breakfast." So no one has looked past strategy. Everyone assumes culture is more powerful than strategy. The question we are raising is "If expectations are the driver of all strategy implementation, does this make expectations more powerful than culture?"

The Top-Down Stigma

Little is written about expectations as being the driver of strategy. We think this is because of what we call "the top down stigma".  This is the notion that employees are independent, autonomous thinkers who, if left alone, will figure out what to do. So we hear things like: "Get me the right team and they'll know what to do."

The notion that strategy is imposed by top-down expectations seems to be an anathema to most academics and business writers. For them, all employees need to be able to figure out their own objectives. That may be so but it cannot happen without a clear articulation of the expectations those employees are expected to meet.

When you look at successful strategy implementation, the first thing you find is the articulation of clear expectations. This, in turn, enables managers and employees to be clear on strategy priorities and to identify choices of action to satisfy the imposed expectations.

The second thing you find is that all expectations flow top-down. What defines good organizations for us is that when employees and managers find that the expectations imposed on them cannot be reconciled with the realities of their external environment, they are allowed to speak up and say so. This is how employee and managerial feedback drives informed decision-making on strategy implementation.

Unfortunately, in far too many organizations, managers and employees are expected to keep their heads down and mouths shut when they see a disconnect between expectations imposed on them and their external reality. Eventually, strategy implementation fails because of this.

Confusing Strategic Thinking with Problem Solving

The second reason we think the focus should be on expectations rather than culture is that expectations are a key component in strategic thinking. However, there are far too many who make the mistake of thinking strategic thinking is about problem solving.

Peter Drucker told us in 1954 in The Practice of Management that strategy decisions were not problems to be solved. Back in Drucker's day, before strategy got tied up in a strait jacket labeled "competitive advantage", strategy was about choices of action. 

Strategic thinking is a subset of critical thinking characterized by thinking about those choices of action. It does this by thinking about how to manage assigned responsibilities consistently with both imposed expectations and the realities of a changing external environment.

Problem solving is a distinctly different subset of critical thinking and is characterized by spending as much time time trying to identify "the problem" as will be spent solving it.

The point is that strategic thinking is driven by imposed expectations. For the CEO, Managing Director, or owner or, in the case of nonprofits, the Executive Director, these expectations come from major stakeholders, such as major shareholders, lenders, or donors. For all employees, the expectations are imposed on them by their boss.

It seems obvious to us that the best way to improve strategy implementation, as it cascades down through the organization, is to improve the articulation and discussion of expectations for its implementation.

Increasing the Reach of Expectations

Right now, expectations are the foundation of every annual performance appraisal. Employee performance is judged on the basis of whether it met, exceeded, or did not meet imposed expectations.

What we see missing is the direct link between employee expectations and how business units, departments, and functions go about their planning. This is because there is a huge void between employees and the strategies of the strategic plan.

The strategic plan should be the source of the initial expectations to drive strategy implementation by departments, business units, and functions. For example, if the growth strategy is to grow by acquisition, what expectations should be articulated to guide an acceptable implementation of the growth by acquisitions strategy?

Without these expectations, the growth strategy can quickly run amok (as it did for the Icelandic banks that went so spectacularly bust) or go nowhere (as it does for many organizations that do not understand how to use expectations to drive strategy implementation).

Obviously, the board of directors should be playing a large role in understanding and reviewing expectations as part of its role in providing oversight of the strategic plan.

Expectations are not going away

We often hear that an organization is dysfunctional because of its "culture". But at the end of the day, it becomes obvious that poor articulation and management of imposed expectations is always the cause of "bad culture".

There are still far too many managers and bosses who don't articulate clear expectations, preferring instead the deadly and ambiguous "Just get it done, okay? And don't bother me with the details."

We need to start focusing on clear articulation of expectations as the primary means to improve strategy implementation.

If expectations are the individual bricks in the wall called culture and you want to change the culture, then start by pulling out and changing the expectations most critical to holding up the wall. That's how to change culture. Don't focus on the wall. Focus on the most important bricks, the expectations.

For more on strategy and expectations, see Strategy + Expectations = Culture

For more on strategy, see The Alpha Strategies: Understanding Strategy, Risk, And Values in Any Organization

 

Need a Strategic Plan? Relax. You Already Have One!

Need a strategic plan? Relax. You already have one. If your company is up and running, there is a strategic plan in place. It's just not yet been put to paper.

Many businesses and nonprofits have operated successfully for a long time without having a written strategic plan.

But now you need one. Our guess is that you need it because a third party, maybe your lender, a new director or business partner, or even a new employee, is putting pressure on you to prepare one.

But you are nervous about getting into a strategic planning process. We don't blame you. They are all about developing new strategy and maybe your business or nonprofit doesn't need any new strategies.

Stop and think for a moment about what it means that your company has been able to operate successfully without a written strategic plan. It means that there is a strategy system already in place and being implemented. You need to make sure there is consensus on the description of the present system or you could be changing strategy for no good reason.

8 strategies are common to every kind of business

To get started on documenting your current strategic plan, use our definition of strategy: "Strategy is a choice of action".

Our research finds there are 8 strategies (or choices of action) common to all for-profit and nonprofit businesses. Using this definition of strategy, strategic planning becomes a review of the eight choices already made.That review is made by considering those choices against the factors in the external environment that would most impact the performance of each.

Let's look at the content of each of the eight.

The Eight Strategies Common to Every Organization

Business Definition (called Mandate in nonprofits): This strategy is also known as the “mission” statement, although done properly, it is just a succinct description of the business and how it is positioned in the competitive environment relative to similar businesses. If your company has audited financial statements you'll find this strategy described in the notes to those statements.

Financial Management: How the organization sources, allocates, and manages capital and manages its revenues and expenses.

Risk: How the organization identifies and manages events, which if they occurred, would have unacceptable consequences.

Marketing/Sales/Communications: (called “communications” in many nonprofits): How the organization identifies and captures customers/users/clients and manages stakeholder relationships

Growth:  How the organization is trying to getting bigger, smaller, or stay the same size

Organization Management: How the human resource needs are sourced, allocated, and managed. (Note: the 8 strategies are also the basis of all organization design)

R&D/Technology: How the organization develops and/or uses intellectual capital

Service Delivery/Manufacturing/Production: How the organization fulfills the marketing/sale or communications promise of value delivery

It's not good enough for you to understand your strategies if you can't describe and explain them to others

Good descriptions of what is being implemented within each of the eight strategy categories together with as much information as is useful to explain the hows, whys, and metrics of the implementation of each will give you a great story on how your business or nonprofit works today.

The exercise will inform everyone on how the company actually works. This in itself could lead to noticeable improvement in performance of some or all of the eight strategies. After all, the purpose of a strategic plan is communication of strategy. Better communication produces better performance. It's not good enough for you to understand your strategies if you can't describe and explain them to others.

The exercise may even point to strategy you want to study further because changes in the external reality are beginning to impact its performance.

Now you have a written strategic plan. No need for a planning process to produce it. No need for fancy jargon. Your strategic plan was created by carefully documenting what is already in place. This always has to be the first step in preparing a strategic plan. Strategic planning often fails because the assumption is made that everyone has the same understanding of current strategy.

Your next step is to keep reviewing the plan (i.e. the choices of action that have been made) against the realities of a changing external environment. If you don't, the plan and its preparation simply becomes an academic exercise when it could be the agenda for much more powerful management and board discussions on strategy.

With everyone around the table agreeing on what is in place now, those strategy review sessions should become much more productive. Instead of looking back at past performance, you will be peering into the future trying to predict what might happen and how to be ready for it.

For more on strategy, see The Alpha Strategies, Understanding Strategy, Risk, and Values in Any Organization

Vision and Mission: They are changing. Should yours?

Vision and mission statements are changing. Should yours?

We make the case that IBM changed the understanding of vision statements for the better and GM's bankruptcy marked the end of the use of mission statements.

It's time to revisit your vision and mission statements with this in mind.

IBM changed our understanding of vision statements

The vision statement went in a new, better direction 20 years ago when Lou Gerstner took the helm of IBM in 1993 and saved it from imminent collapse.

Gerstner was asked at his first press conference whether he had a vision for IBM. He answered “IBM doesn’t need a vision statement. It needs to execute the strategies it has.”  

Academics and the business press were horrified and shocked. They didn’t know what Gerstner meant. All they could think was “How can you run a company without a vision?”

What Gerstner was saying was that IBM already had a long term direction, a vision, as a consequence of the strategies it was pursuing. He was saying that he didn’t feel well enough informed on IBM’s strategies driving that long term direction to make any change to them. At least, not at that time!

Nine months later, after a lot of study and discussion, Gerstner fundamentally changed IBM’s strategies, in particular its dominant strategy. We think Gerstner showed us that strategy, not vision, comes first, particularly the choice of dominant strategy. Once strategy choices are understood and made, then a vision statement can be developed. Vision is a consequence; not a starting point of strategy.

GM changed our understanding of mission statements

As for mission statements, they were already falling out of use when GM went bankrupt in 2009.

Changes in securities legislation in the early 2000's, Sarbanes Oxley for example, impacted the way North American public companies were drafting vision and mission statements. Today, many publicly-traded companies don't use mission statements. IBM doesn't have one. And their vision statements are very much toned-down.

Let's look at GM's contribution to this change, GM was a global icon. GM was the very heart of American business. Yet GM’s pre-bankruptcy mission statement was the stuff of Dilbert cartoons. The GM mission could have been applied to any company in any industry; which meant it was meaningless.

Old GM's Mission Statement

“We are a multinational corporation engaged in socially responsible operations, worldwide. We are dedicated to provide products and services of such quality that our customers will receive superior value while our employees and business partners will share in our success and our stock-holders will receive a sustained superior return on their investment.”

The new GM, post bankruptcy, has no mission statement. GM does provide a carefully worded vision summarizing what it would like its strategies to achieve in the long term. So goes GM, so goes America.

The mission statement is no longer in use.

What this means for your vision and mission statements

To have a meaningful vision statement, you need to understand your strategy system, and in particular, your dominant strategy.

We define a vision statement as a description of the hoped-for outcome from successful long-term pursuit of dominant strategy.

You have to think like Gerstner. Ask yourself, “Am I well enough informed on current strategy of the organization to understand which strategy is its dominant strategy?”

If you don’t think you know which strategy is dominant for your business or nonprofit, what does that say about the possible quality of your present vision statement?

As for mission statements, we take the position that "mission" has always been just 1 strategy of 8 in a strategy system common to all for-profit and nonprofit organizations. See: Strategy Models: Where are They?

We define mission as the Business Definition strategy, also known as the Mandate strategy in nonprofits and government organizations.

The Business Definition/Mandate strategy provides the answer to Peter Drucker's famous question "What is my business?" posed in his 1954 classic, The Practice of Management. It is not supposed to address anything else.

Over the years since 1954, missions turned into convoluted attempts to address more than business positioning or mandate, as the old GM mission statement above demonstrates. In short, in addition to describing business definition, mission statements were trying to address a number of the other strategies in the strategy system.

But thinking on vision and mission statements  has changed dramatically.

The focus is now solidly on first understanding the strategy system in your organization.

That focus will enable you to understand your Business Defintion / Mandate strategy and your entire strategy system.

You will then be able to understand which strategy is dominant for your organization, which will , in turn, drive development of a much better vision statement that describes the outcome of long term pursuit of that strategy.

And you will probably stop using mission statements all together.

For more thoughts on this and other aspects of strategy, be sure to read The Alpha Strategies, Understanding Strategy, Risk, and Values in Any Organization.

Strategy v. Business Models: What's the Difference?

We are often asked to describe the difference between strategy models and business models.

Our answer is that strategy models show the strategies of a business while business models show the interactions between strategies and the uncontrollable external factors that the strategies are intended to address, such as customers and suppliers.

This all sounds very straightforward. But things get murky very quickly when you consider the current wisdom on the definitions of both terms.

Definition of Strategy

The lack of consensus on a definition for strategy is problematic for differentiating strategy models from business models and we think has impacted the development of robust business models.

Many academic textbooks don’t even attempt to define the term, preferring instead to offer a half a dozen or more different definitions collected from other sources.  The result is that the reader is left with a confusing array of definitions.

The common denominator for all these definitions is that strategy is typically seen as being the way a business organizes itself in order to compete. This is problematic, in our opinion.

This seemingly “broad” definition actually shuts out any ability to construct a strategy model showing the structure of strategy in an organization. For one, it assumes strategy is one overarching “thing”, usually to do with competitive positioning and competitive advantage. It is just not possible to build a strategy model based on a single element and is our argument as to why strategy models are so scarce.  See: Strategy Models: Where are They?

The way academics have overcome this issue is to relegate all other activities in a business to being “inputs” in some sort of vague, general “value chain” that then enables strategy to work.

As a result, most models of strategy don’t speak to the structure of strategy at all.  

They are simply models of a strategy development process. The most popular of these so-called models typically shows vision at the top of a model which works its way down to a base of strategy and tactics.

Clearly, this is a process model. It tells us nothing about the strategy of an organization.

Definition of Business Model

As was the case with strategy, there is no consensus on a definition for what constitues a business model.

We believe this is largely caused by the unfortunate current popular misconception that strategy is only about the way a business organizes itself for competitive advantage.

As a result, the closest academics can get to defining business models is saying that they are about reflecting a sustainable way of doing business or that it is a platform that connects resources, processes, and services that will deliver profitability of the business.

Compounding the confusion is the use of the word “business” in business models. We have yet to find a definition of  the term “business” but we know it is largely assumed to be something that is for-profit in nature.

Experience and common sense tell us that business models are not unique to for-profit organizations. Everyone knows that every organization, be it public sector, nonprofit, or for-profit has a business model.

Conclusion

This brings us back to our definitions that strategy models show the strategies of an organization and business models show how those strategy choices interact with the uncontrollable external factors the strategies were meant to address.

We also think the strategy model and the business model must be dynamic.

At this time, models of strategy and business models are very much static, meaning there is no ability to move individual components around in the model.

One way to achieve both a dynamic model of strategy and business model is define strategy differently and this is how we approached the issue.

In our book, The Alpha Strategies, Understanding Strategy Risk and Values in Any Organization, we define strategy as a choice of action.

We used the thinking of Fayol, Drucker, Mintzberg, and Tregoe & Zimmerman to build a strategy model comprised of the 8 strategies and 3 types of strategy common to every organization, no matter whether it is for-profit, nonprofit, or public sector.

These 8 strategies are the basis of all organization design in any organization and are the starting point for all strategy planning and, in our opinion, developing a  business model.

Our model is dynamic in that it can be used to show current strategy and its configuration and to show the impact of strategy decisions that change strategy or their configuration positions.  See our online dynamic Drag'n'Drop Strategy Board

For any business that is up and running, we think it is absolutely necessary to understand its strategy model in order to truly understand or even build its business model.

Without first understanding strategy and its configuration, it is too easy to lose sight of the role of each of the strategies. 

This is why most business models today are centered on 1 or 2 of the eight strategies, usually marketing and finances,  without addressing how the remaining 7 or 8 strategies contribute to that business model.

Understanding both the strategies of a business as well as its business model is essential to being able to communicate convincingly how the business works.  And if that can't be done, trouble is not far away.

Strategy Storytelling: Apple's Startup

We wanted to use The Alpha Strategies model to explain how we see strategy falling into place from the very moment a company is born.  

We decided to use one of the greatest success stories in the history of business: Apple's startup, for our example.

We have relied heavily on urban legend for our Apple facts. But that's the secret of all great stories, isn't it? But our message isn't a secret. 

We define strategy as a choice of action. 8 strategies are common to every organization, be they for-profit or nonprofit. Those strategies may change over time but the 8 are being implemented from the day the company is started. They are the source of all subsequent strategy and the basis of all organization design.

But let's get on with the story. Steven Jobs and Steven Wozniak, and a third person whose name, like that of the fifth Beatle, has disappeared over time, got together in 1976  to start Apple.

Breathing life into Apple started with these young men. They were, in effect, the first strategy; the organization management strategy, being the sourcing, allocation, and management of the human resources of a firm. All the tasks in the new company would be divided among the two Steves and the third co-founder.

Next came the marketing/sales strategy, being the strategy to identify and capture customers. The marketing/sales strategy was that Apple was going to market and sell personal computers to individuals.

Unfortunately, none of the young entrepreneurs had any money or even a place to build their revolutionary product. So, armed with their organization management and marketing/sales strategies, they approached Mr. Jobs Sr. to ask for a loan and the use of the Jobs' family garage as a production facility.

In other words, the financial management strategy; being the sourcing, allocation, and management of capital and revenues of the firm, was to borrow from Mr. Jobs, Senior.

Remember, this was all happening shortly after Ken Olson, president and founder of Digital Equipment Corporation, had famously declared: “There is no reason anyone would want a computer in their home.”

It is very likely that Mr. Jobs Sr. was aware of this pronouncement. Before making any loans or handing over the keys to the garage, he probably wanted to hear his son explain how this new venture, called Apple, would be positioned to succeed in the computer industry. 

In other words, the Dad wanted to know their business definition strategy, being how the business is positioned in the competitive environment.

The young Steves no doubt impressed Mr. Jobs Sr. with their detailed knowledge of the emerging market for personal computers and its potential for spectacular growth. Dad was clearly sold on the idea. They got the loan and the keys to the garage.

Now the young men were ready to implement a production strategy, being the way they were going to fulfill the marketing/sales promise of delivery of value. The strategy was simple. Wozniak would assemble the pc kits one at a time. However, it quickly became apparent that they could not produce products quickly enough to meet the demand!

The young entrepreneurs were having their first encounter with the need for a risk strategy; being the focus on threats and opportunities the company’s strategies faced. The risk they identified was that demand for the product required a high-volume production strategy.

So they turned to the seventh of the eight strategies, the R&D/technology strategy, being the creation and/or use of intellectual property, to manage the production risk. They moved production from the garage into a proper manufacturing setting complete with the technology of assembly lines, conveyors, and the associated, usual practices to enable volume production. 

The rest of the Apple story becomes a history of incredible global success. Apple took off. In other words, the eighth strategy, the growth strategy, was classic Drucker; the consequence of product success.

The point of the story?

For owners, managers, and boards, there are 8 strategies in every company. Do you know what yours are today? Do you know the history of their evolution to today's choices of action?

Unless you understand and can describe current strategy and where it came from, you can't communicate it to others. And how can you change a strategy you don't understand? How can you tell a compelling story?

For all entrepreneurs and startups, what are your answers to the 8 questions of strategy? What are your business definition, risk, growth, financial management, R&D/technology, organization management, production (a.k.a manufacturing or service delivery depending on the nature of your business) and marketing/sales strategies going to be?

The answers to the eight questions are, of course, the strategic plan!

That's what a strategic plan is: a review of the 8 strategies to determine whether change is required given changing stakeholder expectations or changing factors in the external environment.

For more on these ideas, see The Alpha Strategies, Understanding Strategy Risk and Values in Any Organization. Available at online retailers everywhere or for free in pdf format at www.thealphastrategies.com

 

Amazon's Strategy System: The Video Explanation

We wanted to provide a video explanation of our popular post on Amazon's strategy system.

We use The Alpha Strategies methodology to explain why we think the Alpha at Amazon is Service Delivery, not Marketing. And by using Service Delivery with Technology as an Influencer, Amazon disrupted the retailing industry.

We also provide a brief explanation of our Drag'n'Drop Strategy board.

 

Strategy + Expectations = Culture

We think the source of culture in any organization is strategy and expectations.

We know this runs counter to popular thinking that culture is something amorphous that cannot be defined and has something to do with employees; particularly the CEO.

Here’s why we disagree with popular explanations of culture in companies.

Employees Don’t Set Culture…

Culture is typically defined as being the values and practices shared by members of a group, which, for a company, means its employees.

Where we think the discussion goes offside is when it focuses on the group, i.e. the employees, rather than on values and practices. This misstep leads to the assumption that employees are the source of the company’s culture and that culture will change as employees, including the CEO, come and go.

If the focus is on “values and practices”, then you start to look at the source of values and practices. This leads you to start thinking about what employees are doing in the business. And what they are doing is what they have been hired to do; namely, what they are “expected” to do.

What they are expected to do is their job, which in turn is all about implementing their portion of specific strategy in a prescribed manner. 

In our opinion, this makes strategy and expectations the source of culture; not employees.

But what about Drucker?

So why is culture always put forward as being more important than strategy? We think it's because the term "strategy" is so badly defined. Most writers on culture start by saying that strategy can't be defined. Or define it so narrowly as "competitive advantage" or so vaguely ("value creation") that the term becomes meaningless.

Or Drucker's famous quote "Culture eats strategy for breakfast" is trotted out as evidence that culture supercedes strategy.

Really? We think Drucker was brilliant at describing what goes on in organizations. We think what Drucker was describing was that "existing strategy", being the way things are done now, "eats new strategy" for breakfast. And we totally agree with him on that!

Dominant Strategy Sets Overall Culture...

So what's the source of culture? Let's start with the concept of dominant strategy. That's what gives an organization its dominant culture.

for example, that's what makes banks different from insurers. Or manufacturers different from retailers. Or tech companies different service delivery ones.

Strategy is all about choices of action. We define it that way: "Strategy is a choice of action".

Our research for our book, The Alpha Strategies, finds that there are 8 strategies and 3 types of strategy common to all organizations, be they for-profit or non-profit.

In other words, there is a strategy system common to all organizations. See Strategy Models: Where are They?

We argue that any one of the eight can be the Alpha or dominant strategy of the organization and that certain Alphas are associated with specific industries.

For example, financial management is the Alpha in banking; risk, for an insurer or for any regulatory body; service delivery for much of government, healthcare, airlines, and parcel delivery; marketing/sales for retailing; and R&D/technology for many tech companies, universities and some hospitals.

Dominant strategy doesn't change easily.

Most CEO's need not and should not be changing dominant strategy. This is why it is so important for boards to understand what dominant strategy is for the organization when they hire a CEO. Hiring a CEO with the wrong skills to manage dominant strategy quickly sends the organization into a funk because the CEO’s strengths don’t match the needs of the Alpha strategy.

Imagine appointing a tech guy to run a bank or a banker to run a retailer. Or a retailer to run a regulatory agency. It just doesn’t work. Dominant strategy in place sets the culture; not the CEO. The CEO manages the existing strategy. And it takes a very skilled CEO to understand when an organization needs to change its dominant strategy and to manage successfully that change. Think Lou Gerstner and IBM's transformation under his leadership.

… And Expectations Implement Culture.

Expectations are a description of hoped-for outcomes.

A CEO and all managers deliver all strategy through imposed expectations. Expectations are the principal driver of all strategy implementation.

Think about it. We don’t do what we want to do at work (unless you own the business…). We do what our boss wants us to do; expects us to do.

Hence, that lovely old saying: “What interests my boss absolutely fascinates me.”

When we say “expectations”, we mean: “imposed expectations”. Expectations reflect the top-down imposition of guidance and direction with respect to how a specific strategy is to be implemented.

For example, if the growth strategy is to grow by acquisitions, then expectations would frame the parameters of what constitutes an acceptable acquisition strategy.

Strategy is implemented by expectations. This, in turn, produces the well-known question, "How are we going to get this done, folks?" which results in the next iteration of strategy for implementation.

Focus on Strategy & Expectations; not Culture

The lesson to be learned is that there needs to be more focus on understanding and communicating strategy and expectations. There needs to be much more care identifying and understanding dominant strategy. The same applies to the development and communication of expectations essential to implementing strategy.

Do that and culture will take care of itself.

Strategy plus expectations equal culture.

To understand how the dynamic strategy system works in your organization, visit our drag'n'drop strategy modeling site and get The Alpha Strategies working for you!