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Harvard Business Review Leader’s Handbook (2. Developing Strategy)

The essence of strategy is making choices … One of the leader’s jobs is to teach other in the organization about strategy – and also to say no – Michael Porter

What is a strategy?

We define strategy as a coordinated set of actions that organizations, divisions, and teams follow to win: to create distinctive value for customers, differentiate their performance, beat out competitors, and move toward the vision they’ve set. Leaders develop a strategy by guiding their people through choices about where and how to compete for customers that are better than their rivals’.

Michael Porter, “Strategy is as much about what you decide not to do, as what you do do.” The mark of a failing strategy is trying to be all things to all people – and not having the courage of focus.

The Process of Strategy

Two common pitfalls are:

  • Incorrectly assessing an external market situation or misjudging an internal capability needed for the strategy – or both
  • Being surprised by a trend that suddenly changes the game of your business – for example, a new technology or unforeseen competitor that arises

So what are the essential steps? What is the best way to find the right balance, on the one hand, between analysis and deliberation to make the right choices, and on the other, embracing speed, flexibility, and openness to adaptation, suited to today’s faster and more unpredictable climate?

Developing a process to make your strategic choices

Typical problem-solving steps

Step 1, Set the stage

  • Purpose. Why generally are you developing a new strategy? What’s driving the need or opportunity to do that? Do you need a fresh approach to achieving your vision, or do you have a new vision? Your strategy should begin by answering a simple powerful question about the intent of your effort.
  • Audience and stakeholders. Who will the strategy potentially benefit, who must be involved in developing it, and who must ultimately approve it? Key stakeholders might be, for example major influencers in the organization, board members, or frontline people who would have to be centrally involved in delivering the strategy.
  • Scope, constraints, and potential implementation implications. What arenas and unit of analysis must the strategy be situated within? Are there limits or boundaries to what can be pursued from the outset? If the strategy is accepted, what ripple effects will follow? What are the implications for other corporate units? customers? Brand identity? An so on.
  • Participants, engagement, deliverables. What kind of team will work to create the strategy? How will its members work with one another and the broader universe of stakeholders? Will there be off-sites, virtual meetings, multiple strategic planning sessions? How many, when, and so on? And What final form will the strategy take?

Step 2. Set strategic goals

A good strategy should aspire to achieve a limited number of relevant goals that stakeholders of the organization can easily understand; it should also simply explain how achieving them will reflect progress toward its vision. (Goals are usually further broken down into specific objectives and intermediate outcomes for executional planning.)

Step 3. Understand your current situation

Once you’ve set goals tied to your unit’s or your company’s larger vision and strategy, turn your team toward understanding the status quo. Make an honest appraisal of your team’s existing business – current performance, assets, capabilities, basis for competition, and so on. Then do the same for the world in which your unit and broader company operates, looking at how that landscape is changing(e.g., Shifting consumer tastes, new competitors emerging, new technology restructuring business models, etc.) and the threats and opportunities that come with those changes.

Identify key issues and problems to solve

In synthesizing your findings from the internal and external investigations, strive to identify the key issues and problems to solve, that is, where there’s a mismatch or clear opportunity arising when you compare trends or external conditions and what your organization is currently doing. Your central task is to select questions relevant to the strategy that will frame key choices and ultimately shape the overall strategy.

Step 4. Develop options for where and how to compete

Once you’re clear on your goals and understand your team’s current situation (both internally and externally), you can begin to identify the key choices defining your strategy. The shorthand we’ve been using for strategy making – “deciding where and how to compete” – reflects the two core, interrelated decisions that represent your formula for making an impact in pursuit of your vision. They will ultimately frame the kind of sweet spot of unique and defensible value your strategy must strive to create.

From problems to opportunities

To begin developing the “where” and “how” choices for your strategy, consider the problems you identified in the previous step – for example, an out-of-date business model, encroaching competitors, maturing product lines, and so on.

Look for opportunities for winning in some new way, suited to the changing environment, such as leveraging a new technology to improve your cost position, redeploying your talent to improve a customer experience, or adapting products to changing cultural tastes.

Developing the best strategic options requires creativity in addition to analytic skills.

Narrowing the possibilities

As you start to develop different options for your strategy – by exploring different combinations of where and how to compete – you’ll need to identify certain filters for making your final bets. One set of filters should be Porter’s five essential tests of a good strategy.

Five tests for your strategy

“Understanding Michael Porter”

Every good strategy must have:

  • A distinctive value proposition. The decisions you make about where and how to compete are trade-offs – within the context of your larger company, which customers will you choose to serve, and which of their needs, with which offerings, packaging, pricing, and so forth? How will these be better than and different from alternatives in the marketplace?
  • A tailored value chain. It’s one thing to come up with a unique offering for a selected target audience, but you also must deliver on it, especially in a way that would be difficult to replicate by competitors. This may mean changing how you work, restructuring your organization, or taking on (or cutting back on) additional costs.
  • Trade-offs that enable your differentiation from rivals. As we’ve mentioned, strategy is as much about what you decide not to do, because without focusing your effort and resources, it will be difficult to reach a threshold of being distinctive in something. A lack of focus waters down the emphasis and energy you’re trying to compete with against other players. Because no organization can be all things to all customers, and resources are never infinite, you’ll have to stop doing some things. Choose the right ones.
  • Strategic fit. The concept of strategic fit is elusive but important making sure the strategy is designed and tailored to do what your organization does better than others, accords with your culture and values, and calls on internal capabilities that are well aligned with the external needs you are serving. When the parts of your strategy fit together seamlessly and naturally, it works like a self-amplifying system, providing what some strategy experts have called “a coherence premium” (see Paul Leinwand and Cesare Manardi’s HBR article “The Coherence Premium”)
  • Continuity over time. Though strategies inevitably require new thinking and new ways of working, changing too much ore too quickly can undermine success, too. Innovation should not burn all bridges with your heritage, lest you confuse customers or undo the trust on which your future relationships will depend.

Step 5. Assess options, engage stakeholders, move toward decisions

As you develop your own strategy, consider embracing at least two learn-by-doing aspects of the lean startup approach.

First, as you identify different options of where and how to compete, try out the ideas with key stakeholders whom you identified earlier in the process and refine accordingly.

Second, consider taking a further step to test your ideas – literally run trials or experiments of your most promising options (e.g. building a prototype, mock-up, or simulation of your product or service, and then sharing it with stakeholders to observe usage, bugs, and operational challenges).

Finally, testing and experimentation can help you more deeply understand barriers to overcome and the resources and systems for implementation at scale. It could also highlight new aspects of value that you can package and sell, or add to your marketing campaign.

Avoid indecision

As a leader you must be both open to new ideas but also committed to action.

Step 6. Allocate resources and manage implementation

The clearest signal that you are truly launching a strategy is when you begin to allocate resources and build implementation into your operational processes.

Once you’ve agreed on a final strategy, you and your team must build the choices and decisions into existing systems for your company: you must integrate funding, cost allocations, and expected revenue (as appropriate) into your budgeting process. You must accommodate any new recruiting and training within your company’s HR systems. You must introduce any new operational, technology, and infrastructure requirements of the strategy into other functions as appropriate.

Focus investment

As implementation starts to move ahead, you’ll also have to keep enforcing discipline on what the unit has to stop doing to maintain the focus of your strategy.

Communicate clearly

Your job as a leader is also to simplify and communicate your choices about where and how the team will now play – and why.

Keep your key messages short, powerful, and easy to understand; they should clearly connect strategy to the vision and mission. Repeat them constantly, in every interaction you have with your stakeholders, and make clear what the strategy will mean for each of them.

Keep learning, keep adapting

The notion that strategies must be continuously renewed is not new, but the pressure on organizations to do that is harsher than ever before. The rise of lean and learn-by-doing approaches to strategy reflect a new generation of organizations finding ways to adapt to a more volatile and competitive climate. To help with the shift, they are using new technologies to collect and analyze large amounts of customer and market data, including, in real time, enabling faster tailoring of product or service offerings as change unfolds.

As a leader, you should embrace such tools, but don’t confuse technology with human judgment or assume that more data analytics is all you need: if you’re going to keep your strategy fresh and relevant, you must keep challenging the organization with these question: Why is a particular strategy working or not? Why are changes in markets opening up new problems or opportunities? What, in fact, does that mean for our strategy now – and tomorrow?

Are you ready to lead a strategy making process?

If you are an emerging leader in a larger organization, be alert to strategy-making opportunities to build your knowledge and skills. You might be invited- or raise your hand – to develop strategy for a new product or create a localized strategy to start a process of innovation or some broader transformation for your firm.

Questions to Consider

  • Starting point. Do you have a strategy for your unit or team that supports the company’s current vision and overall strategy? Is it clear what your team needs to do – or not do – in order to really make a difference? Is there good reason to rethink your strategy now? If so, can you articulate success and then set goals for a new strategy?
  • Audience. Who is the audience for your team’s strategy – your boss, the senior executive team, your customers, other parts of your organization, your employees, or all of the above? How can you align these stakeholders, particularly if they have different expectations?
  • Key issues and challenges. What current challenges are facing your team? Are external threats or changes in markets, technology, or competition pressuring your business? What internal challenges are you also facing? Are you competing with others for talent or budget? How will you sharpen your understanding of these issues? Are you doing things that don’t add value and you should stop?
  • Opportunities. What opportunities does your team or unit have for adding significant new value to your organization and your customers? Are there services or products that you can provide better, faster, or cheaper than anyone else? What’s the distinct value that you can bring that will differentiate your team from others? Is there data that can help you confirm these opportunities?
  • New thinking. What new, creative approaches can you take to improve your team’s work and increase the impact of your team’s contributions? Are there new products or services to offer? How can you tap into your team’s wisdom and experience to identify new opportunities?
  • Options and choices. What choices about what to do and what not to do should be the basis of your team’s strategy? How might these play out and what would it take to move in each direction? Are certain options more distinctive and harder for competitors to follow? Do certain options fit better with your company and skills, and lay a foundation for more future growth? How can you quickly test your preferred options with customers, executives, and other stakeholders and then use the data to iterate and improve your strategy?
  • Allocate resources. What are the resource implications of your team’s strategy? Do you need more budget or different capabilities? Are you giving your team members the resources they need to be successful?
  • Implementation. How will you assign accountability and track process of your team’s strategy? How can you do this in a way that allows for continual learning, midcourse corrections, and the development of sustaining capability?

Next (3. Getting Great People on Board)

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