SYSTEMS THINKING STRATEGY

iUniverse, Inc.

Contents

1: Introduction.....................................................12: What Is Strategy?................................................53: The Competitive Environment: Looking Outward.....................134: Leveraging Internal Capabilities.................................235: It's About the Customer..........................................316: Systems Thinking.................................................377: Applying Capabilities in the STS.................................458: Applying Customer Information in the STS.........................559: The Competitive Environment in the STS...........................6510: Making Sense in the STS.........................................7511: Lessons Learned.................................................91List of Figures.....................................................95List of Tables......................................................97Research Notes......................................................99References..........................................................117About the Author....................................................123

Chapter One

Why are some organizations more successful than others? Is it better products? Is it a superior service model? Is it some mixture of the two? Is it merely a matter of lining up the products and services to meet the needs of the marketplace at a particular time? Or did they just get lucky?

These are the questions business leaders wrestle with on a daily basis. And they're not just doing it for the fun of the debate. They are trying figure out how to make their organizations more successful. Many business leaders (especially those with top-tier MBAs) believe that finding the answer to these questions is a matter of strategy. Find the right strategy, and the company is bound to be successful.

But what is strategy? That is a tricky question. A Google search will yield around 855 million results. Narrowing the search term down to "strategic planning" is only a little better, with 145 million results. You can't go more than an hour watching CNBC or Fox Business without hearing someone use a derivation of the word. Claiming to be a strategic thinker has almost surpassed good people skills as the talent that too many people put on their résumés when they don't know what else to list.

Obviously there are a lot of people talking about strategy, but how many people really understand what it means? More importantly, how many know how to do it right? Most importantly, how can a business leader understand how to do it right and apply that to his or her organization?

Strategy is about finding ways to drive sustainable competitive advantage (Hamel, 1996; Porter, 1996; Worley, Hitchen, & Ross, 1996). There is plenty of agreement on that point. Where there is disagreement, however, is in the how, where, when, and why of the various approaches to strategy.

Notice that the previous paragraph used the word approaches and not the singular approach. That is not a typo. There are lots of different approaches to strategy, and plenty of debate about which approach is the best. While there will be some discussion of the major approaches later in this book, it is important to remember that despite proponents' claims, none of the established approaches is best for all organizations at all times. As a result, anytime one model is found to be inadequate for a particular scenario, someone comes along and presents a new approach. The majority of these models are fairly specific and applicable only to a finite number of situations. This has led to lots of different models for strategy, more than a little confusion, and numerous calls to come up with a better way (Collis & Montgomery, 1995; Cummings & Angwin, 2004; Mintzberg, 1994).

While it would be extreme hubris to claim that this book will address all of the existing models' shortcomings, it does provide an approach that has a wider application than many of the existing paradigms. This book codifies elements that reflect what many successful organizations are already doing. It takes a new view that answers at least some of the challenges presented by existing paradigms. It does this by applying a systems thinking lens (e.g., see Peter Senge's The Fifth Discipline) to current approaches and illustrating a model that allows for a fuller view of the organization and its ecosystem. Hopefully those who read this book will find something useful they can apply to their own organizations.

This book and the strategy model it presents are based upon a university-supported research study that was part of my doctoral dissertation. It was a long, arduous, and frankly painful process that required nearly a year and a half of literature review, data collection, and analysis, not to mention multiple rewrites. The final product, however, was an in-depth look at one very simple question:

• Do organizations that take a systems thinking approach to strategy perform better than the overall market?

The short answer is yes, they do. The long answer is a bit more complicated. The original dissertation and the summary report that was provided to the study participants are both hefty descriptions of what was done and why it was done, written in such a way as to appease the demands of an academic audience. But then again, that was the goal. The goal of this book is very different.

The goal of this book is to share the insights gained from that study in a way that is more palatable to business professionals without the superfluous prose of a dissertation. Accomplishing this goal will begin with an overview of what strategy is in chapter 2, followed by a look at the dominant strategy paradigms in chapters 3 through 5. Next is a review of systems thinking and how it applies to strategy in chapter 6. Chapter 6 also provides a very high-level review of the research study's methodology. Given the focus of this text, that section of chapter 6 does not go into very much detail, but for those who feel the need to "see the math," research notes are also provided at the end of the book.

Chapters 7 through 10 illustrate the major findings of the study and how they can be applied. Chapter 7 reviews how an understanding of organizational capabilities is applied; chapter 8 looks at how customer data is used; and chapter 9 looks at how information about the competitive environment is integrated into these efforts. Chapter 10 reviews how organizations make sense of all the data points. The last chapter attempts to summarize the overall findings and bring things to a reasonable close.

Chapter Two

The term strategy comes from the Greek word strategos and, loosely translated, means "art of the general" (Collis, 2005). The great Chinese general Sun Tzu said that the responsibility of generalship is to create situations that assure victory (Griffith, 1963). Following this line of reasoning, the case could be made that strategy is about creating situations that allow organizations to be victorious or, in other words, successful. Sounds simple enough, but achieving that goal can be quite complicated.

To be successful, an organization must be able to create some kind of sustainable competitive advantage. The leaders of that organization have to make hard choices about where to focus their efforts and commit their resources. The amalgamation of those decisions is called a strategy. The word strategy itself, however, is a noun, and as we all learned in elementary school, English nouns are things, not actions.

The term many people use to describe the action of strategy is strategic planning, but strategic planning is a specific task that drives toward a strategic plan document. These documents are usually in nice, fancy binders, but there is great debate about how much value they really provide. The basis for this debate is often questions about how often these plans reflect reality and whether they are truly executable. Moreover, strategic plans tend to be limited in scope and only present the tip of the iceberg in terms of what strategic activities the organization is engaging in.

There are many parts of the strategy process that develop, grow, and evolve outside of strategic planning sessions. These other efforts can have as much or more impact on the organization as the formal documents. It would be a disservice not to consider those elements in a comprehensive strategy discussion. For this reason, this discussion considers all strategy formulation activities, not just the ones that result in a pretty binder.

Regardless of how formal or informal the process is, once a strategy is formulated, it has to be implemented. Implementation can be just as challenging as the development, if not more so. Many organizations devote significant resources to ensuring that their strategies are effectively implemented. An important caveat here, however, is that even the best implementation will not lead to success unless the strategy that the implementation is driving toward is properly aligned with the organization's desired destination.

A mentor of mine once described scenarios like this as being like taking a long road trip with bad directions. No matter how good a driver you are, you're probably not going to get where you need to be. And even if you do somehow make it there, how will you know that you've arrived?

Since formulating the right strategy is a critical first step for setting the direction of an organization, this discussion will focus solely on the strategy formulation process. The implementation discussion will be left for another time.

Speaking of time, some might ask why a new model of strategic planning matters today? Why fix something that "ain't broke"? There are a couple of answers to such questions. First, while the current paradigms may not necessarily be "broke," they do have a number of shortcomings. There is no lack of calls to improve the overall effectiveness of those models. As to why this question needs to be addressed now, the simple answer is that the world has changed. The speed of business continues to accelerate, and how organizations are managed must also evolve.

Not so long ago, organizations could differentiate themselves based on the attributes of their products and/or delivered services. If a company's offerings were superior to the alternatives, customers would buy those offerings. Barriers to market entry tended to be high, which meant that it was rare for new alternatives to come into a market. These factors minimized competition and made strong strategic visions nice to have, but not a necessity.

As the economy has matured, however, the options for customers have increased and the barriers to entry have decreased. As a result, competition has amplified to the point where organizations must differentiate themselves not only on the basis of what they do, but also how they do it. Failure to differentiate can result in an organization's downfall. A prime example of this is Digital Equipment Corporation (Schein, 2003).

For those not familiar with this case, Digital Equipment Corporation (DEC) was one of the early leaders in the computer industry. Their VAX platform was the go-to mainframe for most businesses through the mid-1980s. Despite offering products than were better engineered and had more features than those of their competitors, DEC was unable to maintain their leadership position, due in large part to a misreading of the market and where their customers' needs were going. Their former CEO, Ken Olsen, has become infamous for wondering why would anyone want a computer in their home (Schein, 2003, p. 37). While he has tried numerous times to clarify this statement so as not to seem quite so oblivious, the simple fact is that at the time, the organization did not see the market evolving, and thus did not alter their product focus to react to those changes. As a result, DEC no longer exists today.

One way that some organizations have tried to mitigate the risks of relying solely on a product-quality-based advantage has been to establish an early foothold in a market, or even to create an entirely new space. Sometimes these brands become ubiquitous within a particular product category. Such has been the case for the likes of Kleenex, Kodak, and Xerox, for whom such positioning was once a distinct advantage.

In the current market space, however, a first-mover position no longer guarantees success. An example of this is Prodigy, an internet service which, despite being first to market, was soon overtaken by the likes of America Online because Prodigy's platform was developed without much thought for their customers' needs (Hargadon & Douglas, 2001). While both services offered graphical user interfaces (i.e., GUI) to their subscribers long before web browsers were common, AOL sought to be more interactive and intuitive while Prodigy was more content- and text-intensive. Aside from a core of "techies," most users preferred the simpler interface.

Of course AOL has since had its own issues. After peaking at 26.7 million subscribers in 2002, by the end of 2011 AOL was down to only 3.5 million users, while overall internet usage during that time shot up (Lilly, 2011). Much of the slide can be attributed to not having the right strategy to manage the evolution of broadband internet and the decline of dial-up.

This dilemma does not, however, just impact internet companies. As previously mentioned, the Kodak name and brand is almost ubiquitously associated with film photography. Just about everyone knows that the phrase "Kodak moment" describes a photo-worthy event. Unfortunately, the category disruption caused by digital photography has made it difficult for Kodak to find its place in the new market. While it has made a valiant effort to keep up, the company was still forced to file Chapter 11 bankruptcy in January 2012 (McCarty & Jinks, 2012). Whether Kodak will be able to exit bankruptcy is largely dependent on whether the company can develop the right strategy to compete in a market that is drastically different from what it was just a few years before.

Clearly, having a strategy that properly positions an organization to perform is very important. However, while the last few pages have provided excellent examples of why a strategy is important, these examples do not explicitly define strategy. There is no shortage of competing definitions, but all of these variations could be amalgamated into a single definition that is something like a strategy is a plan that creates sustainable competitive advantage and allows an organization to perform over time, even in the face of a changing environment. This is the definition that we will use for this discussion.

Strategy is a lot like singing in that many people think they can do it, only a few people can do it well, and most of those who cannot do it well are unaware of how bad they are. It is almost impossible to find a website for even the smallest consulting firm that does not offer some kind of strategic planning services. It takes very little effort, however, to realize that many of these firms have extremely liberal definitions of strategy. The degree to which they deviate from established practice can range from simple issues of nomenclature to borderline negligence. One of the best way to avoid getting caught up in traps like this is to have a full understanding of what strategy is and is not, and of how it can be applied.

Before beginning that discussion, however, two level sets are required.

The first level set is that, while there are numerous approaches to strategy formulation, this discussion will draw from three broad categories:

• Competitive environment-focused approaches

• Capabilities-focused approaches

• Customer-focused approaches

While just about every strategic planning model claims to be unique, the truth is that the majority of strategy formulation processes can fit into one of these three categories. More importantly, these approaches represent the three main kinds of data that organizations must consider in their strategic planning efforts. Interestingly, most of the existing approaches use only one of these three domains as the primary unit of analysis. This can lead to an incomplete understanding of the organization and its ecosystem, which in turn can lead to a misaligned strategy. The model discussed later in this book attempts to address that shortcoming.

The second level set is that the remainder of this discussion will be guided by two assumptions:

• Strategy is about creating sustainable advantage

• Strategy formulation efforts should be deliberative

The support for the first assumption has already been discussed and ties back to the definition of strategy. The reason for the second assumption is that there is significant research, including the study this book is based on, suggesting that the goals and objectives of deliberatively formulated strategies tend to be realized more often than those of strategies that just happen to evolve (Brown, 2007; Hrebinaik & Joyce, 2001; Mintzberg, 1987).

While there are various opinions as to why this is the case, the most likely drivers are Case Western University professors Cooperrider and Sekerka's theories that organizations tend to evolve in the direction toward which they focus their attention and energies (2003). While this discussion won't get into the hows and whys of that, it is sufficient to say that all the top-performing organizations that participated in this study indicated that their strategy efforts were deliberative. Truth be told, there aren't too many examples of organizations that have succeeded without being focused and deliberative. There are, however, quite a few examples of organizations that have failed and later admitted that they were largely unfocused.

Now that the bases of what strategy is and how it applies to organizations have been covered, it is time to start talking about how to use these concepts to make organizations better. That is where chapter 3 begins.

(Continues...)

Excerpted from SYSTEMS THINKING STRATEGYby Jimmy Brown Copyright © 2012 by Jimmy Brown. Excerpted by permission of iUniverse, Inc.. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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