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Why should you do business strategy?

I think people ask this question because business strategy appears to be a discretionary activity. It appears to be something you can choose to do or not to do.

Most people recognise that a manufacturing business has to buy raw materials, turn them into finished products, and sell them to customers. If you stop doing those things, then your business has stopped. There are similar activities that would seem to be essential to other types of businesses, such as wholesale, retail or service businesses.

But strategy seems more discretionary*. If you stop doing strategy your business will continue to function. For a short time at least. Without strategy, your business may become less relevant over time. But it will take a while before the full effect is felt. And by then the damage is done. Your business is on the back foot. In a weakened state. Trying to catch up with a market where the competitors are stronger and better placed.

*Other functions like marketing or branding may suffer a similar challenge.

So when organisations are under pressure, it is often activities like strategy that are the first to suffer.

When COVID-19 struck, organisations had their hands full. Setting their teams up working from home. Rebuilding their supply and distribution chains. They were focused on surviving the immediate present. There was little time left to think about what they would need to do to succeed in a decreasingly certain future.

Crises force organisations to become reactive. But strategy is a fundamentally proactive process.

It's ironic that at the exact times when the status quo is most disrupted and the future is least certain, when strategy is most needed, that most organisations are least able and likely think strategically.

And so it is at times like this that it is even more important than ever to have a clear answer to the question: Why should you do business strategy?

I think there are two equally important answers to this question:

1. Strategy is about how to succeed in the future

Experience teaches us about how we succeeded in the past. But we know that the future will be different from the past. We may not know exactly what will change. We may not know how big the change will be. We may not know how quickly it will change. But we do know it will be different. Ironically, experience confirms this.

If we had a crystal ball - if we could see the future clearly - we would have less need for strategy. But we can't. Strategy helps us fill that gap.

Strategy is not about forecasting or predicting the future. That would be a fool's errand. But it does present toolsets and processes that can help us to imagine, anticipate and prepare for not just one future, but a range of possible futures.

These tools include things like macroscanning, game theory and scenario analysis.

See for example:

Wayne Gretzky, the legendary Canadian ice-hockey player once explained his success on the ice:

"I skate to where the puck is going to be, not to where it has been."

Wayne Gretsky probably only needed to anticipate the next few seconds of play to achieve this. How far ahead should we look when doing business strategy?

That depends on three things:

How fast can we move?
How long do we need to be there (before we move again)?
How fast-changing and uncertain is the environment?

1. How fast can we move?

It takes about 20 minutes to stop an oil tanker travelling at normal speed. So an oil tanker captain has to be able to anticipate at least 20 minutes into the future. (Fortunately, they've gotten pretty good at that, for the most part.)

If it is going to take you 6 months to develop and launch a new product, you need to be able to anticipate demand and market conditions at least 6 months into the future. Similarly, if it is going to take you 2 years to bring a new factory on line, you need to be able to anticipate demand and market conditions at least 2 years into the future.

2. How long do we need to be there?

If it costs you lot of money and resources to get into a position, then you need to be able to stay there for long enough to earn a return on that investment before you have to move to the next position.

Note that the distance you need to look into the future is the sum of both 1 and 2. That is you need to see far enough ahead to allow for the time it will take you to get there plus the time you need to stay there.

3. How fast-changing and uncertain is the environment?

As the Oracle in The Matrix Revolutions says: "No one can see beyond a choice they don't understand."

Some environments are inherently more complex and fast-changing than others. Sometimes it is in the nature of one industry to be more complex and fast-changing than another. Other times it can be a point of crisis (like COVID-19) which introduces complexity and change across many industries for a period of time.

The tools that strategy gives us will help us to a point. But eventually, in complex and fast-changing environments our ability to anticipate into the distant future becomes more clouded.

Then we have to deal with less granular understanding. This requires us to pursue strategies with higher degrees of inherent optionality. Alternatively, we focus less far into the future and restrict ourselves to smaller but more regular moves. Such organisations invest heavily in methodologies like Agile to shorten delivery cycle times and costs. (See also Agility needs a strategy.)

I conclude this section with a quote from William Gibson:

"The future is already here - it's just not very evenly distributed."

The clues lie all around us if we just look at them in the right way.

2. Strategy is about making choices

At any point in time, there is an almost unlimited number of things an organisation could do. And some organisations seem intent on trying to do them all, and often all at the same time!

Sometimes this is because different people can't agree amongst themselves which ones they should and shouldn't do. This creates a problem of alignment - or misalignment. Other times it's because organisations somehow think they can grow faster by trying to be all things to all people (customers). This creates a problem of focus.

But, as Michael Porter points out (in several different ways):

"Strategy is about making choices, trade-offs; it's about deliberately choosing to be different."

"Strategy 101 is about choices: You can't be all things to all people."

"The company without a strategy is willing to try anything."

"The essence of strategy is choosing what not to do."

So strategy provides frameworks for helping organisations to make decisions in a holistic manner; to achieve both alignment and focus in an organisation's efforts.

I like to say that you don't really have a strategy until you've used it to say "no" to an idea which, on a standalone basis, makes good business sense.

As several commentators have noted, COVID-19 didn't fundamentally change things. Instead, what it did was to accelerate existing trends. Changes which many people had anticipated would happen over the next 3-5 years were compressed into the last 4 months. COVID-19 merely sped things up. It removed obstacles holding back trends which had been building for some time. It forced people to confront challenges they had previously been putting off.

As a result, those organisations which had been alive to and preparing for those trends are coping with the crisis much better than those that had not. Their strategic thinking over recent years has been vindicated and rewarded.

But the fact that what we might have anticipated over the next 3-5 years has now already happened does not mean we will enter a period of stability. Instead, some of the things that we might have anticipated over the next 5-10 years are now more likely to happen over the next 3-5 years.

So the need to think strategically - to anticipate and prepare for the future; to align decision making and execution around a clearly articulated plan - is as great as ever. Those organisations able to shift some of their attention from survival to strategy sooner will win markets from those who are not.

Which will you be?

Should business strategists have foreseen COVID-19?

The answer is: Yes.

But the aim of this article is not to lament what we should have done. Nor is it to crow about what we did do. Instead, it is to consider what we should do going forward.

One of the roles of strategy is to help businesses to be successful into the future. And we must do so for whatever the future brings. When something like COVID-19 comes along, we can't simply excuse ourselves for not having prepared for that future.

Now, I am not suggesting that any business strategist should have predicted exactly what happened.

For example:

that a virus would emerge from Wuhan in late 2019/early 2020,
that it would evolve into a pandemic and shut large parts of the world down,
that it would overburden most countries healthcare systems, and
that government would respond by locking their populations and economies down.

What could we have foreseen?

But there are many aspects of COVID-19 which were easy to foresee. These include, for example:

a pandemic,
a global economic downturn,
the failure of stretched and global supply chains, and
remote working.

These are things we've talked about in the past at length. We've even experienced these before. Perhaps not in our own lifetimes. And of course, each time they happen they're different.

We've had pandemics in the past. (You can click on the chart to the right to see it in more detail.) This 2015 Ted Talk by Bill Gates is one of many warnings of what future pandemics might be like. And we've long been aware of emerging strains on our health care systems posed by things like:

population ageing and
antibiotic-resistant diseases.

Likewise, we've had global economic downturns in the past. Arguably, as recently as 2008. Some argue that this one will be deeper and longer than any we've encountered to date. But even so, that possibility is not hard to imagine.

We've been worried about the impact of globalisation. Be that on the distribution of wealth or on the environment. We've also worried about possible disruptions to stretched global supply chains. Even if that concern was more fueled by concerns over a trade war between the US and China than by concerns of a pandemic.

And we've been debating the pros and cons of flexible and remote working for years. Until now, the status quo has conspired against them. However, in London, for example, the Olympics (see here), as well as numerous train strikes, have offered regular glimpses of the need for greater flexibility.

Our job as strategists is not to be experts in all of these fields. But we should be aware enough of the possibilities to help our organisations to understand and prepare for the specific consequences they might bring.

What should we do?

There are three steps to be prepared:

Be aware.

The first step is to be aware. If we're not watching those Ted Talks, studying that macro-analysis or reading those risk reports then we won't know what's out there.
Consider the impacts.

Then we need to consider the impacts these things might have on our businesses. Each business is unique. And the so the impacts on each business will be different.

Consider, for example, how different the impacts of COVID-19 have been on hotels, airlines, restaurants and the highstreet, contrasted against the impacts on firms like Amazon, Ocado and Zoom.
Integrate this analysis into our planning and execution processes.

If our planning processes amount to simple extrapolations of last year's budget into next year's budget. COVID-19 highlights the significant uncertainties we face. And this underpins the importance of integrating scenario-based analysis and planning. (See: Scenario Planning: A Practical Guide for Navigating Uncertainty).

Once the planning is complete, the results need to be built into your execution processes. Early warning systems need to be put in place. Responses need to be rehearsed. Capacity for rapid change needs to be built.

What are the challenges?

Typical short-comings I have encountered in trying to achieve this include:

Fatalism: Decision-makers conclude they can't predict or avoid crises. They call them 'black swans' and place them outside the bounds of normal logic. As a result, they can't or don't know how to prepare for them. Ultimately, they conclude that they're better off just ignoring the possibility.

It's true that you might not be able to guarantee that the Titanic would be unsinkable. But you could make sure she carried enough life-boats.
Theorism: Decision-makers engage in the analysis. But this fails to progress beyond being an "interesting exercise". Once it is complete, everyone goes back to their desks and carries on as before.

The only thing worse than facing a crisis with your head buried in the sand is facing it with your eyes wide open and in the full knowledge that you failed to prepare.
Optimism Bias: This is the expectations that whilst bad things do happen, they won't happen to me. The best time to repair your roof is when the sun is shining. But that's also the time when the need to do so seems less pressing.

When times are good, we fail to prepare for when they are not. And by the time they are not, it is often too late. Running cash reserves and building redundancy into your processes and supply chain seems like an unnecessary waste during the boom years.

We don't know how and when the COVID-19 crisis will end. So far, most businesses have been very reactive. Just trying to survive. But sooner or later* businesses need to start looking forward and preparing to succeed in the future. Whatever that may be.

*I would strongly suggest sooner.

Dealing with 'inevitabilities' in business strategy

Many of the threats and opportunities we identify on SWOT and PESTEL analyses are uncertain. Things that might or might not happen. Or things that might happen one way or another. Others are simply trends which carry with them an air of inevitability.

For example, we don't know:

if antibiotics will lose their effectiveness or if medicine will find an alternative approach,
if the world will be able to reverse the effects of global warming and/or overpopulation, or
whether the current political trend to the right will continue, etc.

But, we can be pretty sure that:

products and services will continue to digitise,
data will become more important in the way the world functions,
autonomous vehicles will eventually replace human-driven vehicles,
people will be more inclined to rent assets which they had previously had to own, and
AI will take on ever more complex tasks previously thought to need a human to perform them.

Of course, the distinction between these categories of uncertain and inevitable changes can be blurred. It can also depend on the lens through which you look at them. But in any strategic context and time-frame, you can usually distinguish between the two.

How should a strategist handle these inevitabilities?

One swallow does not a summer make

Every inevitability will have its doubters: people who think it will not come to pass. As often as not, this is because they simply don't want it to happen.

But as strategists, we must deal with the world the way it is, not the way we wish it were.

Even the strongest trends seldom proceed in a straight line. There are usually many setbacks and other surprises. The doubters will seize upon these as evidence that it will not happen. But, as Aristotle said:

One swallow does not a summer make.

There can be few recent examples as dramatic as the bursting of the dot.com bubble around the turn of the century. Many businesses went bust. I am sure that small fortunes were lost. At the time, many claimed that this was proof that people wanted to continue to do business as they had before. That the threat of technology had been shown to be a hollow sham. But, as much of a setback as it was, the dot.com trend recovered and strengthened.

Part of the strategists' role is to see through these setbacks and other anomalies and remain focused on the underlying trend.

Not 'if' but 'when' and 'how'

Once we've established that something is more or less certain to happen, we can stop worrying about if it will happen. We can start applying our minds to when and how it will happen.

The strategist should monitor such trends on an ongoing basis. Do recent events suggest that the trend is speeding up or slowing down, or likely to speed up or slow down? Are they evolving in a way which is different from how they started out or were originally expected to play out?

For example, Amazon changed the business of book distribution (and many other businesses!) forever. But fewer people had anticipated how Amazon was able to use its new-found power in the publishing industry to launch the Kindle where so many other e-readers had failed before it. Amazon now sells more ebooks than print books in what some have described as a 'reading renaissance'. (Source)

Being alert to these subtle changes in a trend which seems otherwise inevitable could be a source of significant strategic advantage. Especially where all of your competitors are also building their propositions around the same trend.

So, perhaps it is time to go back over your SWOT and PESTEL analyses:

distinguish between those which are uncertainties and those which are inevitabilities, and
ensure you have appropriate sense-and-respond strategies in place for each.

photo credit: Duncan Rawlinson - Duncan.co - @thelastminute Passage via photopin (license)

Population ageing - the demographic dilemma

One of the many long-term challenges facing society and business is that of population ageing. The main forces at play are:

Declining birth rates associated with economic advancement
Better health care increasing longevity

The net effect, according to United Nations forecasts, is that the world population will either stabilize or peak around 2050, after growing for centuries at an ever-accelerating rate. However, that population will be considerably older.

For example, between 1950 and 2000, the percentage of the world population older than 60 rose almost imperceptibly to 10 percent from 8 percent. By 2050, however, that percentage will more than double, to 21 percent. And in many countries — notably Japan, the most rapidly ageing country in the world, and those in western Europe — the share of population age 60-plus will be more than 40 percent by mid-century.

Despite this, in the developing world, the working population is still growing, which will lead to increases in productivity there. For example, by 2050, it is estimated that roughly 20 percent of the world population is going to be in Africa, up from 9 percent in 1900.

Anomalies in this trend include:

In the developed word, despite having the same demographic profile as Japan or Europe, high rates of immigration in the US offset the effects of population ageing
In the developing world, by contrast, past policies to limit population growth in China mean that its population is like to age rapidly. (Today, only 11 percent of the Chinese population is older than 60, but by 2040 the proportion will rise to 28 percent.)

These trends have tremendous implications for business and policy makers which are often overlooked as the trends spans more than one business planning or electioneering cycle. Some of these implications are:

The escalating retirement and pensions crisis (especially acute with regard to un- or underfunded DB pensions such as the UK public sector and state pensions, as relatively fewer people of working age bear the burden of supporting a growing number of people in retirement).
An increase in the need for health care, particularly long-term care.
Firms may need to shift their focus from products and services aimed at younger consumers to products and services aimed at older consumers. For example, in Japan, they are already looking at toilets that communicate with elderly patients GPs, cars with larger displays, hand controls for the break and accelerator and the ability to curb dangerous driving habits, graveside web-cams for the partner left behind, easy to swallow food, robot pets, beds that turn into wheelchairs and cybernetic suits that strengthen and protect the frail. They are also scaling up production of art supplies for post-retirement hobbyists.
Firms may also need to adapt to include older workers in the workforce, or be forced to shift production from areas with shrinking working age populations, such as Western Europe, to countries with growing working age populations, such as India

Sources: