Enterprise design that’s future-fit and ready

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Abstract

In an increasingly complex business environment, companies need to reassess their strategic choices on a regular basis. However, companies are struggling to collect and efficiently interpret the relevant information on their business environment. Whereas market information is often analyzed, influences from the broader environment (e.g., society) are often neglected. This paper argues that companies often lack a systemic approach to their strategy development process, and that environmental influences are only considered selectively. We suggest that companies themselves need to be seen as systems that are embedded in a complex environment. To develop a successful strategic orientation, a systematic screening of the environment must be coupled with a thorough analysis of the firm’s internal circumstances (e.g., competencies). Therefore, the paper proposes a holistic framework for conceiving companies as systems. Furthermore, we discuss how the scenario technique could support a systematic analysis of the company’s environment. The paper also aims to provide practical guidelines for managers and contributes to integrating a systems thinking approach into strategy development.

Keywords: system theory; strategy development; strategic foresight; scenario technique; core competencies; strategic management

Authors: Marion A. Weissenberger-Eibl 1,2, André Almeida 1,* and Fanny Seus 1,*

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The Idea

The powerful CUBE platform is used during all three of the M&A phases and by using the CUBE Approach to model and depict both enterprises engaged in the M&A one could visualise two CUBEs (i.e., two digital twin copies for enterprise A & B) to be understood, integrated and solved post merger or acquisition.

The Outcome

• Holistic understanding and deep knowledge of both enterprises in rapid time
• Efficiency in both pre and post merger project activities
• Deep understanding of effort required to integrate or create synergies between the enterprises
• Faster realisation of business value post merger due to robustness of enterprise transformation activities
• Entrenched knowledge management enabled on cloud de-risking the overall investment

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FROM THE JULY–AUGUST 2005 ISSUE, Harvard Business Review

Three years ago, the leadership team at a major manufacturer spent months developing a new strategy for its European business. Over the prior half-decade, six new competitors had entered the market, each deploying the latest in low-cost manufacturing technology and slashing prices to gain market share. The performance of the European unit—once the crown jewel of the company’s portfolio—had deteriorated to the point that top management was seriously considering divesting it.

To turn around the operation, the unit’s leadership team had recommended a bold new “solutions strategy”—one that would leverage the business’s installed base to fuel growth in after-market services and equipment financing. The financial forecasts were exciting—the strategy promised to restore the business’s industry-leading returns and growth. Impressed, top management quickly approved the plan, agreeing to provide the unit with all the resources it needed to make the turnaround a reality.

Today, however, the unit’s performance is nowhere near what its management team had projected. Returns, while better than before, remain well below the company’s cost of capital. The revenues and profits that managers had expected from services and financing have not materialized, and the business’s cost position still lags behind that of its major competitors.

At the conclusion of a recent half-day review of the business’s strategy and performance, the unit’s general manager remained steadfast and vowed to press on. “It’s all about execution,” she declared. “The strategy we’re pursuing is the right one. We’re just not delivering the numbers. All we need to do is work harder, work smarter.”

The parent company’s CEO was not so sure. He wondered: Could the unit’s lackluster performance have more to do with a mistaken strategy than poor execution? More important, what should he do to get better performance out of the unit? Should he do as the general manager insisted and stay the course—focusing the organization more intensely on execution—or should he encourage the leadership team to investigate new strategy options? If execution was the issue, what should he do to help the business improve its game? Or should he just cut his losses and sell the business? He left the operating review frustrated and confused—not at all confident that the business would ever deliver the performance its managers had forecast in its strategic plan.

Talk to almost any CEO, and you’re likely to hear similar frustrations. For despite the enormous time and energy that goes into strategy development at most companies, many have little to show for the effort. Our research suggests that companies on average deliver only 63% of the financial performance their strategies promise. Even worse, the causes of this strategy-to-performance gap are all but invisible to top management. Leaders then pull the wrong levers in their attempts to turn around performance—pressing for better execution when they actually need a better strategy, or opting to change direction when they really should focus the organization on execution. The result: wasted energy, lost time, and continued underperformance.

Where the Performance Goes 

This chart shows the average performance loss implied by the importance ratings that managers in our survey gave to …

But, as our research also shows, a select group of high-performing companies have managed to close the strategy-to-performance gap through better planning andexecution. These companies—Barclays, Cisco Systems, Dow Chemical, 3M, and Roche, to name a few—develop realistic plans that are solidly grounded in the underlying economics of their markets and then use the plans to drive execution. Their disciplined planning and execution processes make it far less likely that they will face a shortfall in actual performance. And, if they do fall short, their processes enable them to discern the cause quickly and take corrective action. While these companies’ practices are broad in scope—ranging from unique forms of planning to integrated processes for deploying and tracking resources—our experience suggests that they can be applied by any business to help craft great plans and turn them into great performance.

The Strategy-to-Performance Gap

In the fall of 2004, our firm, Marakon Associates, in collaboration with the Economist Intelligence Unit, surveyed senior executives from 197 companies worldwide with sales exceeding $500 million. We wanted to see how successful companies are at translating their strategies into performance. Specifically, how effective are they at meeting the financial projections set forth in their strategic plans? And when they fall short, what are the most common causes, and what actions are most effective in closing the strategy-to-performance gap? Our findings were revealing—and troubling. 

While the executives we surveyed compete in very different product markets and geographies, they share many concerns about planning and execution. Virtually all of them struggle to produce the financial performance forecasts in their long-range plans. Furthermore, the processes they use to develop plans and monitor performance make it difficult to discern whether the strategy-to-performance gap stems from poor planning, poor execution, both, or neither. Specifically, we discovered:

Companies rarely track performance against long-term plans.

In our experience, less than 15% of companies make it a regular practice to go back and compare the business’s results with the performance forecast for each unit in its prior years’ strategic plans. As a result, top managers can’t easily know whether the projections that underlie their capital-investment and portfolio-strategy decisions are in any way predictive of actual performance. More important, they risk embedding the same disconnect between results and forecasts in their future investment decisions. Indeed, the fact that so few companies routinely monitor actual versus planned performance may help explain why so many companies seem to pour good money after bad—continuing to fund losing strategies rather than searching for new and better options.

Multiyear results rarely meet projections.

When companies do track performance relative to projections over a number of years, what commonly emerges is a picture one of our clients recently described as a series of “diagonal venetian blinds,” where each year’s performance projections, when viewed side by side, resemble venetian blinds hung diagonally. (See the exhibit “The Venetian Blinds of Business.”) If things are going reasonably well, the starting point for each year’s new “blind” may be a bit higher than the prior year’s starting point, but rarely does performance match the prior year’s projection. The obvious implication: year after year of underperformance relative to plan.

The Venetian Blinds of Business 

This graphic illustrates a dynamic common to many companies. In January 2001, management approves a …

The venetian blinds phenomenon creates a number of related problems. First, because the plan’s financial forecasts are unreliable, senior management cannot confidently tie capital approval to strategic planning. Consequently, strategy development and resource allocation become decoupled, and the annual operating plan (or budget) ends up driving the company’s long-term investments and strategy. Second, portfolio management gets derailed. Without credible financial forecasts, top management cannot know whether a particular business is worth more to the company and its shareholders than to potential buyers. As a result, businesses that destroy shareholder value stay in the portfolio too long (in the hope that their performance will eventually turn around), and value-creating businesses are starved for capital and other resources. Third, poor financial forecasts complicate communications with the investment community. Indeed, to avoid coming up short at the end of the quarter, the CFO and head of investor relations frequently impose a “contingency” or “safety margin” on top of the forecast produced by consolidating the business-unit plans. Because this top-down contingency is wrong just as often as it is right, poor financial forecasts run the risk of damaging a company’s reputation with analysts and investors.

A lot of value is lost in translation.

Given the poor quality of financial forecasts in most strategic plans, it is probably not surprising that most companies fail to realize their strategies’ potential value. As we’ve mentioned, our survey indicates that, on average, most strategies deliver only 63% of their potential financial performance. And more than one-third of the executives surveyed placed the figure at less than 50%. Put differently, if management were to realize the full potential of its current strategy, the increase in value could be as much as 60% to 100%!

As illustrated in the exhibit “Where the Performance Goes,” the strategy-to-performance gap can be attributed to a combination of factors, such as poorly formulated plans, misapplied resources, breakdowns in communication, and limited accountability for results. To elaborate, management starts with a strategy it believes will generate a certain level of financial performance and value over time (100%, as noted in the exhibit). But, according to the executives we surveyed, the failure to have the right resources in the right place at the right time strips away some 7.5% of the strategy’s potential value. Some 5.2% is lost to poor communications, 4.5% to poor action planning, 4.1% to blurred accountabilities, and so on. Of course, these estimates reflect the average experience of the executives we surveyed and may not be representative of every company or every strategy. Nonetheless, they do highlight the issues managers need to focus on as they review their companies’ processes for planning and executing strategies.

What emerges from our survey results is a sequence of events that goes something like this: Strategies are approved but poorly communicated. This, in turn, makes the translation of strategy into specific actions and resource plans all but impossible. Lower levels in the organization don’t know what they need to do, when they need to do it, or what resources will be required to deliver the performance senior management expects. Consequently, the expected results never materialize. And because no one is held responsible for the shortfall, the cycle of underperformance gets repeated, often for many years.

Performance bottlenecks are frequently invisible to top management.

The processes most companies use to develop plans, allocate resources, and track performance make it difficult for top management to discern whether the strategy-to-performance gap stems from poor planning, poor execution, both, or neither. Because so many plans incorporate overly ambitious projections, companies frequently write off performance shortfalls as “just another hockey-stick forecast.” And when plans are realistic and performance falls short, executives have few early-warning signals. They often have no way of knowing whether critical actions were carried out as expected, resources were deployed on schedule, competitors responded as anticipated, and so on. Unfortunately, without clear information on how and why performance is falling short, it is virtually impossible for top management to take appropriate corrective action. 

The strategy-to-performance gap fosters a culture of underperformance.

In many companies, planning and execution breakdowns are reinforced—even magnified—by an insidious shift in culture. In our experience, this change occurs subtly but quickly, and once it has taken root it is very hard to reverse. First, unrealistic plans create the expectation throughout the organization that plans simply will not be fulfilled. Then, as the expectation becomes experience, it becomes the norm that performance commitments won’t be kept. So commitments cease to be binding promises with real consequences. Rather than stretching to ensure that commitments are kept, managers, expecting failure, seek to protect themselves from the eventual fallout. They spend time covering their tracks rather than identifying actions to enhance performance. The organization becomes less self-critical and less intellectually honest about its shortcomings. Consequently, it loses its capacity to perform.

Closing the Strategy-to-Performance Gap

As significant as the strategy-to-performance gap is at most companies, management can close it. A number of high-performing companies have found ways to realize more of their strategies’ potential. Rather than focus on improving their planning and execution processes separately to close the gap, these companies work both sides of the equation, raising standards for both planning and execution simultaneously and creating clear links between them.

Our research and experience in working with many of these companies suggests they follow seven rules that apply to planning and execution. Living by these rules enables them to objectively assess any performance shortfall and determine whether it stems from the strategy, the plan, the execution, or employees’ capabilities. And the same rules that allow them to spot problems early also help them prevent performance shortfalls in the first place. These rules may seem simple—even obvious—but when strictly and collectively observed, they can transform both the quality of a company’s strategy and its ability to deliver results.

Rule 1: Keep it simple, make it concrete.

At most companies, strategy is a highly abstract concept—often confused with vision or aspiration—and is not something that can be easily communicated or translated into action. But without a clear sense of where the company is headed and why, lower levels in the organization cannot put in place executable plans. In short, the link between strategy and performance can’t be drawn because the strategy itself is not sufficiently concrete.

To start off the planning and execution process on the right track, high-performing companies avoid long, drawn-out descriptions of lofty goals and instead stick to clear language describing their course of action. Bob Diamond, CEO of Barclays Capital, one of the fastest-growing and best-performing investment banking operations in Europe, puts it this way: “We’ve been very clear about what we will and will not do. We knew we weren’t going to go head-to-head with U.S. bulge bracket firms. We communicated that we wouldn’t compete in this way and that we wouldn’t play in unprofitable segments within the equity markets but instead would invest to position ourselves for the euro, the burgeoning need for fixed income, and the end of Glass-Steigel. By ensuring everyone knew the strategy and how it was different, we’ve been able to spend more time on tasks that are key to executing this strategy.”

By being clear about what the strategy is and isn’t, companies like Barclays keep everyone headed in the same direction. More important, they safeguard the performance their counterparts lose to ineffective communications; their resource and action planning becomes more effective; and accountabilities are easier to specify.

Rule 2: Debate assumptions, not forecasts.

At many companies, a business unit’s strategic plan is little more than a negotiated settlement—the result of careful bargaining with the corporate center over performance targets and financial forecasts. Planning, therefore, is largely a political process—with unit management arguing for lower near-term profit projections (to secure higher annual bonuses) and top management pressing for more long-term stretch (to satisfy the board of directors and other external constituents). Not surprisingly, the forecasts that emerge from these negotiations almost always understate what each business unit can deliver in the near term and overstate what can realistically be expected in the long-term—the hockey-stick charts with which CEOs are all too familiar.

Even at companies where the planning process is isolated from the political concerns of performance evaluation and compensation, the approach used to generate financial projections often has built-in biases. Indeed, financial forecasting frequently takes place in complete isolation from the marketing or strategy functions. A business unit’s finance function prepares a highly detailed line-item forecast whose short-term assumptions may be realistic, if conservative, but whose long-term assumptions are largely uninformed. For example, revenue forecasts are typically based on crude estimates about average pricing, market growth, and market share. Projections of long-term costs and working capital requirements are based on an assumption about annual productivity gains—expediently tied, perhaps, to some companywide efficiency program. These forecasts are difficult for top management to pick apart. Each line item may be completely defensible, but the overall plan and projections embed a clear upward bias—rendering them useless for driving strategy execution. 

High-performing companies view planning altogether differently. They want their forecasts to drive the work they actually do. To make this possible, they have to ensure that the assumptions underlying their long-term plans reflect both the real economics of their markets and the performance experience of the company relative to competitors. Tyco CEO Ed Breen, brought in to turn the company around in July 2002, credits a revamped plan-building process for contributing to Tyco’s dramatic recovery. When Breen joined the company, Tyco was a labyrinth of 42 business units and several hundred profit centers, built up over many years through countless acquisitions. Few of Tyco’s businesses had complete plans, and virtually none had reliable financial forecasts.

To get a grip on the conglomerate’s complex operations, Breen assigned cross-functional teams at each unit, drawn from strategy, marketing, and finance, to develop detailed information on the profitability of Tyco’s primary markets as well as the product or service offerings, costs, and price positioning relative to the competition. The teams met with corporate executives biweekly during Breen’s first six months to review and discuss the findings. These discussions focused on the assumptions that would drive each unit’s long-term financial performance, not on the financial forecasts themselves. In fact, once assumptions about market trends were agreed on, it was relatively easy for Tyco’s central finance function to prepare externally oriented and internally consistent forecasts for each unit.

Separating the process of building assumptions from that of preparing financial projections helps to ground the business unit–corporate center dialogue in economic reality. Units can’t hide behind specious details, and corporate center executives can’t push for unrealistic goals. What’s more, the fact-based discussion resulting from this kind of approach builds trust between the top team and each unit and removes barriers to fast and effective execution. “When you understand the fundamentals and performance drivers in a detailed way,” says Bob Diamond, “you can then step back, and you don’t have to manage the details. The team knows which issues it can get on with, which it needs to flag to me, and which issues we really need to work out together.”

Rule 3: Use a rigorous framework, speak a common language.

To be productive, the dialogue between the corporate center and the business units about market trends and assumptions must be conducted within a rigorous framework. Many of the companies we advise use the concept of profit pools, which draws on the competition theories of Michael Porter and others. In this framework, a business’s long-term financial performance is tied to the total profit pool available in each of the markets it serves and its share of each profit pool—which, in turn, is tied to the business’s market share and relative profitability versus competitors in each market.

In this approach, the first step is for the corporate center and the unit team to agree on the size and growth of each profit pool. Fiercely competitive markets, such as pulp and paper or commercial airlines, have small (or negative) total profit pools. Less competitive markets, like soft drinks or pharmaceuticals, have large total profit pools. We find it helpful to estimate the size of each profit pool directly—through detailed benchmarking—and then forecast changes in the pool’s size and growth. Each business unit then assesses what share of the total profit pool it can realistically capture over time, given its business model and positioning. Competitively advantaged businesses can capture a large share of the profit pool—by gaining or sustaining a high market share, generating above-average profitability, or both. Competitively disadvantaged businesses, by contrast, typically capture a negligible share of the profit pool. Once the unit and the corporate center agree on the likely share of the pool the business will capture over time, the corporate center can easily create the financial projections that will serve as the unit’s road map.

In our view, the specific framework a company uses to ground its strategic plans isn’t all that important. What is critical is that the framework establish a common language for the dialogue between the corporate center and the units—one that the strategy, marketing, and finance teams all understand and use. Without a rigorous framework to link a business’s performance in the product markets with its financial performance over time, it is very difficult for top management to ascertain whether the financial projections that accompany a business unit’s strategic plan are reasonable and realistically achievable. As a result, management can’t know with confidence whether a performance shortfall stems from poor execution or an unrealistic and ungrounded plan.

Rule 4: Discuss resource deployments early.

Companies can create more realistic forecasts and more executable plans if they discuss up front the level and timing of critical resource deployments. At Cisco Systems, for example, a cross-functional team reviews the level and timing of resource deployments early in the planning stage. These teams regularly meet with John Chambers (CEO), Dennis Powell (CFO), Randy Pond (VP of operations), and the other members of Cisco’s executive team to discuss their findings and make recommendations. Once agreement is reached on resource allocation and timing at the unit level, those elements are factored into the company’s two-year plan. Cisco then monitors each unit’s actual resource deployments on a monthly basis (as well as its performance) to make sure things are going according to plan and that the plan is generating the expected results.

Challenging business units about when new resources need to be in place focuses the planning dialogue on what actually needs to happen across the company in order to execute each unit’s strategy. Critical questions invariably surface, such as: How long will it take us to change customers’ purchase patterns? How fast can we deploy our new sales force? How quickly will competitors respond? These are tough questions. But answering them makes the forecasts and the plans they accompany more feasible. 

What’s more, an early assessment of resource needs also informs discussions about market trends and drivers, improving the quality of the strategic plan and making it far more executable. In the course of talking about the resources needed to expand in the rapidly growing cable market, for example, Cisco came to realize that additional growth would require more trained engineers to improve existing products and develop new features. So, rather than relying on the functions to provide these resources from the bottom up, corporate management earmarked a specific number of trained engineers to support growth in cable. Cisco’s financial-planning organization carefully monitors the engineering head count, the pace of feature development, and revenues generated by the business to make sure the strategy stays on track.

Rule 5: Clearly identify priorities.

To deliver any strategy successfully, managers must make thousands of tactical decisions and put them into action. But not all tactics are equally important. In most instances, a few key steps must be taken—at the right time and in the right way—to meet planned performance. Leading companies make these priorities explicit so that each executive has a clear sense of where to direct his or her efforts.

At Textron, a $10 billion multi-industrial conglomerate, each business unit identifies “improvement priorities” that it must act upon to realize the performance outlined in its strategic plan. Each improvement priority is translated into action items with clearly defined accountabilities, timetables, and key performance indicators (KPIs) that allow executives to tell how a unit is delivering on a priority. Improvement priorities and action items cascade to every level at the company—from the management committee (consisting of Textron’s top five executives) down to the lowest levels in each of the company’s ten business units. Lewis Campbell, Textron’s CEO, summarizes the company’s approach this way: “Everyone needs to know: ‘If I have only one hour to work, here’s what I’m going to focus on.’ Our goal deployment process makes each individual’s accountabilities and priorities clear.”

The Swiss pharmaceutical giant Roche goes as far as to turn its business plans into detailed performance contracts that clearly specify the steps needed and the risks that must be managed to achieve the plans. These contracts all include a “delivery agenda” that lists the five to ten critical priorities with the greatest impact on performance. By maintaining a delivery agenda at each level of the company, Chairman and CEO Franz Humer and his leadership team make sure “everyone at Roche understands exactly what we have agreed to do at a strategic level and that our strategy gets translated into clear execution priorities. Our delivery agenda helps us stay the course with the strategy decisions we have made so that execution is actually allowed to happen. We cannot control implementation from HQ, but we can agree on the priorities, communicate relentlessly, and hold managers accountable for executing against their commitments.”

Rule 6: Continuously monitor performance.

Seasoned executives know almost instinctively whether a business has asked for too much, too little, or just enough resources to deliver the goods. They develop this capability over time—essentially through trial and error. High-performing companies use real-time performance tracking to help accelerate this trial-and-error process. They continuously monitor their resource deployment patterns and their results against plan, using continuous feedback to reset planning assumptions and reallocate resources. This real-time information allows management to spot and remedy flaws in the plan and shortfalls in execution—and to avoid confusing one with the other.

At Textron, for example, each KPI is carefully monitored, and regular operating reviews percolate performance shortfalls—or “red light” events—up through the management ranks. This provides CEO Lewis Campbell, CFO Ted French, and the other members of Textron’s management committee with the information they need to spot and fix breakdowns in execution.

A similar approach has played an important role in the dramatic revival of Dow Chemical’s fortunes. In December 2001, with performance in a free fall, Dow’s board of directors asked Bill Stavropoulos (Dow’s CEO from 1993 to 1999) to return to the helm. Stavropoulos and Andrew Liveris (the current CEO, then COO) immediately focused Dow’s entire top leadership team on execution through a project they called the Performance Improvement Drive. They began by defining clear performance metrics for each of Dow’s 79 business units. Performance on these key metrics was tracked against plans on a weekly basis, and the entire leadership team discussed any serious discrepancies first thing every Monday morning. As Liveris told us, the weekly monitoring sessions “forced everyone to live the details of execution” and let “the entire organization know how we were performing.”

Continuous monitoring of performance is particularly important in highly volatile industries, where events outside anyone’s control can render a plan irrelevant. Under CEO Alan Mulally, Boeing Commercial Airplanes’ leadership team holds weekly business performance reviews to track the division’s results against its multiyear plan. By tracking the deployment of resources as a leading indicator of whether a plan is being executed effectively, BCA’s leadership team can make course corrections each week rather than waiting for quarterly results to roll in. 

Furthermore, by proactively monitoring the primary drivers of performance (such as passenger traffic patterns, airline yields and load factors, and new aircraft orders), BCA is better able to develop and deploy effective countermeasures when events throw its plans off course. During the SARS epidemic in late 2002, for example, BCA’s leadership team took action to mitigate the adverse consequences of the illness on the business’s operating plan within a week of the initial outbreak. The abrupt decline in air traffic to Hong Kong, Singapore, and other Asian business centers signaled that the number of future aircraft deliveries to the region would fall—perhaps precipitously. Accordingly, BCA scaled back its medium-term production plans (delaying the scheduled ramp-up of some programs and accelerating the shutdown of others) and adjusted its multiyear operating plan to reflect the anticipated financial impact.

Rule 7: Reward and develop execution capabilities.

No list of rules on this topic would be complete without a reminder that companies have to motivate and develop their staffs; at the end of the day, no process can be better than the people who have to make it work. Unsurprisingly, therefore, nearly all of the companies we studied insisted that the selection and development of management was an essential ingredient in their success. And while improving the capabilities of a company’s workforce is no easy task—often taking many years—these capabilities, once built, can drive superior planning and execution for decades.

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For Barclays’ Bob Diamond, nothing is more important than “ensuring that [the company] hires only A players.” In his view, “the hidden costs of bad hiring decisions are enormous, so despite the fact that we are doubling in size, we insist that as a top team we take responsibility for all hiring. The jury of your peers is the toughest judgment, so we vet each others’ potential hires and challenge each other to keep raising the bar.” It’s equally important to make sure that talented hires are rewarded for superior execution. To reinforce its core values of “client,” “meritocracy,” “team,” and “integrity,” Barclays Capital has innovative pay schemes that “ring fence” rewards. Stars don’t lose out just because the business is entering new markets with lower returns during the growth phase. Says Diamond: “It’s so bad for the culture if you don’t deliver what you promised to people who have delivered…. You’ve got to make sure you are consistent and fair, unless you want to lose your most productive people.”

Companies that are strong on execution also emphasize development. Soon after he became CEO of 3M, Jim McNerney and his top team spent 18 months hashing out a new leadership model for the company. Challenging debates among members of the top team led to agreement on six “leadership attributes”—namely, the ability to “chart the course,” “energize and inspire others,” “demonstrate ethics, integrity, and compliance,” “deliver results,” “raise the bar,” and “innovate resourcefully.” 3M’s leadership agreed that these six attributes were essential for the company to become skilled at execution and known for accountability. Today, the leaders credit this model with helping 3M to sustain and even improve its consistently strong performance.• • • 

The prize for closing the strategy-to-performance gap is huge—an increase in performance of anywhere from 60% to 100% for most companies. But this almost certainly understates the true benefits. Companies that create tight links between their strategies, their plans, and, ultimately, their performance often experience a cultural multiplier effect. Over time, as they turn their strategies into great performance, leaders in these organizations become much more confident in their own capabilities and much more willing to make the stretch commitments that inspire and transform large companies. In turn, individual managers who keep their commitments are rewarded—with faster progression and fatter paychecks—reinforcing the behaviors needed to drive any company forward.

The prize for closing the strategy-to-performance gap is huge—an increase in performance of anywhere from 60% to 100% for most companies.

Eventually, a culture of overperformance emerges. Investors start giving management the benefit of the doubt when it comes to bold moves and performance delivery. The result is a performance premium on the company’s stock—one that further rewards stretch commitments and performance delivery. Before long, the company’s reputation among potential recruits rises, and a virtuous circle is created in which talent begets performance, performance begets rewards, and rewards beget even more talent. In short, closing the strategy-to-performance gap is not only a source of immediate performance improvement but also an important driver of cultural change with a large and lasting impact on the organization’s capabilities, strategies, and competitiveness.A version of this article appeared in the July–August 2005 issue of Harvard Business Review.

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FROM THE NOVEMBER–DECEMBER 1989 ISSUE, Harvard Business Review

Consider this lesson in strategy. In 1934, Professor G.F. Gause of Moscow University, known as “the father of mathematical biology,” published the results of a set of experiments in which he put two very small animals (protozoans) of the same genus in a bottle with an adequate supply of food. If the animals were of different species, they could survive and persist together. If they were of the same species, they could not. This observation led to Gause’s Principle of Competitive Exclusion: No two species can coexist that make their living in the identical way.

Competition existed long before strategy. It began with life itself. The first one-cell organisms required certain resources to maintain life. When these resources were adequate, the number grew from one generation to the next. As life evolved, these organisms became a resource for more complex forms of life, and so on up the food chain. When any pair of species competed for some essential resource, sooner or later one displaced the other. In the absence of counterbalancing forces that could maintain a stable equilibrium by giving each species an advantage in its own territory, only one of any pair survived.

Over millions of years, a complex network of competitive interaction developed. Today more than a million distinct existing species have been cataloged, each with some unique advantage in competing for the resources it requires. (There are thought to be millions more as yet unclassified.) At any given time, thousands of species are becoming extinct and thousands more are emerging.

What explains this abundance? Variety. The richer the environment, the greater the number of potentially significant variables that can give each species a unique advantage. But also, the richer the environment, the greater the potential number of competitors—and the more severe the competition.

For millions of years, natural competition involved no strategy. By chance and the laws of probability, competitors found the combinations of resources that best matched their different characteristics. This was not strategy but Darwinian natural selection, based on adaptation and the survival of the fittest. The same pattern exists in all living systems, including business.

In both the competition of the ecosphere and the competition of trade and commerce, random chance is probably the major, all-pervasive factor. Chance determines the mutations and variations that survive and thrive from generation to generation. Those that leave relatively fewer offspring are displaced. Those that adapt best displace the rest. Physical and structural characteristics evolve and adapt to match the competitive environment. Behavior patterns evolve too and become embedded as instinctual reactions.

In fact, business and biological competition would follow the same pattern of gradual evolutionary change except for one thing. Business strategists can use their imagination and ability to reason logically to accelerate the effects of competition and the rate of change. In other words, imagination and logic make strategy possible. Without them, behavior and tactics are either intuitive or the result of conditioned reflexes. But imagination and logic are only two of the factors that determine shifts in competitive equilibrium. Strategy also requires the ability to understand the complex web of natural competition.

If every business could grow indefinitely, the total market would grow to an infinite size on a finite earth. It has never happened. Competitors perpetually crowd each other out. The fittest survive and prosper until they displace their competitors or outgrow their resources. What explains this evolutionary process? Why do business competitors achieve the equilibrium they do? 

Remember Gause’s Principle. Competitors that make their living in the same way cannot coexist—no more in business than in nature. Each must be different enough to have a unique advantage. The continued existence of a number of competitors is proof per se that their advantages over each other are mutually exclusive. They may look alike, but they are different species.

Consider Sears, Kmart, Wal-Mart, and Radio Shack. These stores overlap in the merchandise they sell, in the customers they serve, and in the areas where they operate. But to survive, each of these retailers has had to differentiate itself in important ways, to dominate different segments of the market. Each sells to different customers or offers different values, services, or products.

What differentiates competitors in business may be purchase price, function, time utility (the difference between instant gratification and “someday, as soon as possible”), or place utility (when your heating and cooling system quits, the manufacturer’s technical expert is not nearly as valuable as the local mechanic). Or it may be nothing but the customer’s perception of the product and its supplier. Indeed, image is often the only basis of comparison between similar but different alternatives. That is why advertising can be valuable.

Since businesses can combine these factors in many different ways, there will always be many possibilities for competitive coexistence. But also, many possibilities for each competitor to enlarge the scope of its advantage by changing what differentiates it from its rivals. Can evolution be planned for in business? That is what strategy is for.

Strategy is a deliberate search for a plan of action that will develop a business’s competitive advantage and compound it. For any company, the search is an iterative process that begins with a recognition of where you are and what you have now. Your most dangerous competitors are those that are most like you. The differences between you and your competitors are the basis of your advantage. If you are in business and are self-supporting, you already have some kind of competitive advantage, no matter how small or subtle. Otherwise, you would have gradually lost customers faster than you gained them. The objective is to enlarge the scope of your advantage, which can happen only at someone else’s expense.

Chasing market share is almost as productive as chasing the pot of gold at the end of the rainbow. You can never get there. Even if you could, you would find nothing. If you are in business, you already have 100% of your own market. So do your competitors. Your real goal is to expand the size of your market. But you will always have 100% of your market, whether it grows or shrinks.

Your present market is what, where, and to whom you are selling what you now sell. Survival depends on keeping 100% of this market. To grow and prosper, however, you must expand the market in which you can maintain an advantage over any and all competitors who might be selling to your customers.

Unless a business has a unique advantage over its rivals, it has no reason to exist. Unfortunately, many businesses compete in important areas where they operate at a disadvantage—often at great cost, until, inevitably, they are crowded out. That happened to Texas Instruments and its pioneering personal computer. TI invented the semiconductor; its business was built on instrumentation. Why was it forced out of the personal computer business? 

Many executives have been led on a wild goose chase after market share by their inability to define the potential market in which they would, or could, enjoy a competitive advantage. Remember the Edsel? And the Mustang? Xerox invented the copying machine; why couldn’t IBM become a major competitor in this field? What did Kodak do to virtually dominate the large-scale business copier market in the United States? What did Coca-Cola do to virtually dominate the soft drink business in Japan?

But what is market share? Grape Nuts has 100% of the Grape Nuts market, a smaller percentage of the breakfast cereal market, an even smaller percentage of the packaged-foods market, a still smaller percentage of the packaged-goods shelf-space market, a tiny percentage of the U.S. food market, a minuscule percentage of the world food market, and a microscopic percentage of total consumer expenditures.

Market share is a meaningless number unless a company defines the market in terms of the boundaries separating it from its rivals. These boundaries are the points at which the company and a particular competitor are equivalent in a potential customer’s eyes. The trick lies in moving the boundary of advantage into the potential competitor’s market and keeping that competitor from doing the same. The competitor that truly has an advantage can give potential customers more for their money and still have a larger margin between its cost and its selling price. That extra can be converted into either growth or larger payouts to the business’s owners.

So what is new? The marketing wars are forever. But market share is malarkey.

Strategic competition compresses time. Competitive shifts that might take generations to evolve instead occur in a few short years. Strategic competition is not new, of course. Its elements have been recognized and used ever since humans combined intelligence, imagination, accumulated resources, and coordinated behavior to wage war. But strategic competition in business is a relatively recent phenomenon. It may well have as profound an impact on business productivity as the industrial revolution had on individual productivity.

The basic elements of strategic competition are these: (1) ability to understand competitive behavior as a system in which competitors, customers, money, people, and resources continually interact; (2) ability to use this understanding to predict how a given strategic move will rebalance the competitive equilibrium; (3) resources that can be permanently committed to new uses even though the benefits will be deferred; (4) ability to predict risk and return with enough accuracy and confidence to justify that commitment; and (5) willingness to act.

This list may sound like nothing more than the basic requirements for making any ordinary investment. But strategy is not that simple. It is all-encompassing, calling on the commitment and dedication of the whole organization. Any competitor’s failure to react and then deploy and commit its own resources against the strategic move of a rival can turn existing competitive relationships upside down. That is why strategic competition compresses time. Natural competition has none of these characteristics.

Natural competition is wildly expedient in its moment-to-moment interaction. But it is inherently conservative in the way it changes a species’s characteristic behavior. By contrast, strategic commitment is deliberate, carefully considered, and tightly reasoned. But the consequences may well be radical change in a relatively short period of time. Natural competition is evolutionary. Strategic competition is revolutionary. 

Natural competition works by a process of low-risk, incremental trial and error. Small changes are tried and tested. Those that are beneficial are gradually adopted and maintained. No need for foresight or commitment, what matters is adaptation to the way things are now. Natural competition can and does evolve exquisitely complex and effective forms eventually. Humans are just such an end result. But unmanaged change takes thousands of generations. Often it cannot keep up with a fast-changing environment and with the adaptation of competitors.

By committing resources, strategy seeks to make sweeping changes in competitive relationships. Only two fundamental inhibitions moderate its revolutionary character. One is failure, which can be as far-reaching in its consequences as success. The other is the inherent advantage that an alert defender has over an attacker. Success usually depends on the culture, perceptions, attitudes, and characteristic behavior of competitors and on their mutual awareness of each other.

This is why, in geopolitics and military affairs as well as in business, long periods of equilibrium are punctuated by sharp shifts in competitive relationships. It is the age-old pattern of war and peace and then war again. Natural competition continues during periods of peace. In business, however, peace is becoming increasingly rare. When an aggressive competitor launches a successful strategy, all the other businesses with which it competes must respond with equal foresight and dedication of resources.

In 1975, the British War Office opened its classified files on World War II. Serious readers of these descriptions of “war by other means” may feel inclined to revise their thinking about what happened in that war and about strategy generally, particularly the differences between actual strategies and apparent strategies.

The evidence is clear that the outcome of individual battles and campaigns often depended on highly subjective evaluations of the combatants’ intentions, capabilities, and behavior. But until the records were unsealed, only people who were directly involved appreciated this. Historians and other observers ascribed victories and defeats to grand military plans or chance.

Also in 1975, Edward O. Wilson published Sociobiology, a landmark study in which he tried to synthesize all that is known about population biology, zoology, genetics, and animal behavior. What emerged was a framework for understanding the success of species in terms of social behavior—that is, competition for resources. This synthesis is the closest approach to a general theory of competition that I know of. It provides abundant parallels for business behavior as well as for the economic competition that characterizes our own species.

Human beings may be at the top of the ecological chain, but we are still members of the ecological community. That is why Darwin is probably a better guide to business competition than economists are.

Classical economic theories of business competition are so simplistic and sterile that they have been less contributions to understanding than obstacles. These theories postulate rational, self-interested behavior by individuals who interact through market exchanges in a fixed and static legal system of property and contracts. Their frame of reference is “perfect competition,” a theoretical abstraction that never has existed and never could exist. 

In contrast, Charles Darwin’s On the Origin of Species, published in 1859, outlines a more fruitful perspective and point of departure for developing business strategy: “Some make the deep-seated error of considering the physical conditions of a country as the most important for its inhabitants; whereas it cannot, I think, be disputed that the nature of the other inhabitants with which each has to compete is generally a far more important element of success.”A version of this article appeared in the November–December 1989 issue of Harvard Business Review.

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FROM THE JULY 1987 ISSUE, Harvard Business Review

Imagine someone planning strategy. What likely springs to mind is an image of orderly thinking: a senior manager, or a group of them, sitting in an office formulating courses of action that everyone else will implement on schedule. The keynote is reason—rational control, the systematic analysis of competitors and markets, of company strengths and weaknesses, the combination of these analyses producing clear, explicit, full-blown strategies.

Now imagine someone crafting strategy. A wholly different image likely results, as different from planning as craft is from mechanization. Craft evokes traditional skill, dedication, perfection through the mastery of detail. What springs to mind is not so much thinking and reason as involvement, a feeling of intimacy and harmony with the materials at hand, developed through long experience and commitment. Formulation and implementation merge into a fluid process of learning through which creative strategies evolve.

My thesis is simple: the crafting image better captures the process by which effective strategies come to be. The planning image, long popular in the literature, distorts these processes and thereby misguides organizations that embrace it unreservedly.

In developing this thesis, I shall draw on the experiences of a single craftsman, a potter, and compare them with the results of a research project that tracked the strategies of a number of corporations across several decades. Because the two contexts are so obviously different, my metaphor, like my assertion, may seem farfetched at first. Yet if we think of a craftsman as an organization of one, we can see that he or she must also resolve one of the great challenges the corporate strategist faces: knowing the organization’s capabilities well enough to think deeply enough about its strategic direction. By considering strategy making from the perspective of one person, free of all the paraphernalia of what has been called the strategy industry, we can learn something about the formation of strategy in the corporation. For much as our potter has to manage her craft, so too managers have to craft their strategy.

At work, the potter sits before a lump of clay on the wheel. Her mind is on the clay, but she is also aware of sitting between her past experiences and her future prospects. She knows exactly what has and has not worked for her in the past. She has an intimate knowledge of her work, her capabilities, and her markets. As a craftsman, she senses rather than analyzes these things; her knowledge is “tacit.” All these things are working in her mind as her hands are working the clay. The product that emerges on the wheel is likely to be in the tradition of her past work, but she may break away and embark on a new direction. Even so, the past is no less present, projecting itself into the future.

In my metaphor, managers are craftsmen and strategy is their clay. Like the potter, they sit between a past of corporate capabilities and a future of market opportunities. And if they are truly craftsmen, they bring to their work an equally intimate knowledge of the materials at hand. That is the essence of crafting strategy.

In this article, we will explore this metaphor by looking at how strategies get made as opposed to how they are supposed to get made. Throughout, I will be drawing on the two sets of experiences I’ve mentioned. One, described in the sidebar, is a research project on patterns in strategy formation that has been going on at McGill University under my direction since 1971. The second is the stream of work of a successful potter, my wife, who began her craft in 1967. 

Tracking Strategy 

In 1971, I became intrigued by an unusual definition of strategy as a pattern in a stream of decisions (later changed to …

Ask almost anyone what strategy is, and they will define it as a plan of some sort, an explicit guide to future behavior. Then ask them what strategy a competitor or a government or even they themselves have actually pursued. Chances are they will describe consistency in pastbehavior—a pattern in action over time. Strategy, it turns out, is one of those words that people define in one way and often use in another, without realizing the difference. 

The reason for this is simple. Strategy’s formal definition and its Greek military origins notwithstanding, we need the word as much to explain past actions as to describe intended behavior. After all, if strategies can be planned and intended, they can also be pursued and realized (or not realized, as the case may be). And pattern in action, or what we call realized strategy, explains that pursuit. Moreover, just as a plan need not produce a pattern (some strategies that are intended are simply not realized), so too a pattern need not result from a plan. An organization can have a pattern (or realized strategy) without knowing it, let alone making it explicit.

Patterns, like beauty, are in the mind of the beholder, of course. But anyone reviewing a chronological lineup of our craftsman’s work would have little trouble discerning clear patterns, at least in certain periods. Until 1974, for example, she made small, decorative ceramic animals and objects of various kinds. Then this “knickknack strategy” stopped abruptly, and eventually new patterns formed around wafer like sculptures and ceramic bowls, highly textured and unglazed.

Finding equivalent patterns in action for organizations isn’t that much more difficult. Indeed, for such large companies as Volkswagenwerk and Air Canada, in our research, it proved simpler! (As well it should. A craftsman, after all, can change what she does in a studio a lot more easily than a Volkswagenwerk can retool its assembly lines.) Mapping the product models at Volkswagenwerk from the late 1940s to the late 1970s, for example, uncovers a clear pattern of concentration on the Beetle, followed in the late 1960s by a frantic search for replacements through acquisitions and internally developed new models, to a strategic reorientation around more stylish, water-cooled, frontwheel-drive vehicles in the mid-1970s.

But what about intended strategies, those formal plans and pronouncements we think of when we use the term strategy? Ironically, here we run into all kinds of problems. Even with a single craftsman, how can we know what her intended strategies really were? If we could go back, would we find expressions of intention? And if we could, would we be able to trust them? We often fool ourselves, as well as others, by denying our subconscious motives. And remember that intentions are cheap, at least when compared with realizations.

Reading the Organization’s Mind 

If you believe all this has more to do with the Freudian recesses of a craftsman’s mind than with the practical realities of producing automobiles, then think again. For who knows what the intended strategies of a Volkswagenwerk really mean, let alone what they are? Can we simply assume in this collective context that the company’s intended strategies are represented by its formal plans or by other statements emanating from the executive suite? Might these be just vain hopes or rationalizations or ploys to fool the competition? And even if expressed intentions exist, to what extent do others in the organization share them? How do we read the collective mind? Who is the strategist anyway?

The traditional view of strategic management resolves these problems quite simply, by what organizational theorists call attribution. You see it all the time in the business press. When General Motors acts, it’s because Roger Smith has made a strategy. Given realization, there must have been intention, and that is automatically attributed to the chief.

In a short magazine article, this assumption is understandable. Journalists don’t have a lot of time to uncover the origins of strategy, and GM is a large, complicated organization. But just consider all the complexity and confusion that gets tucked under this assumption—all the meetings and debates, the many people, the dead ends, the folding and unfolding of ideas. Now imagine trying to build a formal strategy-making system around that assumption. Is it any wonder that formal strategic planning is often such a resounding failure?

To unravel some of the confusion—and move away from the artificial complexity we have piled around the strategy-making process—we need to get back to some basic concepts. The most basic of all is the intimate connection between thought and action. That is the key to craft, and so also to the crafting of strategy. 

Virtually everything that has been written about strategy making depicts it as a deliberate process. First we think, then we act. We formulate, then we implement. The progression seems so perfectly sensible. Why would anybody want to proceed differently?

Our potter is in the studio, rolling the clay to make a waferlike sculpture. The clay sticks to the rolling pin, and a round form appears. Why not make a cylindrical vase? One idea leads to another, until a new pattern forms. Action has driven thinking: a strategy has emerged.

Out in the field, a salesman visits a customer. The product isn’t quite right, and together they work out some modifications. The salesman returns to his company and puts the changes through; after two or three more rounds, they finally get it right. A new product emerges, which eventually opens up a new market. The company has changed strategic course.

In fact, most salespeople are less fortunate than this one or than our craftsman. In an organization of one, the implementor is the formulator, so innovations can be incorporated into strategy quickly and easily. In a large organization, the innovator may be ten levels removed from the leader who is supposed to dictate strategy and may also have to sell the idea to dozens of peers doing the same job.

Some salespeople, of course, can proceed on their own, modifying products to suit their customers and convincing skunkworks in the factory to produce them. In effect, they pursue their own strategies. Maybe no one else notices or cares. Sometimes, however, their innovations do get noticed, perhaps years later, when the company’s prevalent strategies have broken down and its leaders are groping for something new. Then the salesperson’s strategy may be allowed to pervade the system, to become organizational.

Is this story farfetched? Certainly not. We’ve all heard stories like it. But since we tend to see only what we believe, if we believe that strategies have to be planned, we’re unlikely to see the real meaning such stories hold.

Consider how the National Film Board of Canada (NFB) came to adopt a feature-film strategy. The NFB is a federal government agency, famous for its creativity and expert in the production of short documentaries. Some years back, it funded a filmmaker on a project that unexpectedly ran long. To distribute his film, the NFB turned to theaters and so inadvertently gained experience in marketing feature-length films. Other filmmakers caught onto the idea, and eventually the NFB found itself pursuing a feature-film strategy—a pattern of producing such films.

My point is simple, deceptively simple: strategies can form as well as be formulated. A realized strategy can emerge in response to an evolving situation, or it can be brought about deliberately, through a process of formulation followed by implementation. But when these planned intentions do not produce the desired actions, organizations are left with unrealized strategies. 

Today we hear a great deal about unrealized strategies, almost always in concert with the claim that implementation has failed. Management has been lax, controls have been loose, people haven’t been committed. Excuses abound. At times, indeed, they may be valid. But often these explanations prove too easy. So some people look beyond implementation to formulation. The strategists haven’t been smart enough.

While it is certainly true that many intended strategies are ill conceived, I believe that the problem often lies one step beyond, in the distinction we make between formulation and implementation, the common assumption that thought must be independent of (and precede) action. Sure, people could be smarter—but not only by conceiving more clever strategies. Sometimes they can be smarter by allowing their strategies to develop gradually, through the organization’s actions and experiences. Smart strategists appreciate that they cannot always be smart enough to think through everything in advance.

Hands & Minds 

No craftsman thinks some days and works others. The craftsman’s mind is going constantly, in tandem with her hands. Yet large organizations try to separate the work of minds and hands. In so doing, they often sever the vital feedback link between the two. The salesperson who finds a customer with an unmet need may possess the most strategic bit of information in the entire organization. But that information is useless if he or she cannot create a strategy in response to it or else convey the information to someone who can—because the channels are blocked or because the formulators have simply finished formulating. The notion that strategy is something that should happen way up there, far removed from the details of running an organization on a daily basis, is one of the great fallacies of conventional strategic management. And it explains a good many of the most dramatic failures in business and public policy today.

We at McGill call strategies like the NFB’s that appear without clear intentions—or in spite of them—emergent strategies. Actions simply converge into patterns. They may become deliberate, of course, if the pattern is recognized and then legitimated by senior management. But that’s after the fact.

All this may sound rather strange, I know. Strategies that emerge? Managers who acknowledge strategies already formed? Over the years, our research group at McGill has met with a good deal of resistance from people upset by what they perceive to be our passive definition of a word so bound up with proactive behavior and free will. After all, strategy means control—the ancient Greeks used it to describe the art of the army general.

Strategic Learning 

But we have persisted in this usage for one reason: learning. Purely deliberate strategy precludes learning once the strategy is formulated; emergent strategy fosters it. People take actions one by one and respond to them, so that patterns eventually form.

Our craftsman tries to make a freestanding sculptural form. It doesn’t work, so she rounds it a bit here, flattens it a bit there. The result looks better, but still isn’t quite right. She makes another and another and another. Eventually, after days or months or years, she finally has what she wants. She is off on a new strategy.

In practice, of course, all strategy making walks on two feet, one deliberate, the other emergent. For just as purely deliberate strategy making precludes learning, so purely emergent strategy making precludes control. Pushed to the limit, neither approach makes much sense. Learning must be coupled with control. That is why the McGill research group uses the word strategy for both emergent and deliberate behavior. 

Likewise, there is no such thing as a purely deliberate strategy or a purely emergent one. No organization—not even the ones commanded by those ancient Greek generals—knows enough to work everything out in advance, to ignore learning en route. And no one—not even a solitary potter—can be flexible enough to leave everything to happenstance, to give up all control. Craft requires control just as it requires responsiveness to the material at hand. Thus deliberate and emergent strategy form the end points of a continuum along which the strategies that are crafted in the real world may be found. Some strategies may approach either end, but many more fall at intermediate points.

Effective strategies can show up in the strangest places and develop through the most unexpected means. There is no one best way to make strategy.

The form for a cat collapses on the wheel, and our potter sees a bull taking shape. Clay sticks to a rolling pin, and a line of cylinders results. Wafers come into being because of a shortage of clay and limited kiln space in a studio in France. Thus errors become opportunities, and limitations stimulate creativity. The natural propensity to experiment, even boredom, likewise stimulate strategic change.

Organizations that craft their strategies have similar experiences. Recall the National Film Board with its inadvertently long film. Or consider its experiences with experimental films, which made special use of animation and sound. For 20 years, the NFB produced a bare but steady trickle of such films. In fact, every film but one in that trickle was produced by a single person, Norman McLaren, the NFB’s most celebrated filmmaker. McLaren pursued a personal strategy of experimentation, deliberate for him perhaps (though who can know whether he had the whole stream in mind or simply planned one film at a time?) but not for the organization. Then 20 years later, others followed his lead and the trickle widened, his personal strategy becoming more broadly organizational.

Conversely, in 1952, when television came to Canada, a consensus strategy quickly emerged at the NFB. Senior management was not keen on producing films for the new medium. But while the arguments raged, one filmmaker quietly went off and made a single series for TV. That precedent set, one by one his colleagues leapt in, and within months the NFB—and its management—found themselves committed for several years to a new strategy with an intensity unmatched before or since. This consensus strategy arose spontaneously, as a result of many independent decisions made by the filmmakers about the films they wished to make. Can we call this strategy deliberate? For the filmmakers perhaps; for senior management certainly not. But for the organization? It all depends on your perspective, on how you choose to read the organization’s mind.

While the NFB may seem like an extreme case, it highlights behavior that can be found, albeit in muted form, in all organizations. Those who doubt this might read Richard Pascale’s account of how Honda stumbled into its enormous success in the American motorcycle market. Brilliant as its strategy may have looked after the fact, Honda’s managers made almost every conceivable mistake until the market finally hit them over the head with the right formula. The Honda managers on site in America, driving their products themselves (and thus inadvertently picking up market reaction), did only one thing right: they learned, firsthand.¹

Grass-Roots Strategy Making 

These strategies all reflect, in whole or part, what we like to call a grass-roots approach to strategic management. Strategies grow like weeds in a garden. They take root in all kinds of places, wherever people have the capacity to learn (because they are in touch with the situation) and the resources to support that capacity. These strategies become organizational when they become collective, that is, when they proliferate to guide the behavior of the organization at large.

Of course, this view is overstated. But it is no less extreme than the conventional view of strategic management, which might be labeled the hothouse approach. Neither is right. Reality falls between the two. Some of the most effective strategies we uncovered in our research combined deliberation and control with flexibility and organizational learning. 

Consider first what we call the umbrella strategy. Here senior management sets out broad guidelines (say, to produce only high-margin products at the cutting edge of technology or to favor products using bonding technology) and leaves the specifics (such as what these products will be) to others lower down in the organization. This strategy is not only deliberate (in its guidelines) and emergent (in its specifics), but it is also deliberately emergent in that the process is consciously managed to allow strategies to emerge en route. IBM used the umbrella strategy in the early 1960s with the impending 360 series, when its senior management approved a set of broad criteria for the design of a family of computers later developed in detail throughout the organization.²

Deliberately emergent, too, is what we call the process strategy. Here management controls the process of strategy formation—concerning itself with the design of the structure, its staffing, procedures, and so on—while leaving the actual content to others. Both process and umbrella strategies seem to be especially prevalent in businesses that require great expertise and creativity—a 3M, a Hewlett-Packard, a National Film Board. Such organizations can be effective only if their implementors are allowed to be formulators because it is people way down in the hierarchy who are in touch with the situation at hand and have the requisite technical expertise. In a sense, these are organizations peopled with craftsmen, all of whom must be strategists.

The conventional view of strategic management, especially in the planning literature, claims that change must be continuous: the organization should be adapting all the time. Yet this view proves to be ironic because the very concept of strategy is rooted in stability, not change. As this same literature makes clear, organizations pursue strategies to set direction, to lay out courses of action, and to elicit cooperation from their members around common, established guidelines. By any definition, strategy imposes stability on an organization. No stability means no strategy (no course to the future, no pattern from the past). Indeed, the very fact of having a strategy, and especially of making it explicit (as the conventional literature implores managers to do), creates resistance to strategic change!

What the conventional view fails to come to grips with, then, is how and when to promote change. A fundamental dilemma of strategy making is the need to reconcile the forces for stability and for change—to focus efforts and gain operating efficiencies on the one hand, yet adapt and maintain currency with a changing external environment on the other.

Quantum Leaps 

Our own research and that of colleagues suggest that organizations resolve these opposing forces by attending first to one and then to the other. Clear periods of stability and change can usually be distinguished in any organization: while it is true that particular strategies may always be changing marginally, it seems equally true that major shifts in strategic orientation occur only rarely.

In our study of Steinberg Inc., a large Quebec supermarket chain headquartered in Montreal, we found only two important reorientations in the 60 years from its founding to the mid-1970s: a shift to self-service in 1933 and the introduction of shopping centers and public financing in 1953. At Volkswagenwerk, we saw only one between the late 1940s and the 1970s, the tumultuous shift from the traditional Beetle to the Audi-type design mentioned earlier. And at Air Canada, we found none over the airline’s first four decades, following its initial positioning.

Our colleagues at McGill, Danny Miller and Peter Friesen, found this pattern of change so common in their studies of large numbers of companies (especially the high-performance ones) that they built a theory around it, which they labeled the quantum theory of strategic change.³ Their basic point is that organizations adopt two distinctly different modes of behavior at different times.

Most of the time they pursue a given strategic orientation. Change may seem continuous, but it occurs in the context of that orientation (perfecting a given retailing formula, for example) and usually amounts to doing more of the same, perhaps better as well. Most organizations favor these periods of stability because they achieve success not by changing strategies but by exploiting the ones they have. They, like craftsmen, seek continuous improvement by using their distinctive competencies in established courses. 

While this goes on, however, the world continues to change, sometimes slowly, occasionally in dramatic shifts. Thus gradually or suddenly, the organization’s strategic orientation moves out of sync with its environment. Then what Miller and Friesen call a strategic revolution must take place. That long period of evolutionary change is suddenly punctuated by a brief bout of revolutionary turmoil in which the organization quickly alters many of its established patterns. In effect, it tries to leap to a new stability quickly to reestablish an integrated posture among a new set of strategies, structures, and culture.

But what about all those emergent strategies, growing like weeds around the organization? What the quantum theory suggests is that the really novel ones are generally held in check in some corner of the organization until a strategic revolution becomes necessary. Then as an alternative to having to develop new strategies from scratch or having to import generic strategies from competitors, the organization can turn to its own emerging patterns to find its new orientation. As the old, established strategy disintegrates, the seeds of the new one begin to spread.

This quantum theory of change seems to apply particularly well to large, established, mass-production companies. Because they are especially reliant on standardized procedures, their resistance to strategic reorientation tends to be especially fierce. So we find long periods of stability broken by short disruptive periods of revolutionary change.

Volkswagenwerk is a case in point. Long enamored of the Beetle and armed with a tightly integrated set of strategies, the company ignored fundamental changes in its markets throughout the late 1950s and 1960s. The bureaucratic momentum of its mass-production organization combined with the psychological momentum of its leader, who institutionalized the strategies in the first place. When change finally did come, it was tumultuous: the company groped its way through a hodgepodge of products before it settled on a new set of vehicles championed by a new leader. Strategic reorientations really are cultural revolutions.

Cycles of Change 

In more creative organizations, we see a somewhat different pattern of change and stability, one that’s more balanced. Companies in the business of producing novel outputs apparently need to fly off in all directions from time to time to sustain their creativity. Yet they also need to settle down after such periods to find some order in the resulting chaos.

The National Film Board’s tendency to move in and out of focus through remarkably balanced periods of convergence and divergence is a case in point. Concentrated production of films to aid the war effort in the 1940s gave way to great divergence after the war as the organization sought a new raison d’être. Then the advent of television brought back a very sharp focus in the early 1950s, as noted earlier. But in the late 1950s, this dissipated almost as quickly as it began, giving rise to another creative period of exploration. Then the social changes in the early 1960s evoked a new period of convergence around experimental films and social issues.

We use the label “adhocracy” for organizations, like the National Film Board, that produce individual, or custom-made, products (or designs) in an innovative way, on a project basis.⁴ Our craftsman is an adhocracy of sorts too, since each of her ceramic sculptures is unique. And her pattern of strategic change was much like that of the NFB’s, with evident cycles of convergence and divergence: a focus on knickknacks from 1967 to 1972; then a period of exploration to about 1976, which resulted in a refocus on ceramic sculptures; that continued to about 1981, to be followed by a period of searching for new directions. More recently, a focus on ceramic murals seems to be emerging.

Whether through quantum revolutions or cycles of convergence and divergence, however, organizations seem to need to separate in time the basic forces for change and stability, reconciling them by attending to each in turn. Many strategic failures can be attributed either to mixing the two or to an obsession with one of these forces at the expense of the other. 

The problems are evident in the work of many craftsmen. On the one hand, there are those who seize on the perfection of a single theme and never change. Eventually the creativity disappears from their work and the world passes them by—much as it did Volkswagenwerk until the company was shocked into its strategic revolution. And then there are those who are always changing, who flit from one idea to another and never settle down. Because no theme or strategy ever emerges in their work, they cannot exploit or even develop any distinctive competence. And because their work lacks definition, identity crises are likely to develop, with neither the craftsmen nor their clientele knowing what to make of it. Miller and Friesen found this behavior in conventional business too; they label it “the impulsive firm running blind.”⁵ How often have we seen it in companies that go on acquisition sprees?

The popular view sees the strategist as a planner or as a visionary, someone sitting on a pedestal dictating brilliant strategies for everyone else to implement. While recognizing the importance of thinking ahead and especially of the need for creative vision in this pedantic world, I wish to propose an additional view of the strategist—as a pattern recognizer, a learner if you will—who manages a process in which strategies (and visions) can emerge as well as be deliberately conceived. I also wish to redefine that strategist, to extend that someone into the collective entity made up of the many actors whose interplay speaks an organization’s mind. This strategist finds strategies no less than creates them, often in patterns that form inadvertently in its own behavior.

What, then, does it mean to craft strategy? Let us return to the words associated with craft: dedication, experience, involvement with the material, the personal touch, mastery of detail, a sense of harmony and integration. Managers who craft strategy do not spend much time in executive suites reading MIS reports or industry analyses. They are involved, responsive to their materials, learning about their organizations and industries through personal touch. They are also sensitive to experience, recognizing that while individual vision may be important, other factors must help determine strategy as well.

Manage Stability 

Managing strategy is mostly managing stability, not change. Indeed, most of the time senior managers should not be formulating strategy at all; they should be getting on with making their organizations as effective as possible in pursuing the strategies they already have. Like distinguished craftsmen, organizations become distinguished because they master the details.

To manage strategy, then, at least in the first instance, is not so much to promote change as to know when to do so. Advocates of strategic planning often urge managers to plan for perpetual instability in the environment (for example, by rolling over five-year plans annually). But this obsession with change is dysfunctional. Organizations that reassess their strategies continuously are like individuals who reassess their jobs or their marriages continuously—in both cases, people will drive themselves crazy or else reduce themselves to inaction. The formal planning process repeats itself so often and so mechanically that it desensitizes the organization to real change, programs it more and more deeply into set patterns, and thereby encourages it to make only minor adaptations.

So-called strategic planning must be recognized for what it is: a means, not to create strategy, but to program a strategy already created—to work out its implications formally. It is essentially analytic in nature, based on decomposition, while strategy creation is essentially a process of synthesis. That is why trying to create strategies through formal planning most often leads to extrapolating existing ones or copying those of competitors.

This is not to say that planners have no role to play in strategy formation. In addition to programming strategies created by other means, they can feed ad hoc analyses into the strategy-making process at the front end to be sure that the hard data are taken into consideration. They can also stimulate others to think strategically. And of course people called planners can be strategists too, so long as they are creative thinkers who are in touch with what is relevant. But that has nothing to do with the technology of formal planning.

Detect Discontinuity 

Environments do not change on any regular or orderly basis. And they seldom undergo continuous dramatic change, claims about our “age of discontinuity” and environmental “turbulence” notwithstanding. (Go tell people who lived through the Great Depression or survivors of the siege of Leningrad during World War II that ours are turbulent times.) Much of the time, change is minor and even temporary and requires no strategic response. Once in a while there is a truly significant discontinuity or, even less often, a gestalt shift in the environment, where everything important seems to change at once. But these events, while critical, are also easy to recognize. 

The real challenge in crafting strategy lies in detecting the subtle discontinuities that may undermine a business in the future. And for that, there is no technique, no program, just a sharp mind in touch with the situation. Such discontinuities are unexpected and irregular, essentially unprecedented. They can be dealt with only by minds that are attuned to existing patterns yet able to perceive important breaks in them. Unfortunately, this form of strategic thinking tends to atrophy during the long periods of stability that most organizations experience (just as it did at Volkswagenwerk during the 1950s and 1960s). So the trick is to manage within a given strategic orientation most of the time yet be able to pick out the occasional discontinuity that really matters.

The Steinberg chain was built and run for more than half a century by a man named Sam Steinberg. For 20 years, the company concentrated on perfecting a self-service retailing formula introduced in 1933. Installing fluorescent lighting and figuring out how to package meat in cellophane wrapping were the “strategic” issues of the day. Then in 1952, with the arrival of the first shopping center in Montreal, Steinberg realized he had to redefine his business almost overnight. He knew he needed to control those shopping centers and that control would require public financing and other major changes. So he reoriented his business. The ability to make that kind of switch in thinking is the essence of strategic management. And it has more to do with vision and involvement than it does with analytic technique.

Know the Business 

Sam Steinberg was the epitome of the entrepreneur, a man intimately involved with all the details of his business, who spent Saturday mornings visiting his stores. As he told us in discussing his company’s competitive advantage.

“Nobody knew the grocery business like we did. Everything has to do with your knowledge. I knew merchandise, I knew cost, I knew selling, I knew customers. I knew everything, and I passed on all my knowledge; I kept teaching my people. That’s the advantage we had. Our competitors couldn’t touch us.”

Note the kind of knowledge involved: not intellectual knowledge, not analytical reports or abstracted facts and figures (though these can certainly help), but personal knowledge, intimate understanding, equivalent to the craftsman’s feel for the clay. Facts are available to anyone; this kind of knowledge is not. Wisdom is the word that captures it best. But wisdom is a word that has been lost in the bureaucracies we have built for ourselves, systems designed to distance leaders from operating details. Show me managers who think they can rely on formal planning to create their strategies, and I’ll show you managers who lack intimate knowledge of their businesses or the creativity to do something with it.

Craftsmen have to train themselves to see, to pick up things other people miss. The same holds true for managers of strategy. It is those with a kind of peripheral vision who are best able to detect and take advantage of events as they unfold.

Manage Patterns 

Whether in an executive suite in Manhattan or a pottery studio in Montreal, a key to managing strategy is the ability to detect emerging patterns and help them take shape. The job of the manager is not just to preconceive specific strategies but also to recognize their emergence elsewhere in the organization and intervene when appropriate.

Like weeds that appear unexpectedly in a garden, some emergent strategies may need to be uprooted immediately. But management cannot be too quick to cut off the unexpected, for tomorrow’s vision may grow out of today’s aberration. (Europeans, after all, enjoy salads made from the leaves of the dandelion, America’s most notorious weed.) Thus some patterns are worth watching until their effects have more clearly manifested themselves. Then those that prove useful can be made deliberate and be incorporated into the formal strategy, even if that means shifting the strategic umbrella to cover them. 

To manage in this context, then, is to create the climate within which a wide variety of strategies can grow. In more complex organizations, this may mean building flexible structures, hiring creative people, defining broad umbrella strategies, and watching for the patterns that emerge.

Reconcile Change and Continuity 

Finally, managers considering radical departures need to keep the quantum theory of change in mind. As Ecclesiastes reminds us, there is a time to sow and a time to reap. Some new patterns must be held in check until the organization is ready for a strategic revolution, or at least a period of divergence. Managers who are obsessed with either change or stability are bound eventually to harm their organizations. As pattern recognizer, the manager has to be able to sense when to exploit an established crop of strategies and when to encourage new strains to displace the old.

While strategy is a word that is usually associated with the future, its link to the past is no less central. As Kierkegaard once observed, life is lived forward but understood backward. Managers may have to live strategy in the future, but they must understand it through the past.

Like potters at the wheel, organizations must make sense of the past if they hope to manage the future. Only by coming to understand the patterns that form in their own behavior do they get to know their capabilities and their potential. Thus crafting strategy, like managing craft, requires a natural synthesis of the future, present, and past.

1. Richard T. Pascale, “Perspective on Strategy: The Real Story Behind Honda’s Success,” California Management Review, May–June 1984, p. 47.

2. James Brian Quinn, IBM (A) case, in James Brian Quinn, Henry Mintzberg, and Robert M. James, The Strategy Process: Concepts, Contexts, Cases (Englewood Cliffs, N.J.: Prentice-Hall, forthcoming).

3. See Danny Miller and Peter H. Friesen, Organizations: A Quantum View (Englewood Cliffs, N.J.: Prentice-Hall, 1984).

4. See my article “Organization Design: Fashion or Fit?” HBR January–February 1981, p. 103; also see my book Structure in Fives: Designing Effective Organizations (Englewood Cliffs, N.J.: Prentice-Hall, 1983). The term adhocracy was coined by Warren G. Bennis and Philip E. Slater in The Temporary Society (New York: Harper & Row, 1964).

5. Danny Miller and Peter H. Friesen, “Archetypes of Strategy Formulation,” Management Science, May 1978, p. 921.

A version of this article appeared in the July 1987 issue of Harvard Business Review.

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