Strategy in a New Era
The old ways of formulating and executing strategy that were successful in the industrial age are of no use in the new reality. Let’s explore what strategy planning in a new era is about
By Carlos Duran
The evolution of strategic thinking
Strategic Planning in the new era is different from what it used to be. The classical concept of strategic planning where organizations dedicate a lot of time, effort and resources to create a plan is being called into question.
Traditionally, Strategy was understood as a series of complex analyses and synthesis about the industry and the competitive environment. Companies used this information to create and retain a competitive advantage over the competition. This type of analysis usually consumes considerable resources and time.
The basic concepts of strategic planning in business were developed in an era with rare frequent and profound changes. Companies operated in more or less stable and predictable environments in defined industry sectors. The classical approach to strategy planning made sense at that time. The process included understand the environment, the company, the competition, the client, devise a plan, execute it, and review it at given intervals.
Well, that scenario is very different now. We are living in an increasingly unpredictable world, where rapid and profound changes are not the exception but are becoming the norm. Does it mean then that the Strategy is not useful anymore? On the contrary, it is in times of turbulence when we need the Strategy more than ever.
“It is in times of turbulence when we need the strategy more than ever”
The drivers of strategic change in the new era
Strategy is basically winning competitively in a particular situation, and that hasn’t changed. What has changed are the challenges that companies are facing in their competitive environments.
The new reality demands organizations to adapt the ways they think of strategy.The first step is to understand the new competitive environment. Some industries have not changed for a long time, so they can be successful making predictions and applying traditional approaches to strategic planning. Some others are changing very frequently because they might be shaping their environment. Others are trying to survive by enduring changes merely. Some others have products or services competing at the same time in various environments. For that reason, they need to adopt multiple approaches simultaneously.
In addition to that, technology, globalization, social and environmental concerns are things that, in the past, companies could have chosen to ignore and still be successful, but not anymore.
All of these factors are requiring organizations to adopt a combination of strategic approaches to be successful. These approaches depend on the particular business environment where the company has chosen to compete. This is something different from how companies used to work on strategy in the past. The approach to strategy has to match the particular situation of the organization.
Changes of paradigms
Transaction costs, processing and communicating information, have been radically transformed, and that translated into a lesser need to be vertically integrated. A key implication is that value chains can break up. Other players in the value chain can penetrate or attack. This fact is radically transforming the definition of industries that were so familiar to us in the industrial era. Now a competitor in one business can use its position in the value chain to disintermediate or penetrate other steps in the chain.
Colling and Porras in their seminal work “Built to Last” mentioned what they called “the genius of the and”. This concept is a key characteristics that differentiates Visionary companies (successful for long period of time vs other companies that were successful for sometime but that were not able to keep their competitive advantage. They argue that visionary companies excelled at having a very strong sense of purpose and vision and at the same time the ability to embrace change.
This idea seems to very much be applicable to the new strategic abilities that the modern world demands from organizations. The ability to be stable and constantly re-invent themselves, the ability to create value for the company by creating value for the society and the environment, the ability to create competitive advantage by collaborating with competitors and list goes on with seemingly contradictory statements
“The modern world demands from organizations, the ability to be stable and constantly re-invent themselves”
New strategic abilities are required to succeed
A key concept in the new strategic thinking is that no company can deliver all the value that its customers expect on its own. In that regard the new approach demands from organization to see strategy more as facilitators of different players in the ecosystem (where the company is only one of them) to create more value. In addition to that, companies need to accommodate not only the interest of shareholders but also of other stakeholders that care about topics such as social progress and the environment for instance.
These kind of transformations are rendering the traditional approach to strategy obsolete.
Some business are very predictable and some others very unpredictable. As mentioned above, some industries haven’t changed much in hundreds of years, like the paper industry for example, and others change almost every day like the high tech industry. Some organizations have a portfolio of products and services that serve at the same time stable and unstable environments. Hence a single approach to strategy planning doesn’t make sense.
Moreover, there are occasions in which extraordinary circumstances demand organizations to rapidly adapt their strategies to dramatic changes in the environment. Do you recall any recent one? Yes, that is right, the COVID-19 pandemic rendered most organizations’ strategies obsolete.
The impact of data
A large proportion of the data that exists to date can be connected, making information almost free and instantly available to be used for a multitude of purposes. The ability to interconnect data makes possible to uncover patterns that went unseen in the past, and also to connect people and machines in ways that were unthinkable a few years ago.
We can combine and personalize data to create and deliver new products and services customized to the particular needs of the clients.Going back to the strategic thinking, a fundamental question that we need to ask ourselves is: how this model of decentralized sources of data that can be shared and connected around the world is compatible with the business models of organizations that rely on proprietary data.? This is a fundamental change to consider at the time of formulating strategies.
Let’s think for example of the energy sector, and the ability of domestic capacity of producing clean energy through solar panels or small turbines. That technology has the potential of replacing in the future the corporate scale of energy production that we need today. This idea goes against one key fundamental strategic concepts developed in the industrial era, the idea of increasing scope as a source of competitive advantage. This example makes apparent how technology is making possible to break up value chains, and illustrates how the idea of vertical integration as a source of competitive advantage is becoming obsolete.
“The ability to interconnect data makes possible to uncover patterns that went unseen in the past“
New sources of competitive advantage
In the Digital economy, competitive advantage no longer comes only from low cost or product differentiation, as proposed by the traditional strategic planning thinking from the industrial era.
Since the focus has shifted from products to customers and how to provide solutions to them, the new approach requires companies to partner with other organizations to provide the value the customers expect.
In that regard, companies need to manage an ecosystem of players because they cannot provide all the value on their own. Strategic thinking is shifting from simply competing by offering alternative value propositions to finding new ways to collaborate and connect. In the digital world, value is co-created when the organizations work with partners and customers.
The success depends on the companies’ abilities to build relationships with key stakeholders. Strategy in the digital age needs a much broader lens to assess the environment, who the competitors are or with whom the company should partner to create more value for current and new customers.
The increasing importance of ecosystems
A key strategic shift is to put customers first, understand their needs in a broader sense and figure out how you can help them. Once you know what your customers want the next step is to get partners to team up and innovate around how you will deliver value. This way of thinking gave birth to the idea of ecosystems, which is one of the essential elements to consider at the time of formulating a modern strategy.
In the new digital scenario, companies need to be part of an ecosystem or create a network of their own by partnering with organizations. Strategies are developed taking into account not only the context of a company’s industry but also the company’s ecosystem. An important consideration is that companies need to look not only look within the industry boundaries but beyond it to identify key trends that could impact the organization as well as relevant stakeholders such as new potential partners or competitors.
“Success depends on the companies’ abilities to build relationships with key stakeholders“
Innovation, resilience and social and environmental topics
Frequent and profound changes in the business environment require companies to develop the ability to explore opportunities to innovate continuously. Social innovations and experiments can be used to re-imagine the business.
However, not all the changes or innovations will be successful. The organization will have to continuously scan the environment to understand which innovations might provide opportunities for economic growth and revise their strategies accordingly.
A new source of competitive advantage and a key element for long term success will be the capacity of organizations to absorb and adapt to shocks. This includes the ability to anticipate them and be able to withstand them better than the competition.
Companies will need to incorporate resilience into their strategies and operations. Building resilience include streamlining core operations and redesigning processes to leverage the power of technology to create value for the customers. Another critical aspect of resilience will be the ability of the organizations to build a flexible network of suppliers and partners.
The idea that companies create value only for shareholders is challenged by mounting evidence showing that for a company to be prosperous social and environmental considerations must be part of their core business strategy and operations. It is foreseen that this trend will accelerate, requiring organizations to take a closer look at opportunities of working together with different actors in their ecosystems to create not only economic but also social and environmental value.