Firms Thrive When They Ditch Strategic Planning And Adopt Exploration And Discovery.
Strategic planning enjoys a prestigious image in the business world. It’s taught at the top business schools, and then practiced in an elite corporate department headed by a C-Suite officer. It uses high technology to collect and analyze data, and sophisticated models to determine its recommendations, which ultimately guide the most important business decisions about allocation of capital and resources, which markets to enter and compete in, whom to hire and how to organize, and all the most critical choices a company faces. It is to strategy that winning CEO’s attribute their success, and to which business books and magazines devote their thousands and millions of words.
Strategy is bunkum. At least as it is taught in business schools.
Strategy tries to be objective in a subjective world.
Strategy utilizes data-fueled top-down planning models. Some of the models are mathematical predictions – aiming to forecast how many units will be sold in Pittsburgh or Portsmouth in 2023. Others are frameworks that purport to increase the potential for success. Corporate planning departments pump information into SWOT models, Five Forces Frameworks, PESTEL worksheets and many more data structures with the promise that the analytical outputs will contribute to enhanced business performance by fixing weaknesses, enhancing strengths, cultivating best practices and focusing best efforts. We can classify this thinking as object-based: the business environment is capable of summation in data and simulation in mathematical models and can be shaped and changed by corporate action.
The opposite is the truth. The role of the firm is to generate value for customers, and customers’ evaluations of corporate offerings is subjective. Value is an emotion, an experience of using or consuming a produced good or service and feeling satisfaction. A value-generation process is equally subjective, based on the feeling or intuition or judgement that a business is able to facilitate that experience for the customer. Whilst this value flow is turned into money via the consumer’s willingness to pay for the experience, the revenue flow (which is objective) results from the interaction of business intent to generate value and a customer’s subjective evaluation of whether the business’s value promise was kept.
Learning versus smart design.
How does a business get this interaction with customers right? The B-school peddlers of strategic planning would say, “By design”. They mean data gathering on the external environment, internal assessment of performance and trends and proven capabilities – essentially, looking backwards in order to project forwards.
The Austrian view is that all progress is a function of learning. Specifically, learning about what works and what doesn’t work, without any attempt to forecast the outcome in advance. Which initiatives produce desirable outcomes and which fail to do so. In order to learn, therefore, it is necessary to act, to do something. Do businesses act without knowing what is going to happen as a result? Of course. Are they guided by corporate strategy? Only if the “strategy” is: Let’s learn. Let’s not pre-judge what we think will be the result. Let’s not make false promises to ourselves. And, of course, those sentiments are anathema to the strategists.
Implementation versus Formulation
The consequence of the “Let’s learn” approach to company performance and progress is that strategy can not be formulated from on high, at the top of the organization, and then handed down. The process operates in reverse. The front line of the company, interfacing and interacting with customers, identifies customer needs, makes changes, tries new things, calls for new ideas, experiments and adapts to changing circumstances. There is continuous implementation, doing, responding and observing.
Some of the new ideas and changes become programs or initiatives, and draw resources from elsewhere in the corporation or from partners in a value creation network. Some of these programs hint at success, others don’t. Some become formalized. Some find customers willing to pay, and become revenue streams. They become reinforced with additional resources and the revenue stream accelerates and expands.
This is implementation. There was no strategy formulation preceding the implementation. There probably were some guidelines, some internal signals to channel the external activities – sometimes called corporate culture. There’s a shared sense of generally how the company generates value in response to customer needs and market development. The shared sense is translated into specific implementations by individuals or local offices or customer teams and the learning – the code of “what works and what doesn’t” – is fed back to the corporation for even wider sharing.
Dispersion versus Centralization.
Centralization is a structural attribute of strategic planning. Data is collected and consolidated centrally, and processed centrally. A group of strategists in the administrative center of the organization works with the data to develop plans and allocate resources to those plans.
In the learning-by-implementation method, centralization is damaging. To enable the freedom to learn and to apply learning, decision making must be dispersed through the organization. A single mind or single planning unit can not centralize all the knowledge and can’t centralize decision making. A strategic plan is not feasible. Organizational design and decision-making processes must be decentralized and dispersed.
Structure versus Strategy
In the strategic planning model, a company is structured or organized to take advantage of the strategy that’s been designed for it by the central planners. It’s divided into what are often called strategic business units (i.e. units structured based on the dictates of the designed strategy), and additionally into sub-units, geographies, functions and other pieces. Structure follows strategy. Strategy must be fully formulated before the business can be organized.
Austrian thinking runs in the opposite direction. Austrians take the opposite approach: the structure of the firm (its organization, processes and interfaces with the external environment) shapes strategy. This is particularly important for existing businesses. Too often, strategists (especially if they are external consultants) recommend “transformations”, which require significant structural change. Austrians understand that this is not realistic because it’s not possible to restructure an existing organization every time a new strategic vision comes along. There’s a high cost to structural change, and strategy must adjust.
Strategy is emergent, based on value exploration and new value discoveries.
What, then, replaces top-down strategic planning?
Strategy is emergent, not planned. Strategy is entrepreneurial. It’s a continuous process of learning through action and discovery. Sometimes, firms discover things they really wish they hadn’t. That’s part of the process through which, eventually, strategy evolves. Over time, a firm can adopt some simple guidelines for its frontline members to utilize in their explorations, and these can seem to bring some order. But adaptation to new circumstances is always required. Profit is the signal that adaptation is successful.
We use the term explore and expand to capture the Austrian approach to strategy. Firms are always exploring, seeking ways to improve performance. When some experiments yield promising results, they can be expanded. Explore and expand is a trade-off: how much of the available resources should be allocated to each type of activity. Entrepreneurs manage the trade-off in order to succeed. There’s no strategic plan from on high to make the trade-off for them.