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Now Is A Good Time To Discard The Concepts Of Strategy, Planning And Strategic Planning.

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Business schools have been peddling strategic planning for 60 years or more. (Harvard Business School was founded in 1908, so the concept may even go back to that time.) A good deal of the conceptual ideas are said to have been borrowed from military planning. This origin story is illustrated in terminology such as “the battle for dominance” in markets or industries, or “defending market share”, or in language concerning “missions”, and ideas about a company’s strategic weapons or strategic arsenal.

More significantly, the concepts of strategic planning reflect the old-fashioned economics of equilibrium, of market structure and industry boundaries. It’s an approach based on statics and balance. Firms are advised to position themselves within a market map or industry map, often depicted as a box, and to mark out territory for which to fight over with similarly equipped rivals. They are advised how to fend off attacking forces.

It’s all sounds very World War One: massed armies facing off across a flat battlefield, guns drawn and cannons loaded and at the ready. Generals at the apex of the pyramidal hierarchy of command issuing orders to the lower-level officers and the troops.

Business is nothing like this, of course. Economists, led by those of the Austrian school, now recognize that the economy and the economic environment in which businesses operate is ever-changing, roiling and swirling in dynamic re-orientation and re-adjustment. The economy is an ecosystem of entrepreneurial projects, and, as a result of the trillions upon trillions of exchanges and interactions, adaptations and adjustments that take place at increasing speed across an expanding geographic playing field, there is no predictability to the outcomes and no possibility of control of the ongoing processes.

Strategy and planning are misguided attempts at prediction and control. There is great hubris involved: that accomplished strategists deploying advanced mathematics and sophisticated intellectual tools can overcome the uncertainties that baffle and defy lesser minds. Business schools that promise to coach managers in this alchemy can charge very high fees for the chimera of certainty. But their promise is empty. It can’t be kept.

What’s the alternative to strategic planning?

What’s the alternative? As always, there is a combination answer from the identification of the applicable theory, and its implementation in practice.

First, business practitioners must clear their minds of the memes of prediction and control over future outcomes. To do so, they can study and master complexity theory. This body of analysis has established that the outcomes of economic systems are emergent – unpredictable, even random. Or, as the mathematicians and computational modelers put it, non-linear. They are not the result of the interplay of variables in an equation. The key to understanding complex systems is to analyze them at the level of the individual – such as a single consumer – and their interactions with other individuals. The smallest geographies, most local neighborhoods and individual units provide the relevant measurements and data. This is the opposite approach to the grand sweep of global or market strategies and resource planning.

The second step in the escape from the tyranny of planning is to adopt the mindset of ignorance: to be open to the reality of not knowing and not being able to predict. The management method to employ is “explore and expand”. Because the most successful initiatives can not be identified in advance in the ever-changing marketplace, businesses act to ensure they have a sufficient number of exploratory initiatives to search for routes to growth and customer satisfaction. Those explorations that demonstrate promise can be expanded via more investment to more geography, wider reach, and greater impact. Agile businesses keep a continuously updated portfolio of initiatives that are exploratory and capable of expansion, and the composition of the portfolio represents the business’s health. A business is an ecosystem of experiments and initiatives and projects, all at different stages of maturity and development. The capacity to add new projects while growing or maintaining those that have proven their worth in the marketplace is the indicator of a vibrant business model.

Jeff Bezos calls it “wandering”:

 wandering in business is not efficient … but it’s also not random. It’s guided — by hunch, gut, intuition, curiosity, and powered by a deep conviction that the prize for customers is big enough that it’s worth being a little messy and tangential to find our way there. Wandering is an essential counterbalance to efficiency. You need to employ both. The outsized discoveries — the “non-linear” ones — are highly likely to require wandering.

https://www.fool.com/investing/2019/04/11/jeff-bezos-explains-why-wandering-is-key-to-amazon.aspx

Historically, strategy has been a time-consuming act of comparative statics based on data, trying to identify a future state of a business and how to attain it from a starting point in the past or present. Planning has been a static act of resource allocation, in which business units and divisions compete for budgets and then defend them aggressively against change.

Both of these activities are detrimental to business success, which requires adaptiveness to continually changing market feedback and changing circumstances. Adopting the explore-and-expand mindset can be both freeing in the creation of more options for business action, and accelerating in bringing new growth pathways to the fore.

The Age Of Strategy Is Over. The Replacement Is Explore And Expand

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Business schools, business writers, including retired CEO’s writing their memoirs, business bloggers, magazines and conference presenters all insist that strategy is the one mandatory for any individual or team that’s leading or managing a business. There’s no business without a strategy.

Well, I am here to tell you there is. In fact, strategy is way overblown as a business tool or business skill. Not only that, the way it is taught and written about is founded on an entirely false premise.

Strategy is presented to us as a knowledge tool, with the promise that, when the tool is well-used, it can influence future outcomes. When a strategic firm, or a strategic plan, or a strategic CEO, or a well-designed and implemented strategy goes to market, the result, we are assured, will be superior performance: more growth or revenues or market share, a stronger relative position vis-à-vis competitors, stock price appreciation, or some other objective measure of business success.

However, as a brief study of complexity economics makes clear, no market future is predictable, or even subject to influence, via strategy. The knowledge flow that is an input to strategy tools and debates is dynamic and constantly changing, always incomplete, and mostly tacit and non-quantifiable, impervious to the spreadsheet calculus of the strategic planning department. The confidence of the strategist, backed up by charts and graphs and data analytics and presented in powerpoint and video, is false and misplaced. Expertise in strategy development may be good for individual careers, but it has no value in business management because it can not possibly paint an accurate picture of the future. It  can not account for changes in the business environment, whether exogenous or endogenous or (in what is usually the case) a combination of both. Decisions made on the basis of a strategic plan for the future will be blessed with no more certainty as a result of all the effort that went into the planning exercise.

Yet strategy and strategic planning remain a core product of the business education and publishing industry. Why? Mostly because of a lack of alternatives. If businesses don’t have strategy tools to utilize for making the one year and five year plans with which they guide resource allocation and tactical implementation, what’s their alternative? Until recently, there has not been one.

Now, however, an alternative is emerging. That’s a careful choice of wording, because the idea of emergence is core to navigating the business world without strategic planning. Emergence is a property of complex systems such that outcomes occur that are not predictable from the properties of the components of the system or from their interaction. The new properties that the system produces are not shared with the components from which the system is made up or with prior states. Emergent outcomes can not be predicted, they can only be observed.

Peter Corning, one of the early students of complex systems wrote:

Rules, or laws, have no causal efficacy; they do not in fact “generate” anything.

He used the analogy of a chess game, which has very precise rules, but they have no predictive power.

Even in a chess game, you cannot use the rules to predict “history” – i.e. the course of any given game. Indeed, you cannot even reliably predict the next move in a chess game. Why? Because the “system” involves more than the rules of the game. It also includes the players and their unfolding, moment-by-moment decisions among a large number of available options at each choice point. 

If emergence is the characteristic outcome of complex systems, and it can’t be predicted, where does that leave business strategy? It’s a process for which its protagonists claim the capability of prediction: business results will be better with the adoption of the recommendations of strategic planners, who study data, trends and business conditions and competition and markets to arrive at formulations of how to allocate resources optimally, sometimes described as “where to play and how to win”. 

The theory of complex systems suggests that it is impossible to identify where to play and how to win, and dangerously hubristic to try.  The alternative to strategy is a balanced process we can call explore and expand. A business should organize around the activity of exploration: attempting as many new initiatives as possible, and allocating authority to do so to the outermost edges of the organization, those operating directly with customers, active in local markets with all their local variation and distinctive conditions. If any initiatives appear to be effective in meeting customer goals and therefore meeting the goals of the business, quickly expand those initiatives so that more parts of the organization can utilize the learning and more resources can be brought to bear in their activation.

Where strategy pursues standardization and conformity around one set of plans, Explore And Expand prizes variation, and looks to identify more and more ways to pursue value improvements. This is a way of harnessing complexity, as Robert Axelrod and Michael Cohen refer to it, in the book with that title.

Axelrod and Cohen point to a couple of organizational attributes that render the Explore And Expand approach viable. One is the existence and maintenance of rich networks of engagement, between the firm and its customers, within the firm between individuals and decision-making units, and amongst customers. The more information that can flow through these networks from acts of exploration, and the faster it flows, the greater the economic productivity of value improvement.

Second is the development of short-term, fine-grained measures of success, so that the exploration activities can be relieved of the time burden of long wait periods to read results. Although it remains important to be alert to misattribution of outcomes to actions, getting more learning more quickly is generally advantageous, and measurement systems should be aligned with this need for rapidity.

In sum, we should consider the age of strategy in business over, and prepare ourselves for the age of Explore And Expand.