The problem of strategy in today’s world

Most of the classical concepts of strategy creation (developed mostly in the 20th century, by the way) are based on the following general…

Most of the classical concepts of strategy creation (developed mostly in the 20th century, by the way) are based on the following general algorithm:

1. A company must scrutinize external environmental factors and forecasts

2. A company must create an image of the future of its industry and the industries in which it plans to operate

3. A company must find the most attractive place which will suit it from various points of view, taking into account its strengths and weaknesses.

The approach is logical enough, but there are several important flaws:

1. Collecting information to analyse markets and trends is an extremely labour-intensive task, and only large companies can afford to reserve employees only for it.

2. The future cannot be predicted because it does not exist. We can speak of possible scenarios and their probabilities, but no more.

3. Collecting information on new markets in which a company has not been operating is fraught with a very high margin of error. No matter how carefully a company prepares to enter a new market, those who already are on this market will know more.

4. Such an approach implies passive following of the environment rather than influencing it, or even shaping it. But at the same time the best companies, which are an example for us, created the world instead of adapting to it.

5. Even if industry analysis and forecasting work are best done, this information will quickly become obsolete. And it will happen not only under the influence of the external environment, a company itself will actively influence it. That is, the world in which the strategy begins will be different from the world in which it continues.

Classical works have shaped the world’s view of business strategy as a process that needs to be done at some intervals, such as once a year or three years. All other time a company should be engaged in «tactics», which means the implementation of the approved strategy.

In fact, a strategy is a continuous iterative process of creating and testing hypotheses (for example, about a new product), as well as a process of changing current, day-to-day operations in such a way that they maximize client value. Yes, a company can provide a period of time, usually in the second half of the financial year, to dive deeply into strategic issues. But it does not mean that all other time can be devoted to «tactics». Strategy is what a company does every day.

Are there such conditions when the old strategic methods work? Yes, there are. First of all, these are markets with a long product life cycle. For example, metallurgy, aircraft engineering, base polymer manufacturing, and so on. These markets are constantly innovating, but the pace of change is much slower than it is at e-commerce, for example. A product life cycle is the period from the point when a product is conceived to the point when it is time to either be replaced or to be substantially modified under consumer pressure. Mobile apps can be updated several times a month while the rolling mill has been running in the same mode for years. If a company does not intend to diversify into new markets, then classical strategic planning is quite effective. Especially if the main activity of a company is serial production, not project work. I call such a strategy a «red» one.

But if a product life cycle is short and if a company is looking for growth in other markets, it cannot afford to make a development plan three years ahead. It should choose a strategy that I call “yellow” one. It is a strategy of a flexible culture and readiness for constant experimentation. In this culture mistakes are considered as a valuable source of information, but not as a cause for punishment. This does not mean that a company will not have a single course and will move chaotically. But, after having defined some mainstream, a company should be ready to adjust the direction after each successful and unsuccessful experiment.

The «Yellow» strategy is neither better nor worse than the «red» one. They are just applicable to different situations, and the task of a business leader is to understand clearly which strategy is appropriate in each case. This division into «red» and «yellow» strategies forms the basis of my strategy development method — People-Based Strategy.

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