Successful strategy implementation requires building an executable strategy. A strategy is a combination of the goals the organization aims to achieve and how it aims to achieve those goals. Strategy formulation and strategy execution are intertwined processes and success in both is necessary for superior organizational performance. No execution can save a strategy that is not sound or feasible to begin with.
WHAT IS A STRATEGY?
After crafting the vision top management develops a strategy that is able to turn the vision into reality. A strategy is a combination of what goals the organization aims to achieve and how it aims to achieve those goals. A strategy is about the long-term direction of an organization and how to adapt the organization to the external business environment. This often involves managing external opportunities and threats and relating them to internal strengths and weaknesses. A strategy can be seen as a set of hypotheses that need to be tested in reality. Strategy development is about experimenting with the strategy to see what leads to results and what does not. The essence of strategy is about activities – choosing what activities to perform that produce the most value for customers, choosing how to perform these activities, where to perform these activities (which markets, market segments, industries and geographic locations). For commercial organizations it is also important to perform activities differently or to perform different activities than competitors. Strategy execution is about performing those activities in accordance with the strategy and in a way that provides value to customers.
DEVELOPING A SOUND STRATEGY
Developing a strategy involves setting up a strategy team, performing a strategic analysis, choosing a strategy and writing a strategic plan.
Setting up a strategy team. The strategy is usually developed by a strategy team, the department of strategic planning or the office of strategy management. The strategy team ideally consists of a mix of ambitious and competent middle managers and specialists of relevant disciplines such as operations, marketing, finance and human resource management. In smaller organizations the strategy team often consists of the entrepreneur and key employees. The strategy team reports directly to top management. Furthermore a sounding board should be created in which key employees from all levels of the organization participate. Such an approach allows for the testing of the strategy during its development. The aim is to assess whether there is commitment to the strategy and to assess whether the strategy is sound, realistic and feasible. Lower-level employees have specific knowledge about operational issues.
Making a strategic analysis. A strategic analysis consists of three types of analyses: an external analysis, an internal analysis, and a SWOT-analysis. The external analysis consists of three types of analyses: a macroeconomic analysis, an industry analysis and a competitor analysis. The macroeconomic analysis is done by assessing the macroeconomic environment of the organization. This often involves analyzing the political, economic, social, technological, environmental and legal factors and how they can influence the activities and performance of the organization. The industry analysis assesses the industry and market in which the organization operates. This can be done by using Michael Porter’s widely used five forces framework. This framework can be used to analyze and industry by look at the five forces that shape strategy: threat of new entrants, bargaining power of buyers, bargaining power of suppliers, threat of substitute products of services and rivalry among existing competitors. This analysis helps to assess the attractiveness of the industry and to identify the forces that may shape the industry. Lastly, an analysis is made of the competition. The competitor analysis obtains information about key competitors that enables an organization to predict the behavior of competitors allowing better strategic decisions. A profile is made of each key competitor based on their product or service offerings, pricing and costs, strategy, strengths and weaknesses, profitability, marketing strategy and market share. The internal analysis assesses the structure, culture, processes, people and performance of the organization. The goal is to identify the strengths and weaknesses of the organization and to assess its resources, capabilities and core competencies. In this analysis it is especially important to examine the processes or activities of the organization. Processes and activities are the vehicle through which products and services are produced and delivered to customers. Michael Porter’s value chain analysis is an analytical framework that can be used for this.In the SWOT-analysis (Strengths, Weaknesses, Opportunities and Threats)-analysis the threats and opportunities that emerged from the external analysis are related to the strengths and weaknesses of the internal analysis. The aim is to come up with a strategy that uses the internal strengths of the organization to play into external opportunities and mitigates internal weaknesses and external threats.
Choosing a strategy. Developing a strategy involves choosing a strategy that allows the organization to achieve its goals given its internal strengths and weaknesses and its external threats and opportunities. Often this involves choosing a generic strategy such as the three generic strategies of Treacy and Wiersema: operational excellence, customer intimacy and product leadership. The operational excellence strategy is about the production and delivery of products and services. The objective is to lead the industry in terms of price and convenience. The customer intimacy strategy is based on delivering what specific customers want. The objective is long-term customer loyalty and customer profitability. A product leadership strategy is based on delivering the best products of services. It is about on producing a continuous stream of state-of-the-art products and services. The objective is the quick commercialization of new ideas. Each strategy requires a different primary process, organization structure, organization culture and competences of organizational members. Another approach is to develop a blue ocean strategy. This approach aims achieve differentiation and low cost at the same time to open up a new market space and create new demand. The goal is not defeat the competition but to make them irrelevant. This is done by finding a blue ocean where no firms currently operate, leaving the company to expand without competition.
Writing a strategic plan. The strategy is usually described in a strategic plan for at least the coming three years to five years. The strategic plan clearly describes the strategy in a concise, simple and understandable way. The strategic plan also describes what the organization aims to achieve by describing strategic objectives, milestones and targets. The strategic plan further describes how the organization aims to achieve its strategic objectives and targets. This is done by describing a set of strategic initiatives. Strategic initiatives are concrete projects and programs that are designed to achieve to achieve the strategy of the organization. The strategic plan further contains forecasts of the financial and organizational performance of the new strategy such as revenues, costs, profit and number of customers. Finally, the strategic plan describes the required resources to make the strategy a success such as investment, people and infrastructure.
BUILDING AN EXECUTABLE STRATEGY
A well-conceived strategy serves as a roadmap to get where an organization wants to go. In order to guide the strategy implementation effectively, the strategy needs to be realistic, based on a sound idea and be well thought out. No implementation can save a strategy that is not sound or feasible to begin with. Four factors are particularly relevant for promoting implementation success when developing a strategy.
The strategy is based on a sound concept or idea. A failure to think through the strategy makes it impossible to implement, except by chance (Hussey, 1996). Many strategies are not a strategy but a collection of strategic goals. How these strategic goals are to be achieved exactly is often less worked out. Strategy executions often fail because the original strategic plan was infeasible. Developing a strategy is a complex task and requires an extensive analysis of the organization, its environment and current strategy.
The strategy is simple, unambiguous and in a format that implementors understand. A vague strategy is a major barrier to implementation. A best practice for successful strategy implementation is to keep the strategy simple. Organizational members who have to execute the strategy must have a clear understanding of the strategy. They need to understand what the objectives of the strategy are, what the consequences are for them as an individual, and what they have to do to make the strategy a success. The strategy must focus on the essence. When a strategy is clear and simple, it is easier to understand for organizational members, customers and stakeholders. This is important as many people have difficulty understanding complex and abstract management concepts such as a strategy. When employees understand the strategy they are more likely to be committed to it. Commitment to the strategy and its execution is crucial for its success, as we will see later on.
The strategy has clear and concrete objectives. A lack of clear strategic objectives contributes to strategy execution failure. Successful implementation requires clear objectives that are accurately and consistently communicated so that organizational members know what is expected from them. Unclear or conflicting objectives leave room for differential interpretation and discretion in action and thus contributes to implementation failure.
Developing a strategy is never finished. Many executives and managers feel that the strategy is finished when it is described in a strategic plan or comprehensive PowerPoint presentation. A strategy needs to be continually monitored and adjusted in order to adapt it to an ever-changing environment. A strategy is a set of assumptions and hypotheses that need to be tested in reality. Frequent meetings are needed during the year in which the performance of the strategy is monitored and adapted when needed. This is something successful startups tend to do well.
STRATEGIES ARE OFTEN VAGUE
Many organizations have a vague or insufficiently formulated strategy resulting in execution failure. Implementation failure happens often during the formulation phase instead of the actual implementation phase. The lack of a well-formulated and clear strategy at many organizations is due to the following reasons.
Executives lack required competencies. To come up with a sound and clear strategy, leaders need to have a thorough understanding of the current strategy, organization, its business model, and the market in which the organization operates. Executives do not always have such in-depth expertise and often fail to involve those who have.
Executives do not know what they want. Not all managers have a clear direction where to lead the organization. Managers do not always know what they want or how to achieve it. Especially in current organizational environments can it be difficult to chart a clear course for the organization.
Strategy requires making choices. Strategy guru Michael Porter once said that strategy is about making choices about what not to do. Making choices is not always something executives are willing or able to do. It takes courage to make difficult decisions such as a new strategy on which the performance of an organization depends.
Strategies are intentionally kept vague. Many executives have a tendency to keep the strategy rather vague. These executives often have unstated, incremental or intuitive strategies that have never been committed to paper or analyzed. This is because executives want to avoid criticism when the strategy is not successful. In the end are executives responsible for the results the strategy will bring. Executives need to come with a good explanation when the strategy fails to produce the desired results. In recent years many executives have had to step down due to poor results. Furthermore, executive may also want to keep a strategy vague because of competitive concerns. When competitors find out about the strategy they may want to copy or counter it.
Vague strategies are flexible. Some strategy scholars argue that it actually is best to keep strategies vague in order to limit potential conflicts. For example, Hambrick and Cannella (1989) found that successful managers often started with broad game plans in mind, but were flexible, open-minded, and always on the lookout for problems with the new strategy and for ways of solving those problems. These managers were opportunists, had broad guidance systems, and were spontaneous and responsive (ibid). This approach is similar to the lean startup methodology of Eric Ries. According to this methodology strategy begins with a set of assumptions. Startups need to test these assumptions as quickly as possible. To do this the entrepreneur has to build an organization that can test these assumptions systematically without losing sight of the company’s overall vision. Thus, these startups do not really have a strategy but experiment to find out which value proposition works.
Developing a concrete strategy is hard in turbulent environments. The environment in which organizations operate is rapidly changing. In such instances, an incremental approach with a broad strategy may be more suitable, giving direction to implementation effort consisting of a broad set of shifting objectives. This approach allows for more flexibility to capitalize on emerging opportunities and threats. Under such conditions, the objectives may need to be changed in order to keep up with environmental changes.
THE STRATEGY EXECUTION SERIES
This article is based on my PhD research at Rotterdam School of Management, Erasmus University – one of the top business schools in Europe. Research has shown that most strategies fail in the execution phase. The aim of my research was to understand why strategies succeed or fail. This series of articles gives a comprehensive overview of the best practices that contribute to strategy execution success or failure. Collectively, the best practices allow executives and managers to successfully executie their strategy and achieve the goals of their organization.