Senior executives used to know what a strategy was: a multiyear plan to create or protect a defensible competitive advantage in the marketplace. Often it was based on creating long-term advantage through scale and physical assets. Industrial giants like United States Steel and the General Motors Corporation were built through just such a focus.
However, in many — maybe most — industries, the old approach to strategy no longer holds. The world in which economies and institutions operate has changed dramatically, thanks to three revolutionary, if familiar, sources of business upheaval:
• New and disruptive technologies create uncertainty. Value chains are transforming, creating new sources of value that can be exploited by new as well as existing players able to create and leverage innovative business models. In this environment, competitive advantage is often short-lived. We can determine strategies to win today, but we can only guess at what will be required to win tomorrow.
• Deregulation and globalization are making the economy more efficient as well as more volatile. In an increasingly deregulated world, competition forces business models to adapt quickly to meet customer needs, and to do so on a global basis. More efficient transactional relationships allow companies to focus on specific links in the value chain, while participating in (and competing as) extended, coordinated chains. With these new structures, technological and strategic innovation can be more quickly leveraged across global markets.
• Capital markets have become more efficient, putting more pressure on senior executives to increase shareholder value. It is no longer sufficient to manage the existing business competently; executives must create new growth platforms to drive substantial growth in shareholder value. Failure to meet expectations can result in dire consequences for management.
For these reasons, in many industries, the old approach to strategy is under assault.
Today, the long-range planning process, usually employed to craft strategy, functions mostly as a feed into the budgeting and coordination procedures necessary to run the business from day to day. Its methods for managing operations are woefully inadequate for determining the actions, priorities, and decisions required to win in today’s markets. These traditional strategic-planning efforts may fulfill the planning function, but they are no longer strategic.
The simple fact is that strategy and decision making — functions that for decades were causally related and sequenced — are becoming increasingly difficult to separate. Whereas strategy once determined the decisions and transactions necessary to advance the company, today operational decisions and transactions can often redefine the company’s strategy and thus alter the path forward. In this interlinked environment, strategic learning by the management team can be as important as the strategic plan. And adapting the strategy is as crucial as the initial approach.
No firm should ever abandon its traditional focus on the underlying economics of its business. Nor should senior executives cease trying to identify the fundamental levers for creating and capturing sustainable customer value. But traditional strategies aimed only at shaping and protecting long-term positions need to be supplanted by a focus on continuous transformation, to forge capabilities required to win in the next game. And the next. And the next.
Managing a Fleeting Advantage
For all the changes in global and sectoral economies, the principal objective of business — and thus the objective of strategy — has remained fairly stable: to earn superior returns on shareholders’ capital. Strategy development, therefore, still must start with a fundamental analysis of what it takes to win in the market — what creates customer value, what drives costs, and how to maximize profit.
But in today’s fastest-moving industries, the methods for developing a strategy have changed. The time dimension is different. It used to be sufficient for a firm to create a strategy, build the facilities and capabilities to support it, and plan for a strategic position that could be ensured for five years, often longer. For example, finance, organization, technology development, and marketing models enabled General Motors to surpass Ford Motor Company in the late 1920s and kept GM the world’s No. 1 vehicle manufacturer for the rest of the century.