Management by Matrices: 2012

Saturday, July 28, 2012

The role of strategy in firms

My latest column for The Hindu Business Line explores the role of strategy in firms. Full text follows
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While there are many definitions, strategy usually refers to organisational processes involving the determination of either goals or the means to attain those goals. This entails the interplay of many factors — external factors relating to the environment and industry, as well as internal factors, such as capabilities and values. The composite insights generated from these factors lead to the creation of an organisational strategy.

While the broader contours of a strategy may remain constant for a long period of time, the specific details may undergo rapid changes. Hence, it is a going concern, just like the overall firm. Given the proximity of strategy to the principles that impact day-to-day functioning of an organisation, it is quite surprising that this discipline in its applied form is not as formal as many other disciplines, such as marketing, operations and others. This is because, while there is an academic unanimity about the importance of strategy, its protocols in applied and real contexts seem to be rather poorly defined.

It must be noted that the role of strategy is even more significant in growth firms, and, at a broader level, in growth economies like India, where opportunities may seem immense and innumerable, but choosing the right may make all the difference.

So, what are the key issues that the strategy function must strive to work on?

STRATEGY DESIGN

The starting point of the strategy design process lies in the creation of philosophical principles that guide the firm’s existence. These principles would combine two elements — the ‘human values’ and the ‘operating values’ of the firm. The former includes concepts such as integrity, creativity etc, while the latter may include marketplace values, such as low cost, high quality etc.

At the next level, the philosophical principles are put to test against the opportunities offered by the environment in which the firm operates. The next level of granularity would of course entail financial plans, people plans, projects and other activities that enable the realisation of the strategy. At each of these levels, design would not simply be an academic exercise restricted to a few, but would engage the entire firm and its stakeholders. In other words, the strategy design process is neither a top-down, nor a bottom-up activity, but rather a collaborative exercise, with centralised facilitation.

STRATEGIC DECISIONS

Strategy has an important role to play in driving the decision processes in the firm. This occurs at two levels — first, in the key decision-making processes in the firm as a whole, and second, in the creation of protocols for decision-making within components of the firm. Protocols for sub-units help create the balance between autonomy and adherence to broader strategic goals at the level of individual components of the firm.

DIAGNOSTICS

Ongoing diagnostics is another critical function that strategy must perform. A diagnostic involves a detailed analysis of well-defined business unit level or corporate strategic issues where an external and objective perspective is valuable.

As a function, strategy offers the right mix of distance and proximity from business issues and, thus, creates a space where established patterns of understanding can be challenged or looked at afresh. Routine diagnostics help ensure that both the strategy of the firm, as well as its manifestation in sub-units are constantly refined in light of the actual environment and its realities. In other words, diagnostics are the learning engine of the organisation.

SCENARIO PLANNING

Scenario planning entails visualising the impact of multiple external and internal scenarios on the strategic goals of the firm and its stakeholders (shareholders, employees, customers etc). Essentially, it’s a process of detailed de-risking of extreme possibilities, to a point that stakeholder interests are preserved in all eventualities.

INNOVATION

Given the wide range of issues accessed by the strategy function, the innovation practice of an organisation is best placed within strategy. Innovation involves a broad range of issues, including operational innovation, new business incubation and others. Innovation requires multiple perspectives to come together,both firm within the firm and outside it. The primary role that strategy needs to play here is to conceptualise such possibilities and create working prototypes. These prototypes, in turn, could be embedded into the broader organisation if found to be successful. In the absence of such a prototype ‘manufacturing’ function, most organisations choose not to prioritise innovation, since innovation and short-term goals of the organisation compete for the limited attention span of operating mangers, and the latter usually wins.

INTEGRATED REVIEW AND FACILITATION

A mature strategy function also actively reviews the firm’s performance along its strategic objectives in an integrated manner, whereby the ‘sum of the parts’ is routinely evaluated, as opposed to just the individual parts. In this manner it can play the role of ‘conscience keeper’ of the firm. The strategy function can play an ongoing facilitation role, which entails that different units of the firm operate through mutual cooperation, and in sync with the broader strategic goals of the organisation. These are just a few issues where the strategy function can play an important role within the firm. Note that academic constructs like corporate and business strategy have not been delineated in the items described above given the high degree of overlap between them in applied contexts.

Finally, any mature strategy ‘practice’ must strive to work in a spirit of collaboration with a wide spectrum of stakeholders across the board, and constantly seek to ask the right questions, without necessarily having all the answers.
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Friday, July 27, 2012

The purpose of business — creative expansion

My recent column for The Hindu Business Line - The purpose of business - creative expansion
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Why do businesses exist? Understanding the true purpose of business may help design the strategy of a firm on multiple dimensions. In this article, an attempt is made to present one possible approach that is universal and independent of the type of organisation or any other contextual factors. Business can be viewed to exist for the purpose of creative expansion. This is true from the perspective of multiple stakeholders.

Successful firms manage to align their activities towards the purpose of creative expansion from the perspective of all stakeholders. Firms which take a more limited view of their purpose may end up being less sustainable over the long run even if they manage to do well in the short run. Essentially, there are four key perspectives/ stakeholders to consider in assessing whether the core purpose of creative expansion is being fulfilled.

FINANCIAL

From a financial perspective, shareholders invest in a business to obtain a return on their capital that exceeds other avenues of investment in the market. This can only be achieved if the capital is put to creative uses that yield a high return. Thus, the financial imperative of business is the creative expansion of capital. Creative expansion of capital can be achieved in multiple ways — from being the first mover in a new market segment to following innovative, differentiating practices even within an existing market.

PEOPLE

It could be argued that people join organisations to achieve creative expansion on two fronts — first, in their skills through the kind of work they take up, and secondly, in their non-work lives, by earning an income that can in turn afford expansion on other fronts. The dimension of creative expansion is often ignored in the design of job roles, at least for the vast majority of workers.

CUSTOMERS AND SOCIETY

What do customers and society at large expect from business? Fundamentally speaking, great businesses help in the development and delivery of great products and services that enable customers (and through customers, society) to creatively expand. For instance, a great financial product can help a customer worry less about the financial wellbeing of his family, and thus enjoy greater freedom to expand to his potential. A great smart phone can help its user to efficiently handle various tasks that, in turn, enables his expansion as a person through higher productivity.

IMPLICATIONS

Is ‘creative expansion' the master key to business? If indeed it is, the implications are many. Investors would view every business from a holistic perspective beyond just short-term top line and bottom line. Within the firm, innovation would no longer remain a side project with a hobbyist quality to it, but would become a core principle percolating into the activities of every member in the firm. The customer, and through the customer, society at large, would assume a central position in product and service design. In short, every sphere of activity of the firm would be tested against its realisation of creative expansion from all perspectives — financial, people, customer and society.

Another major implication of taking a creative expansion based view of business is that it removes the necessity of adding a layer of social contribution that is commonly termed as corporate social responsibility.

Aligning organisational activities towards the central core purpose of creative expansion requires an appetite for delayed gratification, i.e. doing what is right for the long-term versus chasing short-term goals. However, it may be empirically noted that the leading corporations of each generation (the likes of Google and Apple in this generation) indeed manage to become engines of creative expansion for all their stakeholders. Hence, the goal is certainly within the realm of possibility, and may well be the key to the long-term relevance of a firm.

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