ELE VATE t h e three disciplines o f advanced strate g i c th i nk ing R I C H H O R WAT H NEW YORK Times Be s ts ellin g A u thor O n s trateg y Contents Introduction 1 Elevate\t1 Importance of Strategy 3 Top 10 Strategy Challenges 5 GOST Framework 12 Strategy Defined 14 Thinking Strategically 16 1,000-Foot View 21 Discipline #1: Coalesce\t23 Patterns in Strategy 26 Systems\t32 Platforms\t34 Business Model 39 Phase I of the Business Model: Value Creation 40 Phase II of the Business Model: Value Delivery 44 Phase III of the Business Model: Value Capture 48 Profitable Growth 52 Strategy and Innovation 58 Types of Innovation 59 1,000-Foot View 67 Discipline #2: Compete\t69 Competitive Condition 73 Leader\t73 Challenger\t76 Spectator\t82 Competitive Advantage 84 Competitive Intelligence 88 Trade-off Zone 91 vii ftoc.indd 7 11-02-2014 16:48:44 viiiContents Indirect Competition Intangible Competition 1,000-Foot View Discipline #3: Champion\t103 Using Time Strategically Time Trade-Off Techniques Influencing Strategy Commitment Increasing Buy-In with Social Proof Strategic Behavior Practicing Strategic Thinking Developing Strategy Habits Strategy Conversations The Power of Story Creating a Strategy Story 1,000-Foot View Conclusion 94 97 102 106 109 112 115 119 122 129 134 138 141 145 147 When to Change Strategy Fire Prevention Tactical Evaluation Matrix Strategy Launch Review Strategy Scaffold Strategic I Am 1,000-Foot View 147 149 151 153 155 157 160 Notes\t163 Index\b173 Acknowledgments\b181 About the Author\b ftoc.indd 8 183 11-02-2014 16:48:44 Introduction Elevate To see things in a new way, we must rise above the fray. Approaching the Hughes 269C helicopter, the first thing I notice are the doorsthere aren't any. \"Nope, no doors,\" explains Chris, my helicopter flight instructor. \"Gets too hot in there.\" It's amazing how much more closely you pay attention to the seat belt instructions when the aircraft you're about to go up in has no doors. After completing a thorough pre-flight checklist of some 60 items, including a review of the helicopter's nose area, cabin, engine, main rotor system, tail boom, and tail rotor, we slip into the only two seats in the helicopter. Chris walks us through another review, this one being the 64 items on the pre-takeoff checklist and we're ready to go. As we elevate into the clear blue sky, I'm immediately struck by how different things look from this vantage point, even though we're only about 500 feet up. I see patterns of traffic on the roads and the outlines of towns bumping up against one another. I see features of buildings I've not seen from this perspective. I see homes on 10- and 20-acre parcels of land, too secluded to see from the ground. Now, I see it all. Then Chris says, \"Ok, your turn to fly this thing.\" He reminds me how the cyclic stickused to tilt the main rotor disc by changing the pitch angle of the rotor blades on top of the choppershould be treated like a martini. Any big, jerky moves of the martini glass and your drink will spill. It's the same concept with the cyclic. It should 1 cintro.indd 1 11-02-2014 17:23:24 2Elevate be moved slightly and smoothly, as the tilting of the rotor disc in a particular direction results in the helicopter moving in that direction. At the same time, my feet are on the tail rotor pedals, which control the smaller blades at the back of the helicopter. Since we're in a hovering position, the tail rotor pedals are controlling the direction of the nose of the helicopter. I'm checking the flight instruments inside the helicopter and scanning the air space around us for other aircraft, buildings, and electrical lines. \"You know you just took us up 100 feet?\" Chris asks. \"Uh, no,\" I answer, as a 20-knot wind blows through the open cabin. I feel the helicopter swaying and realize I just took us up another 100 feet. Anxiety growing and confidence shrinking, I say, \"Maybe you should take the controls back.\" \"Sure,\" says Chris, smiling as he notices my left hand clinging to the underside of the seat as we bank right, my body tilting towards the opening where the door should be. I'm staring at the countryside below, and thinking, \"Thank God I got the seatbelt part right.\" My helicopter piloting lesson had come to an end. What I took away from the lesson is that it requires great knowledge, preparation, and skill to capably fly a helicopter. I obviously didn't have these things, but my instructor did. The mastery to operate multiple controls simultaneously, monitor the flight instruments (internal conditions), assess the air space (external conditions), and devise an intelligent flight plan all contribute to a successful journey. And so it is with leading a business. A truly strategic leader possesses the mastery to manage multiple initiatives simultaneously, monitor the internal conditions of the business (e.g., people, processes, culture, etc.), assess the external conditions (e.g., market trends, customer needs, competitive landscape, etc.), and design a strategic action plan to achieve the goals and objectives. In both cases, elevation is required. To elevate means to lift up, or to raise to a higher rank or intellectual level.1 A helicopter is arguably the most precise, agile vehicle for physically raising a person up to considerable heights. Unlike fixedwing aircraft (planes), helicopters are able to hover in one position for extended periods of time, ranging from a few feet above the ground to cintro.indd 2 11-02-2014 17:23:24 Introduction3 more than 36,000 feet high. One of the biggest challenges I continually hear from CEOs and talent management leaders is, \"We need to elevate our manager's thinking.\" In essence, they're saying that managers need to be able to quickly elevate their thinking from down in the tactical weeds of day-to-day operations to a higher level. At this higher level, they can expand their perspective to understand how the core foundational elements of their business fit together and provide superior value to customers. The challenge of taking time to elevate one's thinking is supported by an Economist Intelligence Unit survey in which 64 percent of managers in bottom-performing companies cited the challenge: \"We are too busy fighting the daily battles to step back.\"2 A helicopter has the agility to navigate within congested areas, such as skyscraper-filled cities, and also get to remote areas not accessible by any other means, such as mountaintops, giving them unmatched versatility. This versatility translates into a variety of functions ranging from emergency medical transport to aerial attacks by military forces. As author James Chiles wrote, \"Of all birds, winged mammals and insects, very few have mastered the skill of pausing in midair and going backward as well as forward, so anything capable of such flight is a rare beast.\"3 Business leaders also require agilitymental agility. Mental agility enables leaders to think clearly through the congestion of informationwhich comes in the form of e-mails, reports, and meetingsto isolate the trade-offs and decisions that will make or break their success. In both cases, a fair amount of risk is assumed. Importance of Strategy The inability to elevate thinking in order to set strategic direction can have devastating long-term effects on an organization. Research by The Conference Board has shown that 70 percent of public companies experiencing a revenue stall lose more than half of their market capitalization.4 Additional research attributes the primary cause of these revenue stalls to poor decisions about strategy.5 While it's convenient to blame an organization's failings on external factors such as the cintro.indd 3 11-02-2014 17:23:24 4Elevate economy, decisions about strategy account for failure a whopping 70 percent of the time.6 Following are two examples of executives citing external factors, in these cases \"headwinds,\" for their organizations' failings: We faced a number of competitive headwinds that became more pronounced in the second quarter.7 Telecom CFO We are saddened by this development. We were all working hard towards a different outcome, but the headwinds we have been facing for quite some time . . . have brought us to where we are now [bankruptcy].8 Retail store president So, the next time you hear someone blaming the economy or headwinds for their poor performance, smile and hand them a mirror. If you're going to take credit when things go well, then you'll need to take accountability when things don't go well. And that accountability begins with your strategy. As former United States Treasury Secretary Paul O'Neill said, \"The great companies don't make excuses, including excuses about how they didn't do well because the economy was against them or prices were not good. They do well anyway.\"9 When poor decisions about strategy are made and an organization goes through a revenue stall, it's been shown that, on average, low performance continues for more than 10 years.10 Unfortunately, this prolonged period of poor performance can lead to bankruptcy. Research on 750 bankruptcies during a 25-year period showed that the numberone factor behind these bankruptcies was bad strategy.11 Contrary to popular opinion, the researchers attributed the failures to flaws in the strategies themselves, not to poor execution of the strategies. Therefore, it's important to be skilled at crafting strategy. Great strategy is created by great strategists. Great strategy doesn't magically emerge from Excel spreadsheets, or elaborate PowerPoint decks. It comes from managers who can think strategically. In the Wall cintro.indd 4 11-02-2014 17:23:24 Introduction5 Street Journal, Filippo Passerini, president of global business services and CIO at Procter & Gamble asserts: It is becoming even more important to have the right strategies in place at the right point in time. Having the right strategies now is so important because if you happen to be wrong, you will derail within months. In the past, to figure out you were wrong, would take a few years. Now in three to six months, you may be in grave difficulty if you don't have the right strategies.12 While most managers believe strategy is an inherent factor in their organization's success, several studies also document the support for this claim. One study concludes that, \"strategy has a positive and significant effect on a firm's performance. Specifically, it is found to influence both the growth and profitability of a firm.\"13 Another study summarized its findings as, \"strategy contributes to profitability differences between successful and unsuccessful companies.\"14 While both anecdotal and empirical evidence demonstrate the importance of strategy to an organization's success and the lack of strategy to an organization's failure, a thoughtful, methodical, and practical approach to strategy development is not common. A survey of more than 2,000 global executives found that only 19 percent of managers said that their companies have a distinct process for developing strategy.15 For those firms that do have a process for strategy development, an alarming 67 percent of managers said that their organization is bad at developing strategy.16 Clearly, there are some real-world challenges managers face in bridging the \"knowing-doing gap\" when it comes to strategy. Most managers know it's important, but few do it effectively. Top 10 Strategy Challenges During the past decade, while leading strategic thinking workshops around the world, I've recorded a list of nearly 40 challenges that managers have said prevent them from effectively developing, communicating, and executing strategy. Honing my study down to 25 companies and the responses of more than 500 managers, the top 10 strategy challenges and the frequency of each challenge by company are listed in Table I.1. cintro.indd 5 11-02-2014 17:23:25 6Elevate Table I.1 Strategy Challenges Challenge Percentage of Organizations 1. Time 96 2. Commitment (buy-in) 72 3. Lack of priorities 60 4. Status quo 56 5. Not understanding what strategy is 48 6. Lack of training/tools for thinking strategically 48 7. Lack of alignment 48 8. Firefighting (being reactive) 44 9. Lack of quality/timely data and information 36 10. Unclear company direction 32 1. Time (96 percent). The most commonly cited strategy challenge is time. With more responsibilities and fewer people to handle them, many managers are overwhelmed with activities. While checking lots of tasks off a to-do list each week may foster a sense of accomplishment, activity doesn't always equal achievement. If the individual tasks aren't strongly supporting the strategy, then we may fall into the trap of activity for activity's sake. When there are lots of things to do, managers feel guilty stopping to take time to think strategically about the business. After all, most performance reviews don't include a big box for \"Thinks strategically for six hours a week,\" with the rating of \"Exceeds Expectations,\" marked in it. When there is a lot to get done, time to think is often the first thing to go. 2. Commitment (72 percent). Gaining commitment from others to support and execute the strategy vexes many managers. Often referred to as buy-in, commitment can be challenging for several reasons. If the people expected to execute the strategy aren't aware of it, or don't understand it, then commitment will be non-existent. According to a study out of Harvard Business cintro.indd 6 11-02-2014 17:23:25 Introduction7 School, a shocking 95 percent of employees in large organizations are either unaware of or don't understand their company strategies.17 This finding may be rejected out of hand by some senior leaders, but it's crucial to find out just how high that percentage is for your group. Another reason buy-in is lacking is because many people don't understand the reasons behind the strategy and how it will help them achieve their goals. A study of 23,000 workers found that only 20 percent said they understood how their tasks relate to the organization's goals and strategies.18 If leaders fail to share why the strategies are in place, and don't translate them to people's respective work, the level of commitment will be minimal. 3. Lack of priorities (60 percent). A great cause of frustration among managers is the overall lack of priorities at the leadership level. When everything is deemed important, it creates an overflowing-plate syndrome. If clear priorities are not established up front, then it becomes difficult for people to determine what they should be working on and why. This lack of priorities prevents people from taking things off of their plate, resulting in the frustration of feeling spread too thin by too many initiatives. A lack of priorities is a red flag that the difficult work of making trade-offschoosing some things and not otherswas not accomplished in setting the strategy. Good strategy requires trade-offs, which in turn help establish priorities by filtering out activities that don't contribute to the achievement of goals. 4. Status quo (56 percent). Numerous studies in the social sciences have shown that people prefer the status quo to change.19 When people change strategy, inevitably they are changing the allocation of resources, including how people invest their time, talent, and budgets. Since strategy involves trade-offs, certain people will be gaining resources and others losing resources. Obviously, those slated to lose resources are going to prefer to keep things they way they are. Another factor in the preference of the status quo is the \"if it ain't broke, don't fix it,\" mentality. For groups that have experienced success in the past, the idea cintro.indd 7 11-02-2014 17:23:25 8Elevate of making changes to the strategy flies in the face of common sense, so their question is, \"Why change what made us successful?\" What they may not realize is that changes in market trends, customer value drivers, and the competitive landscape may be making the current strategy obsolete. In leading a revival at Starbucks during his second stint as CEO, Howard Schultz said, \"We cannot be content with the status quo. Any business today that embraces the status quo as an operating principle is going to be on a death march.\"20 5. understanding what strategy is (48 percent). Even at the Not highest levels of organizations, confusion abounds as to what exactly is a strategy. Perhaps due to its abstract nature, strategy tends to mean different things to different people. It's often confused with mission, vision, goals, objectives, and even tactics. Failure to provide managers with a universal definition of strategy, and clear examples to refer to, leaves the term open to interpretation, creating ineffective plans and inefficient communication. To determine the level of understanding in your group, provide each manager with a 3" 5" notecard at your next meeting and ask each person to record their definition of strategy along with an example. Collect the cards, read them aloud to the group, and tally the number that defined strategy in the same way. Professor Richard Rumelt describes the problem this way: \"Too many organizational leaders say they have a strategy when they do not. . . . A long list of things to do, often mislabeled as strategies or objectives, is not a strategy. It is just a list of things to do.\"21 6. of training/tools for thinking strategically (48 percent). Lack Many managers aren't considered strategic simply because they've never been educated on what it means to think and act strategically. For many years in the pharmaceutical industry, district sales managers were not asked to be strategic, because the blockbuster business model combined with the reach and frequency sales approach proved to be a winning formula. However, changes in the industryincluding healthcare cintro.indd 8 11-02-2014 17:23:25 Introduction9 reform, geographic differences in managed care, reimbursement policies, and the emergence of Accountable Care Organizations (ACOs)now require district sales managers to strategically allocate their resources and make trade-offs between different opportunities to grow their business. Research has found that 90 percent of directors and vice presidents have received no training to become competent business strategists.22 It shouldn't be a shock then that a Harris Interactive study with 154 companies found only 30 percent of managers to be strategic thinkers.23 The disconnect on proficiency in strategic thinking can sometimes occur between a CEO's perspective and the perspective of senior executives. A global survey showed that while only 28 percent of CEOs felt their teams needed improvement in strategic thinking, more than half of the non-CEO executives indicated that strategic thinking skills were in need of improvement.24 Procter & Gamble CEO A. G. Lafley writes, \"There simply is no one perfect strategy that will last for all time. There are multiple ways to win in almost any industry. That's why building up strategic thinking capability within your organization is so vital.\"25 7. Lack of alignment (48 percent). Getting people on the proverbial same page is difficult when it comes to strategy. The challenge lies in the fact that different groups within the organization have their own goals and strategies. Sometimes they align with others, but often times they don't. When there is misalignment, power struggles erupt and instead of working with one another, managers from different areas work against each other to ensure their priorities take precedence. Lack of alignment can also occur between executive teams and the organization's board of directors. Some organizations use their board to provide input into the development of strategy and some use the board to review the already completed strategy in a Q&A-format presentation. Selecting the optimal intellectual exchange and setting appropriate expectations for contribution can be critical to a CEO's success. A survey of 1,000 corporate directors found cintro.indd 9 11-02-2014 17:23:25 10Elevate the number-one reason for success and the number-one reason for failure in CEO appointments dealt with strategic alignment between the CEO and the board.26 8. Firefighting (44 percent). Make no mistake, a firefighting mentality starts at the top of the organization. If managers see their senior leaders constantly reacting to every issue that comes across their desk, they too will adopt this behavior. Firefighting then becomes embedded in the culture and those that are seen as the most reactive, oddly enough, garner the greatest recognition. Managers who thoughtfully consider each issue before responding don't seem to be doing as much as the firefighters, when in reality, they're exponentially more productive. \"Let's think about that,\" is a simple but powerful phrase that can eliminate reactivity within your business and culture. The next time you receive an e-mail marked urgent or someone comes charging into your office with how to react to a competitor's activity or a new flavor-of-the-month project, reply with \"Let's think about that.\" Then stop and consider how this helps you achieve your goals and supports your strategic focus. To do so, determine the probability of success, impact on the business, and resources required. If after this analysis, the new task doesn't appear to support your goals and strategies, kindly inform the relevant parties that, relative to the other initiatives you're working on, this doesn't warrant resource allocation. 9. Lack of quality/timely data and information (36 percent). Strategic thinking is defined as the ability to generate new insights on a continual basis to achieve competitive advantage. An insight is the combination of two or more pieces of information or data in a unique way that leads to the creation of new value. So, at the core of strategic thinking is the information or data, which we piece together in unique ways to come up with new approaches, new methods, or new solutions for providing superior value to customers. Managers who aren't receiving timely, high-quality information and data regarding the key aspects of their business are going to be cintro.indd 10 11-02-2014 17:23:25 Introduction11 hindered in their ability to think strategicallyand the ability to understand this information is critical. A study showed that 62 percent of workers cannot make sense of the data that they receive.27 Without clear priorities and methods for understanding, categorizing, and sharing insights, managers at all levels will continue to struggle with generating new ways to achieve their goals and objectives. Research by the consultancy McKinsey & Company verified the challenge managers face when it comes to profitably growing their business on strategic insights: A fresh strategic insightsomething your company sees that no one else doesis one of the foundations of competitive advantage. It helps companies focus their resources on moves that separate them from the pack. Only 35 percent of 2,135 global executives believed their strategies rested on unique and powerful insights.28 10. Unclear company direction (32 percent). It's difficult for managers to set strategy if there isn't clear strategic direction at the business unit and corporate levels. In some organizations, there are strategies at the business unit and corporate levels, but they're kept secret. Evidently, this secrecy is to prevent competitors from finding out their strategy. While it's understandable to keep proprietary processes and future intellectual properties secret, it makes little sense to keep strategy hidden away. If strategy is how to achieve the goals and objectives, it's impossible to gain full engagement and proper commitment from employees in rolling out the strategy if they don't know what it is. The other main reasons for unclear company direction are lack of process to develop strategy, a \"we're too busy to plan\" approach, and ignorance as to what comprises sound strategy. Managers from more than 500 companies have taken an assessment I developed called, \"Is Your Organization Strategic?\" and the average score is 45 percent, a failing grade, indicating there are many rudderless companies out there that are strategically adrift. cintro.indd 11 11-02-2014 17:23:26 12Elevate GOST Framework At the heart of most strategy challenges is a lack of clarity as to what strategy is and how it differs from some of the other key businessplanning terms. If you think that this lack of strategy knowledge only plagues new managers at the lower levels of the organization, take a look at the following quotations I've collected during my work from CEOs describing so-called strategies that aren't strategies at all: Become the global leader in our industry. Use innovation to build customer-centric solutions. Grow our audience. Strengthen core business, execute new initiatives, and reduce costs. Increase sales 25 percent in emerging markets by pursuing new growth opportunities. The examples demonstrate how frequently the terms goals, objectives, strategies, and tactics are used interchangeably. I developed a simple framework called GOST (Figure I.1) to help managers at all levels use and teach others to use these business-planning terms appropriately. Goal Objective Strategy Tactic What What How How General Specific General Specific Figure I.1 GOST Framework cintro.indd 12 11-02-2014 17:23:26 Introduction13 A goal is a target. It describes what you are trying to achieve in general terms. The following is an example of a goal for a regional sales director: Goal: Win the national sales contest for our region. An objective also describes what you are trying to achieve. The difference is, an objective is what you are trying to achieve in specific terms. The common acronym used to help flesh out an objective is SMART: specific, measurable, achievable, relevant, and time-bound. Objectives should meet these criteria, and they should flow directly from the goals you've already set. As evidenced in the following example, the objective matches up with the corresponding goal established earlier: Goal: Win the national sales contest for our region. Objective: Achieve $25 million in sales by the end of the third quarter of this year. Once we've identified the goals and objectives, then we can determine the strategy, which is the path to achieving them. Strategy and tactics are how you will achieve your goals and objectives, how you will allocate your resources to succeed. Strategy is the general resource allocation plan. The tactics are specifically how you will do that. Using the previous example, we can see how the strategy serves as the path to achieving our goals and objectives. Goal: Win the national sales contest for our region. Objective: Achieve $25 million in sales by the end of the third quarter of this year. Strategy: Focus selling efforts on expanding share of wallet with current customers. Tactics: Have district sales managers work with sales reps to schedule appointments with the top five customers for each territory. Prepare a sell sheet showing dollarized value of using our products in combination. Videotape three customers using two or more of our products in combination. Purchase iPads and put new cintro.indd 13 11-02-2014 17:23:26 14Elevate sell sheets and videos into a presentation for use during customer meetings. Create a dollarized, value-close, talking-points checklist to assist district managers and reps in expanding share of wallet. If your managers are having trouble differentiating between strategy and tactics, they can use the \"rule of touch.\" If you can reach out and physically touch it (e.g., sell sheet, training DVD, etc.), it's a tactic. The concept of strategy originated in the military arena thousands of years ago. Even that far back, Chinese general and philosopher Sun Tzu said, \"All the men can see the tactics I use to conquer, but what none can see is the strategy out of which great victory is evolved.\"29 It's often said that strategy is long-term and tactics are short-term. In reality, long-term and short-term descriptors for strategy and tactics may or may not apply. A strategy that successfully helps you achieve your goal within three months might be short-term compared to tactics used for years to come in fending off a tough competitor. Using time as the criterion for distinguishing between strategy and tactics is common, but misinformed. Since we can't see or physically reach out and touch strategy, it's often skipped in favor of going straight to tactics. A good number of the business plans I've reviewed over the past 15 years list goals, objectives, and tactics, skipping strategy all together. If strategy is not determined before tactics, there is no way of intelligently changing course when objectives and their corresponding milestones are not being achieved. Having a high-performance car (tactic) doesn't help you reach the other side of the river if there isn't a bridge (strategy) to cross it. With no strategy in place, it's easy to fall into a game of tactical roulette, where you continually chamber a new tactic and pull the trigger, hoping something hits its target. But, sooner or later, you'll be looking at a dead plan. Strategy Defined Strategy can be fully defined as the intelligent allocation of limited resources through a unique system of activities to outperform the cintro.indd 14 11-02-2014 17:23:26 Introduction15 competition in serving customers. Resources include time, talent, and capital. To provide the opportunity to sustain success, it's helpful to build strategy around multiple activities that either are different from the competition, or can be performed in different ways than the competition. For companies in mature markets, activities such as direct sales, manufacturing, and supply chain management are most likely similar across the industry. However, finding unique ways to perform these activities is where new value is created for customers. While digital networks for job searches have existed for quite some time, LinkedIn has been able to create a virtual professional network for job seekers and recruiters that has also transformed into a content hub. LinkedIn now receives content from 1.5 million publishers in order to provide new value for its nearly 250 million members.30 They've taken a common activity, supporting job searches, and built different ways of doing it, adding new layers of value for their customers. The idea of uniquenessperforming different activities or performing similar activities differently than the competitionis at the core of strategy. Unfortunately, it's easier said than done. A survey of more than 4,000 executives found that the number-one business challenge they faced was achieving competitive differentiation.31 It's common for managers to look at their mature market and surrender to the notion that there are no differences between their offerings and those of the competition. They become resigned to battling it out with competitors on price, which rarely turns out well. A study of more than 25,000 companies found that the companies achieving the greatest return on assets (ROA) over an extended period of time employed differentiation rather than purely low prices. Researchers Michael Raynor and Mumtaz Ahmed summarized their findings by reporting: \"Competitive positions built on greater differentiation through brand, style, or reliability are more likely to drive exceptional performance than positions built on lower prices.\"32 Starbuck's CEO Howard Schultz describes the differentiation challenge from his perspective: \"Whether you are a high tech company or a coffee company, your responsibility has to be to constantly create the kind of excitement that provides differentiation and separation in the marketplace.\"33 When we discuss competitive cintro.indd 15 11-02-2014 17:23:27 16Elevate advantage in the \"Compete\" section, you will find additional insights into how to create differentiated value using practical tools to hone your thinking in this crucial area. Thinking Strategically The business you lead is built on an idea. In the turbulence of daily work filled with product specifications, customer initiatives, board of director meetings, and hundreds of other items, it's easy to lose sight of that idea. The idea started in someone's mind, maybe even yours. Over the years, the idea transformed into offerings in the form of products, services, experiences, and so on that a group of potential customers found valuable and were willing to pay for. Cash flow, receivables, intellectual property, brands, careerseverything flows from the idea. Numbed by the analgesic of activity, we lose our ability to generate ideas. Less than half of managers believe that they are highly effective at generating new ideas.34 The degeneration of one's ability to think strategically and generate new insights limits both individual and organizational progress. In a 10-year study of leaders at 35 organizations, the primary problem attributed to a lack of success was strategic thinking. One of the participants commented: \"Our senior executives tend to get carried away by details and lose their strategic perspective. It is a major challenge to get our decision makers to think in strategic rather than operational terms.\"35 Just because someone has a seniorlevel title on their business card doesn't automatically qualify them as an effective strategic thinker. Similarly, just because someone is a new entry-level manager, don't assume they can't contribute valuable insights that can potentially shape the organization's strategies. The lack of strategic thinking in the workplace runs counter to what employers are looking for in managers. Two separate studies on the abilities organizations most desire in their leaders both found that the umber-one, most sought after skill is strategic thinking.36,37 n With changes in the market, customer needs and the competitive landscape happening faster and faster, organizations seek managers that can quickly identify strategic insights and transform those insights into strategies that create differentiated value for customers. Managers cintro.indd 16 11-02-2014 17:23:27 Introduction17 that simply call out problems without thoughtfully providing a range of solutions are rapidly losing their luster. Their lack of effective contribution can no longer be hidden in organizations that have a reduced head count. My survey on strategic thinking knowledge with 1,160 managers shows an average score of 70 percent. On most grading scales, 70 percent is a C-. That certainly leaves significant room for improvement for those with the hunger to get better. Authors Michael Birshan and Jayanti Kar share their conclusion when they write, \"We are entering the age of the strategist. Rare is the company, though, where all members of the top team have well-developed strategic muscles.\"38 To help managers move from being purely tactical to more strategic, I introduced the three basic disciplines of strategic thinking in my previous book, Deep Dive: The Proven Method for Building Strategy, Focusing Your Resources, and Taking Smart Action. The three basic disciplines of strategic thinking are as follows: 1. Acumen, which helps you generate key business insights 2. Allocation, which focuses resources through trade-offs 3. Action, which requires executing strategy to achieve goals Using this simple framework, managers are equipped with a method to think strategically on a daily basis, not just annually during the strategic planning process. In practice, a manager could use these three disciplines in their daily interactions by asking questions like: What is my key insight from this meeting? Based on the strategy to achieve my goals, what are the trade-offs I need to make with my time, talent, and budget? Am I working on an activity that is important to execution of the strategy, or is it an urgent, but unimportant issue that's taken me off plan? The three basic disciplines of acumen, allocation, and action include dozens of practical strategic thinking tools and questions to help managers strategically guide their business. Through training tens cintro.indd 17 11-02-2014 17:23:27 18Elevate of thousands of managers on this framework, it has been rewarding to see the average manager's knowledge of strategic thinking increase by 30 percent within completion of the program. As these managers continued to hone the basic disciplines of strategic thinking and their responsibilities increased, the natural question for many was, \"What's next? How can I best prepare myself to excel as a senior leader and become an elite strategist?\" Real-world leaders echoed this need. Indra Nooyi, CEO of Pepsi said, \"To me, the single most important skill needed for any CEO today is strategic acuity.\"39 USA Today asked David Novak, CEO of Yum Brands, parent company of KFC, Pizza Hut, and Taco Bell, \"What's the key to being a successful global company?\" He responded, \"You need to be strategic.\"40 And the Corporate Board of Directors Survey showed that the number-one trait of active CEOs that make them attractive board candidates is strategic expertise.41 Functional leaders in areas such as sales, marketing, finance, human resources, information technology, and operations bring great technical expertise to their roles. However, their technical expertise becomes an ante when they are given broader leadership responsibilities. Ascending to a general management position such as chief marketing officer, chief information officer, or chief learning officer now requires the ability to look at the business holistically. It demands trading in a functional perspective for a systemic one in which the leader can synthesize insights into tangible value for both internal and external customers. In an article entitled \"The New Path to the C-Suite,\" Harvard Business School professor Boris Groysberg presented his research findings on what is required of leaders to succeed at the highest levels of the organization. Professor Groysberg summarized the results by writing: For the senior-most executives, functional and technical expertise has become less important than understanding business fundamentals and strategy. . . . One theme that ran through our findings was [that] the requirements for all the C-level jobs have shifted toward business acumen. To thrive as a C-level executive, an individual needs to be a good communicator, a collaborator, and a strategic thinker.42 cintro.indd 18 11-02-2014 17:23:27 Introduction19 CO AL TE ESC E PE M CHAMPION CO Figure I.2 The Three Disciplines of Advanced Strategic Thinking To enable managers to elevate their thinking to a level that allows them to see the foundational elements of the business from a higher, more holistic vantage point, I've developed a framework called the three disciplines of advanced strategic thinking (Figure I.2): 1. Coalesce: Fusing together insights to create an innovative business model 2. Compete: Creating a system of strategy to achieve competitive advantage 3. Champion: Leading others to think and act strategically to execute strategy The three disciplines of advanced strategic thinking provide leaders with new concepts to change mindsets and practical tools to enhance behaviors so that they are maximizing their strategic leadership potential. The fact that the framework elements are referred to as \"disciplines\" means that it takes time, effort, and commitment to master cintro.indd 19 11-02-2014 17:23:28 20Elevate them. In our action-oriented world, where we're electronically tethered to one another, investing time to think on a regular basis can be a challenge in itself. While it's easy to be pulled into one more meeting that you really don't need to be in and check e-mail for the 47th time today while meeting with others, this lack of discipline is going to chain you to mediocrity. The adrenaline rush that comes from scrambling to fight another urgent, but unimportant fire, is addicting and much more exciting than spending 30 quiet minutes thinking about the business. But, it's these types of decisions that create your patterns of thinking and behavior. It's the discipline, or lack of discipline, that can make or break your career and determine the success or failure of your business. The \"30,000 foot view\" of the business is a common phrase used to describe getting to a high enough level to see the big picture. The next time you're in a commercial airplane and cruising around 30,000 feet, take a look out the window and note what you seesome clouds, large swaths of land, maybe a mountain range. The reality is you're too high up to see much of anything with any precision. Take a helicopter between 500 to 1,000 feet and you'll be able to clearly recognize what you're looking at, with the benefit of seeing it from a new, higher perspective. Buildings, homes, bridges, and roads are seen in a more revealing way because of the elevation, while important details are still clear to the eye. To reinforce your learning throughout the book, the end of each section will include a summary of the key points called the 1,000-Foot View. So, buckle up and prepare to elevate your thinking. cintro.indd 20 11-02-2014 17:23:28 Introduction21 1,000-Foot View The Top 10 Strategy Challenges Facing Managers 1.\tTime 2.\tCommitment 3. Lack of priorities 4. Status quo 5. Not understanding what strategy is 6. Lack of training/tools for thinking strategically 7. Lack of alignment 8.\tFirefighting 9. Lack of quality/timely data and information 10. Unclear company direction GOST Framework Goal: What to achieve (general) Objective: What to achieve (specific) Strategy: How to achieve (general) Tactics: How to achieve (specific) Strategy is the intelligent allocation of limited resources through a unique system of activity to outperform the competition in serving customers. The Three Disciplines of Basic Strategic Thinking 1. Acumen, which helps you generate key business insights 2. Allocation, which focuses resources through trade-offs 3. Action, which requires executing strategy to achieve goals cintro.indd 21 11-02-2014 17:23:28 22Elevate The Three Disciplines of Advanced Strategic Thinking 1. Coalesce: Fusing together insights to create an innovative business model 2. Compete: Creating a system of strategy to achieve competitive advantage 3. Champion: Leading others to think and act strategically to execute strategy cintro.indd 22 11-02-2014 17:23:29 Citing and referencing each of the readings, compare and contrast common themes and viewpoints on sustainable competitive advantage. Include an example of company that you feel has used a sustainable competitive advantage by describing the company and the strategy. Chapter 1: Establish Strategy Slides by Siri Terjesen Strategic Management: Logic and Action By Huff, Floyd, Sherman & Terjesen 2009, John Wiley & Sons Introductions Extra Slide - In-class activity What is your name? What is your hometown? Major? Strategy question: why did you choose this major or this university? What is your favorite hobby? What is one fun fact about yourself? Strategy question: where would you like to be in ten years? Strategy Defines a desired objective and communicates what will be done, by whom, how, for whom, and why the output is valuable What are the characteristics of effective strategy? 1. Communicate a compelling purpose or vision to others 2. Connect organizational strengths with environmental opportunities 3. Exploit current success while exploring new opportunities 4. Generate more resources than it uses 5. Coordinate and guide activities 6. Respond to new conditions over time Figure 1.1: A Visual Definition of Strategy Current Events Article What industry does this company compete in? What does this company actually do? (e.g. make things, advertise things, design things) How successful is this company? What factors will affects its success next year? Current Events Article: More Qs What does the firm make? Who does the work? Where? How? When? Who is offered the results? Why will they pay? Why (or why not) is this firm valued? Strategy is about saying \"no\" Strategy defines and communicates what the organization is not... What does the firm NOT make? Who does NOT do the work? Where does the firm NOT have activities? When NOT? Who is NOT offered the results? What will they NOT pay? Strategy is about saying \"no\" When there are too many priorities, there are NO priorities \"My success... is that I have focused on a few things\" - Bill Gates \"The art of leadership is saying 'no', not saying 'yes', it is very easy to say 'yes'\" - Tony Blair Revisit Current Events Article: 'No' What does the firm NOT make? Who does NOT do the work? Where does the firm NOT have activities? When NOT? Who is NOT offered the results? What will they NOT pay? Southwest Airlines and Saying 'No' Business Week: \"Will Southwest Airlines expand internationally? If so, when?\" Herb Kelleher, Co-founder, Chairman: \"It's a question of priorities. You only have so many airplanes. They're expensive and you try to send them where they will do the most good for our people's job security within the shortest period of time - and do the most good for the profit sharing... we've got 10% of the domestic market at the present time and I think that works out to 90% which isn't ours.\" Source: Business Week, December 24, 2003 Southwest Strategy What has Southwest said 'no' to that other airlines say 'yes' to? What has Southwest said 'yes' to that other airlines say 'no' to? Vision & Mission Vision statements provide a compelling image of what the company should be or do - \"the ability to think about the future with imagination or wisdom\" Mission statements are more detailed and explicit than vision statements about what will be done, why whom, how, for whom, and why Sample Vision & Mission: Coca Cola To achieve sustainable growth, we have established a Vision with clear goals: People: Being a great place to work where people are inspired to be the best they can be. Planet: Being a responsible global citizen that makes a difference. Portfolio: Bringing to the world a portfolio of beverage brands that anticipate and satisfy peoples' desires and needs. Partners: Nurturing a winning network of partners and building mutual loyalty. Profit: Maximizing return to shareowners while being mindful of our overall responsibilities. Everything we do is inspired by our enduring Mission: To Refresh the World...in body, mind, and spirit. To Inspire Moments of Optimism...through our brands and our actions. To Create Value and Make a Difference...everywhere we engage. Strategy Connects Organizational Strengths with Environmental Opportunities Strategy has many definitions that we will discuss in this course; one of the most basic is that it is an attempt to organize thoughts about action alternatives A simple but useful 3-part organizing framework for understanding the situation within which action occurs includes: - External macro-environment - Industry environment - Internal company environment The Strategic Environment Figure 1.2: An Overview of the Context of Business Strategy Defining Strategy: Key Propositions All of these distinctions are \"fuzzy\" - It is increasingly difficult to define organizational boundaries (production, for example, can be within the firm or by partners outside the firm) - It is increasingly difficult to define industry boundaries (a shoe, for example, can be part of sports or fashion) - It is increasingly difficult to predict macro factors (e.g. How strong will the US economy be? What scientific inventions will become available?). But these unknowns are what make strategy so interesting and important. Key question of strategy (Will we be able to make enough money to pay our creditors and survive?) requires understanding connections between company actions, industry actions and events in the macroenvironment What strategy is NOT An idea that \"springs to mind full-blown\" - E.g. Zeus and the birth of Athena/Minerva who sprang full-grown in armor from his forehead Often 'kernel' of strategy is sudden insight, but there is a long way to go before organizational strategy can be expressed - E.g. Napster - E.g. Federal Express (grade C at Yale School of Management) What Strategy Is Connected objectives Viable position in an environment Logic for coordinating activities Exploitation of current capability and possibly exploration of new opportunities Source of more resources generated than consumed SWOT Analysis Summarizes the firm's strengths and weaknesses, along with environmental opportunities and threats When used thoughtfully, can summarize the evolution of strategy over time Worksheet 1.1: SWOT Analysis - A tool for identifying strategic fit Strategy Exploits Current Success while Exploring New Opportunities Exploration: successful exploration strategies create new value from unfamiliar resources and activities Ability to Explore - Radical innovation - Discontinuous innovation - \"Do different\" innovations - Step change - Flexibility Example: E.g. Japan Railways East & bottled water Exploitation: Successful exploitation strategies develop additional value from current resources and activities Ability to Exploit - Incremental innovation - Continuous innovation - \"Do better\" innovations - Evolutional change - Efficiency - Productivity E.g. better contracts with existing buyers/suppliers, better equipment, new training programs Strategy generates more resources than it uses Strategy generates substantial resources - income, as well as reputation, employee commitment, brand identity and other intangibles Balance between using and creating resources is critical: imbalance (heavy use) from beginning Strategy responds to new conditions over time Strategizing: ongoing process of discovering purpose, creating and using resources and guiding supporting activities Intended strategy: set of ideas, usually made explicit, that the strategist uses to inspire and direct activities Realized strategy: illustrated by pattern of actual behavior over time Figure 1.3: Six Functions of Strategy How are strategists influenced by other strategists? Strategy is rarely developed by just one individual (e.g. CEO, President) One person can rarely come up with all the ideas Different individuals, interest groups, and organizations care about and expect to have a role in specifying a firm's strategic objectives and activities Figure 1.4: Levels of Strategizing Five Levels of Strategizing Network strategy: coordinates actions among allies; defines purposes no one participant could achieve alone when strategists ally with others they do not formally control Corporate strategy: makes broad domain and funding decisions for a porfolio of business units - E.g. identifies industry(ies) in which subunits of the organization will engage Business (or organizational) strategy: requires more specific decisions at the business level around what, whom, how, for whom and why - E.g. focus on one, or a related cluster, of competitive domains Functional (or operating) strategy: supports business strategy in areas such as information technology, human relations, R&D, marketing; more detailed level and necessary to achieve desired outcomes from business activity Individual strategy: direct efforts by individuals, inside or outside organizations, to protect and enhance their own welfare Stakeholders influence strategists across organizational boundaries Stakeholders: individuals and groups who are potentially affected by an organization's activities and may attempt to influence its strategy - Vary in power and attentiveness - Affect how purpose is defined, resources are gathered and used and who benefits from this activity - Each stakeholder has unique perspective and may conflict, even within the firm Synergies: enable one resource to increase the impact of others Figure 1.5: Business-Level Stakeholders Sensegiving Task of Strategists Sensemaking and Sensegiving Sensemaking - By individuals or groups - Captures something important about experience in words and sentences Sensegiving - Attempts to persuade others of the reality and appropriateness of a strategic unit's sensemaking efforts Why are the successes and failures of other organizations important? Rivals: offer similar products, services or experiences to similar clients or customers Organizations are compared by stakeholders Interacting with strong competitors can strengthen a firm's capabilities Worksheet 1.2: Stakeholder Analysis - working with other strategists Performance differences shape stakeholder expectations Economic profits: level of return after all costs of the unit's activities have been subtracted from revenue Competitive advantage: revealed when a firm is more profitable than its rivals or exceeds them on other valued performance measures Table 1.1: Return of Assets (ROA) in Four Related Industries (5 yr avg) Looking ahead Chapter 2: How resources can be developed and used to create competitive advantage Chapter 3: How organizations create value by engaging customers and provide ideas for drawing customers into strategy process Chapter 4: How opportunity can bring energy and insight into an organization Chapter 5: How to analyze rivals and competitive environments Chapter 6: How business models provide a logic for continued survival Individual as Strategist Exercise Choose a time frame (from one year to a lifetime) Describe your personal career strategy What do you want to do? Who needs to be involved in helping you? How will you proceed? Who will benefit? Why will your efforts be valuable