Why a closed approach to strategy-making is not good for your business.

May 13th, 2022 Posted by News 0 thoughts on “Why a closed approach to strategy-making is not good for your business.”
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Formulating and executing sound organisational strategy is difficult work. Strategy is often made by elite teams and thus can be limited by their biases about competitors, customer needs, and market forces and it can be an uphill battle convincing stakeholders across the company to channel money, time, and energy in a new and unproven direction.

Hence making strategy behind closed doors is a prescription for failure when disruptions are coming from all directions. The authors’ solution to both the strategy formulation and execution challenges is radical: open up your strategy process now!Open strategy offers leadership teams access to diverse sources of external knowledge that they wouldn’t otherwise have, while also making individual leaders aware of their

biases and helping them build the buy-in needed to speed up execution.

 

This approach is particularly valuable when companies face disruptive threats and contemplate transformational change. It’s much easier to master disruptions when you’re forging strategy in concert with others who view the world through a different lens than you do. Progress and innovation depend less on lone thinkers with exceptional IQs than they do on diverse groups of people working together and capitalising on their individuality, as social scientist Scott E. Page has shown.

In short, diversity of perspective matters a lot.

Involving people from  outside your company in strategy-making not only provides a wellspring of fresh ideas but also mobilises and galvanises everyone involved. All this can happen without a loss of control over the strategy-making process.

Why does a Closed Approach to Strategy-Making have its limits?

 

According to a 2018 Bain survey, strategic planning is the most popular tool available to managers. Yet, too often, the results of that planning are under-whelming. 

 

Studies find that somewhere between 50% and 90% of the strategies devised by leaders don’t work. A 2018 survey of 201 American and European executives found that 52% of their strategic initiatives over the previous three years had underperformed.

These disappointing outcomes are particularly surprising considering the resources companies pour into strategy-making. Each year, they spend more than $30 billion on consultants, tapping their knowledge of industries, competencies, and business models, and CEOs spend over 20% of their working hours, on average, focusing on strategy.

At the core of this problem is the very process by which strategy is crafted. Companies have little hope of charting a reliable path forward if they limit strategic deliberations to a small group of senior executives. They can’t get the best ideas that way, nor can they effectively connect strategy to execution. Yet, strategic planning as practised today is a tightly closed, secretive, and bounded process. Executives presume that keeping strategy to themselves keeps the company safe from employees or external contributors who would inject unschooled or unruly thinking, and from competitors who would steal their ideas. But they are wrong: The hoarding of strategy isn’t helping their companies. It’s killing them, in several distinct ways.

Isomorphous strategies

Have you ever noticed that a great deal of strategic thinking in an industry sounds the same? You’re not imagining it. It’s due to a phenomenon that organisational theorists call isomorphism.

In essence, it means that in the process of adapting to our surroundings, we behave in increasingly similar ways. The same is true for companies, particularly as benchmarking and best practices have become central elements of strategy-making. 

Unimaginative strategies

It’s tough to get ideas to cross-fertilise in corporate settings. Departments and individuals compete with one another for resources or prestige, and even when leaders mandate cooperation and silo-busting, the ideas still don’t flow freely. 

Biased strategies

One of the underlying culprits was what cognitive psychologists sometimes call the status quo trap, the tendency to favour what already exists and information that confirms that choice. Other common biases that can torpedo strategies include the sunk cost trap (the tendency to irrationally support past choices that are failing), loss aversion (the tendency to give greater weight to potential losses than potential gains) and the overconfidence trap (the tendency to believe in the accuracy of overly optimistic forecasts). 

All of these biases represent dangerous blind spots for strategists who work alone or in small groups, where the pressure to conform can lead people to ignore negative information and disparage those who bring it up.

Adapted from an article BY CHRISTIAN STADLER, JULIA HAUTZ, KURT MATZLER, AND STEPHAN FRIEDRICH VON DEN EICHEN – MIT Sloan Management Review Spring 2022

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