Designing Strategy For A Complex World

Strategies must evaluate the critical systemic dimension that exists beyond the walls of the organization in order to thrive in today’s world.

Developing an effective, comprehensive strategy has become incredibly difficult in the 21st century. Organizations of all sizes face a growing number of variables due to the unrelenting pace of global change and uncertainty across multiple dimensions. And this trend has obviously been placed on steroids in 2020 due to the unprecedented impact of the COVID-19 crisis and the broad social upheaval surrounding the Black Lives Matter movement. These are truly dynamic and rapidly evolving times. 

Understanding where you operate and creating a decision-making system that adapts to the realities of that environment is not a one-time activity, but rather a new way of operating. Iterative and dynamic strategies are not just for startups or Silicon Valley tech firms. They are useful for every organization that wants to create clarity across the three dimensions of strategy, which are (1) what you do, (2) where you compete and (3) how the broader ecosystem impacts you.

To succeed in the modern marketplace, you must deploy a model that integrates all three. 

Before we look at how to navigate your broader ecosystem, it may be helpful to start with a few simple anchoring ideas related to the topic of strategy. The most fundamental point to understand is that strategy should not be viewed as an output. Strategy needs to be used as a verb instead of a noun. It should be an active, living process that underpins informed decision-making for your leaders and staff.

Some teams treat a “Strategic Plan” document as a final product. But a written plan is really just a static snapshot of your best perspective at a given time. In order to be truly relevant and actionable, your strategy needs to constantly engage and respond to the evolving ecosystem of needs, wants and events. It must leverage that iterative, dynamic information to serve stakeholders in increasingly meaningful ways, lest it becomes what Richard Rumelt calls “fluff masquerades as expertise, thought and analysis”.

We define strategy as a set of integrated choices. The unique combination of intentional decisions across nine foundational strategic elements defines your strategy and creates a “reaction” and expectation with your customers, employees and other stakeholders. The primary value of a strategy is to create clarity for your organization—managers and staff require clear direction to make informed decisions as they optimize the value they create for these stakeholders.

A successful strategy can take many forms, but it must serve to provide clarity for the investment of organizational energy and capital. And in a dynamically changing environment, it needs to be agile, adaptable and responsive. If it doesn’t do that, it’s broken.

We’ve worked with executives for decades and have seen two basic flavors of ineffective strategies:

1. Strategies that create confusion because meaningful choices are not defined. “We will add customers, increase profits, reduce costs, gain market share and be best-in-class operators”. That’s a great wish list but not a strategy. HOW exactly are you going to do those things? Which markets? What offerings? How will you improve supply chain resilience? How will you attract and retain key talent? In the absence of clear decisions, people make well-intentioned but disconnected choices throughout the system. And lack of clarity inevitably costs more and constrains value creation for your stakeholders.
   
2. Strategies that have clear choices but are based on a highly insular view of the world. Strategic focus should ideally be spread across three distinct dimensions (the organization, the market and the ecosystem). As leaders, we all tend to focus on areas that are most directly under our control in the inner circle, which is understandable. However, when we do this, information and insights tend to become myopic, assuming that the world will bend to our will. The next layer includes understanding the realities of where and how you compete, and this offers a broader view of the world around you. Bigger companies with resources and influence often have some control over this space, but all must be aware of how it impacts choices. Depending on how broadly you define your competitive set, the insights gathered here may reflect a lagging view of the market environment and its players. The third dimension is the outer circle that defines the broad ecosystem where you operate. This includes many forces acting to impact your organization that may seem unrelated or tangential at first glance. And this is where most companies fall short in building a strategy that incorporates broad, systemic variables.

Any effective, comprehensive strategy must be calibrated to the dynamic realities of all three dimensions of your environment. 

In previous eras, focusing energy in the two inner circles was reasonably likely to produce good outcomes because the pace of change was slower and markets were relatively stable. However, that level of stability is not realistic in modern times where entirely new markets emerge and shift almost overnight. While this is not a new idea, it represents a huge challenge to create adaptable and responsive strategies in an increasingly volatile, uncertain, complex and ambiguous world. 

Why? 

Because your organization lives in a broader ecosystem that has massive impacts on your performance, but those factors are not always on the table in strategic analysis. 

Taking strategy to the next level by defining the universe.

The missing piece for many leaders is that they fail to realistically define the broader universe in which their organization exists. Some well-known assessment tools (like McKinsey 7S or PESTLE analysis) are useful as multidimensional organizational assessments. However, these instruments often require a deep investment of time and resources and tend to have limited predictive value. 

To assist our clients, we have adopted a simple but powerful framework called the Cynefin framework (Cynefin is a Welsh word meaning “place of multiple belongings”). It is not a traditional categorization model but rather a sense-making framework that aligns the appropriate management systems and decision-making models to your place in the broader ecosystem. This is systems thinking and is hard to describe succinctly, but below is the brief version of the model’s components.

Some ecosystems are Ordered Systems, with two clear domains:

SIMPLE: When cause and effect relationships are clear in an ecosystem, the system trends toward a commodity where linear management systems and decision-making models are appropriate. People drastically overuse the term “best practice”, but it actually applies here as you seek to optimize efficiency. Management theory often treats this as a desired end state of all successful companies or products, which is dangerous because it comes with significant risks, namely management complacency and relying on best practices even when the context shifts.

COMPLICATED: This is the cousin of a simple system, in that it’s still an ordered system with logical outcomes. However, the environment is less predictable and requires the application of greater expertise to harness full value. For instance, while launching a rocket is a huge technical challenge, outcomes are mostly knowable based on defining the hundreds of individual variables involved. The level of risk and reward is higher, thus decision models and management systems need to be commensurate.

In Unordered Systems, the playing field fundamentally shifts, with two new categories that are particularly relevant in the current environment: 

COMPLEX: This category is where things get cloudy, as there are many competing ideas and no “right” answers. Complex and complicated systems are easy to confuse. In fact, most leaders approach complex ecosystems with the same toolkit they use for complicated systems—they attack it with expertise. Whether they be technologists, economists or researchers, it is falsely assumed that enough expertise can be applied to simply create an ordered system. This approach will fail in emerging and unpredictable environments. The only way to address this segment is to foster a climate of creativity and innovation with experiments that probe for emerging patterns, not to impose your existing management systems on the lack of order.

CHAOTIC: This category is highly turbulent and has no discernible cause and effect relationship. A chaotic system represents high risk and high reward, so leaders need to enable greater decision-making speed and clearly define the level of risk appetite. In the long term, shifting the context to complex is desirable because you can apply some level of pattern-based leadership. In chaotic environments, the goal is simply to act, learn and respond quickly. That is difficult to sustain for long periods of time unless the organization’s DNA is deliberately built for that dynamic mode of operating.

Let’s look at an example.

This is just a surface-level summary of a deep and nuanced model, so it may be useful to show how sense-making plays out in an analogy. Let’s assume you are planning to take a big road trip with friends. How do you generally prepare for a trip like that? By starting with the things under your direct control.

That may include checking tire pressure, adding a quart of oil and deciding which set of gut-expanding snacks you will pack in the car. You have full control over these decisions and outcomes, and most of us tackle them without prompting. Next, road trip veterans may check the route in advance to see if there are big construction projects or find out what time will be best to drive through Chicago traffic. These will help you avoid the competition on open roads. These are within your planning purview, and you can make decisions that allow you to narrow and control some variable, even if the final outcomes are not fully in your control. Finally, only true road trip experts will consider broader ecosystem impacts, like the weather system in the west that is threatening to shift course or finding the last four seats for a Hamilton performance on secondary ticket exchanges. Actually, a better example in today’s climate would be to find out which states on your route still have COVID-19 restaurant restrictions!

Many ignore these inputs specifically because they can’t control the outcomes. But experience shows that there is much we can do to mitigate risk, plan for the unexpected and make meaningful projections that can help increase our chances of success, even with elements outside of our control. Assessing all three of these dimensions is the best way to ensure a great trip.

Some organizations are highly dependent on their environments. This is especially true of startups and early-stage entities with no power in their universe, so they have no choice but to pay attention and respond. However, many established enterprises don’t expend precious resources on systemic factors and thus default to choices that are based on what is comfortable and predictable (a.k.a. status quo) in an effort to grow their core business. Without adequately considering how the environment may be shifting, they are opening themselves to risks that could radically impact their success. 

2020 is unfortunately a very real and painful example of how unlikely events create systemic disturbances that can force countless companies and industries to pivot. While many argue that COVID-19 is a “black swan” event, it really isn’t by the strictest definition. Corporate risk officers have had pandemics on their shortlist since at least the 2013 Ebola outbreak. The same could be said of the social unrest following the deaths of unarmed American citizens, where demands for racial and social justice and system change are sadly reminiscent of numerous other cases in American history (Selma, Detroit, Memphis, and Los Angeles to name a few). These events, while tragic and global in the scale of their consequences, were not beyond the realm of possibility. And they threw numerous ordered systems into disorder almost overnight.

Why were so many companies left in reactive mode with strategies that did not contemplate these scenarios? Why did companies neglect to bolster supply chains in January when the impact in China was understood? Why was there limited focus on diversity and inclusion efforts until protests and social media pressure demanded it? The fact is that it is difficult for most of us to spend resources on unlikely events beyond our control, even if those events come with severe negative consequences.  

For instance, consider how the entire foodservice industry was launched from a SIMPLE category with a relatively predictable business model into a CHAOTIC environment. Within the first few weeks of COVID-19 mandated lockdowns, customers disappeared and workforces were dismantled at a record pace. Marketing, loyalty programs and operational best practices became meaningless in the short term. The entire industry was thrust into turbulence, and innovation became the required mode to survive, much less compete.

It’s incredible to think about all the things that had to be evaluated this spring that were formerly taken for granted. How can we care for our people? Can we play a different role in serving the community? How flexible are suppliers if we want to pivot? How do we best protect our properties amidst protests? What capabilities can we leverage or rebuild quickly? How do we support causes that are important to our brand? There are hundreds of these types of ecosystem questions that became relevant overnight, but were probably not contemplated by most before March of this year.

The lesson isn’t to create detailed plans for global market shocks like a pandemic or social upheaval. It is to leverage a sense-making framework of strategic choices that apply to both ordered and unordered ecosystems. It is to honestly evaluate your place in the broader system and get beyond the bubble of your own organization and market. Sometimes you have the luxury to do this in a future planning mode. Sometimes, as we’ve seen recently, you have to do this in an innovative survival mode. Either way, making sense of your environment is not relegated to small, early-stage companies but rather should be viewed as a key portion of multidimensional strategy for all business, regardless of age or size. It is the foundation of modern, successful strategies in an increasingly complex world.