Business level strategy formulation

importance of strategy formulation in business and international business strategy formulation
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PatrickWood,United Kingdom,Researcher
Published Date:16-07-2017
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Business Strategy Formulation: Theory, Process, and the Intellectual Revolution Anthony W. Ulwick QUORUM BOOKSIntroduction This book is written for individuals who are prepared to engage themselvesand their organizations in an Intellectual Revolution: a revolution in which organi- zations create their own futures, encourage change and focus on the creation of value;arevolutioninwhichorganizationsunderstandwhattheircustomersvalue and use that information as the basis for their actions; a revolution in which an organization of any size can possess the structure, information and processing power required to formulate strategies and solutions that will strengthen itsstra- tegic position. This revolution is the result of breakthrough ideas and theories that have evolved the process of strategy formulation from an art to a science. With the use of this advanced process, organizations have the power to consistently and effectively anticipate futureopportunities;makevalue-generatinginvestmentde- cisions; and determine which products and services concepts to pioneer, which core competencies to build, which alliances to form, which activities to pursue and which trade-offs to make. In short, this book introduces an advanced strat- egy formulation process that is not only fueling an Intellectual Revolution, but a process that provides organizations with the power to systematicallyaccelerate the creation and delivery of customer value. This advanced strategy formulation process has been developed and proven over the past seven years. It is being used effectively in organizations such as Pfizer, Hewlett-Packard, United Technologies, Medtronic, Motorola, Johnson & Johnson and other companies in the United States, Pacific Rim and Europe. Its use often results in strategies andsolutionsthathavebeendocumentedtodeliver up to 10 times more value than those derived through the use of traditional strategy formulation methods. This degree of improvement has been made pos-xviii Introduction sible through a unique integration of structure, information and processing power. Organizations are using this process to harness theircollectiveknowledgeand wisdom, to make fact-based decisions and to create the strategies and solutions that are required to overcome their biggest challenges. This process is being used to formulate overall company strategies, product and service strategiesand strategies that evolve an organization’s operational, support and management processes. It is enabling organizations to put into practice the theories espoused by strategists and academics such as Michael Porter, Gary Hamel, C. K. Pra- halad, Peter Senge, Kenichi Ohmae and a host of others. This book is intended to help organizations unravel the mystery surrounding the concept of strategy and the process of strategy formulation. It unveils a structure that addresses the complexity of strategy formulation, planning and decision making without generalizations, deletions or oversimplification. It de- fines the essential elements of strategy formulation and will change forever the way organizations think about customer ‘‘requirements,’’ measurementsystems and competitive analysis. It explains precisely why most organizations fail to understand what their customers value and demonstrates why this phenomenon is a root cause of failure in most strategy formulation processes. It revealstech- nological advancements that are making it possible for any organization to pos- sess the capability to effectivelyformulatebreakthroughstrategiesandsolutions. In his article titled ‘‘Killer Strategies’’ (1997), strategist Gary Hamel asks, ‘‘Can we do anything to increase the fertility of the soil out of which strategy grows? One good place to start isto developadeeptheoryofstrategycreation.’’ The aim of this book is to provide the business world with not only a deep theory of strategy creation but also a process that enables the application of this theory. A process that integrates facts with methods for non-linear thinking, the type of thinking that is often required to produce breakthrough strategies. The advanced strategy formulation process introduced in this book combines many discoveries and innovations with unique applications of ideas andtheories from different fields and disciplines. It is this unique combination of ideas and theories that has given birth to the science of strategy formulation. This book explains this new science and describes how it can be applied by organizations around the world to formulate strategies that consistently produce breakthrough results. Many of the concepts presented in this book are new, challenge existing assumptions and are viewed as counterintuitive. As a result, many company executives, managers, internal and external consultants and otherswillbeforced to question what they once thought to be true. Those of you, who are ready to challenge your thinking strategies and are willing to leave the comfort of your existing paradigms, will learn to engage your mind, yourself, and your organization in an Intellectual Revolution. Let your journey begin—now.Chapter 1 The Intellectual Revolution In the late eighteenth century, society witnessed the start of the first modern- day business revolution—the Industrial Revolution. Fueled with new technolo- gies, such as power-driven machinery, the Industrial Revolution brought about dramatic increases in productivity, output and economic growth. In the early 1920s, new manufacturing technologies enabled the mass pro- duction of a wide variety of products. The 1950s brought the computer and the space age. In 1969, man first landed on the moon. Again, new technologies resulted in dramatic increases in worldwide productivity, output and economic growth. Since that time, we have entered into the Information Age—an age in which ‘‘information is power.’’ With the advent of computers, the Internet and on-line services, individuals have access to a tremendous amount of information on literally thousands of subjects. We must ask: Does this information alone make us powerful? Or does the power really lie in our ability to use this information to create value for ourselves and others? Imagine how powerful we would be if we could possess and structure all the information that is required to create value generating strategies and solutions. Imagine how powerful we would be if we could then take all that information and immediately process it to uncover the strategy or solution that would gen- erate the most value for all those involved in a given situation. Imagine if we could consistently create strategies and solutions that delivered up to ten times more value than those that are normally created. If organizations possessed the capability to generate breakthrough ideas, strategies and solutions, it is argued that they would create another revolution—an Intellectual Revolution. Such a revolution could again bring about dramatic increases in productivity, output and economic growth.2 Business Strategy Formulation The world is on the brink of an Intellectual Revolution. Many aspects of strategy formulation, planning and decision making have been transformed from an art to a science. This transformation is evolving the ability of many open-minded organizations to createbreakthroughstrategiesand solutions. It is providing them with a means to overcome their most important business challenges. The objective of this book is to introduce the process that is being used to make this transformation possible. Through the application of this advanced strategy formulation process, many organizations will, for the first time, be able to take the steps that are required to createbreakthroughstrategiesandsolutions. They will be able to participate in the future of strategy formulation as they engage themselves in the Intellectual Revolution. Thisbook describesthescienceofstrategyformulation,planninganddecision making, a science which many have yet to acknowledge. Many individuals and strategists believe that the complexities associated with strategy formulationare too numerous to control and that a systematic approach to strategy formulation could not exist. Most strategy formulation processes to date have failed to suc- cessfully integrate logic, analysis, creativity and innovation. As a result, strate- gists such as Henry Mintzberg have concluded that the process of strategy formulation cannot be formalized. The truth is, the process of strategy formu- lation can be formalized if the applied process does not limit creativity and innovation or limit the strategic options that are considered. This book intro- duces such a process and explains how it can be used by any organization to formulate the strategies and solutions that will accelerate the creation and deliv- ery of customer value. In contrast to most books written on the subject of strategy, this one does not address why it is important to formulate effective strategies. The importance of effective planning and positioning is well recognized within mostorganizations. Instead, it is focused on describing how an organization can put into practice the theories that are espoused by some of the world’s leading strategic thinkers. In Competitive Advantage (1985), for example, Michael Porter stresses the importance of creating a unique and valued competitive position. In Competing for the Future (1994), Gary Hamel and C. K. Prahalad advise organizations on the importance of changing the rules of the game. In Commitment:TheDynamic of Strategy (1991), Pankaj Ghemawat emphasizes the importance of sustaining a competitive advantage. Simply stated, the goal of this book is to introduce a processthatorganizationssuchasMedtronic,Motorola,Pfizer,Hewlett-Packard, Teledyne, Johnson & Johnson and others are already using to achieve these and dozens of other strategic objectives. To create this advanced approach to theprocessofstrategyformulation,many barriers to effective planning were addressed. This book discusses thesebarriers and how they were overcome. It introduces new ways to think abouttheconcept of strategy and the process of strategy formulation. It addresses the issues thatThe Intellectual Revolution 3 have for years prevented organizations from understanding what theircustomers truly value. Theconceptsintroducedthroughoutthisbookarebuiltonastrongfoundation. To ensure that foundation is understood, it is prudent to start at the beginning. Let’s start with a look at the definition of strategy. WHAT IS STRATEGY? As a wise person once told me, ‘‘definitions of strategy are like vitamins,you get one-a-day and most of them are hard to swallow.’’ Over the years, how many different definitions of the word strategy have you been exposed to? The definition of strategy is the subject of many articles and the cause of many debates. The word strategy is a vague statement that means different things to differentpeopleatdifferenttimes.Muchofthecausefordebatecanbeexplained as follows: Many definitions of strategy not only attempt to define what a strategy is, but they also contain information regarding how a strategy is created, and what a strategy is expected to achieve. For example, Michael Porter, in his article titled ‘‘WhatIsStrategy?’’(1996), states that ‘‘strategy is the creation of a unique and valued position, involving a different set of activities.’’ Kenichi Ohmae, in his article titled ‘‘GettingBack to Strategy’’ (1988), states that strategy means ‘‘working hard to understand a customer’s inherent needs and then rethinking what a category of product is all about.’’ In his article titled ‘‘The Origin of Strategy’’ (1989), Bruce D. Hen- derson states that strategy is ‘‘a deliberate search for a plan of action that will develop a business’ competitive advantage and compound it.’’ In his book titled Strategy and Structure (1962), Alfred Chandler defines strategy as ‘‘the deter- mination of the long-term goalsand objectivesofanenterprise,andtheadoption of courses of action and the allocation of resources necessary for carrying out those goals.’’ Notice that each of these definitions of strategy address how a strategy is created or what a strategy is expected to achieve. Historically, hundreds of strategists and organizations have used many dif- ferent approaches to strategy formulation to achieve a variety of strategic ob- jectives. As a result, organizations, consultants and academicians have, over time, given the concept of strategy literally hundreds of different situation spe- cific definitions. The definitions may be appropriate given the specific situation, but rarely does one definition fit all situations. To overcome the confusion created by this phenomenon, it is important to draw a clear distinction between a strategy, the process by which a strategy is created and its expected results. The distinctions can be drawn as follows.4 Business Strategy Formulation A Strategy A strategy is simply a plan. It is an executable plan of action that describes how an individual or organization will achieve a stated mission. A strategy is often perceived as being intangible, as there is nothing to touch and feel—there are no physical attributes associated with a strategy. A strategy is simply a plan—a plan that describes what an organization proposes to do to achieve a stated mission. Organizations often formulate company strategies, product and service strategies and strategies that drive operational, support and management processes. Creating a Strategy The process by which a strategy is created is referred to as a strategy for- mulation process. A strategy formulation process results in the strategy, plan or solution that is to be implemented. Such a process defines the steps to take to formulate what will hopefully be the optimal strategy or solution. The concept introduced in this book is classified as a strategy formulation process. It defines the steps that must be taken in order to produce breakthrough strategies and solutions. An effective strategy formulation process should enable an organi- zation to create strategies and solutions that will strengthenitsstrategicposition. When individuals define strategy as ‘‘the art of devising planstowardagoal’’ or ‘‘the deliberate search for a plan of action,’’ for example, they are defining the process by which a strategy is created. They are not defining what a strategy is, they are defining the process of strategy formulation. It is for this reason that many individuals have difficulty distinguishing between a strategy as a plan and ‘‘strategy’’ as a series of actions that yield a plan. The Expectations of a Strategy The expected results of a strategy are dependent on the strategist, the organ- ization and the situation for which the strategy is required. Strategies are inten- tionally developed for many different purposes and under avarietyofconditions or situations. The desired results are expected to be different in each unique situation. For example, a strategist or organization may require a strategy that will ensure the organization achieves its desired competitive position, lowers its product cost, increases customer satisfaction, creates a sustainable competitive advantage, increases revenue or market share or accelerates the pace at which it delivers value. An organization may formulate a strategy for the purpose of improving company policy, a product family, a specific product or service or an internal process. In a non-traditional sense, a strategy may be required for hiring new employees, improving the product development process, pricing products and services, or selecting a target market or improving relations with suppliers or distributors. The expected results of a specific strategy are not mu-The Intellectual Revolution 5 tually exclusive and depend on what is important to the strategist and the or- ganization at the time the strategy is being contemplated. A company, in effect, executes a variety of strategies at many levels of the organization to serve a variety of purposes. When individuals define strategy as ‘‘an attempt to develop a competitive advantage’’ or ‘‘an effort to ensure an organization’s ongoing profitable growth,’’ for example, they are actually defining the results that they expect to receive from a strategy that is effectively created and implemented for their organization at that time. They are not defining what a strategy is; they are defining what they would like the strategy to help them achieve. This is the reason why many individuals have difficulty distinguishing between a strategy as a plan and ‘‘strategy’’ as the outcome of effectively executing the plan. Making these distinctionswhen analyzingvariousdefinitionsofstrategyhelps to clarify how a specific organization, consultant or academician perceives the role of strategy. The definition of strategy that is used by an individual provides insight into how they think the strategy should be created and what they expect the strategy to help them achieve in that situation. Regardless of the definition of strategy that is used, an organization’s ability to strengthen its strategic position is dependent on one important factor—its ability to create the strategies that produce the desired results. An effective strategy formulation process is a prerequisite for success. An organization’s strategy formulation process, whether it is formal or not, is the mechanism by which its actions, investments and decisions are determined. This ultimately controls the amount of value an organization creates for its customers, stake- holders, stockholders and others. An ineffective strategy formulation process negatively impacts an organization’s rate of growth and overall competitivepo- sition. An effective strategy formulation process may in itself become a com- petitive advantage. This book is focused on the process of strategy formulation—a process that, when executed effectively, produces a plan that enables an organization to achieve its stated mission. Over the years, organizations have learned to recognize the importance of creating competitive advantages and core competencies, competing on time,mi- grating value, crossing chasms and creating strategic intent.Organizationsknow what they need to accomplish. But what happens when an organization actually attempts to formulate a strategy, define a plan or make a complex decision? Organizations may know what results they are attempting to achieve, but do they know how to create breakthrough strategies and solutions that will enable them to achieve those results? Ask yourself, within your organization, what processes are used to formulate strategy? How was the strategy formulation process developed or selected? Is a formal process used? What steps are taken to create a strategy? Do different parts of the organization define the concept ofstrategydifferently?Dotheyhave different strategy formulation processes? Are they effective? Do they consis- tently produce breakthrough strategies?6 Business Strategy Formulation Since breakthrough strategies and solutions are not all that common, it is logical to conclude that something is preventing organizations fromconsistently creating them. What are the inhibiting factors? What obstacles are encountered when formulating an effective strategy or plan? What would happen if the ob- stacles were identified and overcome?Wewillsoon findout.First,let’sexamine the barriers that are preventing the consistent creation of breakthroughstrategies and solutions. NATURAL BARRIERS TO CREATING BREAKTHROUGH STRATEGIES AND SOLUTIONS Recall the last time that you wereinvolvedinformulatingacompany,product or service strategy. Did you conclude with what you would consider a break- through strategy or solution? Did it create tremendous value for your customers and your organization? Was everyone committed to the resulting plan or strat- egy? Recall the process from a technical perspective. When going through the strategy formulation process, was the mission clear? Were all the appropriate customers considered? Were all their requirements properly captured and un- derstood? Did everyone agree on the criteria that were to be used to evaluate each proposed strategy or solution? Were the decisions based on fact? How did the organization prevent personalities, politics, personal agendas and gut-feel from negatively impacting the chosen strategy? How did the organization pre- vent the chosen solution from being negotiated and compromised to the point where its value was diminished? Was everyone committed to the strategy? Was the chosen solution supported throughout its implementation? Was a large per- cent of the company’s collective knowledge and wisdom infused in the strategy formulation process? Many obstacles tend to stand in the way of creating breakthrough strategies and solutions, but what if those obstacles could be overcome? What if an or- ganization could master its ability to consistently make the optimal choices and create the optimal strategies? How much more value would it be able to create for its customers and stockholders? If an organization could consistently create the optimal strategies, it would then be ableto optimizeitsinvestmentdecisions, deliver the optimal products and services and achieve the optimal competitive position. This, in turn, would accelerate the organization’s rate of growth and profitability. What prevents an organization from consistently formulating the strategies and solutions that create the most value? The ability to formulate breakthrough strategies and solutions has been inhibited by what can be described as three natural barriers. They are natural barriers in that they result from limitationsthat are inherent to most individuals and organizations. Since they are natural bar- riers, they often go unchallenged and are typically accepted as insurmountableThe Intellectual Revolution 7 obstaclesto success.Thesebarrierswereidentifiedthroughqualitativeandquan- titative research that I conducted in companies around the world between 1985 and 1991. The barriers are defined as follows. Structure First, organizations often lack a structure that will enable them to filter, or- ganize, prioritize and manage all the information that enters into the strategy formulation process. This is a complex process. It involves the interaction of people and information. When formulating strategies and solutions, organiza- tions must consider thousands of pieces of information from multiple sources. Customer requirements, regulatory issues, competitive data, manufacturing in- puts, stockholder demands, resource constraints, stakeholder requirements, in- dustry trends and other information must be considered. Information from customers, executives, managers, engineers, sales representatives, consultants and others must be evaluated. Organizations must be able to determine which information takesprecedenceandhowonepieceofinformationimpactsanother. In addition, they must be able to determine the order in which to process the information. What happens when information cannot be structured in a meaningful way? How does that impact the dynamics of a strategy formulation session? Have you ever tried to obtain consensus on a strategy or solution when everybody is using different information as a basis for decision making? Without a structure to organize information, individuals involved in the strategyformulationprocess lack a solid basis for agreement or disagreement. As a result, they often fail to reach consensus or a conclusion and limit the possibility of creating a break- through strategy or solution. Without a solid structure for gathering and pro- cessing information, strategy formulation and planning sessions often become a forum for argument, debate, negotiation and compromise. Solutions are often negotiated and compromised to the point where they lack both value and com- mitment. Who in your company filters, organizes, prioritizes and manages the infor- mation that is included in the strategy formulation process? How is the infor- mation filtered and organized? What methods are used to prioritize the importance of the information? Does a structure exist? A lack of structure is often accepted as a barrier that cannot be overcome. Top strategists rarely ad- dress this as a barrier to success, it is simply accepted asoneof thecomplexities of strategy formulation. What would happen to the quality of your strategies, plans and decisions if your organization could effectively structure all the information that enters the strategy formulation process? Would this be the first step toward an Intellectual Revolution?8 Business Strategy Formulation Information Second, individuals often do not have the information they need, or know what information they need, to create breakthrough strategies and solutions. Sure, individuals have access to large amounts of information, much more than ever before. But they may not know which pieces of information are important, which pieces should be eliminated, which pieces are missing or how to obtain theinformation they need.Forexample,organizationsoftentalkaboutproviding strategies and solutions that satisfy their customers’ desired outcomes, but how often do they know all their customers’ desired outcomes? How often do they know which desired outcomes are most important? As a result of missing or inaccurate information, individuals often base their strategies, plans and deci- sions on an incomplete or inadequate set of facts. Ask yourself, when contem- plating a business or investment strategy, defining a product or service plan or making a trade-off decision, how often do you haveaccessto100%ofthefacts? How many of your decisions are based on 100% of the facts? How often do you have access to 100% of your customers’ prioritized desired outcomes, in- ternal constraints and competitive positioning data? The inability to capture all the information required to effectively formulate strategies and solutions is often accepted as a barrier that simply cannot be overcome. In The Rise and Fall of Strategic Planning (1994), Henry Mintzberg points out that ‘‘much of what is considered as ‘hard’ data is often anything but.’’ He goes on to say, ‘‘there is a soft underbelly of hard data’’ typified by the fallacy of ‘‘measuring what is measurable.’’ Many organizations simplyuse the information they have at hand to assist in strategy creation without ques- tioning its value or relevance. Thisclearly contributestotheinefficiencyofmost strategy formulation processes and the ineffectiveness of the strategiestheypro- duce. What would happen to the quality of your strategies, plans and decisions if they were based on 100% of the facts? What if you had access to all the pri- oritized desired outcomes of your internal and external customers, all the con- strainst imposed on thesolutionandknewwhatcompetitivepositionyouwanted to achieve? Would an Intellectual Revolution be closer at hand? Processing Power Third, individuals must be able to simultaneously process literally hundreds of pieces of information when attempting to formulate strategies, define plans and make complex decisions. Unfortunately, the human mind is limited in its ability to know, remember, process and apply all the pertinent facts that are required when conducting these activities. Psychological research suggeststhatindividualsconsideronlyasmallnumber of variables when contemplating strategies, plans and decisions. Psychologists generally agree that individuals rarely consider more than five to nine pieces ofThe Intellectual Revolution 9 information at a time. Howard Gardner, in Frames of Mind: The Theory of Multiple Intelligences (1983), for example, says that individuals often rely on ‘‘a small set of human intellectual potentials, perhaps as few as seven in num- ber.’’ It follows that when formulating a strategy it would be nearly impossible for an individual to accurately define the optimal solution for any complexsituation given that there are often hundreds of possible solutions from which to choose and over 100 different evaluation criteria that must be considered. As a result, individuals often fail to effectively process all the information that must be considered when attempting to formulate a breakthrough strategy. An analogy of this situation is as follows: When solving a simultaneous algebraic equation, you may be asked, for example, to determine the values of x and y given that: 2x y 3, and y x 1 In this situation you are asked to solve this equation given two variables (x and y) and the numerical constants. Most people cannot solve this rel- atively simple equation in their head. Now consider that in most strategic situations there may be over 100 solutions (variables) and between 50 and 300 evaluation criteria (constants) that must be considered to effectively formulate a strategy. Without the assistance of additional processing power, the probability of an organization choosing the strategy that will deliver the optimal results is near zero. Despite this fact, businesses and individuals often rely on their internal decision-making capabilities to determine which strategy or solution will work best in a given situation. Some strategists encourage this behavior. As a result, strategies, plans and decisions are rarely optimized. This is an obvious barrier to the formulation of breakthrough strategies and solutions. In his book titled The Mind of the Strategist (1982), Kenichi Ohmae states, ‘‘Phenomena and events in the real world do not always fit a linear model. Hence, the most reliable means of dissecting a situation into its constituentparts and reassembling them in the desired pattern is not a step-by-step methodology such as systems analysis. Rather, it is that ultimate non-linear thinking tool, the human brain.’’ This sounds great, but in the complex world of strategy for- mulation there are few people that can meet this mental challenge. It is true that strategy formulation requires non-linear thinking, but it is also true that the human mind requires assistance in processing all theinformationthatisrequired to think in a non-linear fashion. Ask yourself, how often do you rely on your internal decision-making ca- pabilities to determine which strategy or solution will work best in a given situation? How many pieces of information can you process at one time? Do10 Business Strategy Formulation the processes you use alleviate any confusion that may be caused by attempting to simultaneously process hundreds of pieces of information? How many po- tential solutions are considered? How many potential solutions exist? At what point do you stop searching for a ‘‘better’’ solution? Does new information, when it becomes available, make you less confident in your chosen action? The fact is that individuals seldom choose the optimal solution when contem- plating strategies, plans and complex decisions. The structure, information and processing power that is required to choose the optimal solution is rarely avail- able. Think back to the results of yourlast strategyformulationexperience.How confident were you that the chosen solution was the optimal solution? Was the optimal solution ever even considered? Was the chosen solution reconsidered or changed prior to implementation? The need to simultaneously process more than five to nine pieces of infor- mation at a time makes it difficult for any one person, or group of people, to create the optimal solution without additional processing capability. Obtaining the information that is required to uncover the optimal solution is often imprac- tical as the required skills and resources are rarely available. Structuring all the information that is presented is difficult and time consuming. As a result, these inherent limitations are often simply accepted as insurmountable obstacles or natural barriers to greater success and inhibit the formulation of breakthrough strategies and solutions. Strategies and plans are often formulated withoutaninformationstructure, or a basis for agreement or disagreement. Their formulation is often at- tempted without all the facts and without the processing power that is needed to simultaneously process all the required information. Assume for a moment that the process of strategy formulation is comprised of only the three steps that have been mentioned: organizing the information in a structure, capturing the required information, and processing the information in an effective manner. If an organization is 80% efficient at structuring the information that is entered into the strategy formulation process, 80% efficient at obtaining the required information and 80% efficient at processing the infor- mation, then its strategy formulation process is about (.8 .8 .8) or 51% efficient.Ifeachaspectis60%efficient,thentheoverallprocessefficiencydrops to just 22%. If each aspect is 50% efficient, the overall process efficiencydrops to 13%. How efficient is your organization at executing each of these aspects of the strategy formulation process? Can it afford to be less than 90% efficient? These barriers must be eliminated before organizations can dramatically in- crease the amount of value they create for themselves and others. This book describes how these barriers have been overcome. It describes what organiza- tions must do to obtain the structure, information and processing power they require to consistently formulate breakthrough strategies and solutions.The Intellectual Revolution 11 OVERCOMING THE NATURAL BARRIERS TO SUCCESS Does your organization successfully anticipate future opportunities? Does it know which technologies to pursue, which core competencies to build, what product or service concepts to back, which alliances to form and what kind of people to hire? Does it know which investments, activities and actions will create and deliver the most value now and in the future? How does it choose what investments, activities and actions to pursue? Organizations must constantly address a variety of complex strategic issues. Given the disparity between our inherent limitations and the desire to create strategies and solutions that deliver the greatest value, organizations have made many attempts to find simple ways to deal with complex realities. Despite the number of strategy formulation methods that exist, most have failedtoeliminate the natural barriers to success. In 1991, several emerging technologies from unrelated disciplines were in- tegrated into a strategy formulation process by the principals of my consulting firm, The Total Quality Group. This process was the result of years of effort, research and study and was designed to specifically attack the three barriersthat prevent the consistent creation of breakthrough strategies and solutions. Ideas, concepts and theories from disciplines such as statistics, communications, psy- chology, quality, business, mathematics and computer science were used to cre- atethisadvancedstrategyformulationprocess.Itwasapparenttousthatstrategy formulation was not simply a business ritualbuta combinationofmanyintricate activities that required intimate knowledge of many disciplines. Our knowledge was specifically focused on creating a strategy formulation process that would provide the world with: 1. A structure that enables organizations to successfully organize, filter, prioritize and manage the information that enters the strategy formulation process. 2. A process that enables organizations to capture, filter and sort requirements and other information that is required to create breakthrough strategies and solutions. 3. The tools that deliver the processing power that is required to simultaneously process all the information needed to uncover the optimal strategy or solution. In short, the process resulting from our efforts provided the structure, infor- mation and processing power that is required to formulate breakthrough strate- gies and solutions. We have quantified that the strategies and solutionsresulting from this process are ‘‘breakthrough’’ in the sense that they often deliver up to 10 times more value than strategies and solutions that are created through the use of traditional methods. This magnitude of improvement is accelerating the rate at which organizations create and deliver value to their internalandexternal customers. This explains why many organizations are using this process to re- place or enhance their existing strategy formulation processes. Since 1991, these ideas and theories have evolved into an advanced strategy12 Business Strategy Formulation formulation process that we now call The Customer-Driven Mission Achieve- ment Process, or CD-MAP. This process is being used by Fortune 100 com- panies and other organizations around the world to create a broad array of company, product and operational strategies. For example, organizations are using this process to: 1. Devise company-wide and division-wide operating strategies. 2. Formulate short-term and long-term product and service strategies. 3. Create strategies that improve their value-added processes. 4. Formulate strategies that reduce time to market. 5. Optimize investment and trade-off decisions. 6. Identify and select target markets. 7. Optimize product and service concepts. 8. Improve many other operational, support and management processes. This process has been used across many industries and for many purposes and consistently produces breakthrough results. For example, when using this process to improve the development and testing of composite materials, a For- tune 100 company discovered how to reduce the cost of development by over 80% while reducing development time by nearly 75%. A cardiac pacing system company used this process to create a product concept that offered the same function as a highly valued competitive product, but at 40% of the cost. A manufacturer of industrial packaging used this process to create a company strategy that increased their market share by 10% in an environment in which the top 10 players had less than 50% market share. A medical device manufac- turer used this process to create a line of angioplasty balloons that took them from less than 1% market share to a market leadership position in just two years. Organizations are effectively using this process to choose which markets, products, technologies, investments and activities to pursue to strengthen their strategic position. They are identifying value-producing activities that comple- ment, reinforce and optimize one another. They are making discoveries that often form the basis for a distinctive and sustainable competitive advantage. The following study gives you an idea of the degree to which this process has overcome the natural barriers to success.Approximately60individualsfrom organizations around the world, who have applied this process, were asked to compare their traditional strategy formulation process to the CD-MAP process. They were asked to respond, quantitatively, to a series of questions that offer insight into the effectiveness of the strategy formulation processes that theyuse. They were asked to compare the strategy formulation methods they typically use to the CD-MAP process for each of the stated criteria. The results of the survey are documented in Table 1.1. As you read through the questions, youThe Intellectual Revolution 13 Table 1.1 An Evaluation of the CD-MAP Process can evaluate the strategy formulation process used within your organization in the space provided. Dramatic improvements have been made to the process of strategy formula- tion along each of these dimensions. Individuals using this process recognize that it dramatically reduces the percent of decisions that are negatively affected by politics, intuition and gut-feel. They also recognizethatitreducesthepercent of strategies that are negotiated and compromised to the point that they are void ofvalue.Atthesametime,theusersofthisprocessrecognizethatitdramatically increases the percent of decisions that are based on 100% of the facts as it enables organizations to capture and understand what their customers value and define evaluation criteria that all can agree on. In addition, they recognize that it increases the number of individuals whose knowledge and wisdom are used to formulate the strategy. As a result, more people within the organization be- lieve they have uncovered the optimal solution, and they are committed to the result. Thisprocessis focusedonensuringorganizationsmakethechoices,formulate the strategies and define the plans that create the most value for their customers and investors. It empowers individuals—gives them the power—to effectively contemplate strategies, plans and decisions. It enables organizations to win to- day’s battle for intellectual leadership so they will be likely to win tomorrow’s14 Business Strategy Formulation battle for market leadership. It is a driving force behind the Intellectual Revo- lution. TERMINOLOGY It is important to have a clear understanding of the terminology that is used to describe the concepts introduced in this book. Several concepts are described using words that may have other meanings. To reduce the time it will take to internalize the concepts that are put forth, several potentially ‘‘vague’’ words are defined below. The terms will only be used in the context in which they are defined. Breakthrough Solution: A solution or strategy that satisfies over 50% of the customers’ desired outcomes better than an existing strategy or solution. Breakthrough solutions often deliver up to 10 times more value than commonly implemented solutions and enable an organization to leapfrog their competition. Breakthrough solutions also of- ten provide an organization with a unique and valued competitive position. A com- petitive advantage will often arise as a result of a breakthrough solution. Concept: An idea, strategy or potential solution in its conceptual or theoretical stage. Customer: An individual or group of individuals involved in, or affected by, the strategy, plan or decision that is being contemplated. As an example, if an organization wants to improve the process of surgery, the customers may include surgeons, support staff, hospital administrators, the manufacturer of the product and the individuals within the organization who are providing the solution. Desired Outcome: A desired outcome is a statement, made by an individual involved in or affected by a strategy, plan or decision, that describes an important benefit they would like to receive from the strategy, plan or decision that is being contemplated. Desired outcomes are unique in that they are free from solutions, specifications and technologies, free from vague words such as ‘‘easy’’ or ‘‘reliable’’andarestatements that are stable over time. Mission: A specific task or project with which an individual or organization is charged. A mission may include improving a surgeon’s ability to conduct the process of sur- gery, improving an organization’s ability to manufacture a product or improving an organization’s ability to formulate a strategy. A mission may be large or small in scope. Optimal Solution: The one solution or strategy that will satisfy the largest number of important desired outcomes given the internal and external constraints imposed on the solution and the competitive position that is desired. The optimal solution will also be the solution that delivers the most value for the least cost, risk and effort. The optimal solution is typically a breakthrough solution. Predictive Metric: A parameter that can be measured today to ensure its corresponding desired outcome will be achieved in the future. A predictive metric is measured and controlled in the design of the solution and predicts the solution will satisfy one or more desired outcomes. A predictive metric may also be referred to as a predictive success factor (PSF).The Intellectual Revolution 15 Process: A series of activities, actions or events that produce a desired result. Examples of processes include conducting surgery, manufacturing a product, making an acqui- sition, developing a product and formulating a strategy. Solution: A specific set of features that form the elements of a plan or strategy, and define how the desired outcomes will be achieved. A proposed solution is often re- ferred to as a plan or a strategy. Strategy: A strategy is a plan. It is an executable plan of action that describes how an individual or organization will achieve a stated mission. Strategy Formulation: The process of creating a strategy. Value:Thedegreetowhichimportantdesiredoutcomescanbesatisfiedwhileminimizing cost, risk and effort. The language used throughout this book is precise. It may be helpful to ref- erence the definitions stated above, as required. A comprehensive list of com- monly used words and their meanings can be found in the Glossary. SUMMARY In this chapter we have established the fact that a process for strategy for- mulation does exist and that it is capable ofconsistentlydeliveringbreakthrough results. This process was the result of years of effort and requiredtheintegration of knowledge from disciplines such as statistics, communications, psychology, quality, business, mathematics and computer science. This strategy formulation process is focused on overcoming the barriers that typically stand in the way of formulating breakthrough strategies and solutions. The barriers are defined as structure, information and processing power. Struc- ture relates to the way information entering the strategy formulation process is organized, filtered and structured for use. Information relatestothetypesofdata that are required for the successful execution of the process. Processing power relates to the power that is required to simultaneously analyze, calculate and process the information that has been gathered to deliver a breakthrough result. Strategy formulation processes used by most organizations fail to provide the structure, information and processing power that is required to formulate break- through strategies and solutions. These barriers are often simply accepted as insurmountable obstacles to success. Organizations that have used our advanced strategy formulation process have been able to successfully overcome these ob- stacles. They have used this process to successfully formulate overall company strategies, product and service strategies and strategies that drive the improve- mentofoperating,supportandmanagementprocesses.Whenapplyingthisproc- ess, organizations have been able to consistently formulate strategies and solutions that deliver up to 10 times more value than those formulated using their existing strategy formulation methods. This process embodies the science of strategy formulation. It has transformed16 Business Strategy Formulation the process of strategy formulation from an art to a science. Throughout this book, you are introduced to the concepts, theories and ideas that have made this transformationpossible.Youwilllearnwhythisprocessworksandhowtoapply it. You will learn how it can be applied successfully in any organization, and you will learn how you and your organization can use this process toparticipate in the Intellectual Revolution.Chapter 2 Transforming the Thinking Process In his book titled The Age of Unreason (1989) Charles Handy writes, ‘‘We are all prisoners of our past. It is hard to think of things except in the way we have always thought of them. But that solves no problems and seldom changes any- thing.’’ Creating a strategy formulation process that integrates logic, analysis, crea- tivity and innovation required new thoughts and new ways of thinking about strategy formulation. It required thinking differently about the very concept of strategy. As we studied the process of strategy formulation, we discovered that organizations around the world had adopted an unspoken high-level thinking strategy that guided their approach to strategy formulation. By high-level think- ing strategy we mean the mental or subconscious logic that individuals apply when formulating a strategy. We discovered that individuals inherently follow this set logic, and it drives a natural sequence of activities that most organiza- tions follow when attempting to formulate a strategy. This logic is based on our natural tendencies and instincts, and it is often executed without question. We found that this logic, although ineffective, is often simply accepted as a fun- damental of strategy formulation. It has been accepted, without question, for hundreds of years, and until now, this logic has remained unchallenged. We will introduce this logic and explain how for years it has undermined the process of strategy formulation and inhibited the creation of breakthrough strat- egies. We will then introduce a different, high-level thinking strategy that em- bodies the logic that organizations can use to formulate breakthrough strategies. This alternative logic resulted from the application of modeling and pattern detection techniques that were focused on improving the strategy formulation process. This new logic lays the foundation upon which the future of strategy formulation has been built.