This is the first post in the series of Strategy Dynamics Briefings. Join me, as I introduce and explain ideas behind Strategy Dynamics in these fortnightly blog posts.
(If you would like to receive this series from the beginning in your email inbox, please register on www.strategydynamics.com and subscribe to Briefings in “MyAccount”)
There are many strategy textbooks in the market but “Strategic Management Dynamics” starts from a slightly different point, which may make it seem a bit unconventional. When all is said and done, the purpose of designing and implementing strategy is to improve performance over time. In corporate settings, shareholders value the likely stream of future cash flows, rather than profitability ratios. Simply put, investors will prefer a company generating 12% returns when cost of capital is 8% over a company generating 15% if the first company is growing substantially and the second is not. No matter how sustainable the second company’s superior profitability may be, whether due to finding an attractive industry situation or establishing a hard-to-imitate advantage, its lack of growth limits its value. [See for example ‘How to choose between growth and ROIC’, by Bin Jiang and Timothy Koller – McKinsey Quarterly, September 2007.]
The need to improve performance over time is not limited to the strategic management of corporate entities. It applies equally to public service and voluntary organisations, although they may focus on achieving some other quantifiable purpose rather than creating financial value. Functional parts of organisations also face the requirement to improve performance over time, such as improving service quality, accelerating product development or reducing staff turnover.
To deal with this concern with performance over time requires a rigorous and quantitative causal explanation for the direction and rate at which performance is changing. This analysis quickly identifies that accumulating resources are the ultimate cause of current performance – customers drive revenue; capacity and staff drive costs, for example. Any desire to estimate how performance will change must therefore depend on how those tangible resources will change.
The complicating issue is that accumulation and depletion of resources do not follow the straightforward form of causality we usually hope to discover. The quantity of each resource at any particular time reflects the organisation’s entire history, its customer base today, for example, being precisely the sum of every customer ever won, minus every customer ever lost. This has serious implications. If performance depends on factors that have been built up and sustained throughout the past, it cannot be explained by the current values of other factors today – price or marketing spend, for example – no matter how persuasive the correlation results.
The accumulating asset-stock, or resource, is the fundamental component without which no explanation of performance can be accurate. Its principal consequence is that each organisation is on a trajectory into the future that has been steered by its previous strategies and decisions. Our quest is to find adjustments to those strategies and decisions that will redirect that trajectory onto a better path. Even when it is possible to achieve step-changes in performance, reliable growth thereafter is still required.
The time-based behaviour of accumulating resources and other asset-stocks lies at the heart of a method called system dynamics. This method also captures the next stage in the causal logic – showing why resources are being won and lost. These flow rates of resources are fundamental to why performance is changing over time. If there are no flows, then resources don’t change, and if resources don’t change then performance remains the same. Rates of change in resources reflect management decisions and certain external factors, such as competitors’ efforts or limited availability of those resources. Crucially, however, as the strategy field has long known, the rate at which resources can be acquired depends strongly on the quantities already in place. This gives rise to interdependence relationships, the capture and quantification of which generates the organisation’s basic operating system – its core ‘strategic architecture’.
In the first part of “Strategic Management Dynamics” I establish the need to look at performance over time – not just this year’s results but the direction performance is going, whether improving or declining. It goes on to look at how resources drive performance, how the bath-tub metaphor underpins resource behaviour and how to build up a ‘strategic architecture’, from which further analysis can be accomplished.
Over the coming weeks I will provide some insights into strategy development using the approach.
We welcome your comments at any time.
Until next time…
[hr_shadow]
If you would like to receive the series from the beginning in your email inbox, please register on the strategy Dynamics website and subscribe to Briefings in “My Account”
Another thought … There is an important distinction between principle and technique.
Deeply embedded in strategy dynamics is the bath-tub principle – a universal truth about the way things in our world ‘fill‘ and ‘drain‘ over time – e.g. water, cash, greenhouse gasses, animal poputations etc.
To apply principles needs insight that only you can bring due to your knowledge of your situation. By applying the stages that I lay out in Strategic Management Dynamics you will be able to build a strategic architecture of your business that will generate insight and improved strategy planning.
Read more about the book on our website