While a great strategy can have a large impact on firm competitive position and value creation, many firms have inefficient approaches to strategy creation that do not lead to optimum returns on the use of strategy resources. This is because firms often use biased strategy formulation processes that adopt courses of action that, although sounding like they will meet firm goals, in fact are not built on an objective, hard analysis of external and internal firm realities. Three obstacles that often plague the strategy formulation process are the Isolated Strategy Problem, the One-Eyed Strategy Problem and the Strategy Epiphany Problem. This article sets forth an approach for developing strategy that is designed to overcome these problems and improve the return on corporate resources that are invested in strategic thinking.

Three Strategy Formulation Obstacles

Like every firm activity, the process of formulating strategy can be viewed as an investment of and a return on scarce firm resources, including time spent on strategy analysis, the investment of firm capital and accumulated opportunity costs. There can be very large differences between strategy resources invested and strategy results achieved. On the one hand, a small investment of strategy resources can lead to the creation of very positive strategy results, while on the other hand, a large investment of strategy resources may lead to few strategy gains.

The process of formulating strategy can be viewed as an investment of and a return on scarce firm resources. The correlation between the investment of strategy resources and the return on those resources can be very low.

In the process of trying to maximize return on the use of firm strategy resources, three major obstacles are often confronted.

The Isolated Strategy Problem. One phenomenon that often leads to low strategy formulation returns is the “Isolated Strategy Problem.” This is strategy which is developed in relative isolation and has little or no relationship to external or internal firm realities. An isolated strategy is often selected because:

• another firm successfully adopted the strategy and a firm believes that by copying the strategy it can replicate the other firm’s success
• it has become trendy, such as the strategy of implementing impact initiatives or incorporating emerging technology
• the firm has made a deliberate decision to jettison its current strategy and simply try something new. This can occur when the firm’s strategy has repeatedly failed or there are changes in key members of the executive team that bring in new strategy perspectives.

The One-Eyed Strategy Problem. A second phenomenon that often leads to low strategy formulation returns is the “One-Eyed Strategy Problem.” This involves basing strategy on a narrow organizational perspective rather than on a balanced consideration of the many perspectives and operating realities that comprise the organization as a whole. For example, if the human resources department develops firm strategy, the proposed course of action is likely to be biased toward common human resources perspectives and objectives, such as that strategy efforts should be focused on recruiting top talent to improve business results. It may be the case, however, that the key strategy weakness of the firm is not recruiting talent but rather the fact that its products are overpriced.

The One-Eyed Strategy Problem can be a function of vertical as well as horizontal organizational short-sightedness. While a firm’s strategy may incorporate different departmental perspectives, it may be biased toward the views of executives who are removed from day-to-day operating realities rather than reflect the perspectives of people who are enmeshed in tasks that have a large impact on actual operating results.

The One-Eyed Strategy Problem can be a function of vertical as well as horizontal organizational short-sightedness.

The Strategy Epiphany Problem. A third phenomenon that leads to low returns on strategy formulation is the “Strategy Epiphany Problem.” This is the perception that strategy is the result of a sudden insight of the strategy team or the outcome of a pre-planned strategy meeting and the belief that, once that moment of illumination occurs, there is no need to continue strategy analysis. This is a variant of the common problem in organizations that organizational solutions are believed to be a function of the time allotted to develop them. The reality is that strategy is formed in a highly dynamic context where all key variables that affect firm strategy are constantly changing. This means that strategy cannot be based on a limited snapshot of highly dynamic factors but rather the painstaking process of constantly reviewing them and adjusting strategy based on how these factors are changing.

Strategy formulation can be plagued by the common organizational problem where solutions are believed to be a function of the time allotted to develop them.

Overcoming the Isolated Strategy Problem

There are several ways to overcome the Isolated Strategy Problem.

Clearly Define Firm Objectives. For any process of strategy formulation to work, it must start with a clear statement of firm objectives. This must be the basis of and reflect all other strategy formulation components and actual business results. Further, to the extent possible, firm objectives should be expressed in quantitative terms. This makes it much easier to track progress towards strategic goals and permit the identification of when a firm is veering off course as soon as possible.

Articulated firm objectives can be of many different types, including financial and non-financial objectives. For example, a firm may target increasing its revenues, increasing its EBITDA or increasing its valuation. The strategic objective can also be based on other types of goals, such as increasing worker workplace satisfaction or having a larger positive impact on the community.

Carry Out Careful Market Analysis. Strategy must also be based on a careful analysis of the external market, which includes an analysis of the sector the firm is operating in, its growth opportunities and its risks. This should be based, not on anecdotal, statistically questionable pieces of evidence but rather hard data that is reasonably representative of actual market realities. In addition to understanding the market, a firm must also consider who its competitors are, what they are doing, and how the firm will react to what they are doing. The firm’s objectives must be tied to its market analysis.

Analyze Firm Realities. A firm’s strategy must be based on firm realities. This includes the resources the firm currently has and can reasonably obtain and what the firm’s DNA is. A firm with one set of resources and DNA type may be able to effectively implement one strategy while another may not. Further, as a firm’s resources change, strategies that could be implemented at one point in time may be very difficult to implement at another.

Overcoming the One-Eyed Strategy Problem

There are several ways to overcome the One-Eyed Strategy Problem.

Establish a Strategy Team. The key to overcoming the One-Eyed Strategy Problem is to set up a strategy formulation team that takes into consideration multiple organizational issues and perspectives. Ideally, this means receiving thoughtful feedback from people outside as well as inside the firm. The strategy team must not only collect different viewpoints but also synthesize them in a way that creates a feasible path forward that reflects both organizational capabilities as well as limitations.

Consider Multiple Horizontal and Vertical Organizational Viewpoints. The strategy formulation process should strive to take into consideration not only the views of different departments but also people who work in different roles in those departments. This can provide valuable insights into only where strategic opportunities and pitfalls lie but also into the best way to structure the process of strategy implementation.

Overcoming the Strategy Epiphany Problem

There are several ways to overcome the Strategy Epiphany Problem.

Take a Long-Term Strategy Formulation Perspective. Strategy should not be the result of a single meeting or a strategy retreat but rather the working product of a dedicated firm strategy function that generates strategy analysis on an ongoing basis. This group should be tasked with tracking key internal and external variables, developing clear metrics for analyzing strategy progress and, if necessary, making recommendations for strategy shifts.

Continuously Monitor Strategy Recommendations. Strategy should not be developed only when the firm starts operations or reviewed when performance targets have been missed. Rather, it should be a continuous progress that is designed not to generate quantitative leaps but rather iterative strategic gains. Moreover, while it is often thought that strategic shifts should only occur when the firm is not meeting its objectives, they may also be advisable when a firm is doing better than expected because, for example, market factors have turned in the firm’s favor. In these types of circumstances, the recommendation of the strategy team can be to increase the investment of certain types of strategy efforts in order to accelerate growth or extend firm competitive advantages.

Conclusion

Depending on how it is designed, the process of strategy formulation can lead to greater or lesser returns on the use of firm strategy resources. By overcoming the issues of the Isolated Strategy Problem, the One-Eyed Strategy Problem and the Strategy Epiphany Problem, the chances of improving a firm’s return on its use of strategic resources and building shareholder value can be significantly increased.