Strategy Formation

What to consider when ‘crafting’ strategies?

Andy Weeger

Neu-Ulm University of Applied Sciences

September 3, 2024

Learning outcomes

After this session, you should have a solid understanding of

• how strategies do seem to be made (i.e., the descriptive side of the field of strategic management);
• what differentiates a good strategy from a poor strategy;
• the differences between deliberate and emergent strategies;
• the arguments for incrementalism and strategy making as a crafting and learning process;
• how strategy can be understood as an interplay between actions and ideas, and between experience and inspiration;
• the importance of collective intuition, quick conflict, disciplined pace of decision making, and defusing wasteful political behavior;
• and implications for the strategic management process.

Reflection

What is strategy?

Prologue

[Good strategy] does not pop out of some strategic-management tool, matrix, triangle, or fill-in-the-blanks scheme. Instead, a talented leader has identified the one or two critical issues in a situation—the pivot points that can multiply the effectiveness of the effort—and then focused and concentrated action and resources on them. R. Rumelt (2011)

Good vs. poor strategy

Good strategy is made up of diagnosing situations correctly, adopting an overall policy for dealing with the problems and opportunities identified by the diagnosis, and finally coordinating a set of steps that support this policy. Poor strategy does not follow this process, or does it badly.

Reflection

Turn to your neighbor and, in eight minutes, identify the key features of a good strategy and a poor strategy, using what you have learned so far as your reference point.

Prepare to present and discuss your findings.

Hallmarks of a good strategy

According to R. P. Rumelt (2012) a good strategy …

• identifies the critical issues in a situation,
• focuses and concentrates action and resources on these issues,
• acknowledges the challenges that arise in solving the issues,
• provides an approach to overcome the challenges.

Good strategies tend to look simple and obvious in retrospect.

Hallmarks of a poor strategy

According to R. P. Rumelt (2012) key hallmarks of poor strategy are:

• Failure to face the challenge.
• Mistaking goals for strategy.
• Bad strategic objectives.
• Fluff ¹.

Ignores the power of choice and instead tries to reconcile a variety of conflicting demands.

Failure to face the problem:

• Since a strategy is an approach to overcoming a challenge, if the challenge is not defined, one cannot assess the quality of the strategy used to respond to it. Therefore, one cannot identify and reject a poor strategy, or improve a good one.
• Failure to identify and analyse the obstacles leads merely to stretch goals/budgets/wish lists.

Mistaking goals for strategy:

• It is important to see the distinction between the goals, and the strategy used to achieve those goals.
• The job of a leader – the strategist – is to have a strategy that focuses effort on achieving the goal.

Bad strategic objectives:

• Another sign of poor strategy is fuzzy strategic objectives. This problem manifests itself as: a long list of things to do/accomplish, mislabelled as strategies; a ‘blue sky’ – a restatement of the challenge/desired state of affairs that does not identify ‘how’ to get there.
• Good strategy works by focusing energy and resources on one/very few pivotal objectives, whose accomplishment will lead to a cascade of favorable outcomes.
• Good strategy also creates a link between short-term objectives/action and the long-term strategic goal.

Fluff:

• Poor strategy is often characterized by ‘fluff’, or superficial abstraction.
• Fluff is a restatement of the obvious, combined with a generous sprinkling of buzzwords that masquerade as expertise.

Reasons for poor strategy

Poor strategy has many roots, but the key ones are: the inability to choose, and template-style planning R. P. Rumelt (2012).

Strategy means focus and therefore choice. Choice means that some goals are set aside in the favor of others - it is about choosing what to do and what not to do. When such deliberate choices are not made, the result is a poor strategy.

Strategy is often thought of as something that can be generated by a formula. This takes the form of a “vision-mission-strategy” statement or template. This template-like system of strategic planning, which produces empty rhetorical examples, is widely used and often mistaken for decisive insights.

The kernel of good strategy

Good strategies have a basic underlying structure:

1. A diagnosis: an explanation of the nature of the challenge. A good diagnosis simplifies the overwhelming complexity of reality by identifying certain aspects of the situation as being the critical ones.
2. A guiding policy: an overall approach chosen to cope with or overcome the obstacles identified in the diagnosis.
3. Coherent actions: steps that are coordinated with one another to support the accomplishment of the guiding policy.

At its core, strategy is always the same: discover the crucial factors in a situation and design a way to coherently coordinate and focus actions to deal with them.

Reflection

Form small groups and take 10 minutes to consolidate your answers to my questions on Mintzberg (1978).

• Why and how does Mintzberg challenge the prevailing view of strategic planning (i.e., strategy formulation) as the primary approach to strategy formation?
• How does Mintzberg propose to think of strategy formation instead?
• Which patterns of strategy formation has Mintzberg identified? Can you provide examples of organizations that might employ each of these patterns?
• Why and how can the aggressive, proactive strategy-maker as well as contingency planning be risky for organizations, particular in turbulent environments?
• What practical implications can you draw from Mintzberg’s insights for organizations’ strategic management practices?

Strategy formation

A strategy is not a fixed plan, nor does it change systematically at pre-arranged times solely at the will of management. Mintzberg (1978).

Definition

Strategy formation refers to the process of crafting strategies that revolve around the interplay of the environment, the organizational operating system, and leadership.

Mintzberg (1978)

Following Mintzberg (1978), strategy development in most organizations can be thought of as an interplay of three fundamental forces:

1. an environment that changes continuously but irregularly, with frequent interruptions and wide fluctuations in its rate of change;
2. an organizational operating system (i.e., bureaucracy) that seeks primarily to stabilize its actions, regardless of the characteristics of the environment it serves;
3. and a leadership whose role is to mediate between these two forces, maintaining the stability of the organization’s operating system[^OOS] while ensuring its adaptation to changes in the environment.

1. Formal structures: The official hierarchies and reporting lines within the organization.
2. Informal networks: The unofficial relationships and communication channels that influence decision-making.
3. Standard operating procedures: The established methods and routines for carrying out tasks.
4. Cultural norms: The shared values and beliefs that shape behavior within the organization

The term bureaucracy describes the tendency of established procedures and routines to persist, sometimes hindering flexibility and adaptation.

Strategy and strategic change

Strategy: consistent behaviors by which the place in the environment is established. Strategic change: responses to environmental change, limited by the organizational operating system and mediated by leadership.

Mintzberg (1978)

Strategy can be viewed as the set of consistent behaviors by which the organization establishes for a time its place in its environment (Mintzberg 1978).

Strategic change can be viewed as the organization’s response to environmental change, constrained by the momentum of the bureaucracy and accelerated or dampened by the leadership (Mintzberg 1978).

Types of strategies

Intended strategies
and emergent strategies.

Figure 1: Types of strategies according to Mintzberg (1978)

• Deliberate strategies are intended strategies that get realized.
• Unrealized strategies are intended strategies that do not get realized, perhaps because of unrealistic expectations, misjudgments about the environment, or changes in the environment.
• Emergent strategies are realized strategies that were never intended, perhaps because no strategy was intended at the outset or perhaps because they were got displaced along the way.
• Realized strategies refer to actually “observable pattern of behavior”, consistent over time based on a continuum between deliberate strategy and emergent strategy.

For a strategy to be perfectly thought out, i.e., for the realized strategy (pattern of action) to form exactly as intended, at least three conditions must be met (Mintzberg and Waters 1985):

1. Precise intentions in the organization, articulated very specifically before any action was taken.
2. The intentions must have been known to all actors in the organization: they were either seen as their own or accepted, probably in response to some kind of organizational control mechanism.
3. These collective intentions must have been carried out exactly as they were intended, without any outside force influencing them.

For a strategy to be fully emergent, there must be order, i.e., consistency of action over time, even if there is no intention behind it (Mintzberg and Waters 1985). However, it is hard to imagine actions without intention in any part of the organization. Thus, it can be assumed that a purely emergent strategy is as rare as a purely intentional strategy.

Crafting strategies

The process by which effective strategies are created is better captured by thinking of strategy as a craft, rather than as a planning process (Mintzberg 1987).

Why does strategy as a craft better reflect the process by which strategies are formed?

• Craft involves traditional skill, dedication, mastery of detail through long experience and an intimate understanding of the materials at hand. Formulation and implementation merge into a fluid process of learning through which creativity evolves.
• The craftsman has an intimate knowledge of his/her work, capabilities and markets. In considering future prospects, they draw upon their past experiences. This knowledge is ‘tacit’–they sense rather than analyse these things.
• Similarly, effective corporate strategies also evolve through such a creative process. Strategists are craftsmen, who link corporate capabilities to future market opportunities. They use their past experiences, and bring to their work an equally intimate knowledge of the issues they deal with.

Tenets

Like potters at the wheel, organizations must make sense of the past if they hope to manage the future. Only by coming to understand the patterns that form in their own behavior do they get to know their capabilities and their potential. Thus crafting stategy, like managing craft, requires a natural synthesis of future, present and past. Mintzberg (1987)

1. Strategies are both plans for the future and patterns from the past.
2. Strategies need not be deliberate—they can also emerge, more or less.
3. Effective strategies develop in all kinds of strange ways.
4. Strategic reorientation² happen in brief, quantum leaps.
5. Managing strategy is to craft thought and action, control and learning, stability and change.

The following thoughts on crafting strategy are based on Mintzberg (1987).

Plans for the future and patterns from the past

The term ‘strategy’ is used as much to explain past behavior (pattern in actions over time, or realized strategy) as to describe intended behavior (the plan). A plan need not necessarily produce a pattern. So too, a pattern need not result from a plan.

Strategies need not be deliberate – they can also emerge, more or less

The interplay of strategy formulation and implementation: A realized strategy can be the result of a deliberate process involving formulation followed by successful implementation. However, it can also emerge as an adaptive response to evolving circumstances.

When planned intentions fall short of achieving desired outcomes, organizations may find themselves with unrealized strategies. This can be attributed to challenges in implementation, but it may also stem from the belief that strategies should be strictly planned rather than allowed to evolve gradually through an organization’s actions and experiences.

The synergy of thought and action: Similar to how skilled craftspeople seamlessly blend thought and action in their craft, organizations should not separate the aspects of ‘thinking’ and ‘doing’ in strategy.

Strategy is deeply intertwined with the day-to-day operational details of running an organization. Effective strategy does not exist in isolation but is deeply embedded in the organizational context.

Balancing control and adaptation

Purely deliberate strategy formulation can limit an organization’s ability to learn and adapt once the strategy is set in stone. In contrast, emergent strategy allows for ongoing adaptation but may risk losing control.

Achieving effective strategy making requires a balance between learning and responsiveness on one hand and maintaining a level of control on the other. Therefore, in practice, strategy making often blends deliberate and emergent strategies to strike this balance.

Effective strategies develop in all kinds of strange ways

Effective strategies can take shape through a variety of unconventional and unexpected paths. There is no one-size-fits-all approach to strategy development.

Surprising as it may seem, errors can transform into opportunities, limitations can ignite creativity, and even moments of boredom can lead to significant strategic change.

Empowering strategy development from the bottom up

Often strategies originate at lower organizational levels, nurtured by individuals with both technical expertise and a deep understanding of the on-ground realities. With the right resources and a capacity for learning, these locally generated strategies evolve into collective and organizational approaches.

These grass-roots strategies are particularly prevalent in businesses that require a high degree of expertise and creative thinking. In these organizations, strategy development is not confined to boardrooms but is embraced at all levels. Technical experts who are intimately familiar with the business’s intricacies play a central role in shaping the strategies that drive success.

Strategic reorientations happen in brief, quantum leaps

Strategic reorientation often manifest as abrupt and significant transformations, challenging the traditional perspective that change in an organization should be continuous.

While conventional wisdom suggests continuous adaptation, strategy inherently seeks to establish stability. Organisations pursue a given strategic orientation for most of the time, as they achieve success not by changing strategies, but by exploiting the ones they have. However, when that strategic orientation grows out of sync with its environment over time, revolutionary change must take place. The organisation quickly alters many of its established patterns, as it tries to leap/shift to a new position of stability.

A crucial aspect of strategy-making is navigating the delicate equilibrium between preserving stability and responding to external changes.

To manage strategy, then, is to craft thought and action, control and learning, stability and change

Strategists are not only planners or visionaries; they are also learners and pattern recognisers. They manage a process in which strategies/visions can emerge as well as be deliberately conceived. They are open minded, sensitive to experience and learn about their organisations/industries through personal involvement.

Capabilities

Knowing the business,
managing stability,
managing patterns,
detecting discontinuity,
and reconciling change and continuity (Mintzberg 1987)

Know the business

Strategic thinking relies on a deep understanding of the business and the creativity to harness that knowledge. Those with this expertise often notice things others miss and seize emerging opportunities.

Manage stability

Managing strategy primarily involves maintaining stability within the organization, rather than constantly pushing for change. It’s crucial to spend time making the current strategy work effectively.

Instead of fixating on change, it’s more important to know when change is necessary. An excessive focus on change can be counterproductive and disrupt the organization’s balance.

Manage patterns

Effective strategy management hinges on the ability to identifying trends and patterns in organizational behavior and performance — using past experiences to inform future decisions and strategies.

Some patterns may need careful monitoring until their impact becomes clearer, helping decide whether to make them part of the deliberate strategy.

Detect discontinuity

Most changes are small and temporary, requiring no major strategic response. Significant environmental changes that demand attention are infrequent but can be identified.

The real challenge lies in spotting subtle, unexpected shifts that could threaten the organization’s future. This calls for foresight and active involvement to recognize these irregular changes.

Reconcile change and continuity

Managers should aim to strike a balance between change and continuity. An excessive fixation on either can harm the organization in the long run.

New patterns should be held in check until the organization is prepared for a significant strategic shift. Moreover, understanding past experiences is essential for navigating the future effectively. Crafting strategy, much like managing a craft, involves synthesizing the past, present, and future.

Conclusions

Strategies have a life cycle, which is coined by waves of change and continuity.

Thus, a strategy cannot be a fixed plan, or being updated at a predetermined time.

Overall, the dichotomy between formulation (with a focus on the strategy-maker) and implementation (with a focus on the subordinates who implement) makes little sense (Mintzberg 1978).

Following his theoretical and empirical observations, Mintzberg (1978) concludes that

1. strategies have a life cycle spanning from its conception, elaboration, decay, and death; and
2. there are periodic waves of change and continuity within the life cycle.

Thus, the assumptions of planning theory that a strategy-maker “formulates” a strategy, while the subordinates implement are often proved false (Mintzberg 1978):

1. The formulator is fully informed
2. The environment is sufficiently stable, or at least predictable. Thus, there will be no need for reformulation during implementation.

Consequently, a strategy cannot be a fixed plan, nor does it change systematically at a predetermined time solely at the will of management (e.g., as a result of strategy deviations). Similarly, contingency planning, a popular prescription in times of environmental turmoil, can be risky because plans can tend to come to fruition whether they are needed or not. And so sometimes it can also be risky to make strategy explicit, especially in an uncertain environment with a dominant organizational operating system tending towards stability (Mintzberg 1978).

Mintzberg (1978) instead highlights that strategy formation is not a one-size-fits-all process. Rather, it involves various approaches and patterns, including entrepreneurial, adaptive, planning, and logical incrementalism.

• Entrepreneurial approach: Strategy emerges from a single visionary leader.
• Adaptive approach: Strategies evolve incrementally in response to changing circumstances.
• Planned approach: Formal strategic planning processes drive strategy formulation.
• Logical incrementalism: A blend of planning and adaptation, where strategies develop incrementally.

Consequently, strategy formation is not limited to formal processes or boardroom decisions. Informal interactions, serendipity, and learning from experience play a significant role. Likewise, aligning organizational actions with formulated strategies can be complex and may require ongoing adjustment.

Strategists are not only planners or visionaries; they are also learners and pattern recognisers. They manage a process in which strategies/visions can emerge as well as be deliberately conceived. They are open minded, sensitive to experience and learn about their organisations/industries through personal involvement.

Review and consolidation

The following questions are designed to review and consolidate what you have learned and are a good starting point for preparing for the exam.

• How do good strategies differ from bad strategies?
• What do the hallmarks of a good strategy imply for the strategic management process?
• Why does Mintzberg speak of strategy formation or crafting rather then strategy formulation?
• Why and how does cognition play a significant role in strategy formation?
• What is the role of informal processes in strategy formation? Can you provide examples from real-world organizations where strategies emerged through informal interactions or learning from experience?
• How might the patterns of strategy formation affect the execution of strategies within organizations?
• Why can it be assumed that a purely emergent strategy is as rare as a purely intentional strategy?
• What do the tenets of seeing strategic management as an art and craft imply for strategic management?
• Discuss the following statement: Strategy seldom comes out of a structured process. It’s a mix of deliberate and emergent strategies and in practice in management learning by doing often is more important than planning. What does it imply for the process and the capabilities required to craft effective strategies?
• Firms that are successful in making high-quality strategic decisions on a frequent basis have following capabilities: (1) building collective intuition that enhances the ability of top management to spot threats/opportunities sooner and more accurately; (2) stimulating quick conflict to improve the quality of strategic thinking without sacrificing significant time; and (3) defusing political behavior that creates unproductive conflict and wastes time. Why are these capabilities critical for effectively crafting successful strategies? Having a look at Eisenhardt (1999) will help to answer the question.
• The “Honda Effect” is a term often used to describe the business success and impact of the Japanese automaker Honda in the United States, particularly during the 1970s and 1980s (e.g., in Pascale (1996)). Research on that effect and explain the difference views of strategy that manifested in the approaches of American and Japanese automakers at the time.

Homework

Read Barnett and Salomon (2012) and make notes on following questions:

• What are the primary objectives of Barnett and Salomon’s study regarding CSR and financial performance?
• How do the authors measure CSR and financial performance in their study?
• What are the main findings of the study regarding the relationship between CSR and financial performance?
• Were there any unexpected or counterintuitive results in the research findings? How do these findings contribute to the understanding of CSR in strategic management?
• How can the findings of this study inform strategic management practices?

Q&A

Literature

Barnett, Michael L, and Robert M Salomon. 2012. “Does It Pay to Be Really Good? Addressing the Shape of the Relationship Between Social and Financial Performance.” Strategic Management Journal 33 (11): 1304–20.

Eisenhardt, Kathleen M. 1999. “Strategy as Strategic Decision Making.” MIT Sloan Management Review 40 (3): 65.

Mintzberg, Henry. 1978. “Patterns in Strategy Formation.” Management Science 24 (9): 934–48.

———. 1987. “Crafting Strategy.” Harvard Business Review, 66–75.

Mintzberg, Henry, and James A Waters. 1985. “Of Strategies, Deliberate and Emergent.” Strategic Management Journal 6 (3): 257–72.

Pascale, Richard T. 1996. “The Honda Effect.” California Management Review 38 (4): 80–91.

Rumelt, R. 2011. Good Strategy/Bad Strategy: The Difference and Why It Matters. Profile.

Rumelt, Richard P. 2012. “Good Strategy/Bad Strategy: The Difference and Why It Matters.” Strategic Direction 28 (8).

Footnotes

1. Entertainment or writing perceived as trivial or superficial.

2. Strategic reorientation means that organizations may undergo rapid and substantial changes in their strategic direction in response to major internal or external events, such as market disruptions, technological advancements, or shifts in leadership. These quantum leaps can be seen as moments when an organization fundamentally rethinks and realigns its strategy to better fit its environment or to capitalize on new opportunities.