Strategy Formation

Strategy and Performance Management

Andy Weeger

Neu-Ulm University of Applied Sciences

July 22, 2025

Learning objectives

After this section, you should have a solid understanding of

• how strategies do seem to be made;
• 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;
• and implications of seeing strategizing as interplay between action and ideas for the strategic management process.

Prologue

Good strategy

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)

Reflection

Turn to your neighbour and 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.

05:00

Hallmarks of 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.

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.

The hallmarks reflect the fundamental structure of good strategy, which always involves the same core approach: discover the crucial factors in a situation and design a way to coherently coordinate and focus actions to deal with them.

The kernel of good strategy

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.

Good strategies have a basic underlying structure that R. P. Rumelt (2012) calls “the kernel”:

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.

This kernel is present in all good strategies, regardless of context or industry.

Hallmarks of 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;
• and fluff.

Poor strategy 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. Failure to identify and analyse obstacles leads merely to stretch goals/budgets/wish lists.

Mistaking goals for strategy: it is important to distinguish between goals and the strategy used to achieve them. The job of a leader is to have a strategy that focuses effort on achieving the goal.

Bad strategic objectives: fuzzy strategic objectives manifest as long lists of things to do, mislabelled as strategies, or ‘blue sky’ restatements that don’t identify ‘how’ to get there. Good strategy works by focusing energy and resources on one/very few pivotal objectives.

Fluff: poor strategy often characterized by superficial abstraction — restatement of the obvious combined with buzzwords that masquerade as expertise.

Reasons for poor strategy

Poor strategy has many roots, but according to R. P. Rumelt (2012) the key ones are:

The inability to choose
and template-style planning

Inability to choose: strategy means focus and therefore choice. Choice means that some goals are set aside in 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.

Template-style planning: 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.

Implications for strategy formation

The analysis of good vs. poor strategy reveals critical requirements for effective strategy formation:

If good strategy requires diagnosis, guiding policy, and coherent actions, then strategy formation must enable deep understanding, creative problem-solving, and coordinated implementation.

Traditional planning approaches often lead to poor strategy because they emphasize process over insight and templates over understanding.

Implications for strategy formation

Implications for diagnosis:

• Strategy formation must enable deep understanding of the situation
• Need processes that uncover critical issues rather than superficial symptoms
• Requires intimate knowledge of business, markets, and competitive dynamics
• Must avoid template-driven approaches that miss unique situational factors

Implications for guiding policies:

• Strategy formation must facilitate creative problem-solving
• Need to generate innovative approaches to overcome identified challenges
• Requires balancing analysis with intuition and creativity
• Must enable difficult choices and trade-offs

Implications for coherent actions:

• Strategy formation must ensure coordination between different initiatives
• Need to connect high-level strategy with operational implementation
• Requires integration of multiple organizational levels and functions
• Must avoid fragmented, uncoordinated activities

Weaknesses of traditional planning

Process over insight

• Focus on following planning procedures rather than generating genuine insights
• Emphasis on completing planning steps rather than understanding the situation
• Risk of going through motions without achieving strategic breakthrough

Templates over understanding

• Reliance on standard frameworks rather than situation-specific analysis
• “Fill-in-the-blanks” mentality that misses unique aspects of the challenge
• Generic solutions that don’t address specific organizational circumstances

Formulation vs. implementation separation

• Artificial separation between strategy development and execution
• Strategy developed in isolation from operational realities
• Implementation problems not anticipated during strategy formation

Top-down assumption

• Assumption that strategy must originate from top management
• Ignores valuable insights from operational levels
• Misses emergent opportunities and local innovations

These limitations suggest need for more sophisticated understanding of how strategies actually form in practice.

Strategy formation

Case study: Netflix’s strategy journey

Before diving into theory, let’s examine how strategy actually unfolds in practice.

Netflix’s journey

• 1997–2006: DVD rental by mail + subscription model → profitability by 2003
• 2007: Launched streaming (“Watch Now”) — was this in the 1997 plan?
• 2011: Qwikster disaster (separating DVD/streaming) → reversed after customer backlash
• 2013: Original content (House of Cards) using data insights — planned or discovered?
• 2016–2025: Global expansion with localized hits (Money Heist, Squid Game)

Further reading:

• Timeline of Netflix — Wikipedia
• Case Study: Netflix’s Transition from DVD Rental to Streaming
• International expansion of Netflix — Wikipedia

Netflix’s strategic journey illustrates how organizational strategies actually develop in practice, rather than following textbook planning models.

The founding vision (1997)

Netflix was founded with a clear intent: revolutionize video rental through convenience and customer experience. The subscription model (unlimited rentals, no late fees) was a deliberate strategic choice that differentiated them from Blockbuster’s pay-per-rental model.

Technology-driven evolution

The shift to streaming in 2007 represented strategic foresight—Netflix leadership anticipated that internet bandwidth would eventually support video streaming. This wasn’t opportunistic; it was a planned evolution of their “convenient home entertainment” mission.

Unexpected strategic turns

Several major strategic elements were not in any original plan: (1) Original content production emerged as a response to an unforeseen threat: studios and networks began pulling content from Netflix to launch their own streaming services. The decision to produce House of Cards (2013) was informed by data analytics showing viewer preferences, but the strategy of becoming a major content studio wasn’t part of the 1997 vision; (2) The Qwikster failure (2011) demonstrated strategic learning through failure. Netflix attempted to separate its DVD and streaming businesses, but reversed course within weeks after severe customer backlash. This shows strategy adapting based on market feedback; (3) Localized content strategy evolved through experimentation and learning in international markets. Shows like Money Heist (Spain) and Squid Game (South Korea) weren’t dictated by U.S. headquarters but emerged from understanding local markets.

The paradox

Netflix needed both planning (streaming infrastructure, global expansion) AND adaptation (content production, market-specific strategies). A rigid adherence to their 1997 plan would have left them as a declining DVD rental company. Pure reactive opportunism without strategic intent would have led to scattered, unfocused efforts.

This case raises the question: How do we conceptualize strategy formation when it includes both intended plans and adaptive responses?

Reflection

What can we learn from the Netflix case?

In pairs, discuss:

1. Which strategic moves do you think were in Netflix’s original 1997 business plan? Which ones probably weren’t?
2. For the moves that weren’t originally planned: How do you think they came about?
3. If Netflix had made a rigid 5-year plan in 1997 and stuck to it religiously, what would they have missed?

Be ready to share one example.

07:00

Insights from Netflix

Netflix’s success came from having clear strategic direction (subscription model, customer focus) while remaining open to strategic adaptation (streaming timing, content production, global localization).

This pattern—strategic intent + adaptive execution—is at the heart of effective strategy formation.

The Netflix case reveals a fundamental characteristic of successful strategy formation: the interplay between intention and emergence.

Strategic intent

• Direction: Clear focus on dominating home entertainment through superior customer experience
• Coherence: All decisions filtered through lens of “Does this serve our mission?”
• Resource allocation: Knowing where to invest (technology, content, user experience)

Adaptive execution

• Responsiveness: Ability to pivot when Qwikster failed
• Innovation: Discovering content production opportunity through data
• Learning: Understanding market-specific needs through experimentation

Planning and adaptation

Organizations that over-emphasize planning become rigid and miss opportunities (e.g., Blockbuster rejected streaming because it didn’t fit their retail store model). Organizations that under-emphasize planning become chaotic and lack competitive advantage (e.g., startups that pivot too frequently without learning).

The challenge for strategists is not choosing between planning and adaptation, but developing organizational capabilities to do both simultaneously. This requires:

• Clear strategic frameworks that provide direction without constraining learning
• Decision-making processes that balance analysis with experimentation
• Organizational cultures that value both discipline and flexibility
• Leadership that can articulate vision while remaining open to new information

This is what Mintzberg (1978) mean when they describe strategy formation as crafting rather than simply planning or formulating.

Strategy formation — 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).

In Netflix’s case: Streaming technology and competitor moves (environment) challenged their DVD distribution capabilities (operating system), requiring leadership to navigate between stability and change.

The three fundamental forces that drive strategy development are:

1. An environment that changes continuously but irregularly, with frequent interruptions and wide fluctuations in its rate of change;
2. An organizational operating system¹ (i.e., the established structures, processes, routines, and capabilities that organizations use to deliver value) 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 while ensuring its adaptation to changes in the environment.

Netflix example

• Environment: Rapidly changing technology (streaming), competitive threats (studios pulling content), global markets
• Operating system: DVD distribution infrastructure, then streaming infrastructure, then content production capabilities with distinct organizational characteristics
• Leadership: Reed Hastings mediating between need for stability (reliable service) and need for change (new business models)

The interplay between these elements explains why strategy formation is more complex than simple planning models suggest. You cannot simply “decide” on a new strategy and implement it. The environment constantly shifts, the organization resists change to maintain efficiency, and leadership must skillfully navigate these competing forces.

If strategy formation were just about planning, leadership could simply analyze the environment and issue directives. But because organizations have operating systems that resist change, and because environments shift unpredictably, strategy must emerge through a more nuanced process of continuous adaptation.

Given this complex reality of strategy formation, what types of strategies actually emerge from this process?

Three types of strategy

Intended strategies are plans developed before action; 
emergent strategies are patterns that develop without prior intention; and
realized strategies combine both deliberate and emergent elements

The strategy formation spectrum

The strategy formation spectrum

 

 

Strategy formation ranges along a spectrum from pure planning to pure adaptation:

Pure planning assumes you can predict and control everything.
Pure adaptation means just reacting without direction.

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

In this quote, Mintzberg challenges the fundamental assumption that strategies are deliberately planned and then implemented. The traditional planning model assumes:

1. The formulator is fully informed — but complete information is rarely available
2. The environment is sufficiently stable — but environments are often turbulent and unpredictable
3. Implementation follows formulation — but strategy often emerges through action

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

As a consequence, strategies are hardly deliberately planned and then implemented in reality. Instead, different types of strategies can be observed:

• Deliberate strategies are intended strategies that get realized exactly as planned.
• 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 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.

Understanding this spectrum helps explain why both purely planned strategies and purely emergent strategies are rare in practice.

Figure 2: The strategy formation spectrum

The one extreme: pure planning

Pure deliberate strategy would require:

• Perfect information about the environment
• Stable, predictable conditions
• Complete control over implementation
• No interference from competitors or external events

Example: Large construction projects come closest—you design a building completely before construction, with detailed blueprints. But even here, unexpected site conditions, material availability, and design modifications during construction introduce emergent elements.

Pure planning does not work in reality as …

• … markets and technologies evolve unpredictably;
• competitors take unexpected actions;
• customer preferences shift;
• internal capabilities prove different than anticipated;
• and new opportunities emerge that weren’t visible during planning.

The other extreme: pure emergence

Pure emergent strategy would require:

• No prior intentions whatsoever
• Complete flexibility to pursue any opportunity
• Pattern recognition without any guiding framework
• Organizational willingness to change direction constantly

Example: Some scientific discoveries happen this way—penicillin was discovered accidentally. But even accidental discoveries require some intentional framework (Fleming was intentionally researching bacteria).

Pure emergence does not work in reality as …

• without direction, resources get scattered;
• lack of focus prevents building competitive advantage;
• it is difficult to coordinate organizational action;
• hard to communicate strategy to stakeholders;
• and it may miss opportunities that require sustained investment.

Implications for strategic management

Understanding the spectrum between deliberate and emergent strategies reveals that most successful strategies blend both elements, but the balance point varies by context.

Strategic management must transform from a periodic planning exercise² into an ongoing organizational capability for sensing, adapting, and navigating complexity.

In reality, most successful strategies blend both deliberate and emergent elements, but where organizations should position themselves on the spectrum depends on their specific context:

High-planning contexts

Pharmaceuticals (long development cycles, regulatory requirements), aerospace (capital intensity, safety standards), infrastructure (coordination complexity). These industries can and should emphasize more deliberate planning due to long time horizons and high switching costs.

High-emergence contexts

Technology startups (rapidly changing markets, uncertain product-market fit), fashion (unpredictable trends, short cycles), entertainment (hit-driven, difficult to predict success). These industries must emphasize learning and adaptation due to high uncertainty.

Balanced contexts

Most established companies operating in moderately dynamic markets need significant capabilities in both planning and emergence.

The goal is not to find one “correct” point on the spectrum and stay there, but to develop organizational capability to adjust position based on circumstances. When the environment is stable and predictable, move toward planning. When the environment is turbulent and uncertain, move toward emergence. Most importantly, recognize that you need capabilities for both—simultaneously.

This understanding fundamentally transforms what strategic management is and how it must be practiced.

From periodic planning to continuous process

• Traditional approach: Annual strategic planning cycle
  (analyze → decide → implement → review → repeat)
• Required approach: Ongoing strategy formation that continuously integrates analysis with action
• Implication: Cannot relegate strategy to quarterly or annual planning sessions

From separation to integration

• Traditional approach: Strategy formulation (top management) separated from implementation (operational management)
• Required approach: “Making” strategy and “doing” strategy are intertwined—implementation generates strategic insights
• Implication: Cannot delegate strategy entirely to planning departments; requires involvement at all levels

From single-mode to dual-mode capability

• Traditional approach: Choose between planning-driven or learning-driven approach
• Required approach: Both top-down planning (strategic direction) and bottom-up emergence (strategic learning) have essential roles
• Implication: Need organizational processes that both impose direction (to avoid drift) and detect emergence (to avoid rigidity)

From control to navigation

• Traditional approach: Management controls strategy through decisions and resource allocation
• Required approach: Management navigates between intended and emergent strategies, recognizing when to persist and when to pivot
• Implication: The key managerial challenge is managing the interplay between intended and emergent strategies, not choosing one approach over the other

Strategy life cycles

Strategies have a life cycle marked by waves of change and continuity.

Strategy cannot be a fixed plan updated at predetermined times, and the dichotomy between formulation and implementation makes little sense (Mintzberg, 1978).

Strategies, like products or organizations, have a life cycle—they are born, elaborate, mature, decay, and eventually die or transform into something else.

Rather than smooth continuous evolution, strategies experience alternating periods, often refered to as waves:

• Periods of convergence/continuity: Focus on refining and improving the current strategic approach. Most organizational time is spent here—incrementally improving operations, extending into adjacent markets, optimizing processes. This is necessary for building capabilities and competitive advantage.
• Periods of divergence/change: Brief but crucial periods of strategic reorientation in response to major environmental shifts, competitive threats, or internal crises. These are the “quantum leaps” where fundamental strategic direction changes.

Strategy as craft

Given this reality, strategy formation is better understood as craft:

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 strategy, like managing craft, requires a natural synthesis of future, present and past. Mintzberg (1987)

Effective strategists integrate past patterns, present realities, and future intent through hands-on engagement.

The crafting metaphor captures the essential nature of strategy formation that we’ve explored:

An architect designs a building completely before construction begins, with detailed blueprints specifying every element. Construction follows the plan with minimal deviation. In contrast, a potter begins with general intent (a bowl, a vase), but shapes the clay continuously while working with it. The final form emerges through ongoing interaction between the potter’s vision and the clay’s properties.

Strategy formation is more like pottery—continuous interaction between strategic intent and organizational/market reality. The strategist cannot fully specify the outcome in advance but shapes it through ongoing engagement.

Critical capabilities

Capabilities for strategy crafting

Crafting effective strategies requires specific organizational capabilities that enable to navigate the interplay between deliberate planning and emergent learning.

Following capabilities directly enable the diagnosis, guiding policy, and coherent actions required for good strategy (Mintzberg, 1987):

Knowing the business, managing stability, managing patterns, detecting discontinuity, and reconciling change and continuity.

To craft strategy effectively—balancing deliberate planning with emergent learning—organizations and their leaders need to develop five critical capabilities:

Know the business intimately

Strategic thinking relies on deep understanding of the business and creativity to harness that knowledge. This goes beyond analytical knowledge to include:

• Intimate understanding of operations, markets, capabilities, and competitive dynamics gained through direct engagement
• Those with deep expertise often notice subtle patterns and opportunities that others miss
• This intimate knowledge enables proper diagnosis of critical issues (first element of good strategy kernel)

Manage stability effectively

Managing strategy primarily involves maintaining stability, not constantly pushing change:

• Most of the time should be spent making the current strategy work effectively (convergence periods)
• Organizations need to optimize and refine existing approaches before moving to new ones
• The skill lies in knowing when change is necessary versus when to persist with the current approach

Manage patterns proactively

Ability to identify trends and patterns in organizational behavior, market dynamics, and performance:

• Use past experiences to inform future decisions and strategies
• Monitor emerging patterns but don’t overreact to every fluctuation
• Distinguish between noise (temporary variations) and signal (meaningful trends)
• Wait until patterns and their implications become clearer before making major strategic decisions

Detect discontinuities

The real strategic challenge lies in spotting subtle, unexpected shifts that could fundamentally threaten or transform the organization:

• Most changes are small and temporary, requiring no major strategic response
• But some seemingly small changes signal fundamental discontinuities that require strategic reorientation (the “quantum leaps”)
• Requires foresight, active involvement, and ability to recognize irregular changes that break established patterns
• Must distinguish between changes that require adaptation within current strategy versus those requiring strategic reorientation

Reconcile change and continuity

The ultimate capability is striking the right balance between stability and change:

• Maintain core strategic direction while adapting tactical approaches
• Preserve what’s working while evolving what needs to change
• Understanding past experiences is essential for navigating the future effectively
• Synthesize past patterns, present realities, and future intent into coherent strategic direction

Summary

These five capabilities directly enable the kernel of good strategy:

• Knowing the business enables proper diagnosis of critical issues
• Managing patterns and detecting discontinuities inform the guiding policy by revealing what’s working, what’s changing, and where to focus
• Managing stability and reconciling change/continuity enable coherent actions that balance optimization with adaptation

Together, these capabilities allow leaders to craft strategy—continuously shaping strategic direction through hands-on engagement with organizational and market realities, rather than relying on periodic planning exercises or rigid formulas.

Netflix example

• Know the business: Netflix leadership’s deep understanding of both technology trends and customer viewing behavior enabled them to recognize streaming opportunity and content production needs
• Manage stability: Netflix leadership maintained focus on perfecting subscription model for years before major strategic shifts
• Manage patterns: Netflix leadership team recognized binge-watching as a meaningful pattern (not temporary behavior), which informed content release strategy
• Detect discontinuities: Netflix leadership recognized that studios pulling content was a discontinuity (not temporary), requiring fundamental strategic response (become content producer)
• Reconcile change and continuity: Netflix C-level maintained core intent (dominate home entertainment) while fundamentally changing business model (DVD → streaming → content production)

Decision-making capabilities

Beyond individual capabilities, organizations need collective capabilities for making high-quality strategic decisions quickly in uncertain environments.

Firms successful in fast strategic decision-making frequently have three capabilities (Eisenhardt, 1999):

Building collective intuition,
stimulating quick conflict,
and defusing political behavior.

While the previous capabilities focus on individual leaders’ skills in crafting strategy, organizations also need collective capabilities for making strategic decisions. According to Eisenhardt (1999), companies that excel at making high-quality strategic decisions quickly—particularly important when environments are dynamic and uncertain—consistently demonstrate three organizational capabilities:

Building collective intuition

Collective intuition is the ability of a management team to make quick yet sound decisions based on shared understanding of the business and industry:

• Relies on real-time information (not just historical data) and frequent interactions among decision-makers. Regular meetings where teams review operational metrics, competitive moves, and market signals create shared situational awareness.
• Teams can spot threats and opportunities sooner and more accurately because they have developed pattern recognition as a group, not just as individuals. They develop a “feel” for the business collectively.
• Enhances the organization’s ability to diagnose critical issues rapidly (supports the diagnosis element of good strategy). When everyone shares deep understanding, less time is spent explaining context and more time can be spent on strategic response.

Stimulating quick conflict

Quick conflict means encouraging multiple perspectives and vigorous debate while resolving disagreements rapidly through fact-based discussion:

• Deliberately generate multiple alternatives for every major decision. Assign devil’s advocate roles. Encourage dissenting views. But resolve conflicts through data and evidence, not politics or hierarchy.
• Improves quality of strategic thinking by exposing flaws and uncovering blind spots, but without the time cost of prolonged political battles. Teams consider more options and test assumptions more rigorously.
• Leads to better guiding policies because alternatives are thoroughly vetted. Balances the need for comprehensive analysis with speed of decision-making—critical when environments change rapidly.

Defusing political behavior

Defusing politics means preventing strategic decisions from being driven by personal agendas, power struggles, or coalition-building rather than what’s best for the organization:

• Create common goals and shared vision that align individual interests. Use humor and informal interaction to reduce tension and build trust. Make decision criteria explicit and transparent. Focus on facts over opinions.
• Avoids unproductive conflict that wastes time and fragments action. Keeps focus on strategic issues rather than personal agendas or departmental turf battles. Enables honest discussion of difficult strategic choices.
• Enables coherent actions because decisions are made based on organizational needs rather than political compromises. Prevents the “inability to choose” problem where organizations try to satisfy all constituencies and end up with unfocused strategy.

Summary

These three capabilities address fundamental challenges in strategy formation:

1. Enable effective information processing: In uncertain, fast-moving environments, organizations need to process information quickly and accurately. Collective intuition accelerates this. Quick conflict improves it. Defusing politics prevents distortion.
2. Lead to better decisions faster: Speed and quality are both essential—slow decisions miss opportunities; fast but poor decisions create bigger problems. These capabilities enable both simultaneously.
3. Avoid common pitfalls: Organizations often suffer from either analysis paralysis (too much deliberation, too little action) or political paralysis (too much infighting, too little focus). These capabilities prevent both extremes.
4. Enable ongoing adaptation: Since strategy formation is continuous (not periodic), organizations need decision-making capabilities that can be exercised repeatedly and quickly. These capabilities become organizational routines, not one-off planning exercises.

Netflix example

• Building collective intuition: Netflix leadership team’s regular reviews of viewing data, content performance, and subscriber metrics built collective intuition about what content would work, enabling faster decisions about content investments.
• Stimulating quick conflict: Netflix’s culture of “informed captains” encourages debate and dissent but requires decisions to be made based on data and evidence, enabling both thorough consideration and rapid execution.
• Defusing political behavior: Netflix’s emphasis on organizational mission (great entertainment experience) over individual unit goals helped prevent political battles between DVD and streaming divisions during the transition period.

Conclusions

Synthesis

Strategy formation should be understood as an organizational capability.

Effective strategy formation transforms strategic management from a periodic planning exercise into a continuous organizational capability for navigating complexity.

The five tenets of strategy formation:

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 reorientation happens in brief, quantum leaps
5. Managing strategy is to craft thought and action, control and learning, stability and change

Core insights

• Real strategies combine deliberate plans with emergent patterns. Strategy formation is continuous—involving waves of convergence (refining strategy) and divergence (reorientation)—not a linear plan-implement-evaluate cycle. Formulation and implementation are inseparable: action reveals opportunities that planning cannot anticipate.
• Strategy formation is better understood as craft than planning. Like a potter shaping clay, strategists continuously shape strategy through hands-on engagement, integrating past patterns, present realities, and future intent. This requires both analytical capabilities (frameworks, data) and craft capabilities (pattern recognition, judgment, intuition).
• Critical individual capabilities (Mintzberg, 1987): Know the business intimately; manage stability; manage patterns; detect discontinuities; reconcile change and continuity.
• Critical collective capabilities (Eisenhardt, 1999): Build collective intuition; stimulate quick conflict; defuse political behavior.

Implications

Strategic management must shift from:

• Periodic to continuous processes
• Separation to integration of formulation and implementation
• Single-mode to dual-mode (planning AND learning)
• Control to navigation between intended and emergent strategies
• Universal models to context-dependent approaches

The Netflix case illustrates these principles: clear strategic intent combined with adaptive execution; planning capabilities combined with learning capabilities; stability combined with change. Success came from the organizational capability to craft strategy through continuous interplay of deliberate and emergent elements.

Key takeaways

• Good strategy requires clear diagnosis, guiding policy, and coherent actions—not just goals or templates
• Deliberate and emergent strategies both play important roles; purely deliberate or emergent strategies are rare
• Strategy formation is continuous—marked by waves of convergence and quantum leaps of divergence
• The spectrum ranges from pure planning to pure emergence; most effective strategies fall in between
• Crafting perspective views strategy as requiring skill, experience, and pattern recognition—not just planning
• Individual capabilities: knowing business, managing stability/patterns, detecting discontinuities, reconciling change/continuity
• Collective capabilities: collective intuition, quick conflict, defusing political behavior
• Integration needed between planning and learning, formulation and implementation, thought and action

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 than 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

1. Listen to the Decoder Episode with Philips CEO Roy Jakobs and take notes on Philips’ organisational structure.

2. Read Lorenz & Buchwald (2023) and make notes on following questions:

   1. What is the difference between a Chief Digital Officer and a Chief Information Officer?
   2. What are their main responsibilities?
   3. How do CDOs and CIOs work together to develop digital projects and align them with the company’s overall strategy?
   4. What is structural ambidexterity and how does it relate to the CIO and CDO roles?

Q&A

Literature

Eisenhardt, K. M. (1999). Strategy as strategic decision making. MIT Sloan Management Review, 40(3), 65.

Lorenz, F., & Buchwald, A. (2023). A perfect match or an arranged marriage? How chief digital officers and chief information officers perceive their relationship: A dyadic research design. European Journal of Information Systems, 32(3), 372–389.

Mintzberg, H. (1978). Patterns in strategy formation. Management Science, 24(9), 934–948.

Mintzberg, H. (1987). Crafting strategy. Harvard Business Review, 66–75.

Pascale, R. 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, R. P. (2012). Good strategy/bad strategy: The difference and why it matters. Strategic Direction, 28(8).

Footnotes

1. The term “organizational operating system” can be understood as analogous to a computer’s OS—it’s the underlying infrastructure that makes everything work. In organizations, this includes: formal structures (hierarchies, departments, roles); established processes (how decisions are made, how work flows); core capabilities (what the organization knows how to do well); and cultural norms (unwritten rules about “how we do things here”). Just as a computer OS resists frequent changes to maintain stability, organizational operating systems naturally
   resist change even when the environment demands it. This creates inherent tension in strategy formation.

2. The planning exercise usually involves performing analysis, making decisions, implementing plans, evaluating results and repeating this linear process.