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;
• how strategy can be understood as an interplay between actions and ideas, and between experience and inspiration;
• and implications 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, 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 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

Reflection

In groups of four, reflect on and consolidate your insights from reading Mintzberg (1978).

Your task:

1. Review the summary of Netflix’s strategic journey (below) and extend it with your insights.
2. Identify the major strategic shifts and classify each as deliberate, emergent, or mixed strategy.
3. Consider the limits of traditional planning: Which strategic actions in 2005 or 2010 would a classic 5-year plan likely have overlooked?
4. Detect Netflix’s “crafting” capabilities.
5. Decide which of these “crafting” capabilities was most critical to Netflix’s success — justify your choice with evidence.
6. Prepare a short presentation with one concrete example showing how Netflix’s success resulted from strategic crafting rather than traditional long-range planning.

Summary of Netflix journey

1. 1997–2006: DVD rental & subscription model → profitability by 2003.
   
2. 2007–2012: Launch streaming (“Watch Now”), cloud migration after 2008 failure, streaming > DVDs by 2009.
   
3. 2013–onwards: Originals (House of Cards, Orange Is the New Black), data-driven content strategy.
   
4. 2010–2025: Global rollout (Canada → LatAm → 190+ countries), localized hits (Money Heist, Dark).
   
5. 2012–onwards: Own CDN (Open Connect), advanced personalization & recommendations.

Further reading:

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

Defintion

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 while ensuring its adaptation to changes in the environment.

This interplay explains why strategy formation is more complex than simple planning models suggest - it must navigate competing forces of stability and change.

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

Output — two types of strategy

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

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.

This 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

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.

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

For purely deliberate strategies, precise intentions need to be articulated before action, these need to be known by all organizational actors and to be collectively carried out exactly as intended, without external interference. For purely emergent strategies, there need to be order and consistency without any intention anywhere in organization, which is hard to imagine action without intention somewhere. Thus, most effective strategies blend deliberate and emergent elements.

Understanding that strategies can be both intended and emergent, how should managers approach the strategy formation process?

Process — the crafting metaphor

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).

The crafting metaphor addresses the limitations identified in poor strategy analysis:

• Deep understanding comes from hands-on experience, not just analysis
• Innovations emerge through experimentation and adaptation
• Coordination achieved through ongoing adjustment rather than upfront planning

• Craft involves intimate knowledge of materials (business, markets, capabilities) — a craftsman senses rather than just analyzes (i.e., tacit knowledge development); deep understanding comes from hands-on experience, not just analysis
• Craft involves creativity evolving through practice — formulation and implementation merge into fluid learning process; innovations emerge through experimentation and adaptation
• Craft integrates thought and action, planning and doing — coherent actions emerge through iterative refinement; coordination is achieved through ongoing adjustment rather than upfront planning

This suggests strategy formation is more art than science, requiring skill, experience, and continuous learning.

Tenets of strategy crafting

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)

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

These tenets directly address how to avoid poor strategy and enable good strategy formation (Mintzberg, 1987):

Plans and patterns integration

• Avoids “mistaking goals for strategy” by recognizing that realized strategy includes both intentions and emergent patterns
• Strategy formation must pay attention to what actually happens, not just what is planned

Deliberate and emergent balance

• Addresses “inability to choose” by recognizing that some choices emerge through experience
• Balances planning with learning and adaptation
• Enables strategy to adapt to new information and changing circumstances

Strange ways of development

• Counters “template-style planning” by recognizing that effective strategies often emerge through unexpected paths
• Encourages bottom-up strategy development from those with technical expertise
• Values innovation and experimentation over rigid adherence to plans

Quantum leaps in reorientation

• Recognizes that organizations need both stability and change
• Strategic reorientation happens in brief periods of revolutionary change
• Balance between convergence (stability) and upheaval (transformation)

Crafting multiple dimensions

• Integrates thought and action (avoids formulation/implementation separation)
• Balances control and learning (planning with adaptation)
• Manages stability and change (continuity with innovation)

These tenets provide the philosophical foundation, but what specific capabilities do managers need to craft strategy effectively?

Critical capabilities

Capabilities for strategy crafting

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

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

Know the business

• Strategic thinking relies on deep understanding of business and creativity to harness knowledge
• Those with expertise often notice things others miss and seize emerging opportunities
• Intimate knowledge enables identification of critical issues

Manage stability

• Managing strategy primarily involves maintaining stability, not constantly pushing change
• Crucial to spend time making current strategy work effectively
• Know when change is necessary vs. when to persist with current approach

Manage patterns

• Identify trends and patterns in organizational behavior and performance
• Use past experiences to inform future decisions and strategies
• Monitor patterns until impact becomes clearer for strategy decisions

Detect discontinuity

• Most changes are small and temporary, requiring no major strategic response
• Real challenge lies in spotting subtle, unexpected shifts that could threaten organization
• Requires foresight and active involvement to recognize irregular changes

Reconcile change and continuity

• Strike balance between change and continuity
• Understanding past experiences essential for navigating future effectively
• Crafting strategy requires synthesizing past, present, and future

Decision-making capabilities

Firms successful in making high-quality strategic decisions frequently have three capabilities: collective intuition, quick conflict, and defusing political behavior (Eisenhardt, 1999).

According to Eisenhardt (1999), following capabilities enable organizations to avoid poor strategy formation as they:

• Enable effective information processing in uncertain environments
• Lead to better decisions faster than competitors
• Avoid paralysis from either too little analysis or too much politics
• Enable ongoing strategic adaptation

Building collective intuition

• Enhances ability to spot threats/opportunities sooner and more accurately:
• Relies on real-time information and frequent meetings
• Creates shared understanding of business and industry dynamics
• Enables rapid recognition of strategic issues (supports diagnosis)

Stimulating quick conflict

• Improves quality of strategic thinking without sacrificing time:
• Encourages multiple alternatives and devil’s advocate roles
• Uses fact-based discussion to resolve conflicts quickly
• Balances comprehensive analysis with speed (supports guiding policy development)

Defusing political behavior

• Avoids unproductive conflict and wasted time
• Creates common goals and shared vision
• Uses humor and informal interaction to reduce tension
• Maintains focus on strategic issues rather than personal agendas (enables coherent actions)

Conclusions

Strategy formation reality

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 and the dichotomy between formulation and implementation makes little sense (Mintzberg, 1978).

The assumptions of planning theory are often proved false because (Mintzberg, 1978):

1. The formulator is not fully informed
2. The environment is not sufficiently stable or predictable
3. Strategies have a life cycle spanning from conception, elaboration, decay, and death
4. There are periodic waves of change and continuity within the life cycle

Consequently, the dichotomy between formulation (strategy-maker focus) and implementation (subordinate focus) makes little sense because strategy formation involves various approaches and patterns, not just formal planning processes.

Implications

Strategy formation insights suggest integration of planning and learning, pattern recognition capabilities, and balanced organizational capabilities.

1. Formal planning (formulation) and emergent learning (implementation) need to be integrated and deliberate intentions with adapted responses balanced.
2. Strategists are craftspeople, not just planners or visionaries. They manage process where strategies can emerge as well as be deliberately conceived, remain open-minded, sensitive to experience, and learn through personal involvement.
3. Organizationas need to develop capabilities to recognize and interpret strategic patterns — the need to monitor actions for emergent strategic directions and be able to distinguish meaningful trends from temporary fluctuations.
4. Leadership needs to emphasize collective intuition and quick conflict resolution as well as defuse political behavior that impedes strategic thinking.
5. There is no one-size-fits-all model for strategy formation. Different situations call for different approaches to strategy formation. Thus, approaches need to adapt to organizational context and environmental conditions.

This understanding transforms strategic management from a mechanical planning process into a dynamic capability for navigating complexity and uncertainty.

Key takeaways

• Good strategy requires clear diagnosis, guiding policy, and coherent actions - not just goals or templates
• Strategy formation must enable deep understanding, creative problem-solving, and coordinated implementation
• Traditional planning limitations often lead to poor strategy through emphasis on process over insight
• Deliberate and emergent strategies both play important roles; purely deliberate or emergent strategies are rare
• Crafting perspective views strategy as art requiring skill, experience, and pattern recognition rather than just planning
• Strategic capabilities for high-quality decision-making include collective intuition, quick conflict, and defusing politics
• Integration needed between planning and learning, formulation and implementation, rather than artificial separation

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 Peteraf (1993) and make notes on following:

1. Define the Resource-Based View (RBV) — how does it differ from other strategy perspectives?
2. Identify key resource types (tangible, intangible, human) and give examples from the paper.
3. Explain resource heterogeneity — why is it central to competitive advantage in RBV?
4. Explain resource immobility — how does it support sustained advantage?
5. Define dynamic capabilities — how do they enable adaptation and innovation?
6. Link resources to value creation — how do they drive advantage for customers?
7. Explain performance differences — why do some firms consistently outperform others?
8. Derive implications for strategy — how should firms apply RBV to compete effectively?

Q&A

Literature

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

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.

Peteraf, M. A. (1993). The cornerstones of competitive advantage: A resource-based view. Strategic Management Journal, 14(3), 179–191.

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).