Strategy as Coherence: a paradigm for the governance of Strategic Risk
By far the greatest challenge in managing Strategic-Risk is that ‘Risk’ has received most of the attention; and yet, ‘Strategy’ is at the heart of the problem and constitutes the truly significant term in the Strategic-Risk compound. The two terms, in fact, sit uncomfortably together: they reach solutions following distinct heuristics — one qualitative, the other quantitative. Given the nature of the problem as outlined earlier, it could be argued that Strategic Risk is a misnomer, were it not for the fact that the solution is one that transits from significant uncertainty that escapes modelling, to informed uncertainty that allows for the structuring of choice and future commitments.
As decision-makers turn to Strategy, though, they struggle with the ineffectiveness of the dominant paradigm as embedded in organisations and their governance systems. Despite advances in the theoretical understanding of Strategy towards more dynamic and resource based models, the paradigm of Strategy dominating organisational cultures and systems, that structures mindsets, behaviours and activities, derives from industrial processes, typified by the American manufacturing corporation: determination of aspirational objectives, mostly financial and short-term, and articulation of a plan on which to invest resources and align efforts. The strategic ‘plan’ is an operational device with which conceptually lazy organisations seek to transform a challenging, discursive and dynamic process of reflection, insight and choice into an object.
The effect is a dangerous concentration of commitment on the assumptions that underpin the plan and in the activities that support achieving an organisational goal. This Strategy paradigm assumes stability over time in the business environment and in the firm’s identity and purpose, and seeks to maximise efficiency by leveraging scale, hierarchy and rigid control systems. It fosters a governance bias for stability, consistency and compliance. It is a paradigm fundamentally at odds with structural, rapid and random changes in the nature and dynamics of social experience and of the Context of business in particular, and, consequently, with changes in the nature of the business firm and in the needs and expectations of customers and other agents. The practice of Strategy it fosters is ineffective in supporting governance systems that are called to determine relevance, resolve uncertainty, effect renewal, and thus weakens the determination to address Strategic Risk and the possibility of managing it effectively over time.
A conceptual architecture is called for that can establish and help apply a diffused risk-taking rationale that does not threaten the resilience of the organisation, but in fact enhances it by managing structural shifts in the Context to generate consistent competitive advantage. This framework must enable the decision-makers to be creative and entrepreneurial, and therefore allow them to take on more risk than they typically might do, whilst being rigorous in applying the discipline of good, prudent business management. A simple rationale must be embedded that will harness renewal efforts with a discipline of decision-making informed by relevance, intelligence and ongoing learning that eventually will lead to the design of new forms.
Strategy is an intellectual pursuit demanding critical thinking, interpretive effort and creative capability. Furthermore, negotiating the rationale for action in human systems is a complex political activity, and to that extent essentially a process of social learning. Strategy emerges from an iterative negotiation of differences, is pragmatic in recognising contingency, fluid in responding to its constraints and reflective in generating meaningful and effective responses: it demands critical questioning of the Self and its status in time. That interrogation engenders recognition of the degree to which any adjustment made to the Self, in order for that entity to be resilient and successful, calls for access to relevant externalities: what ‘out there’ matters? How and when will it change? What do I need to change of myself to survive and thrive? Where do I find the resources to do so? And what models should I design and graft my new Self into?
In the process of Strategy there is an underlying richness of elements and a dynamic complexity that needs reducing to furnish decision-makers with a strong hold on the overarching concern. Strategy can be “made” simple by resolving its complexity in terms of a system’s view, which allows us to think of it as:
the activity by which human systems establish and manage a coherent relationship between who they are and why they are there, and their environment or context.
Any agent that has a will to be is at play in a Context, with respect to which it seeks to maximise its purpose — to last in time and to do so meaningfully. On account of this intent it interprets the nature and dynamics of the Context and understands the value of its own position with respect to it. As the Context changes, so must the agent, to adapt and better leverage the new configuration.
The abstract system’s view, of what is fundamentally a relational dynamic, empowers a cognitive appreciation of what is essential to the problem of Strategy and Strategic-Risk, and thus structures our approach to it, ultimately allowing us to effectively solve it: a human system needs to be coherent with Context and its evolutions over time. Therefore, Coherence between Identity and Context is the true object of strategic thinking and strategic decision-making.
The main conceptual value this simplification provides is the degree to which “quality” is a function of two terms that stand in relation to each other: decision-makers can with this comprehend and resolve an extremely high level of complexity. This paradigm establishes a relational system that evolves dynamically as each of the terms changes. The control and design of this dynamic relationship, is necessarily emergent and evolutionary: it is an activity, not a ‘thing’. The adaptive properties of this conceptual solution are better suited to the speed and random directions of change, to the scale of complexity of the environment in which institutions and organisations need to operate effectively and competitively.
Coherence has no metrics and is an eminently “qualitative” paradigm. Strategic decision-making can, on account of the articulation and application of this framework, shift from a passive and reactive focus on quantitative modelling (based on retrospection and past performance data) to an active focus on qualitative interpretation of the future (based on insight and learning). One is the object of measurement, the other an effect of judgement. It is now possible, therefore, to address and satisfy the most important concerns to have emerged with respect to Strategic Risk: the decision-making at Board and executive level as to the resilience and competitiveness of a current business-model.
The focus on Coherence has an important effect: it shifts the object of Strategy away from either Identity or from Context. The object of design in Strategy is Coherence. Incoherence, therefore, is the Risk.
A systemic and structurally simple understanding of Strategy enables an effective definition of Strategic Risk: if Strategy works to produce coherence between an Identity and its future Context, then Strategic Risk is the possibility of an incoherence occurring between those same two terms.
A robust definition of Strategic Risk is an important outcome for it has so far eluded governance systems:
Strategic-Risk emerges from changes, mostly external, that an organisation will experience and that would have an impact on its survival and performance. This risk is a function of incoherence between the current Identity and future relevant evolutions of the Context.
The safest — statistically most robust — assumption to make about the future is constancy of change and randomness of the reconfigurations that emerge. Incoherence is, therefore, an unavoidable condition in the dynamic relationship between an Identity and its future Context. Hence the need to embed processes and functions to constantly and effectively manage it.
Defining Strategic Risk as the possibility of a mis-relationship between an Identity and a future Context offers an organic understanding of “Risk”: the role of Strategy being the constant negotiation of incoherencies produced by dynamics of change. This definition furnishes decision-makers with clear terms of reference with which to prudently manage Strategic Risk. It requires participants to address the ‘qualitative’ nature of the problem.
Extract from “Innovation: managing Strategic Risk”, my contribution to the Companion to Strategic Risk Management recently published by Routledge. Changes have been made to the text and all notes and references have been removed.
