The Art and Science of Strategy
This article was originally published on discoursive.blog by Joseph Smith
Business strategy is about making choices. Choices inform plans. Plans then inform actions. Strategy is as much about deciding what not to do as it is about deciding what to do. Out of all possible directions an organization could move in, good strategy involves selecting the optimal one. This is both an art and a science. It is a science in the sense that strategic planning should involve facts, data, and evidence; experimentation; and risk management. It is an art in that it requires judgement, creativity, and courage on the part of a company’s leadership. However, good strategy alone is worthless without execution. Execution is a multiplier of good strategy. So, business leaders need to understand the art and science of strategy, and cultivate the ability to execute it if they wish to succeed.
The intuitive aspect of strategy is difficult to codify — some leaders find it comes instinctively, others must hone their gut-feeling over time and through trial and error. I believe that good strategy is a function of both sides: art and science. Each side of the equation is not mutually exclusive, but is interconnected in a reinforcing or balancing loop. Facts & data corresponds with judgement, creativity with experimentation, and courage with risk management.
Facts & data inform judgement, and the use of judgement helps filter the useful facts & data to arrive at a decision.
Creativity is crucial to devise informative experiments under budget constraints. Learning what does and doesn’t work from experiments provides a landscape for creativity to flourish. Both are required for innovation.
Risk management is important for avoiding catastrophic loss and is a crucial tool for business leaders looking to cap their downside while maximising the potential upside. However, without the courage to act at the right time, opportunities quickly fall by the wayside.
Judgement ←→ Facts & Data
When it comes to developing successful business strategy, taking an evidence-based approach is strongly encouraged. An evidence-based strategy can be formed by following a fact-gathering process: interviewing or surveying all the appropriate stakeholders to build an understanding of where the business currently is and where it should go; conducting research on macro-level trends to see which way the wind is blowing; and analysing data and feedback from customers to find out how to improve the product, service, or customer experience.
A leader must use her judgement to aggregate all of these inputs and generate feasible courses of action, or potential strategies. Good judgement is crucial for being able to make decisions about which strategies the organisation should NOT pursue. In situations where the data may point in different directions and contain varying predictions about the future, it could be easy for a leader to get lost in their existing mental models and fall victim to confirmation bias. Great strategy, though, requires the art of great judgment, and so a business leader must seek disconfirming evidence that challenges her existing worldview against which she must stress-test her beliefs and strategies.
After deciding what not to do, a CEO can leverage the collective wisdom of her leadership team to chart the right course of action. Making use of the specialised individuals within the organisation, a leader can essentially crowdsource the judgement of many individuals to arrive at an optimal business strategy.
Creativity ←→ Experimentation
An evidence-based approach to strategy requires the accumulation of facts & data. An effective way to gather information beyond the data collected through standard channels is to conduct experiments. Experiments with falsifiable predictions are fundamental to science, and can also lead to better business strategy through the generation of new insights. Successful experimentation requires devising ways to test hypotheses, making predictions, and constructing novel ways to find out if the predictions hold true.
Experimentation requires a lot of creativity. Coming up with ways to run useful experiments from within a company can be difficult and expensive. However, without running experiments to discover new ways of doing things, companies may find it difficult to innovate. Adopting a fast and iterative organisational framework can embed experimentation into a company’s operating model. Implementing agile principles, design thinking, or even having a separate innovation lab can help a company to generate creative new ideas quickly, prototype or develop MVPs, and then run an experiment with the new product or service on small samples of customers to see if works.
This process requires a lot of creativity and experimentation to work effectively, and the reinforcing loop of rapidly testing new ideas allows these teams to generate new insights and understanding about customers, products, and services which can be looped back into the overarching company strategy.
Courage ←→ Risk Management
The best entrepreneurs are masters of risk management. From the outside, it may look like entrepreneurs only follow the most bold and cavalier strategies, or that they must be comfortable dealing with staggering amounts of uncertainty. And while that may be partly true, in reality, the top performers are always looking for situations that present asymmetric risk; opportunities that yield a potentially unlimited upside with a capped downside. It requires a significant amount of judgement to be able to recognise these opportunities if, and when, they arise. It also requires the courage to act and relentlessly pursue them.
There is a balance needed between the art of courage and the science of risk management to achieve an optimal strategy. An excess in bold action without considering potential downsides might work once… but in the long-run, with multiple iterations of repeated games, the odds do not run favourably. On the other hand, too much risk mitigation could result in a lack of action and a missed opportunity. The right balance is probably a golden mean between the two. The best business leaders, therefore, are those who excel at recognising and cultivating situations with asymmetric payoffs while understanding and mitigating the risk involved — all while building an organisation that can capitalise on the opportunities as part of its business strategy through outstanding execution.
Without the execution to make it happen out there in the world, a strategy is just words on a page. Execution is a multiplier of strategy. Successfully operationalising a business strategy might be the most difficult part of the strategic planning process. It requires a business’ leadership to turn their imperatives and initiatives into pragmatic action plans that can be carried out by everyone in the organisation. There is no silver bullet, organisations of all sizes find it challenging. In the startup world, a consistently superior level of execution is what separates a small handful of unicorns from the myriad great strategies of the companies that never made it. The leaders who demonstrate a track record of being able to repeatedly execute on their strategies across multiple ventures and domains are few and far between, and thereby globally recognised and highly sought-after.
What makes it particularly difficult is that strategic planning might only happen once every 2–4 years. Business planning happens annually. But execution happens every single day, where the rubber meets the road. It’s a slow and persistent effort to take an overarching strategy and turn it into chunks of activity that can take place each day to move the company forward. It is challenging to maintain the momentum necessary to seize the opportunities identified in the organisation’s strategic plan. Companies that can do this successfully frequently outperform those that can’t.
The Execution Multiplier Effect (Adapted from Derek Sivers)
No Strategy = $1
Poor Strategy = $1,000
Average Strategy = $10,000
Good Strategy = $100,000
Great Strategy = $1,000,000
Best-in-Class = $10,000,000+
No Execution = 0
Awful Execution = -1x
Poor Execution = 1x
Average Execution = 5x
Good Execution = 10x
Great Execution = 15x
Best-in-Class Execution = >20x
The notion that strategy is both an art and a science is an important one because intuition tends to be discounted in today’s business environment. Business leaders are rarely condemned for choosing a course of action based on the available data, even if it leads to ruin. However, leaders that make decisions based solely on instinct quickly go extinct. I believe that the two elements are necessary co-factors for business leaders to develop and execute good strategy. Cultivating the art side of the equation may seem untenable for some leaders, but in a game of fine margins it could be the factor that separates a winner from a loser.
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