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Challenges for Corporate Strategy Formulation as a Result of Rapid Economic Change
Introductory Remarks: The following is the translation of a German essay which I have just finished writing for my application to a large consultancy's strategy workshop I would like to attend. I had some trouble initially coming up with a text that is sufficiently generic for the given topic, but also specific enough not to be boring and without meaning. I think the result is satisfactory. Judge for yourselves whether I have nailed it or not.
The invention of the micro-processor, the induced computer revolution, and an increasingly networked economy has led to a dramatic increase in the pace of change in the economy. Sectors, customer requirements, and general conditions are changing in previously unimaginably short time frames; new sectors develop, market potentials arise and disappear within just a few years. But not only the pace of change, but also the general speed of processes and communications, have increased.
This general acceleration of the economy - combined with several secondary and complementary effects [1] - poses new challenges for corporate strategy formulation. By definition, a strategy is a long-term plan serving as a direction of attack for the company to take advantage of market opportunities with the goal of increasing shareholder value.
One might be tempted to conclude that long-term plans and directions of attack are a fundamental contradiction to an ever-faster changing corporate environment. Quite the contrary: The right strategy is exactly the framework that can give stability and consistency to the corporation and its employees, partners, and customers while they conduct their mid- and short-term business.
Nowadays, it is certainly not possible to gain competitive advantages by merely applying norm strategies from textbooks. These norm strategies have in the meantime become standard knowledge and can thus only have limited value for differentiation. Additionally, it is exactly the attribute of a successful strategy that, it combines the characteristic competencies of the corporation with the specific chances of the chosen markets in an individual way. Creative, new solutions are necessary and need to be implemented consistently.
Short-term reactions to changes thus can become a two-edged sword: With a clearly drawn-out strategy, they deliver the necessary flexibility to overcome operational barriers and seize opportunities. Without a clear strategy, though, they are nothing less but fickle, failure-prone corporate maneuvers on an unidentified path towards an unknown goal. Only high-quality strategies are compatible with short-term reacting.
To that extent, I for now conclude that, although it might seem at first glance, neither goal nor basics of corporate strategy formulation have been significantly changed by economic acceleration.
Nevertheless, acceleration has effects on the formulation of strategy. Nowadays, tremendously short feedback cycles are prevalent. The cycle of regulation for the system of strategy formulation has been shortened dramatically, which can prove very advantageous to corporation acting with this principle. A related conclusion is the requirement for the corporation to become strategically active before all information is at hand. An exploratory approach is needed to develop strategies, test strategy elements in the markets, and refine them from the lessons learned: two steps forward, gather lessons learned, one step backward, adjust, two steps forward ...
I would like to use as an example the strategic attack of Intel Corporation on the wireless Internet (Wi-Fi) market: A few years ago, after Intel had determined this technology to have a profound effect on the technology sector and consequently on Intel itself, it made Wi-Fi a cornerstone of corporate strategy. Because it was and still is unknown how exactly this development would materialize in the market, Intel made on large bet in the development and marketing of the Centrino chip, which was supposed to become a core element of Wi-Fi's market architecture. As a flanking element, Intel put aside more than $150m for its venture capital division to invest into fledgling startups in the wider Wi-Fi market. The lessons gathered from these tactical investments can then be fed back into the strategy development cycle and be used for fine-tuning of the larger Wi-Fi strategy. To sum up: Intel had determined its strategy based on macro-trends, makes a few large bets on this strategy, but adjusts the specific implementation and further refinement of that strategy with the lessons learned from supporting experimental projects.
Another challenge of acceleration is the handling of the logical conclusion to all erratic changes, i.e. the exacerbated risk profile of strategies. The aforementioned exploratory approach requires the taking of immense risks by entering unacquainted territory. These risks can only be bridled by timely and stringent controlling of all measures as well as successes and failures; the integration of controlling and corporate strategy becomes more important than ever. One more logical conclusion of acceleration is the requirement for corporations to proactively seek and take risks and to take the costs of this risk-taking. This makes sense because the result of erratic changes not only is an exacerbated risk profile, but also an improved chance profile. The management of real options (identification, acquisition, continuous analysis of chance and risk profiles, continuous stop-or-proceed decisions) becomes a necessary element of strategy formulation.
In times of the rapid acceleration of economic changes only a proactive, exploratory approach to strategy formulation promises to be successful, which includes assessments of chances and risks on the basis of real options and a continuous tactical learning process to adapt corporate activities to current situations. Corporations like Intel (or Dell, or Wal-Mart, or Microsoft, or Honda) have shown that also and especially in times of rapid economic change the right strategy, consistently implemented, is the basis of successful management. The formulation of corporate strategy may have become more complicated, but today it is more important than it ever was to be able to succeed in a technological and global competition that is characterized by constant disruptive change.
Footnote 1: For brevity reasons, the complementary effects of acceleration cannot be covered here. These effects would be, among other things, the increasing importance of information technology not only as an enabler but as a driver of strategy on the cost and customer side, the effects of globalizations, the consequences of ubiquitous connection of all communication networks, or the changes in consumer structures.