What IS strategy, anyway?

I always appreciate feedback on these posts, especially when it shows me that I need to do better. In that sense, the best comment I got on last week's post (on "Strategic process definition") was one that showed me I failed to explain a critical point. One reader wrote that the post "didn't engage ME--it seemed to pertain only to large corporations with formally-defined management systems.  I like better the ones where I can see the immediate application to Martha's burger shack (or other mom-and-pop businesses, like the one where I work), and/or where you make that application apparent."

Oh my goodness, did I fail to explain that part? It's true that sometimes I write about issues that show up only in formalized management systems, or in large bureaucratic companies. But last week wasn't one of those times. So let me unpack this topic a little better.

What about small, mom-and-pop companies?

Last week's post is about defining your processes so they align with your strategy: not all your processes (or not necessarily) but the right ones, the ones where such alignment is appropriate. So in principle the discussion applies to any business that has processes and that also has a strategy.

But everyone has processes. Remember that they compose your management system. And we have discussed earlier (for example, in this post here) that every organization necessarily has some kind of management system, because the management system is the constitution or the nervous system that ties the organization together. The organization's processes and management system might be informal or unwritten. But they are still real, for all that. The processes and the management system are all the things you do that make you part of the organization.

• 
  Wear your company t-shirt when you are on duty.
• Record sales here, and in this way.
• Sell this kind of product.
• If a customer complains, respond like this.
• Log your hours here, in this tool or this database.
• Collect your check here. You'll be paid every week, or every two weeks, or monthly.
• If you need supplies, get them from this cabinet. If you take the last of something, tell this person so we can order more.

• It is (or is not) acceptable to use company printers for personal use, to print personal emails or a cute cat meme.
• If you want to plan vacation time, request it like this.
• If the building catches fire, exit promptly but calmly and meet here in the parking lot.
• And so on.

Each of these is a process. Taken together, they constitute a management system. They may not be written; people may just think of them as The Way We Do Things Around Here. But they are absolutely real.

And when I suggest aligning your processes with your business strategy, all I mean is that The Way You Do Things should support your big goals. Don't shoot yourself in the foot.

That sounds fine, but wait a minute: Do small, mom-and-pop businesses have strategies?   

What is a strategy, anyway?

Good question. How can you tell? What is a strategy, anyway?

Once again, I'm going to turn to Roger Martin, who answered this question in an article last year.* Martin starts by pointing out that any business has to make a lot of choices. Some of these choices really have to go they way they do; other choices could have been made differently, but weren't. 

• For example, you might choose how to pay your suppliers (cash on delivery, net 30, net 60, or whatever), but you can't choose whether to pay your suppliers! Obviously you have to pay them. The choice whether to pay your suppliers has to be Yes. 
• On the other hand, you might focus on one group of customers instead of another. If you sell office supplies, you might focus on business customers or you might focus on students at the local college. That decision could go either way. But depending which you pick, you will probably decorate your store differently; you might make other choices differently too.

Martin says it is only the latter kind of decision that counts as strategic. The other decisions are important too, but he calls them Operating Imperatives.

Martin describes the distinction this way.

[I was reading a list of business choices that one of my IT clients is planning to pursue, when ...] I realized that the single list contained two very different kinds of items. And the distinction revolves around the question ...: Is the opposite of your choice stupid on its face?

For some on the list, the answer is yes: the opposite is stupid on its face. For example, one item on the list was ‘suitability,’ i.e., the IT solutions need to aim for suitability for the internal users it served. Nobody strives for unsuitability in their IT solutions. That would be stupid.

For some, the answer is no: the opposite is not stupid on its face. And that is demonstrable because other players in the industry make the opposite choice and it doesn’t prevent them from succeeding. For example, another item on the list was ‘modularity.’ Many other players attempt to achieve their desired IT outcomes with systems that are more integrated and not modular at all.

I realized that I could go down the list of items and pretty quickly categorize them as yes-the-opposite-is-stupid or no-the-opposite-is-not-stupid.

The latter meet my definition of a Strategic Choice. Since the opposite isn’t stupid, it represents a real choice to do something meaningfully different than some or all competitors/peers. The former don’t meet the definition. Does that mean they are unimportant and shouldn’t be mentioned in a strategy document? No. This is what I have come to call an Operating Imperative. Because it is smart and there is no other obvious approach, we will fall behind if we don’t do the positive thing that everybody else is doing.

We make Strategic Choices when we want to gain an advantage over our competitors. That doesn’t happen when we do the same things as competitors. We follow Operating Imperatives when we want to avoid falling behind competitors on a meaningful dimension.

 Don't get hung up on the word "opposite" or the word "stupid." Martin isn't saying that Strategic Choices have to be contrarian or oppositional. Not at all! His point is just that strategy is when you make choices about your business that are real choices—choices that might have gone the other way. But once you make them, they make a difference in everything else you do after.

Big company examples

Let's look at some examples.

In his classic book Up The Organization, Robert Townsend tells the story** that when he took over as CEO of Avis Car Rental in 1962, he relocated his headquarters to Long Island, in between JFK and LaGuardia Airports. His idea was that if Avis rents cars without drivers, they have to go where they can find drivers without cars—and he wanted his head­quarters easily accessible by his working managers. 

Townsend's decision was a Strategic Choice for Avis, because it could have gone another way. At the time, the headquarters of their competitors were bottled up on the island of Manhattan, which proves that the opposite of Townsend's choice was not stupid. But it was a choice that worked for Avis.

Or consider any of Martin's examples from last week's post. We saw that Progressive Insurance has chosen to get "settlements to its customers so quickly that lawyers don’t get into the middle of the process." Could that choice have gone the other way? Sure—and many other insurance companies do, in fact, make the other choice by requiring longer in-house review and adjustment of a claim before paying it. 

Progressive has chosen to optimize for speed, and this choice has consequences. Last week we saw that it requires Progressive to manage its investment portfolio in a special way, to emphasize short-term liquidity even at the expense of growth. But Martin's article also makes clear that Progressive "empowers [their] claims-people to make settlement decisions and cut checks for customers at accident sites rather than having to go through a time-consuming head-office claims processing ritual."***   

Thus does strategy make a difference.

Small company examples

Finally we come back to the question, Do small, mom-and-pop businesses have strategies?

Of course they do. Small businesses have to make decisions, just like big ones. Some of those decisions could go either way. Those are the strategic decisions. And when I advised last week to align your processes with your strategy, all I meant is that you shouldn't let your daily operations undercut the decisions you've made about how you want to do business.

What does this look like in practice?

Let's say you run a small, local business in some line of work where customers need a little bit of technical knowledge (but not too much) in order to succeed—something like gardening. So let's say you run a nursery. There are a lot of things you have to do. You have to pay your suppliers on time. You have to service your customers. You have to comply with all the local laws for small businesses. In Martin's terminology, these are Operating Imperatives.

Other decisions could go either way. For example, people always come into nurseries asking, "How can I make my garden better?" Often they have follow-on questions. They talk to you for an hour about their problems. Then sometimes they buy something and sometimes they don't. What do you do about these people?

You can decide either way. Some stores act as Local Experts, and talk willingly. Other stores won't talk to these people unless they buy something. Either way the store should set a policy, so the choice isn't left up to each sales clerk each day.

But notice one consequence: If you decide that you want your sales clerks to answer questions for the community as Local Experts, then they really have to become experts. That means your hiring practices should favor people who already know something about gardening, and your personnel policies have to give your employees the chance to learn more once they are on board. If you don't adjust your hiring process and your personnel process, you risk undercutting the strategic decision you have made to serve your community as Local Gardening Experts.

The reason it is hard to see this alignment in small companies is that very often the decisions are made unconsciously.**** The immediate needs of today's issues always press very hard on small businesses, so it is often true that no one can afford the time or perspective to articulate the company's strategy in words—much less to check all the (probably unwritten) processes in the (unwritten) management system to make sure they align with that strategy!

But the processes exist anyway, even if nobody has identified them by name. 

The management system exists anyway, even if nobody has written it down. 

And the strategy exists anyway—as the collection of Those Business Decisions Which Could Have Gone Otherwise—even if nobody has ever checked to make sure that it is consistent, and that it is supported by the management system.

All this is to say that it can be very hard to do this sort of analysis in a small, mom-and-pop business. But if you can ever find the time, it surely matters.     

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* See "Is or Is Not The Opposite Stupid on its Face?" in Medium, February 5, 2024.  

** See "Mars, Man From" in Robert Townsend, Up the Organization: How to Stop the Corporation From Stifling People and Strangling Profits (New York: Alfred A. Knopf, 1970), p. 106. 

*** See "The Role of Management Systems in Strategy" in Medium, October 5, 2020. 

**** Of course I don't mean that literally.         

Strategic process definition

How do you align your business processes with your "strategic direction"?

It sounds like a good thing to do, and in fact ISO 9001 requires you to do it. In four different clauses,* the organization (or its top management) is required to make sure that the quality system is compatible or consistent with the business's overall strategic direction. And that's great, of course, ... but what does it really mean? How—in concrete terms—are you supposed to make this alignment happen? 

• You probably have a hiring process. But isn't hiring a well-understood activity? Is your hiring process really going to look that different from everyone else's?
• Maybe you sell widgets, and you package them before shipping them out. How do you align your packaging process with your business strategy? Is there really that much more to say besides, "Put the widget in the box, add the packing peanuts, and tape it closed"?
• Pick a couple more examples at random, and you might think that this requirement was included just because it sounds good, rather than for any more practical reason.

But it turns out you'd be wrong to think that. Process definition can support your strategic direction. It's just that most companies haven't thought through how to make the connection.

The other day, entirely by accident, I ran across the work of Roger L. Martin (LinkedIn), a writer, strategy advisor, and former professor. It turns out that he addressed exactly this topic in an article in Medium, back in 2020, called "The Role of Management Systems in Strategy." It's a delightful article that systematically works through examples of companies who have, in fact, used their overall strategic direction to make fundamental decisions about how to design their business processes. In fact, my biggest criticism of the whole article is terminological, because Martin regularly uses the phrase management systems to describe what could (I think) be better called business processes.** But that's a small cavil indeed.

Let me quote a few of Martin's examples, to show you how this strategic alignment works in practice:***    

Four Seasons Hotels & Resorts seeks to win with a kind of service that is unique and that needs to be carried out by experienced Four Seasons hotel staff (as opposed to hotel staff experienced at other hotels), but in an industry that experiences 60–70% annual turnover. To get this kind of experienced hotel staff, Four Seasons has a management system that drives disproportionately huge investment in recruiting/hiring. To be hired, a recruit needs to have three successful in-person interviews, the last of which is with the hotel manager. This would be an unthinkably large expenditure of resources for other hotels, but sensible and necessary for Four Seasons desired capability. This [process] is rigorously enforced and adhered to. In addition, its career development [process] is disproportionately invested in because after recruiting the very best, Four Seasons wants and needs to keep them for a long career, which it does with turnover below 10%.

Progressive Insurance seeks to win, in part, by getting settlements to its customers so quickly that lawyers don’t get into the middle of the process because Progressive knows that on average when a lawyer is involved, it costs Progressive more and the customer gets less due to the high fees charged by the lawyer. In order to be in a financial position to pay claims quickly, Progressive has a management [process] for its investment portfolio that invests disproportionately in short-term liquidity at the cost of earning higher investment returns.

Procter & Gamble, when CEO AG Lafley took the helm in 2000, switched its basis for determining incentive compensation from market total shareholder return (M-TSR) to operating TSR (O-TSR). M-TSR, which measures performance based primarily based on movements in the company’s stock price, is the standard measure used across public companies. But it has the effect of encouraging management teams to focus on short-term fluctuations in stock price and the drivers thereof rather than on the long-term performance of the company, which O-TSR more closely measures by focusing on sales growth, profitability and cash conversion.

These are only a few examples. Martin's article gives ten more examples besides these, and I'm certain that his research includes plenty of others as well. 

So if it is possible to align your business processes with your strategic direction, why doesn't everybody do it? I haven't studied the rest of Martin's research, but I assume that the first answer is that figuring out the right alignment is hard to do. I'm pretty sure there is no simple paint-by-numbers approach that will generate your business processes automatically when you feed in your strategy. Like with any other strategic decision, you have to understand your industry really well, and then to understand your place in it. 

What can you do better than any of your competitors, and what does it take to enable you to do it? 

What risks can torpedo your efforts, and how can you neutralize them?   

These aren't easy questions. But then, they aren't easy for your competitors either. So if you can get a solid grip on them, and then derive unique business processes that play to your strengths, you'll be miles ahead.

__________

* In ISO 9001:2015, these requirements are found in clauses 4.1, 5.1.1(b), 5.2.1(a), and 9.3.1. 

** For example, Martin writes (in his fourth paragraph): "every company has numerous management systems. It has an order-entry system, a system for putting together its regulatory filings, a system for announcing new executive appointments, a capital appropriations system, etc." When I write about business systems in this blog, I would call each of these activities—order entry, regulatory filing, announcing appointments, and capital appropriations—a business process, in accordance with the definition in clause 3.4.1 of ISO 9000:2015: "set of interrelated or interacting activities that use inputs to deliver an intended result." But as I say, that is a very small and highly technical quibble.   

** All these examples are direct quotes from Martin's article cited immediately above. But I have replaced the phrase "management system" with the phrase "[business process]" (in square brackets, as shown) wherever I think it is clearer.      

A management system just for show

A few days ago I was browsing through LinkedIn, and I found a link to a video called "3 Signs Your Management System Is Just for Show." Well the title was intriguing, so I watched it; and it was three minutes well-spent. The information won't be new to regular readers of this blog, but it's expressed in compact points that any viewer can easily digest and carry away.* 

The basic message of the whole video is that your management system shouldn't be something special that you have to think about. It should just be The Way You Do Things. Did you get a customer complaint from the field? Open an 8D, because that's how you handle customer complaints. Are you making a big change to your manufacturing process? Schedule an FMEA, because that's how you evaluate the risks in production changes. Does someone have an idea for a cool new product? Call together a project team, because that's how you develop new products. The place you want to get to is one where you don't have to wonder, "What does our process say we're supposed to do?" or "What does the ISO standard require?" because you just know that this is how we do things here.

The video makes this message more precise by calling out three specific red flags:

• Senior management does not know what is happening with the management system.
• Audits are performed solely to maintain certification.
• The team does not know what the management system is for. 

These are concrete points you can look for. But in essence they all mean that you aren't really living your management system. 

If senior management doesn't know what is happening with the management system, it means they haven't been showing up for Management Review. But Management Review is the key to the whole organization, the place where you make system-level interventions so that the day-to-day work can move forward by routine without requiring senior management to fire-fight every little issue.

If an organization treats audits as no more than an emergency interruption to ensure certification, they won't get the real benefits of the audit program. We've discussed at length that audits shouldn't require you to do anything different from what you normally do every day. And experience with an audit program can help grow a Quality mindset.

And if a team doesn't even know what the management system is for, ... well, they can't be living it, can they? And the system won't do anyone any good if it just sits on the shelf gathering dust.

As I say, the lessons from this video aren't going to be new or shocking to regular readers. But I do like how they presented it all in such a compact way. I hope you do too.   

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* The video was produced by an organization called QMS Certification. I've never heard of them before, and know nothing about them. So this post does not constitute any kind of commercial endorsement of their services. But I liked the video.