In defence of planned strategy

A long-standing tension among academic management thinkers has been between proponents of planned strategy and proponents of emergent strategy. In the caricature version, the planned strategy is determined on the top executive floor by a cadre of analytical, numbers-driven, MBA-holding employees in their 30s. They produce fancy reports full of tables, graphs, boxes and arrows. In the caricature version, the emergent strategy just happens when middle managers in their 40s and 50s, with lots of practical experience in the industry, decide to do something novel. These middle managers are free from the shackles of analytical thinking, instead they succeed through honorable trial and error learning. Often the debate between the two perspectives is held on a sandbox level.





In my impression, the emergent-strategy camp has been sniping at the planned-strategy camp, which is not bothering to counterattack, for around thirty years. Most strategic management scholars are not involved in the war, but practitioners have clearly been more influenced by the emergent-strategy camp in recent years.

Many companies in the 1960s and 1970s, failed because they had an ivory tower approach to strategic planning. Stuck with an arrogant belief that the future could be forecasted in five-year plans, companies failed miserably when growth declined in the 1970s. Some important empirical studies in the 1980s described the complexity of real-life strategic management processes (e.g. Burgelman's study of Intel). Practitioners became occupied with operational improvements instead. Still the attack on the planned-strategy camp was ongoing. The most popular current object of dislike is Michael Porter, who wrote two important books on strategy in 1980 (Competitive Strategy) and 1985 (Competitive Advantage). In the first chapter of the 1980 book, he introduced the five forces model. Subsequent criticism has focused on this chapter and chapter 2 of the same book. One seriously has to wonder whether the critics have read the two books in full.

One example of this very emotional sniper war occurred after Monitor Consulting's recent bankruptcy. The company was co-founded by Michael Porter in 1983. Several pundits (here, here, here) explain the downfall with Michael Porter's ideas lingering on in the company for 30 years and eventually showing their ugly face. Some of the pundits are even gleefully happy after the bankruptcy. In 2012, the company had 100+ partners and 1,200 employees, Porter had no equity in the firm after 2009, and had not had an active role in the company for at least ten years (source: Boston Globe). In my view it is more likely that the company failed due to rainmakers leaving, lack of strategic focus, lack of cost control, wrong pricing strategy or maybe Colonel Gadaffi scared clients off. (Here is somebody with more insight.)

Much management education has focused on emergent strategy, or at least avoided the analytical strategy approach. One example is the teaching of Blue Ocean strategy, basically a creativity approach to identify new products or business models without being too analytical. This is often feel-good material for participants in an executive program, since the emergent-strategy camp often considers the middle managers as heroes  Personally, I think middle-managers are a very useful source of new ideas and their ability to lead is often strong through their social network; they often possess the right combination of knowledge. Middle-managers at 3M have for decades been masters in inventing new products and materials, but they are not as good in finding market niches for their products. This is one area, in which a planned strategy can help. Planned strategy involves having a clear product offering, knowing the customer needs, having a view of how to get paid, understanding which companies in the supply chain have power, etc. Emergence and spontaneity  is important, but the pendulum has swung too far away from planned strategy. Why not combine Blue Ocean with Porter's idea of industry segmentation (Porter, 1985, chapter 7)?

How many executives have the patience to sit down and perform a detailed industry supply chain analysis, test out different industry segmentation schemes, search the financial databases for all relevant competitors in foreign countries, study the segment reporting in the competitors' financial statements to understand where profit is being made, investigate customer's willingness to pay, or seek an understanding of the needs of Chinese customers? Too few judging from the performance of many recent IPOs. And do the management consultants still have these skills? Here are some examples of spectacular failures in strategic planning. Please check out the links to analysis featured on this blog.

• Groupon. A strategy that assumes that retailers are willing to pay 75% of sales for promotional services.
• Zynga. A strategy that assumes (1) that customers will pay to improve their ranking when playing simple social network games, several of which are introduced per year, (2) that the monopsony distribution channel facebook never will wield market power, and (3) that the company will not engage in R&D.
• Facebook. A strategy that assumes that customers will at one point in the future decide to click on ads on their facebook page.
• Friendfinder Networks. A strategy that assumes that people would like to place and access personal ads based on ethnicity or religion  (e.g. Koreans, Jews, Christians, Italians, Lations, Christians) on a software platform that mostly used for pornographic websites.
• Blackberry. A strategy that assumes (1) that the company will be able to offer a superior smartphone solution compared to Microsoft, which generates 75-80% of its profit from companies, (2) that Microsoft and Nokia will never become desperate and slash prices even in the case of trouble, and (3) that customers are willing to pay $8-40 monthly for access to push email indefinitely.

Under pressure from share prices dropping like stones, many of these companies have taken action to fix some of these problems. This is trial-and-error learning at its best. Hopefully the companies will survive and find a great emergent strategy. However, with a little bit of planned strategy the companies would have been able to foresee most of the weaknesses identified above. They would not have had to go through the trauma of seeing their share prices go down 80%. Some other recent IPOs have a much stronger strategy, which probably is the result of both planned and emergent strategy:

• Linkedin. A strategy that assumes that business professionals and recruiters are willing to pay to get access to new professional business contacts.
• Opentable. A strategy that assumes that restaurant guests would like to reserve tables online and that restaurants are willing to outsource the functionality. An average sized restaurant where diners spend $40 per person would pay 4.5% of revenue or $1.70 per diner (source: NYT).

I have done work in Vietnam and planned, analytic strategies are important. During the last ten years, more and more industries have seen entry of foreign multinationals. With modern strategic planning, these MNCs are gradually increasing their market share in industry after industry. The local air conditioning industry lost its brand recognition to Panasonic and Daikin more than ten years ago. Currently, a similar fight is being played out between Nestle and Trung Nguyen in coffee. Mr Vu of the Vietnamese company is putting up a good fight. However, the more general point is that the Vietnamese management teams need a more analytic data-driven approach to strategic planning.

Any intelligent academic, businessperson, or consultant will easily understand that both perspectives are necessary. It is perfectly possible to iterate between emergence and planning. I hope business schools can create a better breed of strategists in the future. The pendulum has to swing back towards planned strategy for that to happen.

What is your view?