The practice of business strategy is unrecognizable from what it was just a few years ago. Today, strategy at its best has become a digital-decoding, direction-setting, business model transforming, democratizing, globalizing, inspiration strengthening, and partnership-building process that involves the whole firm, its customers and partners, and inspires accelerated value creation. It is very different from the past.
Ten major changes characterize the transition from industrial-era strategy practices to today.
1. The Shift In Focus From Competitors To Customers
The practice of business strategy is often said to have begun with Michael Porter’s 1979 HBR article, “How Competitive Forces Shape Strategy.” The article opened with the fateful sentence, “The essence of strategy formulation is coping with competition.” Porter’s work in due course spawned a multi-billion-dollar strategy consulting industry, led by his own strategy consulting firm, Monitor. The movement promised to generate excess profits, not with the risk and hassle of creating bold new products and services, but rather by positioning the firm correctly amid “the five forces of competition.”
Typically a team working with the C-suite would conduct massive data analyses to determine the structure of the industry. But because the data was about the past, it shed little light on strategy’s subject—the future. The team would report to the top management after completing its studies and would often solemnly conclude that the firm’s future strategy lay in doing mostly what the firm had already been doing for some years.
But the charade could not go on forever. In November 2012, Monitor filed for bankruptcy.
Porter’s main mistake was his concept of “the essence of strategy.” The essence of strategy is not coping with competition—a contest in which a winner is selected from among existing rivals. The essence of business strategy is to add value for customers. Porter’s five-force model of strategy misses the basic point that ultimately customers are the determinant of business success.
Moreover, the power of digital technology to create either a customer-heaven or a customer-hell accelerated the importance of paying close attention to the customer. The fact that a customer-first strategy enabled firms to create value for all their stakeholders was a further inducement to begin strategic thinking first and foremost with the customer.
Nine of the ten most valuable US and European firms have missions with customers “first and foremost.”
Figure 1: Market cap of US & European firms: 2008 vs 2023
Customer primacy firms went from 2 out of 10 in 2008 to 9 out 10 in 2023
2. The Courage To Discard The Past
The second characteristic of modern strategy practice is the courage to close down products, services, or even businesses, that no longer have a useful future in the firm. In the calmer, slower-paced world of 20th century, businesses hesitated to bring unproductive activities to a close.
It was thus a surprise when in 1997 Apple CEO Steve Jobs cut 45 out of 50 computer products, closed down Apple’s R&D department, and let go most of Apple’s mid-level managers.
Similarly, in 2014, few were expecting that the newly appointed CEO of Microsoft, Satya Nadella, to announce that Microsoft would be dropping the Nokia phone, into which it had just poured billions of dollars, and would no longer sell the crown jewel of its businesses—the Windows operating system—and would provide it free as a service.
“Stopping things is hard.,” writes strategist Jeff DeGraff. “It’s full of feelings of loss, disappointment and failure. It takes more than creativity. It takes courage to stop what you’ve been doing to make room for the things you want to start doing now.”
Being willing to discard the past was thus a sign that Jobs and Nadella “meant business.”
3. Recognizing That Software Is Eating The World
While famous economists like Robert Solow disparaged the importance of digital services by contrast to “real products”, Marc Andressen awakened the world with his 2011 Wall Street Journal article, “Why Software Is Eating The World.” It explained how digital firms were emerging with strong profits and exciting growth prospects. In 2011, the phenomenon was just emerging. Today, eight of the ten largest firms sell primarily digital services. (Figure 2)
As a result, most firms today are attempting ‘digital transformations. albeit with mixed results.
Market cap of most valuable digital firms 2008 vs 2023
Figure 2: Digital firms went from 2 in 2008 to 8 in 2023
4. Digital Technology Obliterated The Boundaries Between Industries
Another consequence of the digital economy is that firms are able to be much more agile in entering sectors in which they had no background, such as Apple’s takeover of the mobile phone business in just 18 months, thus dispatching Nokia and most of the other mobile phone companies to commercial oblivion. Firms could no longer focus merely on a well-known group of competitors in “their industry.” As Columbia Business School professor Rita McGrath suggests, it is better to talk of shifting “arenas” of business activity, rather than “industries.”
5. Digital Technology Greatly Accelerates Both Pace And Scale
In the digital economy, firms could become global almost overnight, such as Tik Tok, Facebook and Google. By comparison, in the industrial era, reaching global scale had taken decades.
To achieve such global success, customer/user focus in strategy formulation has to be ferocious.
6. Digital Technology Enables “Winner Take Most”
Google has 93% of search, globally. As very few people want the world’s “second best search,” Google’s market position appears impregnable. It can thus be simpler for firms to concede defeat in that domain and compete somewhere else, as Microsoft did in setting aside its investments in the Nokia phone, thereby giving way to Apple’s iPhone.
Yet no seeming business victory has a guarantee of permanence. If the technology changes, such as the emergence of AI and ChatGTP, Microsoft’s astute investments in that area could start to impact Google’s competing AI tool, Bard.
The fact that some firms have been able—to everyone’s surprise—to reinvent themselves, such as Apple in 1997 and Microsoft in 2014, also shows that there can be life after seeming near-death.
7. New forms of organization create new strategic options
The emergence of new kinds of organizational structures such as “platforms”, “walled gardens: and “ecosystems” dramatically increase the array of options available to today’s strategist. (Figure 2)
Figure 3: Evolution of 21st century management
New types of organizational arrangements
8. Ideas Can Come From Anywhere (Including Customers)
In these new organizational arrangements, that are far from the command-and-control pyramids of the industrial era, ideas can come from anywhere, including from customers. (Figure 4) The rush of new ideas can become so great that the CEO may need to become the Chief Slowdown Officer for ideas that may have irreversible consequences, so as to permit due consideration of the risks.
Figure 4: from machine, to walled garden, to ecosystem
Machines, walled gardens and ecosystems
9. ‘Strategic Choices’ Become ‘Options In A Portfolio’
In the highly unpredictable world in which firms today find themselves, they often have difficulty in choosing between the multiple strategic options generated. As Rita McGrath again points out in her book, The End Of Comparative Advantage, the best firms apply options reasoning and a portfolio management approach, which:
· Enables conditional choices in an uncertain world
· Avoids the risk of settling one choice too soon
· Can defers decisions till the last responsible moment, and
· Reduce he pervasive tendency to persist in chasing sunk costs, when a promising idea turns sour.
10. Getting The Sequence Of Strategy Steps Right
The array of strategic decisions involved a transition from an industrial-era firm to a digital-age in a complex, rapidly shifting environment is mind-boggling. The firms that are likely to do best are those that learn from others and from their own experience.
Case studies are available here for the US bank, JP Morgan Chase, and the Swiss pharmaceutical firm, Novartis.
The choices that are available are rarely clear or ideal, Thus Microsoft can be seen as beginning its transformation journey with a few teams experimenting with Agile practices, with no upper management support and no real idea whether they would work or not. Gradually, as the Agile practices succeeded and spread, by the time that the right top management was in place, the six years that had been spent acquiring Agile experience proved to be an invaluable investment for the future. (Figure 5)
Figure 5: Microsoft’s Journey From 2008 To Today