Notes On Developing A Strategy And Designing A Company: Vol. 1 – A Framework-Of-Frameworks see brief excerpt below – full paper on SSRN
Harvard Business School – Strategy Unit
May 26, 2016
The practice and teaching of business strategy today exist largely as a set of alternative views and frameworks not entirely connected to one another. These notes contribute an integrated sequence of steps for creating or evaluating a strategy, and associated company design. These notes also draw clear lines from these things to quantitative and evidence-based evaluation of enterprise performance and to financial valuation. The approach is generalizable to any modern industry. The materials, wholly consistent with what is known from modern research and graduate school training, are geared to practical use by managers or pedagogical application by instructors of MBAs and executive MBAs.
Notes On Developing A Strategy And Designing A Company: Vol. 1 – A Framework-Of-Frameworks – Introduction
A “Higher Bar” than You Might Think
Whether launching a new or planning for an existing company, nothing beats simply having a compelling product that customers demand. Age old trade school wisdom is then to implement control systems and diligent management to assure revenues exceed costs.
Surely each of these things is a considerable accomplishment, accomplishments that the majority of entrepreneurs do not attain. However, attaining only these goals is not enough. The bar is higher. Will the business succeed in the face of competition? Is the company capable of not just earning positive accounting profits, but to earn more than just regular returns that are greater than its true opportunity costs? Is the business designed and executed to attain maximal performance—today? And, tomorrow?
A good product and “good shop-keeping” are surely good business. A deeper understanding of the strategy and economics of the business gives a clearer sense of whether (and how) the company can meet this higher bar.
The goal of these notes is to provide managers with a minimum complete explanation of Strategy–in as few words as possible. The emphasis here is on “how to do Strategy” rather than “what we know” on the topic. The approach is to define a complete analysis and set of steps, and then walk the reader through them. (A number of advanced topics in Strategy dealt with in Volume II are essentially more particular applications of concepts presented here.)
The notes draw on and link to existing frameworks that you will surely be familiar with. In certain cases, these frameworks have been modified, updated or added to in order to generalize to modern industries and what we have learned in research in standard graduate training. These notes should serve as a brief guide and “complement” to books, texts and articles in the field–allowing you to see how things fit together and map into a big and complete picture.
The “Outputs” from Doing Strategy?
You might naturally think of the outputs of Strategy as a business plan or perhaps a consulting strategy “slide deck.” These Notes are not intended to help you with those things, exactly. More basic outputs of Strategy that you might put into those templates are as follows:
- Company design or “blueprint”: This is a most basic understanding and description of the pattern of decisions and practices that define the business and distinguish it from others. Implicit in your design of the business, you should have a thesis of the economics of the business: how this internal pattern of choices works together and interacts with the external environment. All other outputs, to follow, flow from gaining a deep understanding of the design and underlying thesis of the business, so these notes focus greatest attention here.
- Strategy statement: Once the design and overall pattern of decisions and practices in your company is clear, you can attempt to isolate just the most central defining choices that imply all others—and turn this into prose that can be shared to company stakeholders. In this sense, the strategy statement is “short form,” whereas the company design is explicit “long form”.
- Empirical evidence to support your thesis: The thesis you have for the business, underlying its design should be supported not just by economic reasoning, but by facts too. Use your Strategy analysis to isolate key assumptions that need to be true to support your thesis (or if untrue might support an alternative thesis). Added information and research has value precisely when (and only when) it has the potential to change your decisions.
- Quantitative model of profitability: If your thesis is your company is indeed resilient to competition and able to deliver greater than regular returns, this should be apparent from analyzing historical data or tangibly reasoned into forecasts. Moreover, the particular line items where the company outperforms (and underperforms) should directly reconcile with the design and the underlying thesis for how the business works.
- Deep understanding of fundamentals—and lucid “elevator pitch”. Most important of all, business leaders and their staff and wider organizations who truly understand the Strategy and company design are able to take new decisions with clarity and conviction and able to readily explain how new issues fit or do not fit into the big picture. Understanding the pith and essence of the economics also allows you to clearly and persuasively convey ideas to all stakeholders, including internal direction, elevator pitches to prospective investors and prospective employees, and so on.
Once these issues are clear, the slide deck or business plan should simply be a matter of formatting your thinking within whatever template you prefer.
The Organization of these Notes
Among the outputs, above, the core issue to nail down is the company’s design. All other outputs are either supportive or ancillary to delivering on this first output. Accordingly, the Notes are centrally organized around this output. Section 2 begins by simply explaining what is the bare minimum sufficient definition of a company design you will need to produce in order to understand how a business truly works.
The next sections lay out the criteria that the design needs to conform to in order to meet the “higher bar” described earlier. Section 2 lays out the criterion of internal alignment, or internal business logic of the company. Section 3 lays out the criterion of external alignment, or how the business’s design solves problems and exploits opportunities in the environment, while dealing with threats and pressures. Section 4 lays out the criterion of dynamic alignment, or assuring that internal and external alignment are managed not just for today, but for tomorrow. Section 5 discusses the importance of grounding your analysis in facts. Whereas the build of these notes links company design and its strategy to performance in terms of enterprise or economic value, Section 6 discusses how your strategy influences your valuation (in the sense of what another company is willing to pay for your company), and this can be quite a bit different from enterprise economic value for good reasons.