What is strategy? What is strategic?

‘Strategy’ and ‘strategic’ are two words that are easy to use but difficult to define.

People often use the word “strategic” to describe an issue when what they really mean is that it is “very important”. Does strategic really mean any more than that? And if it does, what? How can we tell the difference?

Strategy vs Action

Our starting point has be the realisation that strategy, by itself, adds no value. Only actions add value. A strategy that is never implemented is less than worthless, because of the wasted time taken to create it.

But random actions are worthless too. Action only adds value if it is in line with a good ‘strategic direction’ — whether or not that direction is clear in advance or only understood with hindsight.

What does this tell us how to run our businesses better?

Only activities add value

If we want to know how to run our businesses better we need to consider the different activities that might add value: the core activities of marketing, finance, and operations, and the support activities of HR, legal, real estate and so on.

Each of these functions is essential to success. Remove any one of them and the business will fail. So in a sense every activity in all of these areas is ‘strategic’. But that’s really not what we mean either.

Starting to tell the difference

Actions and issues arise every day. Some, like new customer orders, get handled as part of the daily routine. Others, like a product recall, are less frequent and require special decisions and follow-up actions. Other issues and actions can lead to projects that transform the business and may take months or years to complete — entering new markets or acquiring new companies, for example.

Broadly speaking, then, it might seem that the bigger an issue is, and the longer it takes to resolve, the more ‘strategic’ it is.

But that’s not right either. Size alone is not an indicator of ‘strategic-ness’. Even apparently small sets of events can bring down an entire corporation. A single banker in Singapore can bring down Barings Bank. A subsidiary in Switzerland can lead to UK bankers facing questions from MPs. A single volcano in Iceland can block transatlantic air traffic for days. A small set of subprime mortgages can affect an entire system.

Size alone is not enough to determine what is strategic, and it doesn’t give us any indication of how to tell the difference between ‘large tactical’ issue or a ‘small strategic’ one.

‘Strategic’ affects the whole

So, let’s come at it from the other direction. Top-down.

Pure strategic issues affect the business as a whole. So perhaps the deciding factor of ‘strategic-ness’ has to do with whether an issue affects just one core function or all of them?

Maybe there is a rule which says something like: “One core function affected equals Tactical. All affected equals Strategic” ?

To test this out, let’s think-through a simple example.

Imagine that we have bought a new car and we want to sell our old one, “for a good price in a reasonably short time”. What are some of the possible ‘strategies’ and ‘tactics’ that we might use?

Our overall aim (to “sell the car for a good price in a short time”) combines two of the four core parts that make up any business: the financial result, and timing.

Each combination of strategy and tactics defines the two other parts of the business: marketing (the customers we want to sell to) and operations (the actions we take to achieve our goal).

In some cases the strategy defines the customers that we want to sell to, and the tactics define alternative ways of achieving that. And sometimes the strategy defines how to go about advertising the car, and the tactics define the customers who will be reached.

Whichever priority or order they come in, it is the combination of all four parts together (customers, operations, financials, and timing) that define the ‘business’ as a whole — or in this case, the sale of our car.

All four parts are always present. The ‘strategy’ is simply about choosing to focus on any one of them:

• timing
• size of profit
• target customers, and
• operational delivery.

So what is the difference between the strategies we could have chosen?

It’s all about risk

The thing that is fundamentally different between each of the strategies listed above is the mixture of risk, return and timing that each one offers.

We can list them:

It is the mixture of risk and return that varies between strategies.

And the same applies to the different strategies that a business might choose between: each one offers a different mix of risk, return, and probability. When we choose a strategy what we are really choosing is our preferred mix of risk and return.

All businesses act as ‘risk and return intermediaries’. They combine the market risk and reward of serving their chosen customers, with the operational risk and reward associated with their chosen business model and employees/suppliers, to create a financial risk and implied return for their lenders and investors.

Each of these three external groups (customers/distributors, employees/suppliers, and lenders/investors) agree and work to contracts with the business in order to achieve a chosen mix of risk and reward for themselves. The business can only be successful when it creates an overlapping set of win-win-win agreements with all three of these groups.

What drives this (and the way we can describe it to each other) is the strategy it chooses.

So this explains what the words ‘strategy’ and ‘strategic really mean: something that affects the risk/return profile of the business.

And it explains why the ‘support’ activities of HR, legal, and real estate are generally not considered strategic: they generally don’t affect that risk/reward profile.

In Conclusion:

A ‘strategy’ is a mutually-consistent set of actions that together define and represent a particular mix of risk and reward for the business.

An issue is ‘strategic’ when it significantly impacts or affects the risk/return profile of that business.

So What?

So, if you are defining a strategy for your business, think about which of marketing, operations, and finance are constrained, and which of marketing, operations, and finance you are wanting to optimise. Within what timescale.

Is it clear what mix of risk and reward you are trying to achieve? Who is driving or setting that mix? Is it clearly defined? Or is it implicit, perhaps in the culture? Do all participants share the same attitudes to risk and reward?

This article is adapted from Chapter 7 of The Escher Cycle, which explains ‘The Origins of Strategy’.

The chapter shows how what we think of as ‘strategy’ arises naturally out of the simple marketplace interactions between the three basic activities of any business: finance, marketing, and operations.

Making this explicit reveals a simpler, leaner way of doing strategy: thinking strategically about the actions that the business undertakes, rather than inventing a separate set of concepts called ‘strategy’.

As two reviewers put it, “This is one of the clearest accounts I have read about the principles of successful business strategy and practice” — “A book that brings strategy into the very heartland of business operations.”