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sTRATEgY 2.0:innovating how we Develop anD exeCute Strategy
‘Ready, aim, fire.’ In the traditional model of strategy, you set a clear objective, predict the future outcomes of strategic moves, and then set the
controls for executing the selected decisions.
But when markets are emerging, colliding,
splitting or dying, this traditional model doesn’t
work very well. The problem is the increasing
difficulty of predicting outcomes in a world of
faster, broader and uncertain change.
Recent work on firms’ competitive perfor-
mance confirms what many of us already
know. Competitive advantage has become
harder to sustain across a broad range
of industries. A broad, relentless shift is
underway, towards a new, more dynamic form
of competition called hyper-competition.
In a hyper-competitive market, sustained
competitive advantage is not a matter of a
single advantage maintained over time, but
more a matter of a sequence of advantages
inter-linked over time. For example, Apple’s
sequence of moves — iTunes -> iPod ->
iMac -> iPhone -> iPad — is a case in
point. Through the iPod and iTunes, Apple
has been able to break out of the barriers
imposed by its unique proprietary operating
system and attack the much larger commu-
nity of Microsoft customers by moving into
the markets for music.
In this hyper-competitive, dynamic world
a new toolset is needed. We call this toolset
Strategy 2.0. Its aim is to enable firms to
develop and execute strategy in a fast-moving,
uncertain environment. Strategy 2.0 involves
shifts in the way we think about strategy:
From ‘strategic positioning’ to developing
‘dynamic capabilities’, facilitating adaptation
and capture of new opportunities.
From emphasising ‘prediction and control’
to ‘sense-making’, favouring actions that are
informative and exploratory.
From making ‘big bets’ on the future
to creating ‘real options’, opening up new
choices in an uncertain world.
Let’s look at each of these fundamental shifts.
From ‘strategic positioning’ to developing ‘dynamic capabilities’The traditional view of strategy focuses on
how to build a good position. Based on the
well-known ‘five-forces’ framework of Michael
Porter, competitive advantage comes from
actions taken by a firm to create defensible
positions against competitors - for example,
by erecting strong barriers to entry. In this
framing, the strategic problem faced by
managers is one of making markets work less
efficiently - to the company’s advantage. This
is no longer an easy route in a ‘flat world’ of
smart, orchestrated networks of firms that do
not need huge capitalisation to compete.
In a second framework, the resource-based
view of strategy, competitive advantage comes
from difficult-to-imitate firm-specific assets
that can be used to capture rents — for
instance, through strong intellectual property,
or a dominant brand. In this view, profits flow
from having lower costs or higher quality (e.g.
through efficient supply chains or operational
excellence), innovative products, or customer
insight that allows firms to understand and
meet customer needs in the way competitors
cannot. Both of these perspectives are largely
static and emphasise how firms compete at a
single point in time.
The new strategic framework of dynamic
capabilities builds on the notion of core
competencies but focuses on building and
adapting these competencies to address
rapidly changing environments. This develop-
ment was stimulated by the recognition that
many successful or dominant firms fail to
sustain their performance as markets and
technologies shift (think Ansett, the former
Coles-Myer, or General Motors). In spite of
having the resources, these companies failed
to adapt to changed circumstances.
Dynamic capabilities are the routines,
activities and micro-processes by which an
organisation achieves a new configuration.
Their intent is to generate and modify the
company’s operational routines to thrive in a
dynamic business environment.
Early warning systems, fault tolerance, flexibility and modularity in products and processesOne example of a ‘must-have’ dynamic
capability is the ability to identify and
capture opportunities more quickly than
rivals. The logic behind an early-warning
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system is compelling. It is a form of insurance.
Without regularly monitoring the signals that
come from an early warning system, compa-
nies are actually increasing their vulnerabili-
ties. What has not been foreseen is unlikely to
be seen in time.
Other must-have capabilities include the
ability to rapidly create new products and pro-
cesses in response to changing market opportu-
nities. In marketing and R&D it is a willingness
to cannibalise, entertain constructive conflict,
tolerate failure, and cut some slack in the avail-
ability of resources.
In manufacturing and service operations, it
is the “plug and play” or modular product and
process architectures that are key enablers
of strategic flexibility. Modularity is created by
decomposing a product or process design into
relatively independent components, and by
specifying standard interfaces that define the
inputs and outputs that flow between interact-
By exploiting modularity you may be able to
change the competitive game. For example,
the modular structure of the personal computer
made it possible for Michael Dell and others to
begin selling PCs to order, by assembling them
like Lego from a set of standardised components.
From emphasising ‘prediction and control’ to ‘sense-making’Intelligence in a low-predictability environment
Quantitative forecasting – such as with econo-
metric and financial risk modelling – does not
perform well in an uncertain environment, since
the assumptions and structure of such models
are derived from past history. And history can
be a very imperfect guide to the future.
Risk is present when future events occur
with measurable probability. But uncertainty is
present when the likelihood of future events is
incalculable. Mistaking risk for uncertainty has
been singled out as a major contributor to the
global financial crisis.
Mr Greenspan described risk management in
2002: “The use of a growing array of derivatives
and the related application of more sophisti-
cated methods for measuring and managing
risk are key factors underpinning the enhanced
resilience of our largest financial institutions. As
a result, not only have individual financial insti-
tutions become less vulnerable to shocks from
underlying risk factors, but also the financial
system as a whole has become more stable.”
That must rank high among observations the
speaker wishes he had not made.
Possibly the most important feature of a
strategy is that it must present a coherent
view about the forces at work and how best to
respond. When there are high levels of ambigu-
ity, complexity or unpredictability in the business
environment, strategy must be discovery driven,
involve exploration and learning using qualitative
methods, rather than simply being a quantitative
This discovery-driven approach involves three
challenges of imagination:
• The challenge of identifying the range of
future developments in markets, technologies,
the natural environment, politics and society.
• The challenge of determining how those future
developments will affect the company.
• The challenge of determining the impact of
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sTRATEgY 2.0:innovating how we Develop anD exeCute Strategy “Entrepreneurs are the masters of sense-making.
Their skill is finding opportunity in the midst of turbulence, to spot and seize major opportunities when they arise.”
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the company’s actions in response to future
To meet these challenges, sense-making is
the art of discovering the new terrain as you are
inventing it by:
• Seeking many types and sources of data,
and involving a broad range of expertise
from inside and outside the company in your
• Not simply applying existing frameworks and
overlaying them on the situation, but moving
beyond current stereotypes.
• Performing experiments to obtain potentially
valuable new knowledge.
• Using scenarios to capture and communicate
Scenario planning as a sense-making framework
Scenarios are plausible, compelling yet surprising
stories that describe how the future might pan
out. They weave together changes in technolo-
gies, markets, politics, social values and drivers
of change in the form of a ‘storyline’. Scenarios
are not predictions, nor options from which a pre-
ferred choice should be made. Rather, they are
examples distilled from many possible futures.
They serve to challenge preconceptions about
the future. The natural inclination of managers
is to work from what is known. Scenarios force
us to look at what is not very well-known, and
what cannot be controlled.
The essence of the scenario process is that
you research emerging developments. You deter-
mine which are predictable, which are uncertain,
and which uncertainties are most influential.
You base the scenarios of the future on those
uncertainties, and spend time understanding the
implications of those scenarios. Figure 1 shows
the two main phases in scenario planning:
building scenarios and using scenarios.
Thinking entrepreneurially using scenarios
Entrepreneurs are the masters of sense-making.
Their skill is finding opportunity in the midst of
turbulence, to spot and seize major opportuni-
ties when they arise. Turbulent markets typically
produce a steady flow of small opportunities,
intermittent midsize ones, and periodic golden
opportunities to create significant value.
Once scenarios have been crafted, the
strategy development begins: testing the
company’s strategic options against the sce-
narios, addressing the following questions.
What should the company be doing under
each scenario? What actions are common to
all scenarios—the “no regrets” strategy? What
actions work under one scenario, but are very
risky under another scenario? What is the
essence of the organisation’s success, given
the range of scenarios?
The scenarios are used to develop the port-
folio of initiatives to address the challenges and
the opportunities. These initiatives might include
• New capabilities which are needed, and existing
capabilities which need to be revamped.
• Initiatives to increase flexibility and speed of
• Changes in the nature of the dialogue between
key stakeholders – customers, investors,
policy makers, regulators, and so on.
• Formation of new alliances and partnerships.
• Decisions on ‘real option’ investments that build
robustness against the range of scenarios.
From making ‘big bets’ on the future to
creating ‘real options’
In developing strategy under uncertainty,
companies face two economic tradeoffs when
making large, irreversible investments:
Acting early versus acting later after the
uncertainty is resolved, and
Focusing resources on one scenario versus
spreading resources to address several scenari-
os and so build resilience and flexibility.
Messy, ambiguous, uncertain and complex business outlook
DivergenceExploring difference multiple perspectives.
ConvergenceSearch based on imagination and disciplined analysis.
Strategic Outcomes• Changed thinking.• Informed narative
about possible futures.• Improved organisational
decision making.• Enhanced human and
organisational learning and foresight.
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To solve these issues, the analytical frame-
work of ‘real options’ is applied.
Real options logic has an intuitive sense. It
advises to move forward in stages when steering
investments through uncharted waters: consider
a variety of future scenarios and potential strate-
gies; favour flexible actions that are robust to
uncertainties; favour actions that yield useful
information; probe, experiment and learn through
doing; monitor and adapt to changing conditions.
The real options framework explicitly recog-
nises that management always has the power to
change strategy in response to changing condi-
tions. They use levers such as: accelerate or
defer, ‘make or buy’, switch markets, expand or
contract, and so on.
Value is created through identifying, creating,
owning, managing, and exercising options such
as the following:
Planting seeds: Experiment strategically by
making a series of small investments, before
making the big ones;
Learning actively: Decisions on a program do
not always have to be made up front; conduct
tests and capitalise on learnings;
Building on-ramps and off-ramps: Embed
options to defer or accelerate, to switch direc-
tion at any stage.
Figure 2. illustrates a decision tree for a
two-stage investment decision, the simplest
form of real option.
By breaking decisions into stages, execu-
tives can build flexibility into their plans. When
building a new plant, for example, it may be
tempting to realise the full economies of scale
by building the biggest facility the company
can manage. But it may be wiser to first build a
smaller plant that can be easily expanded later
on. That way, if the market for the products the
plant produces does not emerge as expected, a
smaller investment has been put at risk. At that
point, managers have the option to scale down
or abandon operations. On the other hand, if
things turn out well, they have the option to
expand the plant.
With increased volatility in the business envi-
ronment, real options actually become more
valuable, so companies should be willing to pay
A recent study of Korean manufacturing export
firms demonstrated that companies with real
option-type investments – operating both off-
shore and on-shore facilities – benefited through
having flexibility during the economic downturn,
in contrast to firms without such investments.
ConclusionIf traditional strategy no longer works in a world
of faster, broader and uncertain change, then
neither does fire fighting, buzz-following and
similar myopic approaches.
To succeed in the years of dramatic change
ahead companies will benefit from the methods
of Strategy 2.0.
Develop sense-making skills such as scenario
planning to probe a messy, complex and uncer-
tain market and business environment. Reduce
the reliance on forecasts for making decisions;
for example by shrinking lead times. Use real-
option based reasoning to build flexibility into
investment programs. Build new capabilities
that facilitate responsiveness, experimentation
and capture of new opportunities.
Play the game like an entrepreneur would
play. A talent for seeing things differently, rather
than competing head-to-head, is now the chief
instrument of strategic advantage.
Jay Horton is the founder and managing
director of Strategis Partners, and a leading
adviser to companies and governments in Asia
and Australia on strategic management issues,
including scenario planning, capital investment
decision making and real options analysis, and
corporate strategy. Contact Jay at [email protected]
strategispartners.com.au or visit www.strat-
PHASE 1Investment Decision / Project Performance
PHASE 2Investment Decision
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