What is Strategy Dynamics?

Strategy Dynamics was developed to improve the teaching and practice of strategic management. The principles and frameworks behind the Strategy Dynamics approach are built on sound theoretical foundations that have implications throughout the management field, as well as in many others.

Strategy Dynamics is concerned with understanding and managing performance through time - for commercial firms most often concentrate on earnings, though other performance measures may be important, especially in public policy and non-profit cases. The responsibility of strategic managers and teams is to build and sustain strong performance into the future. To fulfill this responsibility, management should at all times be able to answer 3 basic questions.

                            * Why is business performance following its current path?

                            * Where is it going if we carry on as we are?

                            * How can we design a robust strategy to radically improve performance into the future?

The answer to the final question - how to improve performance into the future - must give managers specific policy recommendations ... what to do, when, how much, in what order, coordinated how between different functions, with what likely outcomes, and with what mechanisms for monitoring and adjusting strategy and policy as the future unfolds.

How is Strategy Dynamics different from current approaches?

Most methods and frameworks for strategy analysis in use today trace back to either

(a) micro-economic analysis of competitive markets

or

(b) scrutiny of firms' cost-structures and margins.

Both value-chain analysis and statistical approaches to understanding and enhancing profitability are essentially static tools. They seek to explain profits at each moment in terms of other causes, at that same time. In some cases, analysis is time-shifted, in an effort to recognise that delays will arise – e.g. is today's profitability related to R&D expenditure or training commitments 5 years previously? In contrast, Strategy Dynamics recognises that organisations are travelling along a trajectory through time, whose path is determined by the accumulating history of their policies.

The word ‘dynamics’ appears frequently in discussions and writing about strategy, and is used in two distinct, though equally important senses.

The dynamics of strategy and performance concerns the ‘content’ of strategy – initiatives, choices, policies and decisions adopted in an attempt to improve performance, and the results that arise from these managerial behaviors. The dynamic model of the strategy process is a way of understanding how strategic actions occur. It recognizes that strategic planning is dynamic, that is, strategy-making involves a complex pattern of actions and reactions. It is partially planned and partially unplanned.

A literature search shows the first of these senses to be both the earliest and most widely used meaning of ‘strategy dynamics’, though that is not to diminish the importance of the dynamic view of the strategy process.

Static Models of Strategy and Performance

The static assessment of strategy and performance, and its tools and frameworks dominate research, textbooks and practice in the field. They stem from a presumption dating back to before the 1980s that market and industry conditions determine how firms in a sector perform on average, and the scope for any firm to do better or worse than that average. E.g. the airline industry is notoriously unprofitable, but some firms are spectacularly profitable exceptions.

The need for a Dynamic Model of Strategy and Performance

The debate about the relative influence of industry and business factors on performance, and the RBV-based explanations for superior performance both, however, pass over a more serious problem. This concerns exactly what the ‘performance’ is that management seeks to improve.

The essential problem is that tools explaining why firm A performs better than firm B at a point in time are unlikely to explain why firm B is growing its performance more rapidly than firm A.

This is not just of theoretical concern, but matters to executives too – efforts by the management of firm B to match A’s profitability could well destroy its ability to grow profits, for example. A further practical problem is that many of the static frameworks do not provide sufficiently fine-grained guidance on strategy to help raise performance. For example, an investigation that identifies an attractive opportunity to serve a specific market segment with specific products or services, delivered in a particular way is unlikely to yield fundamentally different answers from one year to the next. Yet strategic management has much to do from month to month to ensure the business system develops strongly so as to take that opportunity quickly and safely. What is needed is a set of tools that explain how performance changes over time, and how to improve its future trajectory – i.e. a dynamic model of strategy and performance.

A Possible Dynamic Model of Strategy and Performance

To develop a dynamic model of strategy and performance requires components that explain how factors change over time. Most of the relationships on which business analysis are based describe relationships that are static and stable over time. For example, “profits = revenue minus costs”, or “market share = our sales divided by total market size” are relationships that are true. Static strategy tools seek to solve the strategy problem by extending this set of stable relationships, e.g. “profitability = some complex function of product development capability”. Since a company’s sales clearly change over time, there must be something further back up the causal chain that makes this happen. One such item is ‘customers’ – if the firm has more customers now than last month, then (everything else being equal), it will have more sales and profits.

The number of ‘Customers’ at any time, however, cannot be calculated from anything else. It is one example of a factor with a unique characteristic, known as an ‘asset-stock’. This critical feature is that it accumulates over time, so “customers today = customers yesterday +/- customers won and lost”. This is not a theory or statistical observation, but is axiomatic of the way the world works. Other examples include cash (changed by cash-in and cash-out-flows), staff (changed by hiring and attrition), capacity, product range and dealers. Many intangible factors behave in the same way, e.g. reputation and staff skills. point out that this causes serious problems for explaining performance over time:

    * Time compression diseconomies i.e. it takes time to accumulate resources.

    * Asset Mass Efficiencies ‘the more you have, the faster you can get more’.

    * Interconnectedness of Asset Stocks. Building one resource depends on other resources already in place.

    * Asset erosion. Tangible and intangible assets alike deteriorate unless effort and expenditure are committed to maintaining them

    * Causal ambiguity .. it can be hard to work out, even for the firm who owns a resource, why exactly it accumulates and depletes at the rate it does.

The consequences of these features is that relationships in a business system are highly non-linear. Statistical analysis will not, then, be able meaningfully to confirm any causal explanation for the number of customers at any moment in time. If that is true then statistical analysis also cannot say anything useful about any performance that depends on customers or on other accumulating asset-stocks – which is always the case.

Fortunately, a method known as system dynamics captures both the math of asset-stock accumulation (i.e. resource- and capability-building), and the interdependence between these components The asset-stocks relevant to strategy performance are resources [things we have] and capabilities [things we are good at doing]. This makes it possible to connect back to the resource-based view, though with one modification. RBV asserts that any resource which is clearly identifiable, and can easily be acquired or built, cannot be a source of competitive advantage, so only resources or capabilities that are valuable, rare, hard to imitate or buy, and embedded in the organization [the ‘VRIO’ criteria] can be relevant to explaining performance, for example reputation or product development capability. Yet day-to-day performance must reflect the simple, tangible resources such as customers, capacity and cash. VRIO resources may be important also, but it is not possible to trace a causal path from reputation or product development capability to performance outcomes without going via the tangible resources of customers and cash.

P2M InfoTech brought together the specification of resources [tangible and intangible] and capabilities with the math of system dynamics to assemble a framework for strategy dynamics and performance with the following elements:

    * Performance, P, at time t is a function of the quantity of resources R1 to Rn, discretionary management choices, M, and exogenous factors, E, at that time (Equation 1).

(1) P(t) = f{R1(t), .. Rn(t), M(t), E(t)}

    * The current quantity of each resource Ri at time t is its level at time t-1 plus or minus any resource-flows that have occurred between t-1 and t (Equation 2).

(2) Ri(t) = Ri (t-1) +/- \bigtriangleup Ri(t-1 .. t)

    * The change in quantity of Ri between time t-1 and time t is a function of the quantity of resources R1 to Rn at time t-1, including that of resource Ri itself, on management choices, M, and on exogenous factors E at that time (Equation 3).

(3) \bigtriangleup Ri(t-1 .. t) = f{R1(t-1), .. Rn(t-1), M(t-1), E(t-1)}

This set of relationships gives rise to an ‘architecture’ that depicts both graphically and mathematically, the core of how a business or other organization develops and performs over time. To this can be added other important extensions, including:

    * the consequence of resources varying in one or more qualities or ‘attributes’ [e.g. customer size, staff experience]

    * the development of resources through stages [disloyal and loyal customers, junior and senior staff]

    * rivalry for any resource that may be contested [customers clearly, but also possibly staff and other factors]

    * intangibe factors [e.g. reputation, staff skills]

    * capabilities [e.g. product development, selling]

The Static Model of the Strategy Process

According to many introductory strategy textbooks, strategic thinking can be divided into two segments : strategy formulation and strategy implementation. Strategy formulation is done first, followed by implementation.

Strategy formulation involves:

   1.    * Doing a situation analysis: both internal and external; both micro-environmental and macro-environmental.

          * Concurrent with this assessment, objectives are set. This involves crafting vision statements (long term), mission statements (medium term), overall corporate objectives (both financial and strategic), strategic business unit objectives (both financial and strategic), and tactical objectives.

          * These objectives should, in the light of the situation analysis, suggest a strategic plan. The plan provides the details of how to obtain these goals.

This three-step strategy formation process is sometimes referred to as determining where you are now, determining where you want to go, and then determining how to get there.

The next phase, according to this linear model is the implementation of the strategy. This involves:

   1.    * Allocation of sufficient resources (financial, personnel, time, computer system support)

          * Establishing a chain of command or some alternative structure (such as cross-functional teams)

          * Assigning responsibility of specific tasks or processes to specific individuals or groups

          * It also involves managing the process. This includes monitoring results, comparing to benchmarks and best practices, evaluating the efficacy and efficiency of the process, controlling for variances, and making adjustments to the process as necessary.

          * When implementing specific programs, this involves acquiring the requisite resources, developing the process, training, process testing, documentation, and integration with (and/or conversion from) legacy processes

Moncrieff Model of Strategy Dynamics

The alignment of action with strategic intent (the top line in the diagram), is the blending of strategic intent, emergent strategies, and strategies in action, to produce strategic outcomes. The continuous monitoring of these strategic outcomes produces strategic learning (the bottom line in the diagram). This learning comprises feedback into internal processes, the environment, and strategic intentions. Thus the complete system amounts to a triad of continuously self regulating feedback loops. Actually, quasi self regulating is a more appropriate term since the feedback loops can be ignored by the organization. The system is self-adjusting only to the extent that the organization is prepared to learn from the strategic outcomes it creates. This requires effective leadership and an agile, questioning, corporate culture. In this model, the distinction between strategy formation and strategy implementation disappears. Do not copy from here .. there is no evidence for its validity! No author's name ! No expert opinion. This website is just for reference.

Criticisms of Dynamic Strategy Process Models

Some detractors claim that these models are too complex to teach. No one will understand the model until they see it in action. Accordingly, the two part linear categorization scheme is probably more valuable in textbooks and lectures.

Also, there are some implementation decisions that do not fit a dynamic model. They include specific project implementations. In these cases implementation is exclusively tactical and often routinized. Strategic intent and dynamic interactions influence the decision only indirectly.