by Dr Ian Turner

An article based on this paper appeared in the Financial Times series Mastering Management

How can organisations formulate strategy in a world which is fast changing and unpredictable? How can managers implement strategies when they cannot control the resources required for their success?

Conventional approaches to strategy have been grounded, broadly, in two opposing schools of thought. The "traditional approach" (it has been called many different names) was pioneered in the 60s by writers like Igor Ansoff and Kenneth Andrews. Strategy was conceived as a rational, sequential process. Define your objectives, analyse your position, evaluate alternative courses of action, select your strategy and implement it. In this process the "thinking" aspects were kept separate from the "doing" aspects, both in time - through the sequence described above - and in space, through the separation of planning functions (centralised at the top) and operations.

In the 1980s, faced with the reality that too many strategic plans fell victim to organisational inertia, the traditional approach re-invented itself as strategic management. The role of planners was downgraded in favour of line management involvement in an effort to create "ownership" of plans.

However, by this time the orthodoxy of business strategy was drawing fire from a new breed of revisionists. Writers like Quinn and Mintzberg, coming from a behavioural background, questioned the assumptions of the "traditional approach". We know, they said, that decisions in organisations are usually taken with only partial understanding of the situation. Trial and error more closely approximates reality in most organisations. Many strategies emerge gradually over time: sometimes, indeed, strategy is a post-hoc rationalisation of activity which is already ongoing.

This "incremental" approach appeals to many managers because it more closely accords with the messiness of organisational life. But "emergent strategy" offers little guidance to managers struggling with the problem of navigating their companies in an uncertain world.

In fact, neither approach is adequate for our purpose. The traditional approach assumes that the future is understandable and predictable and that action follows thought. The incrementalist approach is essentially reactive.

Non-Linear Logic

Fortunately, insights from the natural sciences can enable us to address the problem of strategy and uncertainty.

These insights come from the emerging body of thinking known as complexity theory. Most of our current theories of economics and organisation are based on linear logic, where cause and effect are closely linked.

More recently there have been attempts to develop non-linear approaches to the study of complex natural and organisational phenomena. According to this perspective, associated with writers like Ralph Stacey, our ability to predict the course of events is limited, because even quite minor changes in apparently isolated phenomena can provoke major changes in the total system. So, for example, a small shift in the fertility rate can provoke a dramatic increase in the population size of certain insects, or a minute variation in temperature levels can cause fundamental changes in natural habitats.

Complex systems have a number of properties. They exhibit life and intelligence. In such systems you cannot fully explain or predict behaviour patterns from simply describing the component parts of the structure. They evolve and develop over time in a non-linear fashion. For example, some technological innovations like computers may develop slowly over many decades. Suddenly, because of the bringing together of distinct technological breakthroughs and/or the discovery of new applications, technologies take off and expand exponentially in a very short time. Complexity theorists refer to this as "punctuated equilibria". There are a number of corollaries to this. One is that evolution proceeds often by chance and accident rather than by conscious attempts at finding optimal solutions. There may not be any particular reason why computers use the QWERTY keyboard or cars maintain a conventional "accelerator, brake, clutch" pedal layout. The design may have been arrived at by chance, but once acceptance is widespread the design becomes "locked in".

Quite complicated behaviour patterns can emerge once a few simple rules are discovered. A flock of birds flying can be simulated by implementing three simple rules, for example. Such behaviours , however, are unlikely to be intuitive and usually the only way to work them out is actually to experience them.

One important implication of complexity theory is how industries evolve over time and are transformed as new innovations become disseminated or standardised. These "industry breakpoints" could be caused by a new revolutionary product which transforms the rules of the competitive game. They can also be driven by fundamental changes in process, (for example the adoption of "lean production" methods by the Japanese car industry) or distribution channels, such as the launching of direct insurance services.

Paul Strebel divides breakpoints into two types: divergent and convergent. Divergent breakpoints occur when product variety suddenly proliferates; convergent breakpoints, by contrast, are often associated with sharp improvements in systems and processes. Divergent breakpoints tend to occur at the embryonic stage in an industry or later on in the life cycle when technological innovation can successfully rejuvenate a mature industry.

Convergent breakpoints usually occur in the transition from embryonic to exponential growth. The standardisation of productions systems, as in the introduction of mass produced car manufacture, or of formats, as in the choice of video or recorded music systems, are good examples of convergent breakpoints.

Strebel has identified a number of typical leading indicators of industry breakpoints. Indicators of divergence include:

Indicators of convergence, on the other hand, include:

Spotting a sea-change in the industry is one thing. Doing something about it is another. Faced with incontrovertible evidence of a significant shift, companies frequently go into denial. This is because the "dominant logic" in the firm is so strong.

Bettis and Prahalad define dominant logic as "the way in which managers conceptualise the business and make critical resource allocations decisions" The dominant logic acts as a filter for all information coming from the environment deemed to be irrelevant. These filtered data in turn then become incorporated into the strategy, systems, values and expectations of the organisation. Thus, within IBM, for years there was an assumption that mainframe computers were essential to the business. The "dominant logic" then became embedded in the strategy, reward systems and resource allocation systems, and persisted long after the circumstances which gave rise to it had changed. In fact, the dominant logic in IBM's case was so persistent that it provoked a crisis which threatened its existence.

Clearly in order to adopt new dominant logics, organisations have to spot changes in the environment and learn new behaviours. Perhaps as important as the capacity to learn as an organisation, is the capacity to "unlearn". Thus, before IBM could revitalise itself, the main-frame logic had to be partially unlearned or forgotten and with it, all the other organisational systems adapted to the new circumstances. There are a number of corollaries to this:

Betttis and Prahalad maintain that organisations are most likely to learn and unlearn when they are removed from their point of equilibrium. This is a key difference with traditional approaches to strategy.

The traditional approach to strategy is based on the notion of "fit": align the company's internal strengths with its external environment. This notion of fit works well when the fundamentals of the business environment remain the same. Fit enables companies to maximise their natural competitive advantage. But faced with radical discontinuities, like industry breakpoints, too much "fit" can prevent a company from making necessary adjustments to compete in a new era.

Complexity theory suggests that organisations respond best to fundamental change if they are not perfectly aligned with their environment but poised on the "edge of chaos". To achieve this top management have to do the following:

Complexity theory challenges our existing view of strategy and shifts our thinking away from "steady state" concepts like: vision, mission, leadership and core businesses. It emphasises process and organisational dynamics, at the expense of content and analysis. It highlights the necessity for experimentation in strategy, but critically it also underlines the importance of revolutionary changes in business logic and competitive behaviour.

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© Ian Turner / Through the Loop Consulting Ltd 1998-2000