Strategy as Art and Science: Part 4 – Strategic Assumptions and their Importance to the Process

Introduction

One of the main causes for sub-optimal strategy execution in organisations, is the formulation of incorrect assumptions about future changes in the environment – or even worse – not making any assumptions. There are many potential reasons for this, but there are normally only a handful of factors responsible for these “stalls” in strategy execution. Before discussing those, let us go a bit deeper into the issue of strategic assumptions, also called critical assumptions.

What are Strategic Assumptions?

Assumptions are our beliefs about different characteristics of the external and internal environment that underlie our current strategy – and because strategy is forward-focused, by implication it is about future changes in those environmental characteristics.

Since there are potentially hundreds of such assumptions, a company should focus on those assumptions which, if not (properly) addressed, would lead to significant change for the company’s strategy, plans or operations.

There are various ways in which to go about making assumptions on the external dimensions of the Political, Economic, Social, Technological, Legal, and Environmental (physical) arenas. Some examples are:

1.  Customer Interrogation.

• Groups of company employees across all departments engage in brainstorming exercises to unearth core beliefs as to what customer perceptions might be, e.g. “what would our customers never say about us?”
• The members are drawn from across the company varying in age, gender, and job function.
• These exercises are helpful in directing discussion to important categories of assumptions.

2.  Crucial Bets.

• This is based on the research conducted by the corporate strategist/R&D section with a range of industry experts. A select range of employees are asked for their bets about which assumptions will be important.
• The process drives towards providing incentives for intense, effective negotiation.
• The infusion of industry opinions on marketplace uncertainties helps ensure that a comprehensive set of issues is considered.

3.  Cause-Effect Analysis.

• A cross-functional team brainstorms marketplace driving forces, stating hypotheses for clusters of forces that describe the team’s assumptions. Each hypothesis is then diagrammed to help explain the various phenomena, very much along the lines of a cause-effect analysis.
• The diversity of the team helps surface a broad array of driving forces.
• The graphical representation of the team’s ideas is a powerful tool for clarifying thinking on the underlying assumptions behind each force.

4.  Assumptions-Scenario Pairing.

• Multiple teams advocate different scenarios and evaluate the significance of assumptions underlying each strategy.
• The teams collectively develop a single list of assumptions for further evaluation and monitoring.

Reasons for Strategic Stalls

So those are some ways in which one can arrive at defining strategic assumptions. But why do so many companies still fail to identify the correct assumptions? Or differently put – what are the underlying causes of why organisations fail to properly develop proper strategic assumptions?

• Strategic Inflexibility. Inability of a market leader to respond correctly to the emergence of a low-cost competitor and/or changing customer needs/desires. Also termed the 'We have always done it this way' syndrome. History is replete with examples of companies who have lost their premium position in the market by not reading the signs of environmental changes correctly.
• Emergence of Disruptive Technology. A new product or channel that typically “underperforms” upon first appearance in market, but then rapidly disrupts existing competitors by evolving to superior price/performance position. Examples are especially available within the PC and cellphone markets. (I bought a ZX Spectrum when they first came out, with just about one byte of memory! Little could I imagine what future portable computing power would do...)
• Group Think. I have written an article before on LinkedIn about this. Inadequate skill/experience base in the executive management team to respond effectively to changing market conditions or competitive requirements – a bias towards “group think.” One often finds this when senior management are promoted beyond 'their level of incompetence.'
• Premature Ejection. Failure to fully exploit growth opportunities present in the existing core franchise (product/customers/-channels).
• Strategic diffusion. A bit of the converse of the previous point - overabundance of strategic initiatives by management team results in dilution of effort.
• Capabilities/Demand Mismatch. Failure of new business/product development infrastructure to meet the incremental growth needs of the company.

Especially as far as these latter points are concerned, management need to keep these close-by as a type of checklist when embarking on strategic assumptions identification, to ensure that they do not fall into the same trap.

References

Aurik, J., Fabel M., Jonk G. 2014. The History of Strategy and Its Future Prospects. Dallas: ATKearney.

Corporate Strategy Board. 1999. Proceedings in Daylight: Frontier Practices in Challenging Strategic Assumptions. Washington D.C: Corporate Executive Board.

Loewen J. 1997. The Power of Strategy A Practical Guide for South African Managers. Johannesburg: Zebra Press.

Pfeiffer J. Goodstein, Nolan T. Understanding Applied Strategic Planning: A Manager’s Guide. California: University Associates, Inc.