Is Your Strategic Approach Robust?

A whitepaper adressing the academic background of the Strategic Diamond by Alexander Tschentscher , Anshumaan Saxena and Dr. Annika Judith Schlicht

Executive Summary

Initial problem and root cause

Strategy implementations are linked to a high failure rate, often caused by the lack of ability of the underlying strategic framework to resist risks and manage changes. Many functional strategies are not being able to be closely aligned with the business strategy, which also results in challenges and isolation for functional strategies. In this regard, especially supply chain management and logistics strategies may lead to ineffectiveness and failure in the face of future disruptions to supply chains. The reason is that strategic frameworks in supply chain management and logistics often neglect the required adaptability to the faster pace of change and the required dynamics in the volatile and uncertain world. Instead, they are often closely linked to the enhancement of quality, cost, and time. Future strategic frameworks in supply chains need to consider market impacts and developments as well as strategic goals in a dedicated structure.

Solution

This realization has encouraged Siemens to design a strategic framework that is appropriate for supply chain strategy implementation in unstable times.?The developed Strategic Diamond establishes extensive end-to-end connections between the market and the strategy and allows to focus on the customer perspective. Hence, it provides the ability to adapt to the ever-changing world of supply chain management rapidly and precisely.??

Value-addition

The Strategic Diamond allows for being strategic rather than deviating to tactics. It filters the relevant impacts on the strategy. In addition, it addresses the reasonable challenges to keeping the strategy relevant and alive. Thus, it facilitates supply chain leaders in not merely focusing on current but beyond leveraging future profits. Overall, it concentrates on four core characteristics:

·?????? CONNECTIVE: Connecting external market side and internal strategy side

·?????? SAFEGUARDING: Acting as a shielding layer for impacts on the strategy

·?????? ADAPTABLE: Keeping strategy’s relevance high through an adaptable framework?

·?????? TRANSPARENT: Providing intra-organizational transparency?

Strategy implementation in unstable times

Recently, businesses have faced numerous challenges more than ever before. Unexpected events like COVID-19, the Ukraine-Russia war, the blockage of the Suez Canal, and political turmoil in Afghanistan put many businesses in survivor mode. As a result, there has been huge unemployment, shutting down of operation facilities, a decline in production, and many other challenges that impacted supply chains directly or indirectly. As sustaining the business became consequently more important than implementing strategies, also most strategies lost their focus during these crises due to their disrupted supply chains.

Particularly, in March 2022, 80.2% of German manufacturing companies complained about bottlenecks and issues obtaining raw materials and intermediate products [1]. In general, supply chain disruptions lasting a month or longer are predicted to occur on average every 3.7 years in the future [2]. Potentially, they are accompanied by significant financial repercussions for businesses in a variety of industries [2]. Global supply chains are increasingly faced with digitalized and fast-paced developments [3, 4], which may lead to constant transformations, which results in a complex and ambiguous environment [5], especially for supply chain management and logistics strategies [6].

On the theoretical side, the dynamic capabilities view (DCV) by Teece et al. [7] is considered an appropriate strategic approach in unstable times. It explains that dynamic capabilities are required to allow "the firm’s ability to integrate, build, and reconfigure internal and external competencies to address rapidly changing environments" [7, p. 516]. Dynamic capabilities are specific routines or processes that allow the integration, transformation, or renewal of current resources to create new capabilities as markets evolve [7, 8]. As a result, dynamic capabilities support survival and persistence in today's unstable environment [3, 7, 8].

According to Teece [11], dynamic capabilities can be seen as a process that is divided into three steps: (1) Sensing new opportunities and trends; (2) Seizing the opportunities; and (3) Reconfiguring the available resources to remain competitive.

Consequently, sensing, seizing, and reconfiguring capabilities need to be considered when looking at strategies of organizations in unstable times [12], as presented in Figure 1.?

On the practical side, as far as strategies in the field of supply chain management are concerned, this realization does not yet seem to have emerged in practice. In 2009, Harvard Business Review [13] already stated that for strategies, “constant transformation is the new normal”. Also according to Gartner [6], supply chain strategies often do not provide an approach for the frequent connection of strategies to the continuous flow of disruptions as to be expected.??

This is reflected in the high failure rate of strategy implementations, reaching up to 90% [14]. The list of failure reasons for strategy implementations is long and varies from no clear priorities to over-complexity and isolated actions within the strategic framework that is detached from the market side [6, 15–17]. Some of these failures reasons can be traced back to the lacking ability of an underlying strategic framework to connect to the ever-changing world [6, 15–17]. For instance, to counteract over-complexity, it is essential to first concentrate on priorities within the strategic framework and then review and adjust the elements of the framework to new impacts over time [18]. Due to unforeseen circumstances, a strategic framework that is now successful might be outdated in one or two years [19]. Therefore, it could prevent the strategy to get fully implemented [19]. Considering the as-yet-unimagined disruptions and risks, strategic frameworks in supply chain management that ignore the connection to the market lead to ineffectiveness and failure [6].

To conclude, this disconnection between the market and the strategy side implies decreasing relevance of the strategy over time, as displayed in Figure 2. There, all the key elements of a strategy in relevance with the market and the business goals are represented by the orange and black lines, respectively. After the launch of the strategy, it can be seen that the strategy is constantly affected by unexpected impacts. The impacts negatively influence some key elements of the strategy and thus reduce the relevancies to the market. As a result, the relevancy gap between both views becomes prominent from the initial impact during the development phase and keeps on growing with each impact afterward. The challenge to reduce or even maintain this difference cannot be overcome by just quarterly strategy reviews and the respective adoptions. During the annual strategy reviews, significant discrepancies between the two views are identified. Then, revisions made to match those views are not enough to regain the initially established level of relevance, as also highlighted by the end of the fourth quarter in Figure 2.

The strategy failure provided by the insufficient response to impacts and the ever-increasing strategy relevancy gap (as shown in Figure 2) need appropriate solutions. Ongoing impacts on supply chain strategies require the strategic framework to always keep an eye on the strategy relevance of both sides [6]. Hence, to allow effective strategy implementation, decision-makers need strategic frameworks that help to respond to the impacts appropriately and to establish a connection with market trends.

The Strategic Diamond as Siemens’ Approach

In general, impacts may concern every kind of strategy. Functional strategies, such as supply chain strategies, carry additional risks because they aren't always considered a core component. Rather, they are considered an enabler for maintaining operations and the end-to-end handling of goods and services. Therefore, supply chain strategies must be the focus of every leadership team to support businesses in their viability. As a result, organizations are searching for approaches to combat the shortcomings of supply chain strategies and solutions to allow the crucial outside-in perspective within their strategic framework.

So, what exactly is Siemens’ approach to these challenges? Siemens recognized early that supply chains are impacted in an ongoing manner, implying the need to connect strategy to the external world to allow adaptability. Otherwise, as highlighted in Figure 2, the strategy loses relevance over time, before being fully implemented. Infrastructure, “The supply chain of the future needs a detailed overview of the underlying strategy, while closely looking at business operations and customer demands”. From this belief, supply chain leaders must not only have a holistic view of their strategy but also have a perspective to implement very detailed activities across their organization.

As stated by Alexander Tschentscher, Head of Logistics Strategy at Siemens Smart Infrastructure, “Immediate response to a supply chain impact is not a strategy, it should be intended to resist the risks rather than only managing it”. However, strategic frameworks applied in practice neglect the required connection to the unstable environment by solely focusing on risk management. Nevertheless, risk management is one step too late, combatting merely negative influences that already happened. To overcome this tactical direction of supply chain strategies, the loop of managing impacts and the attempt to put the strategy in a steady state needs to be broken, as presented in Figure 3.

In strategy implementations, instead, it was found to be relevant to be aware of changing conditions and include them without changing the whole strategy direction [20–26]. Hence, based on the DCV [7, 12], Alexander Tschentscher decided to create a strategic framework, called Strategic Diamond, being convinced that it is the more or less secret ingredient to guarantee the viability of a strategy in unstable times.??

The so-called the Strategic Diamond can be defined as –

“A strategy implementation framework which establishes connections between strategies and impacts from the markets. It enables businesses to sustain their strategy by continuous adaption while managing the impacts and proactively resisting risks in an unstable environment. The overall framework resembles the shape of a diamond and consists of five main facets, namely trends & triggers, focus areas, strategic activities, strategic fields, and strategic key elements.”

The Strategic Diamond provides a comprehensive answer to challenges influencing supply chain strategies, such as changing market conditions, disruptive technologies, changing offerings, new business models, or changing competition [17]. The Strategic Diamond does not follow any trends and triggers, but merely those which impact the strategy. This allows one to always be oriented towards customers while managing ongoing impacts, as the best strategy implementation framework adds no value when not matched with the constantly transforming customer needs [27].

The Strategic Diamond thus contributes to keeping supply chain strategies viable in the following ways:?

1.??????? CONNECTIVE: Connecting external market side and internal strategy side: By building imaginary, but omnipresent connections between market and strategy, the Strategic Diamond enables Siemens’ supply chain executives in making better strategic decisions while having a detailed view of all the interconnected elements of the Strategic Diamond.

2.??????? SAFEGUARDING: Acting as a shielding layer for impacts on the strategy: By not merely integrating all trends & triggers, the structured facets of the Strategic Diamond help to focus on the essentials and do not jeopardize as well as delay the strategy implementation. It supports being resistant to the continuous and direct impact of trends & triggers on the strategy and thus keeping the strategy on track in the unstable environment.

3.??????? ADAPTABLE: Keeping strategy’s relevance high through an adaptable framework: The Strategic Diamond supports by providing flexibility to adapt frequently based on changing market trends and business goals without losing focus on customers and also without restructuring the established strategy. This is accomplished by independent linear connections between the elements of the strategy and the market.

4.??????? TRANSPARENT: Providing intra-organizational transparency: Through the Strategic Diamond, every member of the logistics community at Siemens has the accessibility to know the impacts of their job-related activities on the strategy. This enables the leaders to initiate the projects crucial to fulfilling the strategic goals and further manage the interdependencies of the activities throughout the organization.

The described major characteristics of the Strategic Diamond can be summarized in Figure 4.

By dealing with the four characteristics, the Strategic Diamond allows for keeping the internal and external view in conjunction (as in Figure 5) - in contrast to increasing the relevancy gap (as in Figure 2). This establishment of active connections helps the businesses to keep their strategy on track and thus relevant to both views. As also shown in Figure 5, the level of relevance of both views was held high throughout the year and did not decrease as displayed in Figure 2. The disruption caused by impacts does not increase the difference between both relevancies. Instead, the quarterly reviews and connected framework of the Strategic Diamond enable re-establishing the close connection of the sides and reviving the strategy's respective relevancies. Through the Strategic Diamond, the integration of trends & triggers with the strategy is actively sustained through development until the implementation phase. Therefore, the Strategic Diamond is easing the maintenance process of strategy implementation.

In conclusion, the advantage of the Strategic Diamond lies in supporting organizations in securing the viability of their strategies, whether it is related to a business strategy, or underlying strategies regarding specific functions of an organization. By actively responding to and resisting impacts coming from the market & customer side, the framework is specially designed to assist in fast-changing environments, such as supply chain management and logistics.

Functioning of the Strategic Diamond

Overall, the Strategic Diamond aims to embrace the philosophy of doing the right things over doing things right. It concentrates on the market side and the strategy side to fulfill the four core characteristics. The connections between these sides are established by components inside the Strategic Diamond, which are called facets. The five different facets act as a foundation for the Strategic Diamond. On the one side, two facets are present, so-called trends & triggers and focus areas, acting as shielding layers, helping to sense the essential impacts [12] on the strategy. These facets require regular adaption. In contrast, on the other side, facets named strategic fields and strategic key elements ensure not to deviate from, stay closely aligned with, and seize [12] the strategy. The two sides are connected with a facet in the middle of both, called strategic activities. The strategic activities consider the external side while keeping on track with the strategy by reconfiguring capabilities [12].

The two sides of the Strategic Diamond and the five different facets are illustrated in Figure 6.?

In general, the end-to-end connection between elements of the Strategic Diamond can be accessed in both ways, starting from the trends & triggers to the strategic key elements or vice-versa. For simplification reasons, the functioning of the Strategic Diamond is explained only in one way beginning with the trends & triggers and ending with the strategic key elements.

Market and customer side (External View)

Trends & triggers are the alterations and advancements provided by the market and the customer that have an intended or unintended, positive, or negative effect on the strategy. Various external factors, such as geopolitical, economical, social, technological, environmental, or legal regulations as well as internal adaptations within a company’s strategy or goals, new insights in research, and shifting norms that affect the strategy medium-term, can be emerged as trends & triggers. Thereby, they are compared to an ever-evolving living organism, as the list of trends & triggers impacting the strategy can be never completed. At least every quarter, meetings and vigorous analyses are conducted to challenge new impacts on the strategy and to evaluate the relevance of identified trends & triggers to the business. This procedure allows for coping with the complexity of a strategic framework by constantly monitoring the latest trends & triggers influencing the strategy by using trend scouting, close collaboration with trend offices, and analyses of relevant data for a company’s business.?

To support the understanding of the mechanism behind the Strategic Diamond, a logical decision diagram is presented in Figure 7. After potential trends & triggers are identified from all the incoming impacts (step 1), the question arises if these are relevant to the strategy (step 2). The two steps act as the first shielding layer. If yes, then the respective trends & triggers are included in the further evaluation. If no, the identification process of new trends & triggers resumes (step 1). All the identified trends & triggers are potentially consolidated and arranged into dedicated thematic clusters called focus areas.

Thereby, it first needs to be evaluated if appropriate pre-defined focus areas exist for the identified trends & triggers (step 3). In case no suitable focus area exists, new focus areas need to be created to cluster the respective trends & triggers (step 4). After the clustering, it is checked whether the created focus areas are relevant to the strategy (step?5), acting as the second shielding layer. In case it is found to be relevant, the selected trends & triggers are consolidated into these focus areas and are included in the Strategic Diamond (step 6). If the identified focus areas are found not to be aligned with the strategy, the identification of trends & triggers will be resumed again (step 1).

Going back to the question, of whether appropriate pre-defined focus areas for the identified trends & triggers exist. If this is the case, directly a consolidation into these focus areas takes place (step 6).

Focus areas are generally designed based on themes like sustainability, digitalization, diversity, or political issues. Focus areas and trends & triggers are checked and revised every quarter. They display attention to the major themes impacting the strategy which need to be addressed continuously and help business executives to decide the drivers of individual topics.?

Connecting the Market and the Strategy

After the trends & triggers have been consolidated in focus areas, the question arises if enough strategic activities are available to realize the focus areas in connection with the strategy (step 7).?

In case applicable strategic activities are already in place, a connection with the respective focus areas needs to be created (step 9). If not, new strategic activities need to be created (step 8) before connecting the activities to the focus areas (step 9), as presented in Figure 7.

In the tenth step, after the connection between the strategic activities and the focus areas has been established, it needs to be checked whether the strategic activities are in alignment with the strategy side or not (step 10). This is mandatory as every strategic activity must adhere to at least one focus area and one strategic field of the Strategic Diamond to be validated. If yes, a connection is established between the strategic activities and respective strategic fields (step 11). If not, new strategic activities need to be created (step 8).

The creation of suitable strategic activities is a critical bottleneck by being the connecting bridge between the external market & customer side and the internal strategy side. Without them, managing the impacts along with realizing strategic objectives would be inadequate, resulting in a mismatch between both sides and, ultimately, an ineffective strategy. Strategic activities do not need to be updated in the same frequency as the other elements of the Strategic Diamond, but rather whenever necessary. Furthermore, strategic activities are the starting point for each member of the organization to understand the role and relevance of their actions toward managing impacts and strategy fulfillment.

Strategy side (Internal View)

The other end of the Strategic Diamond consists of two facets and refers to medium-term strategic goals that are challenged approximately every five years. One facet is strategic key elements, which are directly derived from the business and can therefore be seen as the heart of the strategy. The key elements are revised and verified on a two-year basis and provide key points about what is relevant to the strategy and what is not.?

Every strategic key element is allocated to at least one strategic field. The strategic fields establish the connection between the key elements and the activities. The core purpose of strategic fields is to enable progress tracking of the fulfillment of strategic key elements. Therefore, they are closely tied to specific key performance indicators (KPIs) that help monitor the strategy’s realization. To allow the connection to the external world, every strategic activity must be connected to at least one strategic field (step 11). The connections between the strategic key elements and strategic fields are pre-defined in strategy decision meetings and cannot be affected by any impact.

Key rules

To summarize, the process to set up the Strategic Diamond consists of several steps that need to be followed to allow the functioning of the framework and consistency with the four identified core characteristics. Thereby, certain rules can be derived that must be adhered to.

1.?? Up to date: Regular inclusion of new trends & triggers: The Strategic Diamond relies on the regular inclusion of relevant trends & triggers. This allows the Strategic Diamond to always stay up to date. Otherwise, it results in lower relevancies, and eventually, it may fail to support the strategy implementation.

2.?? Suitable: Checking the suitability of included elements to the strategy: When including a new element in the Strategic Diamond, its alignment with the strategy needs to be ensured before connecting it to other elements. This keeps the strategy relevancy up and avoids it to drop with every impact.

3.?? End-to-end connection: Connecting all middle elements to each side: All focus areas, strategic activities, and strategic fields need to be connected on each side. There could never be a dead end in the middle of the Strategic Diamond. Otherwise, the required connection between the market and the business side is not established.

Strategic Diamond Example

The Supply Chain & Logistics of Siemens is regularly impacted by new trends & triggers. Consequently, it is predestinated for the application of the Strategic Diamond. Following a thorough description of the Strategic Diamond's working mechanism, the example below provides a practical explanation of how Siemens handles impacts on their supply chain strategy.

Within the quarterly strategy review, the triggering norms “ISO 45001/ISO 14001” have been identified by Siemens (step 1). These norms are connected to an organization's internal and external impacts, and hence to the overall implementation of an Environmental Management System (EMS). They aim to decrease an organization's waste, pollution, and energy consumption. Consequently, by impacting decarbonization goals, it is verified that these norms are relevant to the supply chain strategy (step 2).

After “ISO 45001/ISO 14001” have been found to have a crucial impact on the supply chain strategy, these triggers are considered for further evaluation. Going to the next facet, one needs to look for suitable focus areas (step 3). Siemens already has pre-defined focus areas regarding their sustainability topics, and among all of them, the focus area “Create a supply chain which fulfills zero CO2 emissions by 2050” was found to be most suitable. Therefore, the triggering norms are consolidated in this focus area (step 6).

Siemens' supply chain executives concluded in vigorous analyses and discussions that a strategic activity named “End-to-end CO2 footprint tracking with carbon web assessment” is in direct alignment with this focus area (steps 7 - 8). In step 9, the focus area “Create a supply chain which fulfills zero CO2 emissions by 2050” is connected with this strategic activity. Following, it is examined whether the strategic activity is in alignment with the strategy side (step 10).

Siemens’ supply chain strategy has been decoded into several strategic key elements. They considered some selected topics for competitive advantage and thus have a key element entitled “outperform”. This key element has connections with other proceeding strategic fields, and one of them is “tailored services”. As a result of internal strategic analyses, the aforementioned strategic activity is found to be related to the strategic field of “tailored services”. Therefore, this connection has been made between these two (step 11).

As a result, the identified trigger “ISO 45001/ISO 14001” is now connected with the strategic key element “outperform”, as displayed in Figure 8. By applying the intermediate steps of the Strategic Diamond, the strategy relevancy gap is expected to remain small and helps to keep the supply chain strategy on track.

Conclusion

Strategy implementations are more than ever confronted with an accelerating pace of change in the world. Especially in the field of supply chain management and logistics, ongoing disruptions often imply a deviation from the initially set strategy and further hinder the proper implementation. The pace of change will not fall, so instead of responding and managing the challenges afterward, supply chain management and logistics need to resist the risks and avoid being trapped in a tactical paradigm.

Recent disruptions faced by businesses have proven the need for adaptable and connected strategic frameworks. Until now, existing strategic frameworks in practice are mostly too rigid to respond adequately to the high pace of change and are focused on the optimization of the intra-organizational side of strategy. However, regarding managing impacts from the external world, the connection to the strategy often fails.

The Strategic Diamond addresses these challenges and provides a decent foundation for a well-structured strategic framework. The connection established between the external market side and internal strategy side benefits the supply chain leaders to have an end-to-end overview of their strategy in connection with the market, without losing focus on customer demand. This helps to overcome the failure rate, keeps the relevancies high, and provides a transparent layer of the strategy and aligned operations with it. With the next evolutionary stage of implementing artificial intelligence algorithms, the identification of critical paths related to the impact on a strategy would make the Strategic Diamond a strategic navigator for organizations in the future.

Keeping the strategy on track is what the Strategic Diamond adds value to. Facets acting as shielding layers support businesses to filter the impacts into precise trends & triggers and thus avoid deviating from fulfilling the business goals.

The case study of Siemens’ supply chain and their application of the Strategic Diamond prominently displayed the role of strategic frameworks in keeping strategy effective in unstable times and improving ongoing operations. Their strategic framework allows the reduction of complexity and provides a multi-dimensional perspective on the strategy to support multiple bodies to collaborate on common grounds and induce a culture of innovation and change.

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