Has Strategy Lost Relevance in the Age of Uncertainty?

Rethinking the Strategy Paradigm to Tackle the Future Value Challenge.

The Problem with Strategy

Strategy is fundamentally about creating value. Having an inspiring strategic ambition, making the right strategic choices, and executing them effectively to deliver value to the company’s shareholders and key stakeholders. This sounds relatively simple but the reality is much more complicated. Competitive advantage is hard to achieve and even harder to sustain particularly in environments that are characterized by volatility, uncertainty, complexity, and ambiguity (VUCA). In most industries, competitive advantage today is evanescent in the face of Schumpeterian creative destruction. For a number of years, a handful of companies (e.g., Alphabet, Amazon, Apple, Meta, Microsoft, and Tesla) have seemed impervious to such forces but even these companies have appeared mortal recently.

Creative destruction as defined by the economist Joseph Schumpeter (1883-1950) refers to the “process of industrial mutation that revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” According to a recent study Innosight, corporate longevity remains in long-term decline with the average tenure of companies in the S&P 500 declining from 30 years in the 1970s to 22 years in the 2000s. Moreover, the trend is expected to continue with the average tenure declining below 18 years in the 2010s (Chart 1). The primary driver of the trend is disruption from technology which shows no signs of slowing down. Rather, we are likely to witness more technological progress in the next decade than ever before incl. automation, virtualization, computing, applied AI, genetics (CRISPR), and synthetic proteins.

Chart 1. Average Tenure (Years) of Companies in The S&P 500, 1965-2030.

The average tenure is calculated as the seven-year rolling compound annual growth rate (7yrCAGR) to smooth year-on-year volatility.

Faced with an onslaught of dynamic and potentially disruptive challenges, leaders have been forced to re-examine their strategies and organizational designs. Moreover, the relevance of conventional strategic thinking and planning practices has been questioned by practitioners, and for a very good reason. Frequently, strategic planning is nothing but a mystified administrative formality undertaken by the top management for the purpose of rationalizing the status quo rather than challenging the organization and its key stakeholders into an open and sometimes critical dialogue about future value creation. When strategies are reduced into mere collections of generic, uninspiring, and unrelatable platitudes, middle management and front-line employees have difficulty in understanding and translating the strategy into practice effectively. Consequently, it does not come as a surprise that some have questioned whether strategy has lost relevance altogether.

Investor Expectations of Future Value Creation

On the contrary, the ability to think and act strategically is now more important than perhaps ever before. In most industries, operational excellence has become a basic premise that does not, however, ensure corporate survival let alone value creation. Instead, value creation requires that businesses innovate relentlessly, drive customer-centric differentiation, and rethink their business models. The importance of strategic innovation is evident when companies’ market capitalizations are disaggregated into two components: (1) value extracted from current businesses (exploitation strategy), and (2) future value creation (exploration strategy). According to Accenture, nearly 60% of the aggregate value of the US stock market already in 05/2003 was based on investor expectations of future growth. The relative share of the future value has since increased as economic growth has in recent decades been driven by companies whose value is based largely on intangible assets. The importance of future value is corroborated by the Shiller P/E for the S&P 500 Index which reached 40 (25.8.2021) and nearly 60% higher than the 20-year average. (Chart 2). Moreover, the Shiller P/E ratio has shown to be strongly inversely related to the future returns of the S&P 500 which should keep investors awake at night.

Chart 2. The Shiller P/E Ratio for The S&P 500 Index, 1991-2021.

The Shiller P/E ratio (CAPE) is calculated as the inflation-adjusted earnings from the previous 10 years to smooth the volatility of earnings.

Towards a New Strategy Paradigm

In order to tackle the future value challenge, strategic management needs to be transformed from an administrative formality into a core competence and a competitive advantage. Strategic management is a relatively new discipline that emerged in the 1950s from military strategies and long-range planning practices of large corporations for coordinating globalization activities and managing the risks thereof. For a long time, these practices worked relatively well and evolved into what we can call the conventional strategy paradigm (Table 1). The starting premise was that companies operated within well-defined industry structures that developed in predictable (linear) patterns. Strategies were regarded primarily as a choice of Porterian positioning within the industry which would, subsequently, drive profitability. The relationship between the strategy and organization design was rather mechanistic as best summarized by the business principle by Alfred D. Chandler from 1962 that structure follows strategy. Finally, strategic planning was considered a top management responsibility with little involvement from the organization prior to top-down strategy communication.

However, many of these assumptions are no longer valid. Most companies today do not operate within well-defined industries but rather in dynamic and uncertain competitive landscapes that intersect industries. In particular, digitalization has blurred traditional industry structures as a competitive advantage is determined by who can best capture and manage data to deliver customer value. Consequently, strategy is less about picking and defending the right industry positioning than about dynamically orchestrating a coherent pattern of strategic choices to drive continuous innovation. Moreover, in dynamic environments, the role of organization design is at the heart of strategy because it determines the starting conditions for an emergent strategy when decision-making entails real options with high uncertainties. Finally, strategic planning is understood as a creative problem-solving process that benefits from open and critical dialogue involving the organization and external key stakeholders.

In conclusion, the first step for building strategy into a core competence and a competitive advantage for your organization begins by re-imagining your new strategy paradigm.

Table 1. Towards a New Strategy Paradigm.

The Strategy Toolbox is a collection of articles concerning strategic thinking, planning, and management based upon the Strategy Playbook™. New articles will be published intermittently whenever I have something to share. I hope you find these articles insightful and please feel free to share them with your fellow strategists. Please get in touch to share your comments and ideas for future articles.

Meanwhile, have a great and productive day!

Rosendahl & Co. Growth Partners is a strategic advisory with the mission of helping great leaders make great impacts. We help our clients tackle their toughest business problems concerning strategy, M&A, and business transformation e.g., growth and restructuring. We offer different collaboration models ranging from coaching and proven concepts to tailored projects and interim leadership services.