Strategy Principles: Strategy as a Science--A Theory of Winning
In Brief
Strategy is a theory of winning and not a list of actions to take or goals to reach.
A good theory requires:
Foresight about the future of the industry,
Insight into the company’s unique ability to create value, and
Cross-sight into how the company can combine its resources with external resources to create unique value.
A good theory leads to testable hypotheses that can help validate the strategy.
A good theory makes predictions about an unknown future and so likely entails some level of discomfort for managers.
Lawyers can act as partners in helping develop and implement a company’s theory of winning.
Southwest Airlines: A Case Study in Strategy
Southwest Airlines started with a simple theory: If their airline acted as an alternative to Greyhound buses, they could attract customers that competitors were not serving. If true, many of the features and practices of other airlines would be unnecessary for winning their targeted customers. Acting on their theory led them to a series of interrelated and self-supporting decisions, including, for example:
Operating point-to-point flights on shorter routes rather than the more common hub-and-spoke model.
Limiting food and beverage offerings on their flights.
Using only one type of airplane to lower costs through standardized infrastructure, processes, and procedures.
Simplifying the booking process by offering only one class of seats, not offering assigned seats, and requiring customers to book flights directly.
Southwest was able to greatly reduce their costs but still attract customers away from the alternatives. Other airlines were unable to imitate them. So, Southwest carved out a unique niche in the market and dominated it for years.
What a Strategy is Not
It is easy to confuse a company’s strategy with strategic actions, strategic plans, strategic goals, or even the company’s mission or vision. While these are indeed important for a company’s success and may inform—or result from—a company’s strategy, they are not the company’s strategy.
What Strategy Is
A company’s strategy is its’s theory about how it will win in the marketplace. A good theory should include, according to Professor Todd Zenger, three components:1
Foresight into the future of the industry,
Insight into how the company’s specific resources and capabilities make it uniquely valuable, and
Cross-sight into the potential value that the company could create by combining its internal assets with external assets.
With those components in place, the theory then drives the company’s choices, including about:
The markets it enters and what products it offers,
The problems its products solve and the types of solutions they provide,
The resources and capabilities it needs to develop or acquire,
How it outperforms competitors in creating value for its customers, and
How it creates and captures value.
When the company can explicitly articulate its strategy and expose the underlying logic, the company can make choices and take actions—it can develop strategic goals and strategic plans—that are aligned, internally consistent, and self-reinforcing. Everything it does, then, can be focused on advancing its theory and implementing its strategy.
Strategic Management as Developing and Testing Strategic Hypotheses
A scientific theory provides testable hypotheses. If the hypotheses prove true, the theory receives support. If the hypotheses fail to hold, the theory needs to be revised. The same is true for strategy as a theory of winning. A company’s strategy allows it to generate hypotheses that it can test in the marketplace. If the hypotheses hold true, the strategy is supported. If the hypotheses fail to obtain in the real world, the strategy should be revised.
The hypotheses suggested by a strategy include assumptions about the world that must be true for the theory to hold. What assumptions does the strategy make about the company, including its resources and capabilities? About the industry? About the competition? About the customers? When these assumptions are explicit, the company can proactively develop tests to verify that they true or simply observe the world as it unfolds and see if they hold. As key hypotheses are supported and invalidated, the company will know how to tweak its strategy as appropriate, or perhaps even pivot significantly, in order to win.
Good Strategy Likely Means Discomfort for Managers
Because a good strategy makes predictions about the future, it often entails some degree of uncertainty and discomfort.2 This often creates angst for strategic managers. The uncertainty is not a sign of poor management; it is instead a sign of great strategic leadership.
What is Your Company’s Theory for Winning?
What is your company’s theory about how it will win in the marketplace? Does the theory anticipate your vision of the future of your industry? Does it account for the distinct and valuable resources and capabilities that your company possesses? Does it help you see how your company can create value by combining internal and external assets and opportunities? What testable implications can help you validate your company’s theory? What actions does your company need to take in order to create and capture value?
The Role of Lawyers in Supporting Your Strategy
Lawyers who understand a company's theory of winning, and who can help a company make its theory explicit, are uniquely positioned to contribute to its success. They can offer tailored legal advice to support the company’s strategy. This deep understanding allows them to anticipate potential risks and legal issues and proactively structure deals and contracts and use other legal tools to support the company's pursuit of its strategic objectives. As a result, these lawyers become valuable partners in the business, ensuring the use legal frameworks that enhance rather than hinder strategic execution.
Dentons can provide you with legal advice and guidance that supports your theory of winning. As strategic advisers for your company, at Dentons, we understand that our role is not simply to identify and eliminate risk. We do not just say, “no.” Dentons provides legal counsel that can help shape, support, or implement your theory of winning. As the largest law firm in the world, Dentons can help you grow, protect, operate, and finance your organization by providing uniquely global and deeply local legal solutions in line with your company’s theory for winning. For more information, contact Daniel Olson at daniel.olson@dentons.com.
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