Strategy process: how it works, step by step

Strategy is a non-delegable leadership task. It deals with the difference between present and future. Strategic commitments give an organisation the focus that keeps it able to act under uncertain conditions. At the same time, precisely these commitments must be put to the test at regular intervals. Two questions guide this review. Which commitments are you deliberately holding on to despite indications of a need for change? And which do you have to change to secure business success?

Left to themselves, organisations deal with the problems of the present and are preoccupied with themselves. A strategy process counteracts both. It draws impulses for development from a jointly developed vision of the future and directs attention to markets, customers and competition.

Which developments are changing the business? Which customer expectations are relevant? The joint analysis links external observations with the organisation's knowledge. Existing assumptions are explicitly named and tested from different perspectives.

Core competences show what the company can build on. Strategic options describe different possibilities for further development. They are worked out and evaluated before leadership commits to a direction.

The analysis of core competences is more than a list of strengths. What is sought are bundles of capabilities that are deeply rooted in the organisation and have developed over years. Three conditions apply. A core competence leads to customer benefit, even if the customer does not attribute it to this capability. It leads to differentiation, meaning it can neither be copied in the short term nor bought in. And it is not tied to a single product but can be transferred to other business areas.

Strategic options are possible designs for the future that differ from the status quo. They are made concrete, examined from a business point of view and evaluated according to feasibility, prospects of success and risks.

Which value proposition should apply to which target customers? Which economic goals and capabilities go with it? These decisions condense the vision of the future. A strategy map can make the assumed relationships visible.

At the end of the deliberation there is a vision of the future that the strategy team has worked out itself. Either aspects of several options merge or one option is chosen. The vision of the future answers six questions: who does the company want to be? In which markets does it want to operate? Which target groups does it focus on? Which services does it provide? How does it differentiate itself? Which goals does it set itself?

As a rule, this picture differs significantly from the company's current state. The levers for getting there are coordinated with each other. For each lever, the key measures are bundled in a master plan and given measurement and steering variables.

Initiatives, responsible persons and forms of decision-making are derived from the chosen direction. Changes to structures, capabilities and communication are included. Implementation should be compatible with the organisation.

The work does not end with an adopted document. New observations and experience from implementation are evaluated together. A review may make adjustments to measures or to the strategic direction necessary.

A chemical park operator had emerged from spun-off departments of a group. After a turnaround and operational optimisation, the business areas each pursued their own strongly figures-driven strategies. The first strategy process for the company as a whole was meant to change this. First the core competences were worked out, trends in the environment analysed and the network of stakeholders with its different interests evaluated. The guiding question was what customers expect.

This produced five strategic options in a space between focusing and expanding business activities. The strategy team jointly developed observation and evaluation criteria and decided to focus on customers, site and efficiency. Supposedly attractive elements of the earlier vision of the future were given up for this. The second management level played a major part in shaping the decision. Some years later, a review confirmed the path and developed it further.

In a stakeholder analysis, the first step is to clarify which groups influence or are affected by the specific question about the future. Internal assumptions about their expectations are tested through conversations or surveys. If different needs emerge within a group, the classification is adjusted. Shared interests and conflicting goals feed into the strategic deliberation. Responsibility for the decision remains with corporate management.

The Innovative Strategy Check can condense the starting situation. The stakeholder analysis adds the interests and influence of relevant groups. Strategic options are then worked out and evaluated before a positioning is decided. A strategy map links the chosen direction with goals for markets and customers, processes, learning and economic impact. Implementation requires responsible persons, initiatives and a review of the underlying assumptions.

These instruments are not a rigid mandatory sequence. An organisation can start at different points, depending on which decision is currently due. What matters is that leadership names for each phase which information is missing, who obtains it and who makes the choice. Otherwise a strategy process becomes a collection of workshops without a binding direction.

Every company that holds its own in the market over a long period has developed its own way of answering questions about the future. According to Nagel and Wimmer, four forms can be distinguished, depending on whether strategy work takes place explicitly and whether decisions about the future are worked out inside or outside the organisation.

In the intuitive form, one or a few key people decide on the basis of entrepreneurial instinct, often in pioneering and family businesses. In the evolutionary form, individual units seize market opportunities, and the successful patterns are interpreted afterwards as an intended strategy.

The expert-oriented form explicitly delegates strategy work to external consultants. It is based on three problematic assumptions: that the necessary knowledge can be obtained completely, that market and competition follow predictable laws, and that the organisation is an instrument for implementing given goals. Its main weakness is implementation. First there is thinking, then implementation, often by other people or hierarchical levels. Many of these strategies remain ineffective even though their content is useful, because the organisation cannot take them up and process them.

In addition, experts give companies in an industry similar recommendations. This intensifies competition and creates no differentiation. This form also reinforces the management team's tendency to concentrate on day-to-day business.

The systemic form understands strategy development as a joint leadership achievement and combines the three other patterns: the knowledge of key people, the models and concepts of experts and entrepreneurial intuition. It is based on three paradigms. The environment cannot be fully understood, the future remains uncertain, and the company is not a trivial machine.

Environment, strategy and organisation influence each other. Because those involved bring in the logic of operational business from the outset and power and influence relationships are dealt with as well, the separation of thinking and acting disappears.

The systemic process architecture assumes that the knowledge for shaping the future exists within the organisation. At the start, therefore, a strategy team of key people is formed that goes through all the steps and shapes their content. The management team responsible for the decision is indispensable. In addition there are people from other areas of responsibility who bring in unconventional views and break up entrenched patterns of argument.

The team should represent all business and functional areas and include the most important knowledge holders as well as people with great formal or informal power. Its members need expertise in business matters, social competence for conflict-laden situations and enough time alongside their daily work. Up-and-coming managers are involved so that the process also works as a development measure. To remain manageable, the strategy team comprises a maximum of twelve people. Those who were involved in the entire process later carry the operational consequences into their own area of responsibility.

The first substantive step concerns the framework conditions. Because all information is never available, strategy work is based on assumptions that are explicitly named and shared in the team. The strategy team determines the decisive influencing factors from the wider environment and the competitive environment, thereby defining the organisation's frame of observation. Trend assumptions are formulated for each influencing factor and opportunities and threats are derived from them.

Two things are evaluated: how likely the underlying trend assumption is to materialise and how well the opportunity can be realised or the threat averted. The assumptions may later prove right or wrong. Clear documentation of the jointly supported results makes them traceable in the later strategy review.

A case study with four business areas shows how the work is distributed. The process comprised twelve steps and extended over around five months. The strategic starting situation was developed in the strategy team in four steps: framework conditions and trends, core competences, strategic challenges with core questions, and the segmentation of business areas. A two-day workshop, a one-day workshop and two further one-day workshops were scheduled for this. The core competences were derived from the successes of recent years and critically examined with a flop analysis.

In the fifth step, work teams analysed the business areas with four workshop days each within three weeks. This included customer segmentation by behaviour and needs and interviews with selected customers to check the benefit expectations of each segment. In the sixth step, the strategy team developed strategic options in one and a half days.

As a rule, six to eight drafts are made concrete and three to four are selected for elaboration. Each option was given a responsible person and a work team, which elaborated it in four workshop days over three weeks and evaluated it from a business point of view.

Each option was evaluated according to the same criteria: self-image and role, goals and key performance indicators, answers to the strategic core questions, effects on business areas, organisational structure and core competences, and prerequisites, risks and advantages. The strategy team then designed the vision of the future in two days. It named which existing core competences support this vision and which capabilities need to be built or developed further.

Work teams made the positioning for each business area concrete in three workshop days over two weeks. A two-day workshop adopted the vision of the future and the positionings. This was followed by one workshop day per business area for the strategy map and two sessions of two days each in the strategy team for the strategic initiatives and effectiveness monitoring. For this, forward-looking observation points were defined and deviations determined at which countermeasures are taken.

Strategy work begins with the question of which business areas the company operates in. The previously applicable logic of segmentation is critically examined. It can be based on products, target groups, technologies or regions. It is important to work out the logic that is fundamental for the organisation and not to allow mixed categories.

It is also examined whether socio-technical developments in the infrastructural, socio-economic, ecological and political environment call the established logic into question. Every company must clarify for itself how it defines its market so that it can observe, evaluate and serve it well.

Customer segmentation asks different questions: who are the customers, what different needs, behaviours and benefit expectations do they have, and which characteristic groups can be formed? The concept of the customer should not be defined too narrowly. The entire value chain of the industry belongs in the analysis, because the business is often influenced by groups with which there is no direct business relationship at all. For many companies it makes sense to segment other influential stakeholder groups in the same way.

A common mistake is to use the criteria of business area segmentation for customers too, for example region, product, company size or industry. Mid-sized companies are not all alike, nor are all companies in a region or all end consumers in an age group.

Once the assumptions about the framework conditions have been described and the core competences identified and validated, the central strategic challenges are derived. These are the topic areas that will decide survival and success in future dealings with markets, competitors, customers and other stakeholder groups. They lie in the specific competitive environment or in the company's wider environment. They may concern coping with threats or exploiting identified opportunities.

To do this, the identified opportunities and threats are quantitatively evaluated and prioritised. The assumptions about the future development of these topic areas open up a difference from the here and now. This gives rise to strategic core questions to which the company must find viable and unambiguous answers, and the associated need for decisions.

The core questions direct the view forward. Those who do not want to lead a company out of the past align the entire strategy process with the self-created perspective for the future. The company then orients itself less towards its previous identity and more towards an attractive design for its future identity. In this sense, strategies deliberately create differences. The gap between current commitments and the developments observed in the relevant environments gives rise to the need for decisions and action that is shared with the key people.

This understanding of strategy breaks away from the conviction that a company can be steered by plans. It follows the idea of a continuous process of self-renewal. The company is to be continuously supplied with learning impulses that are used for strategic decisions. Targeted irritation breaks through the self-referentiality of the organisation.

The knowledge of experts is fed into the process as a “data donation” for this purpose. It is evaluated in the strategy team, in a process of discussion and mutual understanding. The focus is on the question of which data, hypotheses, conclusions and theses of the external experts the team adopts or modifies and allows to flow into further work. In this way, external views are critically examined and their essence actually reaches the organisation's decision-making processes.

The concept takes into account the high dynamism of social systems and the inertia that results from self-referentiality. It also takes into account that actors in organisations pursue their own goals alongside those of the company and bring self-promotion and attempts at influence into a strategy process.

Strategy work in the management team with the involvement of key people is also always a special form of team development. It happens without this goal being on the agenda. At the same time, the problem-solving capacity of those involved and of the organisation as a whole grows.