What is the theory of your firm?

What is the theory of your firm?

If asked to define strategy, most executives would probably come up with something like this: strategy involves discovering and targeting attractive markets, and then crafting positions that deliver sustained competitive advantage in them. Companies achieve these positions by configuring and arranging resources and activities to provide either unique value to customers or common value at a uniquely low cost.

This view of strategy as position remains central in business school curricula around the globe: valuable positions, protected from imitation and appropriation, provide sustained profit streams. Unfortunately, investors don’t reward senior managers for simply occupying and defending positions. Equity markets are full of companies with powerful positions and sluggish stock prices.

A leader’s most vexing strategic challenge is not how to obtain or sustain competitive advantage, but rather how to keep finding new, unexpected ways to create value. I offer what I call the corporate theory, which reveals how a given company can continue to create value. It is a guide to the selection of strategies. The better its theory, the more successful an organisation will be at recognising and composing strategic choices that fuel sustained growth in value.

Value creation in all realms involves recombining a large number of existing elements. Leaders must draw from available knowledge and prior experience to develop a cognitive, theoretical model and make an educated guess about where to find valuable configurations of capabilities, activities and resources. Actually composing the configurations will put the theory to the test. If it’s good, the leader will gain a refined vision of some portion of the adjacent topography – perhaps revealing other valuable configurations and extensions.

Companies that enjoy sustained success are typically founded on a coherent theory of value creation. All too often such companies get into trouble when the founders’ successors lose sight of that theory, whereas turnarounds often involve a return to it.

The three ‘sights’ of strategy

Foresight An effective corporate theory articulates beliefs and expectations regarding an industry’s evolution, predicts future customer tastes or consumer demand, foresees the development of relevant technologies and perhaps even forecasts the competitive actions of rivals. Foresight suggests which asset acquisitions, investments or strategic actions will prove valuable in predicted future states of the world. It should be both relatively specific and somewhat different from received wisdom. If it is too generic, it won’t identify which assets are valuable. If it is too widely shared, the desired assets and capabilities will be expensive to acquire or else not unique.

Insight If competing companies own assets identical to yours, they can replicate your strategic actions with equal or perhaps even refined capacity, thus undermining any superior foresight in your theory. An effective corporate theory is therefore company-specific, reflecting a deep understanding of the organisation’s existing assets and activities. It identifies those that are rare, distinctive and valuable.

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