Why Your "Intended" Strategy May Not Be Your "Realized" Strategy

Does your firm seem to have one strategy in theory and another in practice?   That is to say, does your intended strategy differ from the strategy that actually emerges based on people's behavior?

If so, you may not be alone.  Indeed, Harvard Business School professors Clark Gilbert and Joseph Bower have recently published a new book, "From Resource Allocation to Strategy," explaining the forces that can shape strategy in unintended ways and make the "realized" strategy different than the "intended" strategy.  In an interview with Harvard's Working Knowledge, they explain the fundamental insight of their research:

"If you add up what [a firm's managers] actually do, which ideas they choose to bring forward, and which of those get funded, the consequences of that activity is what adds up to the strategy of the company, not words on paper."

After all, "what people actually do" reflects internal factors such as their incentives and the reporting structure, as well as external factors such as clients, competitors, and marketplace trends.

And there's another factor:  Much of what ends up being your strategy is generated farther down in the organization, not within the executive committee.  For example, what if a loyal client expresses an interest in, say, project finance?  My bet is you are about to find you have a shiny new project finance practice group—whether or not that was part of The Strategy.   Being business school professors, they have a label for this phenomenon:  It's the client "capturing the resource allocation process."

Or, consider this real-world example from the post-dot-com era: 

"[S]enior management at a U.S. newspaper company says, "We need to get into the Internet, we need to prioritize this and make a big investment."  But then at the operating level of the firm you have a sales rep who is used to selling a display ad for $40,000. The new business has a lower gross margin, the customer who is buying it isn't the rep's traditional customer, and the price point isn't the same. And so that sales rep says, "Well, I can sell a $40,000 display ad, or I can go out and find one of these new customers and sell them a $2,000 banner ad.""

In other words, "line" and operating managers can have a powerful impact on whether or not The Strategy takes wing.

At your firm, suppose The Strategy calls for growing the share of revenue that comes from new clients, since management is afraid you're overly dependent on a few huge clients, the loss of any one of which would be extremely painful.  Now let's suppose billing partners are equally rewarded for every dollar of business under their wing, whether it comes from new clients (hard and time-consuming to get) or existing clients (pick up the phone and they're there).  

If that's your firm—or if anything resembling it where there's a disconnect between The Strategy and the factors affecting how managers choose to allocate resources is your firm—the incentives for allocating resources will trump The Strategy every time.  

A fascinating, and wonderfully serendipitous, example of this occurred a few decades ago at Intel.  As far as "corporate" was concerned, Intel was a memory chip company.  But in the manufacturing organization, the key performance metric was maximizing gross margin per square inch of silicon wafer.  As the computer industry evolved, it became clear that microprocessors offered bigger bang per square inch than memory chips, and the transformation of Intel was for all intents and purposes irreversible.

What are the good professors up to next? 

They promise to pursue research into strategic redirections in new, small, and startup ventures, where nimble mid-course corrections can be the difference between life and death of the enterprise, and are looking into "What are the things that will help those redirections occur?"

Finally, lest this piece seem to add yet another incalculable layer of complexity to your challenge of getting a bunch of autonomy-seeking Type A's to ever ever agree that the battlefield is that-a-way, the professors are on your side:

"One consequence of this research is that we have begun to get a picture of just how complex a job it is to manage a large [firm]. And in this way, in a sense, we have gained a much better sense of how the corporate office adds value. So my work right now is trying to express what corporate value added is. Most business units think that "corporate adds overhead and that's about it." But in fact, great corporate offices do a number of very important things in driving a company."