Your Strategy Should Be a Hypothesis You Constantly Adjust

Foreword by Anna Plechatá Krausová, DPhil., Chancellor of NEWTON University

In an environment where an unchanging institutional strategy would make us too predictable to competitors, it's essential to embrace the dynamic nature of strategic planning. This approach is vividly captured in this article, co-authored by the keynote speaker of the NEWTON Research & Innovation Week, Professor Amy Edmondson.

Acknowledging that our strategic framework must evolve in response to new insights and evidence underscores the importance of flexibility, especially in development projects or change initiatives. The concept of treating strategy as a hypothesis offers a compelling solution: it allows organizations to set a focused direction for the short term, thereby sidestepping decision paralysis, while also remaining open to adjustments based on the accuracy of initial assumptions.

This principle is crucial for institutions aiming to stay ahead in a rapidly changing world, reflecting a nuanced understanding of strategy as both a guide and a question, continually tested and refined through experience.

Summary.   Strategies must be constantly adjusted to incorporate information from operations and the market. Research on recent dramatic cases of strategic failure in different industries and involving vastly different business models and strategies shows a common pattern: What started as small gaps in execution spiraled into business failures when initial strategies were not altered based on new information provided by experience. These companies’ strategies were viewed by their top executives as analytically sound; performance gaps were blamed on execution. An alternative perspective on strategy and execution — one that is more in tune with the nature of value creation in a world marked by volatility, uncertainty, complexity, and ambiguity — conceives of strategy as a hypothesis rather than a plan. Like all hypotheses, it starts with situation assessment and analysis — strategy’s classic tools. Also like all hypotheses, it must be tested through action. With this lens, encounters with customers provide data that is of ongoing interest to senior executives — vital inputs to dynamic strategy formulation. The authors call this approach strategy as learning, which contrasts sharply with the view of strategy as a stable, analytically rigorous plan for execution in the market. Strategy as learning is an executive activity characterized by ongoing cycles of testing and adjusting, fueled by data that can only be obtained through execution.

The widely accepted view that strategy and execution are separable activities sets companies up for failure in a fast-paced world.

One of us (Paul) is a strategy scholar and economist; the other (Amy) studies organizational behavior and operations management. We came together to consider why strategy so often breaks down in the execution stage. While conducting research on recent dramatic cases of strategic failure in different industries, involving vastly different business models and strategies, we discovered a common pattern: What started as small gaps in execution spiraled into business failures when initial strategies were not altered based on new information provided by experience. These companies’ strategies were viewed by their top executives as analytically sound; performance gaps were blamed on execution.

Take the notable failure at Wells Fargo last year. Executives formulated a distinctive strategy of cross-selling, which had much to recommend it. Selling additional products to current customers leverages the costs of establishing those relationships in the first place, and serving more and more of their financial service needs (to grab a greater “share of wallet”) is appealing, in theory. Wells Fargo was even good in implementing the strategy — up to a point.

Yet the strategy eventually hit the realities of customers’ finite wallets (their spending power) and real needs.

Cementing the business failure, salespeople appeared to believe that senior managers would not tolerate underperformance, and found it easier to fabricate false accounts than to report what they were learning in the field. The widespread nature of the behavior strongly suggests that the fraud was not the result of some corrupt salespeople. Rather, it points to a system set up to fail — by the pernicious combination of a fixed strategy and executives who appeared unwilling to hear bad news. (From the perspective of the senior management at many companies, missing sales targets is a failure in the execution of an analytically sound strategy.)

An alternative perspective on strategy and execution — one that we argue is more in tune with the nature of value creation in a world marked by volatility, uncertainty, complexity, and ambiguity (VUCA) — conceives of strategy as a hypothesis rather than a plan. Like all hypotheses, it starts with situation assessment and analysis — strategy’s classic tools. Also like all hypotheses, it must be tested through action. With this lens, encounters with customers provide data that is of ongoing interest to senior executives — vital inputs to dynamic strategy formulation. We call this approach “strategy as learning,” which contrasts sharply with the view of strategy as a stable, analytically rigorous plan for execution in the market. Strategy as learning is an executive activity characterized by ongoing cycles of testing and adjusting, fueled by data that can only be obtained through execution.

Imagine if Wells Fargo had adopted a strategy-as-learning perspective. Its top managers would have taken repeated instances of missed targets or false accounts as data to help them assess the efficacy of the cross-selling strategy. This learning would then have triggered a much-needed adjustment of the original hypothesis.

The key indicator of a strategy-as-learning approach lies in how managers interpret early signs of gaps between results and plans. Are they seen as evidence that people are underperforming? Or as data that indicates the initial assumptions were flawed, triggering further tests?

Volkswagen’s software that allowed diesel engines in its vehicles to cheat on emissions tests is another case of a top-down fixed strategy that suffered in implementation. VW’s strategic ambition to become the largest car company in the world required it to conquer the U.S. market. To help VW stand out and win in the U.S. market, its executives formulated a strategy of developing so-called clean-diesel vehicles that leveraged the company’s core competence.

As was the case at Wells Fargo, VW’s culture — specifically, its executives’ lack of tolerance for pushback from people lower in the organization — seems to have played a major role in its diesel-emissions fiasco. Bob Lutz, who held leadership roles at General Motors, BMW, Ford, and Chrysler, describes a “reign of terror” that had long prevailed at VW. This, he says, undoubtedly contributed to VW’s ignoring evidence that the claim that the diesel technology could comply with environmental regulations was too good to be true. In this way, VW leaders lost out on the opportunity to revisit and update the strategy. Meanwhile, engineers had developed software to fool the regulators — postponing the inevitable.

Cheating and cover-ups are natural byproducts of a top-down culture that does not accept “No” or “It can’t be done” for an answer. But combining this with the approach that treats strategy and execution as separable is a sure recipe for failure. At both Wells Fargo and VW, disconfirming data was available for a surprisingly long time and was not acted on by senior management. Signs that corners were being cut were ignored. And the illusion that brilliant top-down strategies were working persisted — for a time.

We are not saying top-down fixed strategies necessarily lead to fraud. Rather, our point is that these two visible examples of strategic failure illuminate the risks of failing to integrate strategy and execution through a deliberate and continual executive-learning process.

Strategy as learning requires senior executives to engage in an ongoing dialogue with operations across all levels and departments. The people who create and deliver products and services for customers are privy to the most important strategic data the company has available. And the strategic learning process involves actively seeking deviations that challenge assumptions underpinning current strategy. Deviations and surprises must be welcomed for their informative value in adapting the strategy. Executives who adopt a strategy-as-learning framework understand that pushing harder on execution may only aggravate the problem if shortcomings are, in fact, evidence of inadequate market intelligence or flawed assumptions about the business model.

Companies that fuse strategy and execution, continually making adjustments and periodic dramatic pivots, demonstrate what strategy as learning can look like in action. Consider the steady strategic morphing of Amazon from online bookseller to global retail powerhouse. Or take ING Bank in the Netherlands, which adopted an agile approach to strategy and execution that uses “squads” as the company’s “nervous system” to sense changes in customer needs and competitive realities and to give senior executives the data they need to rethink strategy and respond. These and other cases exemplify a fundamentally different (iterative) approach to strategy making.

Of course, embracing a learning approach at the top of the organization is not a new idea. What we suggest has much in common with the notion of execution as learning, introduced in HBR some years ago. Our ideas are also consistent with current work on organizational agility — defined as an ability to sense and respond quickly to changes in the environment. (See these articles by Jeff Gothelf, McKinsey, and the Boston Consulting Group.)

What is new is the idea that closing the gap between strategy and execution may not be about better execution after all, but rather about better learning — about more dialogue between strategy and operations, a greater flow of information from customers to executives, and more experiments. In today’s fast-paced world, strategy as learning must go hand in hand with execution as learning — bypassing the idea that either a strategy or the execution is flawed — to recognize that both are necessarily flawed and both are valuable sources of learning, improvement, and reinvention.

Some of the research for this article was supported by Solvay Brussels School of Economics and Management’s Baillet Latour Chair in Error Management and its senior researcher, Vincent Giolito.

Amy C. Edmondson is the Novartis Professor of Leadership and Management at Harvard Business School. Her latest book is Right Kind of Wrong: The Science of Failing Well (Atria Books, forthcoming in September 2023).

Paul J. Verdin is the chair in strategy and organization at Solvay Brussels School of Economics and Management.

Source: Your strategy should be a hypothesis you constantly adjust, HBR. November 8, 2017. With Paul Verdin.