HARVARD BUSINESS REVIEW

STRATEGIC PLANNING

The Different Approaches Firms Use to Set

Strategy
Kimberly Teti; Mu-Jeung Yang; Nicholas Bloom; Jan W. Rivkin; Raffaella
Sadun

APRIL 10, 2017

What is your strategy? Most senior executives can confidently answer

this question. How has that strategy changed over time? This one
usually gets a quick answer too. How do you make decisions about
changing that strategy? Now it gets much more difficult. The fact is,
many senior executives struggle to describe how they make strategic
decisions. Thats a serious problem, since the process for making
strategic decisions can shape the strategy itself. Making a strategy
without knowing your process is like sailing without a compass. You
are setting yourself up for a long, stressful journey. Even worse, if you
eventually reach your destination, you may not realize that youre in
the right place.

To better understand how companies really make strategic choices,

we recently interviewed 92 current CEOs, founders, and senior
executives. We asked each to answer detailed questions about
their approach to strategic decision making. Their replies revealed
both striking variety and underlying patterns. Here, we offer a
typology of four approaches. Our results cant say that any single
approach to strategy is always best, but we do offer some evidence
that one of the approaches is often flawed.

Four Approaches to Strategic Decision Making

Companies processes differed from each other in two ways. The first
was whether a firm uses a high or low level of process to make
strategic decisions. That is, does it have recurring routines for
discussing strategy, triggering strategic changes, and reviewing those
changes? The second was the amount of input from other employees
that the leader considers while making a strategic decision. This
factor focuses on employee involvement in decision making, not
simply attendance at meetings or post-decision communication.
These two factors can exist in any pairing, and based on our
interviews, firms populate all boxes, which gives us four distinct
archetypes of strategic decision making.
 Unilateral firms are both low process and low input. They tend to
have a top-down leader who makes decisions alone. During our
interviews, these individuals often had difficulty explaining their
decision-making process and the role other employees played.
Interestingly, these interviewees had two different types of attitudes:
Some disliked their process and admitted that they should do
things differently, while others seemed very confident with how they
made decisions. A potential benefit for Unilateral firms is that leaders
can make decisions quickly, without the constraints of process
complexity and debate. However, the bad news is that, lacking checks
and balances, Unilateral firms can make baddecisions fast. Moreover,
speed is not a sure thing in a Unilateral firm: If the top-down leader
chooses to procrastinate on a tough decision, no process is there to
force timely action.

Ad Hoc firms are low process and high input. These firms do not
have a codified, recurring process that they follow every time they
make a strategic change. But when a change needs to be made, the
leader pulls their team together to take action. The exact steps the
firm follows and the exact people in the room change from one
decision to the next. The benefit of an Ad Hoc system is that rigid
rules dont constrain the firm. Leaders can tailor the process to each
decision by adjusting the length of deliberations, the involved parties,
and other factors. The main risk is that the firm may not learn over
time how to get better at making strategic decisions. The top leader
of an Ad Hoc firm might also use the process flexibility to exclude
stakeholders who disagree with the leaders position. This will
eliminate the debate that fuels Ad Hoc decision making and, in
essence, shift the firm down to the unilateral box.

Administrative firms are high process but low input. These firms
follow rigorous processes and well-defined routines to make strategic
decisions without actually eliciting debate from other employees. One
benefit is the detailed data collection and documentation that
accompanies this extensive process. If Administrative firms are smart,
they can leverage this information to improve future decision making.
But, similar to Unilateral firms, the low level of input can result in bad
decisions if leaders do not consider key information or opinions. In
fact, this risk can be especially grave in Administrative firms because
the detailed process and the sheer quantity of information gathered
can act as theater, masking the lack of broad input from internal and
external stakeholders.

Collaborative firms are both high process and high input. These
firms have the rigorous process of an Administrative firm, but also the
engaged employees of an Ad Hoc firm. During interviews, these
leaders showed strong consistency across different types of decisions
and could clearly articulate how employees added value during the
process. The detailed process ensures that the leaders dont miss any
steps. The frequent input ensures that they dont miss any
information. However, the inflexible system can potentially slow down
decision making and prevent firms from acting on time-sensitive
opportunities. For example, Collaborative firms may inadvertently
include irrelevant parties in strategy discussions or spend too much
time achieving consensus among the participants in order to maintain
engagement.

Which Approach Should a Firm Use?

Each of these archetypes has benefits and risks, which invites

a question: Where should a firm sit in the matrix? Our interview data
shows tremendous variation in archetype within each industry and
across firms of similar size, which suggests that the right archetype
for a given firm depends on subtle features of the company and its
context. Our current research does not include enough data on
context and firm performance to pinpoint the conditions in which one
archetype would be the winner.

That said, our early data does make us skeptical about the Unilateral
archetype. In our interviews, we asked managers to give us a sense of
where their approach stood in terms of five attributes that are
generally associated with good strategic decision-making processes,
namely:
 Alternatives. Does the firm consider alternative options when
making strategic decisions?
Information. How much information does the firm use to spark
debate about decisions?
Implementation. Is a detailed implementation plan available
when a decision is made?
Learning. Does the firm study successes and failures to learn for
future decisions?
Communication. Does the firm have a clear plan to communicate
changes to employees?

We then scored executives responses based on a quantitative rubric.

The chart below shows the percentage of total possible points that
the average firm in each archetype scored on each of the attributes.
Unilateral firms scored lower on all criteria, to the point of statistical
significance, than Collaborative firms; on four of the five
than Administrative firms; and on three of the five than Ad Hoc firms.
The low scores of Unilateral firms raise a red flag about this approach.
If you are using the Unilateral archetype, you should pressure-test it
and consider whether it is the best option for your firm. In contrast,
the other three archetypes do not differ much in terms of the five
attributes. For example, the chances of establishing learning routines
appear very similar across Ad Hoc, Collaborative, and Administrative
archetypes.

Ultimately, the wide variation in strategy-making approaches, even

within similar industries and across organizations of similar sizes, was
a real eye opener for our research team. An optimistic interpretation
of this finding is that managers have considerable leeway to choose
the archetype that best fits their specific context. A less rosy
interpretation is that managers may inadvertently be stuck with less-
than-optimal approaches. Our future research will aim to shed more
light on this important question.

In the meantime, our advice to leaders is to take a hard look at how

they make strategic decisions. Where does your firm sit on the
matrix? Does your approach match where you want to be, given the
pros and cons of each archetype? Does the approach fit with the
demands of your market and firm? Questions like these will show
whether you need to change, and will help you start the work needed
to shift processes and culture to find a new home on the matrix.