Strategy Dynamics
(Warren)

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What is Strategy Dynamics? Description

The Strategy Dynamics method from Kim Warren is a technique that can be used to explain the business performance to date, and develop strategies for improving the future performance, based on building and retention of resources and capabilities.

The target of Strategy Dynamics is to answer some challenging questions (figure):

• Why is the business performance following its current path?
• Where will the business performance go if we continue the way we are doing today?
• How can we design a robust strategy to radically improve the performance into the future?

The ultimate concern of strategic management is to quantitatively improve performance through time. Whether for the enterprise as a whole, or for a key function of interest [e.g. sales]. This trajectory depends, strongly and unavoidably, on what has occurred over the organization's history, and will continue to do so. The method therefore starts from a time-chart of the organization's performance over its relevant history, and the future period of interest, as measured by one or more conventional indicators [e.g. revenue or profits].

Rather than seek statistical explanations for this performance, the method drills back along the logical causal chain. Revenue = sales volume x price. Costs = salaries + sales & marketing + R&D. Etcetera. Each element is mapped on a diagram, whether on paper, white-board or software. Any non-constant item is, like the performance outcome itself, depicted with a time-chart of its values over the past, and as estimated into the future.

After 2-3 steps, this drill-back process reaches one or more 'resources' [strictly, accumulating asset-stocks]. These resources are factors whose behavior is such that they fill up, and drain away over time. Customers, cash, people, products in a product range, and capacity are the most common examples. The logical causality rule still applies. Sales volume = customers x sales-per-customer . Total salaries = staff x average salary.

The next element of the method is critical - the current value of such asset-inventories is not 'determined by' any other factor, but is mathematically identical to the sum of all element that were ever added, minus all elements that were ever lost. This is fundamental in the case of cash. Cash-today is equal to all cash that was ever received, minus all cash that was ever spent. But this is equally true of every other asset-inventory. Today's customers is equal to every customer that was ever won, minus every customer that was ever lost. Today's staff is equal to every person that was ever hired, minus every person that was ever lost. Today's product range is equal to every product that was ever launched, minus every item that was ever discontinued. This is why today's performance and future performance are both unavoidably dependent on history.

The next question of causality is to explain what has been driving these 'flow-rates'. How quickly customers have been won, or how quickly staff was lost. These flow-rates turn out to be dependent upon:

• Management Decisions [e.g. the amount of money spent on marketing is influencing the customer acquisition. The salaries that were offered are influencing the staff attrition.
• External Factors [e.g. other firms' marketing or salaries, or customers' disposable income], and crucially also upon
• Existing Resource-levels [ e.g. customer loss rates depend on service quality, which depends on adequate staff numbers]. All of this is populated with quantitative time-path information.

The three Principles of Strategy Dynamics are:

1. Performance depends on resources.
2. Resources fill and drain.
3. These flow-rates depend on existing resources.

When combined, the principles create an integrated strategic architecture that depicts the 'physics' of the system - highly analogous to the flow-charts found in chemical process plants or power-transmission systems - and how this system determines performance through time.

Once this core architecture of an enterprise is complete [or of a business segment], additional factors can be added by extending the same principles. Key amongst these is the role of potential resources [e.g. likely customers] and the various development-states of resources [e.g. junior, middle, senior staff, or products in research, development and launched]. The impact of intangible factors can be captured. How does reputation affects customer acquisition. How does the morale influences staff turnover. Competitive rivalry effects can be estimated, e.g. likely rates at which rivals may win a newly-developing customer segment. And the impact of organizational capabilities can be evaluated.

Origin of Strategy Dynamics. History

The underlying science is the System Dynamics method, originated by Prof Jay Forrester at MIT in the 1960s, applied explicitly to a resource-perspective of organizations and strategy and the principle of asset-stock accumulation highlighted by Dierickx and Cool, and long recognized to lie at the heart of Strategy and performance. However, in contrast to the Resource Based View [Wernerfelt, Barney, Grant, et al], and competence-based and knowledge-based perspectives on strategy, the method stresses the importance of mundane resources [products, people, capacity ...] as well as the role of rare and inimitable factors believed to be responsible for sustained competitive advantage. The method also differs from 'Systems Thinking' approaches [Senge et al] in emphasizing resource-accumulation and the importance of quantifying change-through-time, in contrast to the qualitative, feedback orientation of that tradition.

Calculation of Strategy Dynamics. Formula

Performance(t) = f[Resources(1-n, t), Decisions(t), Exogenous factors(t)]
Resource(i,t) = Resource(i,t-1) +/- Resource-flows(i,t-1 to t)
Resource-flows(i,t-1 to t) = f[Resources(1-n, t), Decisions(t), Exogenous factors(t)]

Usage of the Strategy Dynamics method. Applications

• The method is applicable to every kind of enterprise, whether commercial, public-service, or voluntary, as well as to every function within an enterprise.
• It is also applicable to not yet existing enterprises, such as new ventures or voluntary initiatives.

Steps in Strategy Dynamics. Process

1. Quantify the time path of the current performance objective, and of the anticipated or desired performance objective.
2. Identify and quantify over time the causal relationships back to the resources that directly drive performance.
3. Quantify the flow-rates of these resources over time.
4. Trace the causality from these resource flow-rates back to the decisions, exogenous factors and existing resources on which they depend.
5. Connect these dependencies to create the core "strategic architecture" for the enterprise.
6. Optional: Extend this core architecture to encompass potential resources, resource-development, intangible factors, rivalry etc.

Strengths of Strategy Dynamics. Benefits

• The method is strongly evidence-based and rigorous, and it provides a good understanding of the causes of current performance, and it provides confidence in the future performance.
• Since it highlights exactly where management actions and decisions exert control, it provides clear and specific strategies and action plans, that are adaptable when the future unfolds.
• The method is evidence-based, and it can solve differences of opinion amongst team-members. Also it allows each individual [both amongst the management team and below] to see where their activity contributes to the whole, and on whom they depend.
• The method provides a solid foundation for methods as the Balanced Scorecard [Kaplan and Norton] and for Value Based Management, and is a means of integrating other established strategy frameworks and approaches, such as PEST, Core Competence, Value Chain.

Limitations of Strategy Dynamics. Disadvantages

• The method is demanding, and time-consuming, but not excessively so, given the value at stake from improved strategies and decisions.
• There are significant limits to the certainty that can be applied to certain factors, e.g. measures for reputation or capability, and to some important causal relationships, e.g. to what extent reputation influences the rates of customer acquisition.

Assumptions of the Strategy Dynamics approach. Conditions

• To maximize its impact, the method requires extensive factual evidence, including history, about many aspects of the enterprise and its performance. Frequently, these key numbers are unknown, in which case the team must be prepared to exercise its judgment in estimating what those missing values might be, and what impact they may have.
• The approach depends on management's willingness and ability to be quantitative in their decision-making, which not all cultures find easy.

Book: Kim Warren - Competitive Strategy Dynamics

Book: Kim Warren - The Critical Path

Book: Lars Finskud - Competing for Choice

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