How Operating Principles Can Make Strategy Meaningful

Peter Boggis and David Trafford argue that the purpose of any strategy is to change an organisation’s trajectory, away from its current default future to one that is judged to be better. Unfortunately most strategies are too complicated, too detailed or too vague to be meaningful to the people who are expected to implement them. They lack a meaningful set of clearly articulated principles that define how the organisation needs to operate in the future.

In Richard Rumelt’s best-selling book, Good Strategy/Bad Strategy he argues that the gap between good strategy and the jumble of things people label as ‘strategy’ has grown over the years and that strategy is not the same as ambition, leadership, vision, planning or understanding the logic of competition. Freek Vermeulen of the London Business School argues in his article So, you think you have a strategy? that at least nine out of ten organisations don’t actually have a genuine strategy. His conclusion is based upon viewing many strategy presentations that lack the basic necessities of cogent and executable strategy, namely that they are not really making choices; are stuck in the status quo; have no relationship to value creation; and are mistaking objectives for strategy.

If the purpose of a strategy is to change the trajectory of an organisation away from its default future – the place it will end up if it takes no action – then essentially it’s about making informed choices about what needs to be done differently to drive the organisation in a different direction. As important as defining what the organisation needs to do, it should also make explicit what it should stop doing. All too often strategies are additive and fail to clearly articulate that the intent is for the organisation to do ‘this’ and stop doing ‘that’.

Some choices will be truly strategic – in that once decided upon are difficult, if not impossible, to reverse or un-do – while others are essentially planning decisions that can be changed without too much difficulty. The test of any strategy therefore is to ask whether the organisation’s trajectory would actually change – to one that takes it to its target improved future – if all the choices were successfully implemented.

Today’s strategies must be engaging

A successful strategy must not only define a new trajectory, but engage people at all levels of the organisation in a way that is meaningful to them. Gone are the days when strategy was for the few, typically the Executive Committee who every five years or so refreshed the strategy, presented it to their Board for approval and then passed it to their senior managers to implement. Communication was on a need-to-know basis and staff assumed that management knew best. The prevailing thinking was that markets would continue to grow, customers would remain loyal, change could easily be implemented and skilled people were readily available.

Today the world is very different: markets are continually changing, customers are no longer loyal, technology drives innovation, sourcing is done globally and the war for talent is getting tougher. As a result, strategies need to be refreshed on a continual basis and their successful implementation is dependent upon the contribution of virtually everyone in the organisation.

But all too often strategies are too complicated, too detailed or too vague to be meaningful to the people who are expected to implement them. They lack meaningful definitions of how things need to operate in the future, what capabilities are needed and what challenges need to be overcome. In our view, what’s missing is a set of clearly articulated principles that define how the organisation needs to operate in the future.

We have discussed the importance of organisational capabilities in our blog Using Organisational Capabilities to Pull the Present into the Future.

Operating principles reflect conscious choices

If strategy is essentially about making choices, then these choices can be articulated through a set of principles, where a principle is defined as a ‘conscious choice between two equally valid alternatives’.

For example, the strategy of an organisation could be to grow organically, as opposed to growing through acquisition. This defines the trajectory the organisation has chosen to travel and how it will operate in the future. The strategic choice can therefore be articulated as the following operating principles:

“We continue to grow organically.”
        as opposed to …
“We grow through acquisition.”

Drawing upon Michael Dell’s advice on strategy where he famously said “it’s as important – if not more important –to be clear about what we have decided NOT to do as it is about what we have decided to do”. Defining the second part of the principle, the ‘as opposed to…’ does exactly this. It defines a choice (or choices) that has not been made.

A number of other examples of operating principles are given below. The power of articulating strategy through a set of operating principles is that it makes the strategy meaningful to people throughout the organisation. It informs them as to which choices have been made – and those that have been rejected. It also defines how the leadership expects the organisation to operate in the future and provides guidance on how everyone can contribute through the decisions they make and actions they take. Changing the trajectory of an organisation is a bit like changing the direction of an ocean liner – it takes time. The more people understand how living the operating principles will change the trajectory of their organisation, the more likely they are to contribute.

Examples of operating principles

Example 1
“We take a single integrated view of a customer’s relationship with us.”
        as opposed to …
“We view each customer’s relationship separately depending on the product.”

Example 2
“We operate as a holding company allowing significant degrees of freedom to each business unit.”
        as opposed to …
“We operate as a horizontally integrated company, with the highest level of common and shared processes possible – whilst recognising authentic business unit differences.”

Example 3
“We are self-sufficient in everything we do within our supply chain.”
        as opposed to …
“We focus on those parts of the supply chain where we can add most differentiated value to customers – and find partners to be excellent at those parts that we choose not to excel at ourselves.”

Example 4
“We integrate acquisitions in 90 days by applying our policies, processes, systems and tools.”
        as opposed to …
“We adopt a best-of-breed approach to integrating acquisitions.”

Principles have implications

Making a choice and articulating it as a principle is necessary but not sufficient, as it’s also important to understand the implications of the choice. In the example above the implications of the principle ‘We continue to grow organically’ could be:

  1. We will not seek out acquisitions or respond when approached.
  2. We will focus on getting better at what we currently do.
  3. Our existing organisational capabilities will be sufficient.

If the alternative choice was made – ‘We grow through acquisition’ – there would be a different set of implications. For example:

  1. We will seek out suitable acquisitions and rapidly acquire those that fit our strategy.
  2. Acquisitions will change our organisation and the way we manage the business.
  3. New organisational capabilities will be required in order to successfully integrate acquisitions.

The last implication is particularly important, as all too often organisations define a new strategy and completely ignore the organisational capabilities needed for it to be successful. Defining the implications helps to highlight what is needed so that action can be taken to address them. For example, if an organisation has never previously made an acquisition it is unlikely to have the organisational capabilities needed to:

  1. Identify potential acquisition targets.
  2. Undertake appropriate due diligence.
  3. Manage a complex integration programme that involves integrating operating models, systems, technology, people and culture.
  4. Manage an enlarged organisation, including new governance, roles and accountabilities.

As Peter Drucker said decades ago – and it continues to be true – the majority of acquisitions destroy rather than create value – therefore the risk associated with making acquisitions is non-trivial.

In using principles to define strategy, it is not that one is right and one is wrong – rather it is about articulating and confronting the deep implications of these choices and being realistic about what has to be in place to realise the strategic intent.

Principles over practices

Organisations like to benchmark themselves against other organisations; they like to compare how they are doing and pick up ideas on how they can improve. In many cases such actions are an initial step towards strategy development. The danger with this approach is that too much focus is given to identifying what are considered to be best practices and not enough to understanding the underlying operating principles. All practices are based upon principles, and it’s the application of an operating principle in a specific context (ie within a specific organisation) that establishes the operational practices. If the context is different in two organisations, then the application of the same operating principle in both organisations could lead to different operating practices. It is for this reason that it is always dangerous to advocate best operating practices over best operating principles.

For example, a few years ago we took the leadership team of a European company to North America to learn how other similar-sized organisations practised Enterprise Portfolio Management. One of the companies we visited was GE Power Systems in Atlanta where the then-CEO John Rice chaired the Prioritisation Committee, which on a quarterly basis balanced and re-balanced the dynamic portfolio of enterprise initiatives. We observed the processes that were in place, the governance that was exercised (who had what decision rights over what things) and the IT support to managing the portfolio. While all of this impressed our client, we emphasised the need to understand the underlying principles of Enterprise Portfolio Management that GE Power Systems was using, as the practices that they observed would not necessarily work in their own organisation – although the underlying principles were transferable.

Another example in the UK is the Liverpool Heart and Chest Hospital, which is the UK’s top performer in terms of patient experience. In order to change their trajectory to one that gave a more patient-centric experience, the senior leadership team visited a number of hospitals in the USA that were recognised as putting the patient at the centre of their thinking, one of which was the well-respected Mayo Clinic. On their return, the team began to apply the principles they had learned to their own context by defining a set of practices they wanted to see applied across the hospital. The results have been so successful that they recently organised a Patient & Family Centred Care Conference where they showcased best principles and practices in one of the most challenging areas facing the NHS today.

A tool for navigation

At the start of the article we argued that the purpose of any strategy is to change an organisation’s trajectory, away from its current default future to one that is judged to be better. We know that strategic targets are insufficient as people need guidance on how to translate the strategy into everyday action. Operating principles provide this by acting as a navigation aid. It’s like having the organisational equivalent of satellite navigation, which provides continual guidance on how the organisation needs to operate in order to change its trajectory. They can help ensure that change initiatives are aligned to the target future and be a leading indicator of progress. They provide an objective foundation to judge whether the organisation is going in the intended direction and a basis for deciding any mid-course corrections that may be required.

Principles need to be experienced

For operating principles to have impact they need to be lived, and before they can be lived they need to be accepted, and before they can be accepted they need to be understood. The challenge is to articulate the principles in such a way that people understand what they need to do differently. They need to do more than state the obvious and they need to be aligned with what’s measured – or rather what’s measured needs to be aligned with the principles. To have a principle that states ‘we focus on giving the customer a compelling end-to-end experience’ as opposed to ‘we focus on driving internal process efficiency’ will be meaningless if the only thing that is measured and acted upon is process efficiency.

Operating principles need to be experienced in a way that reinforces their implicit behaviour. And most importantly they need to provide a clear line of sight to the target future.

Making the implicit, explicit

Having a discussion about the operating principles by which leaders want their organisation to run in the future is both essential and valuable. Its value comes from surfacing the degree to which members of the leadership team – often from different businesses, functions and geographies – see the world the same way. Inevitably at the beginning there will be tension and conflict, but defining operating principles is an effective way of resolving them and achieving alignment of both thinking and action. The problem with too many strategies is that the choices inherent in the strategy are implicit rather than explicit. Principles are conscious choices and therefore by definition ones that need to be articulated, debated and understood in the open.

Default operating principle lead to a default future

All organisations have operating principles, the only question is how explicit they are and how aligned they are to the strategy. Operating principles are a powerful factor in determining an organisation’s trajectory and if not explicitly managed result in organisational habits that can be difficult to change. Understanding today’s operating principles and replacing them with those needed to change an organisation’s trajectory is an essential part of the strategy formulation process.

How explicit are your operating principles?

If you’re currently planning or implementing a strategy consider these four questions:

  1. Are the principles of how the organisation needs to operate – in order to change its trajectory to its target future – clearly articulated and understood?
  2. Are the implications of the operating principle understood, and are plans in place to address the implications?
  3. How will people learn about the operating principles and translate them into how it practically impacts what they do?
  4. How will you know the organisation is operating to the principles?

We welcome your thoughts.

David Trafford

Peter Boggis