StratChat 24 September 2020: The fractal nature of business strategy

StratChat is a weekly virtual networking event for business strategists and anyone with an interest in developing and executing better business strategies. It is an informal community-led conversation hosted by StratNavApp.com. To sign up for future events click here.

StratChat is conducted under Chatham House Rules. Consequently, the summary below is presented without any attribution of who said what. As such, it is an agglomerate of views - not necessarily just those of the writer or indeed of any one individual.

This week's conversation will look at the fractal nature of business strategy.

What are fractals?

"A fractal is a never-ending pattern. Fractals are infinitely complex patterns that are self-similar across different scales. They are created by repeating a simple process over and over in an ongoing feedback loop. Driven by recursion, fractals are images of dynamic systems – the pictures of Chaos." (Source: Fractal Foundation)

If that's as confusing as it sounds, fractal images may help to illustrate the point better. The two images on the Fractal Foundation page illustrate the point perfectly. Notice how you can zoom in or out on the images (theoretically) indefinitely. No matter how far you zoom in or out the underlying structure of the image is the same.

What does that have to do with business strategy?

Just like fractals, the anatomy of a strategy recurs at different scales.

• A corporate strategy is made up of business strategies.
• Business strategies are made up of divisional strategies.
• Divisional strategies are made up of departmental strategies.
• Departmental strategies are made up of individuals' or roles' strategies, etc.

Each layer takes as its context or external environment the strategy at the layer above it. Each layer must be composed of the strategies in the layer below it.

Because of this, we can have a business strategy supported by an HR strategy, an IT strategy, a marketing strategy, and an operations strategy etc. We can apply the same basic principles across each of these strategies. And we can be sure that each of these sub-strategies adds up to more than the sum of the parts in delivering the strategy above.

Is this what Sun Tzu meant when he wrote "Management of many is the same as management of few. It is a matter of organisation." in The Art of War some 2,500 years ago? (Source: Wikiquote)

The Pareto principle

Within individual strategies, the 80/20 power law, or Pareto principle is also fractal. 

The Pareto principle states that (roughly) 80% of effects come from 20% of causes. For example, 80% of profit comes from 20% of customers. Or even 8-% of the bugs in a computer system come from 20% of the code.

This is fractal in that the same can be said of 80% of either of the first 80% or 20%, etc. indefinitely.

This Pareto principle can be used to plan interventions in organisations to achieve the maximum effect for the least cost and effort.

Should strategy be top-down or bottom-up?

The fractal nature of strategy emphasises the fact that strategy must start from the top of the organisation. That is, there must be a clear purpose or mission for the organisation as a whole so that this can permeate down through the organisation and into all of the various sub-strategies.

Just as with a fractal image, if the top-level image is woolly and ill-defined, then this lack of clarity will permeate every sub-strategy below it. The sub-strategies will either become woolly and ill-defined themselves, or they will take on a shape of their own and become misaligned with the strategy above and the strategies alongside them.

Good communication is essential. Without it, there is a risk that the various sub-strategies do not align with the high order strategies and everyone ends up pulling in different directions again.

Paradoxically, the fractal nature of strategy also allows for the fact that strategy can also bubble up from the bottom (see discussion below about more participative management styles). The fractal nature of strategy recognises that it can be either top-down or bottom-up. It is not the direction that matters as much as it is important that the strategy is aligned at every level.

Commander's intent

In an uncertain and changing environment, it helps if the strategic mission expressed higher up in the fractal hierarchy is more stable than the environment experienced lower down in the fractal hierarchy.

'Commander's intent' is a principle from the military. For example, a unit is tasked with blowing up a bridge. But during the mission, things go wrong. In addition, they lose communications with their base. How should the unit respond and adapt its approach? If they know that the 'commander's intent' was to prevent the enemy from crossing the river, they are much more able to adapt their own strategy in a way that will best enable them to support the overarching strategy above.

Commander's intent can be applied from the highest level in an organisation, through each layer and all the way down to the lowest level in an organisation. It allows people at each level to do their best to achieve the desired outcome, or intent, even if they have to adjust the strategy from what was originally agreed in order to do so.

As discussed at a previous StratChat, it is important that the people executing a strategy know not just what the strategy is, but also why that is the strategy.

How do you determine the overall mission?

There is a lot of debate about whether organisations should be mission-driven or financially motivated. From a business strategy perspective, it may not matter.

Some people may be motivated to make enough money to enable them to live a comfortable lifestyle or pursue some other goal. For them, any strategy which achieves that without conflicting with their values may be good enough.

Other people may be more motivated for by a passion or deeply held belief (their mission). However, they still need their venture to make enough money to enable them to continue to pursue that mission.

In both cases, there needs to be a strategy (which requires some purpose) and a profit/financial motive. It probably does not matter which comes first and which comes second as long as they align.

We see this in startups which pivot. They start off with one mission, but then switch to another. In this case, the mission is secondary to their desire to make money or demonstrate their technical prowess.

The current crisis has highlighted that some organisations have lost sight of that balance. They became so focused on making money that they lost sight of the importance of having a mission, of serving their customers and their communities, etc. As a result, when the crises meant that making money was no longer possible, they had no other  sense of purpose to guide their strategy.

Changing fashions

At different times in the recent past, there have been movements who have argued that:

1. The focus should be on shareholder returns
2. The focus should be on your customers
3. The focus should be on your employees

But management's role is to strike a deal between all stakeholders: shareholders, customers, employees, government, regulators, special interest groups and lobbies, etc. Although the relative power of each of those groups may wax and wane over time, if management cannot strike a deal which satisfies all stakeholders over the short-, medium- and long-term, the organisation will eventually falter. For any group to get what it wants, all of the groups have to get something.

As the world becomes more interconnected, knowledge grows and is more widely available, it makes sense that we will move to a greater balance between the needs of the different stakeholder groups. This is currently evidenced in the push, led by millennials, away from a focus on shareholder returns and towards more purpose-driven organisations which are more employee- and environment-friendly.

Not long ago, much leadership styles were more autocratic, not taking holidays was a badge of pride, and jobs were considered to be for life. Increasingly, however, people entering the workforce know not to expect promotions or job security. As a result, they choose their employers more carefully and their expectations of their employers have changed. They expect more training and flexibility. They expect to have their say about the way the organisation is run and its strategy is determined. And they are more willing to vote with their feet if those expectations aren't met.

Authors like Frédéric Laloux have been challenging the idea of organisations as a top-down hierarchy. In his book, Reinventing Organisations, he looks at alternative structures and practices which allow individuals to contribute more fully.

The world is more fragile

COVID-19 has shown us how fragile our world is. One of the impacts has been a hastening of the digitisation of business processes. But we are likely to see a broader hastening of all forms of innovation as an increasingly well-informed and interconnected world adjusts.

How do we, as strategists, deal with this unprecedented uncertainty and change?

The fragility we are seeing is fractal. It exists on a global level, within nation-states, within institutions and organisations, at a local level and down to your own personal level. We can look at each of those levels and consider what we can do to de-risk them and to make them more robust. Or we go further and consider how we make them antifragile - that is, so that they will grow stronger under pressure.

Join us at StratChat next week 1 October at 14h00 BST as we continue to explore these topics: How do you do strategy in the face of unprecedented uncertainty and change - does antifragility provide an answer? Click here to find out more and sign up to join us.

Attendees: Chris Fox (host and notes), Christopher Norris, Jerald Welch, Pratap Lakshmanan, Simon Krystman and Su Copeland