We are on record as strong believers that the best strategies start bottom-up – in fact, we called our book “Grassroots Strategy” for that reason. Our experience is that the best ideas come from the front lines, the people who work day-to-day with customers and/or technologies and can see creative solutions to unsolved problems. However, for a corporation, this does not mean that doing strategy bottom-up is sufficient. Bottom-up cannot see across opportunities in the business units or fully leverage the capabilities of the corporation. Further, bottom-up strategy only works when the infrastructure and top-down leadership to support the process is in place. A recent client story helps make the point:
Our client was a small engineering and manufacturing company. For historical reasons, they were organized into five largely stand-alone business units. While there was a lot of overlap in expertise and some potential overlap in customer base, they operated independently of each other from sales through operations.
Responding to a board request to document their strategy, the client set to work. They asked each business unit to describe their growth opportunities and then quantify the profit potential and required investment. Each business unit laid out a plan to incrementally increase their production capacity and so grow the business. They then rolled up these financials and presented it as their strategy.
If you read this blog regularly, you know that we believe that having a plan does not mean that you have a strategy. In this case, some of the board members recognized the lack of strategic thinking as well, and asked us to take a look. W then worked with the client to dig into the details and fill some gaps in the their market understanding. Together, we came away with a much clearer strategy, but also saw firsthand the hazards of a pure bottom-up approach:
- Without clearly defining expectations for the market-back questions that each business unit had to answer to have a strategy, the process was largely about internal numbers and budget negotiation – e.g., since I will be held to these projections, how much investment do I need to feel confident that I can deliver?
- In fact, because each BU knew these would become their targets, they were focused almost exclusively on incremental growth because it is perceived as lower risk. The outcome was similar to what we call an ‘everyone try harder’ strategy – with resources spread proportionately to the BUs and no break-through thinking.
- When we worked with the client to better understand their markets, it became clear to us that their markets were not at all similar– in fact, the strategies, and therefore the levels of investment, should be quite different. In this case, ranging from a business that they should probably exit to a business where they have real differentiation that they could use against fragmented competition and achieve dramatic growth either organically or through acquisition.
- In addition, they missed a major opportunity – when we started with the customer perspective, it became clear that there was a significant segment of the market that would value an integrated offering which our client was uniquely positioned to provide – but they needed a different sales force structure to sell what would be a cross-BU offering (and no one was doing that today).
We continue to believe that strategy is not primarily a top-down exercise. We have seen too many smart people paralyzed while they wait for someone higher up to give them a corporate strategy. That being said, as the above story illustrates, there are some clear roles that corporate can play to both develop solid product line and business unit strategies; and must play to turn them into a coherent corporate strategy:
- Corporate should define what a good strategy looks like – one of the best ways to do this is by listing the five or six key questions that a strategy must answer, as this encourages and directs bottom-up thinking (rather than shutting it down as many top-down approaches tend to do).
- In many cases, an important corporate role is to support developing the skills within the business units to objectively understand markets from the customer-back – we firmly believe that this teachable skillset should be spread broadly throughout business units and not limited to a few enlightened individuals in a strategy department.
- Ultimately, a corporate strategy needs to allocate resources, so corporate needs to evaluate BU strategies and direct investments to the best returns (not proportionate to last year’s profits) – sharing these decisions and the rationale behind them will tend to reward clear thinking and help improve the quality of BU strategies over time.
- A corporate strategy has to have a clear view of the corporate capability system – that small number of hard to copy processes/tools/systems that can be leveraged across the business units…
- …Armed with that, a corporate strategy should identify potential synergistic opportunities even where no specific business unit is pursuing them today, and then develop the business models, organizational requirements and/or acquisition options to pursue them.
- Lastly, to make this sustainable, a corporate center has to implement and maintain an organizational model that balances the role of corporate functions versus BUs in a way that invests in the relevant capabilities, aligns with the strategy and minimizes conflict and duplication of effort.
In the end, we stand by our position that good strategies start bottom-up, but like many things in life, the real answer is not that simple. Without clarity from corporate and the right environment and infrastructure, bottom-up strategies can be precisely wrong and can never add up to a coherent corporate strategy. Finding a way to meet in the middle that leverages the capabilities of the corporation but captures the unique market understandings of the business units is key.