In this article the authors discuss how organisations can better strategise for the future by integrating and balancing the three logical approaches to strategy: analytical, institutional and systemic.
In the current context of increasing global hypercompetition and market turmoil, strategy is becoming more and more prominent. Where formally strategic planning was conducted every 3, 5 or even 10 years, today it is reviewed almost annually, and in some cases strategy may even suffer major revisions within a year. As we suggested in a previous article, in practice, three logical approaches to strategy are commonly used.1
The first is analytical logic, based on estimations of the various business variables and establishing causal relations between them. It is based on explicit information (from both the environment and internal resources and capabilities) and is developed deliberately through the conscious analysis of the situation. In general, analytical logic regards the company’s activity as an economic-competitive reality that can be analysed and predicted.
The second is institutional logic, which is based on the development and preservation of the principles and values that govern the company’s activities and stakeholder relationships. It is generally expressed through “statements”, such as the company’s credo, mission, vision, values, purpose, etc., but this statement is only a symbolic representation of the institutional perspective’s true scope. It is primarily developed at a pre-conscious or even subconscious level and is generated through the socialisation and internalisation of beliefs regarding the general principles of the company.
And the third is systemic logic, which, through experience and intuition, focuses on the holistic understanding of the business, without being bound by the barriers of quantifiable data or by the characteristics of the organisational identity. It is developed through a profound knowledge of reality that allows the establishment of hypotheses regarding the fundamental aspects of the market and the company itself. The raw material of the systemic perspective is a mixture of conscious and unconscious knowledge, and is usually presented in a broad or non-specific manner in the form of ideas, models or reality maps.[ms-protect-content id=”9932″]
Relevance of Strategic Logics
Since the birth of the strategy discipline in the mid-twentieth century,2 the relevance of these three types of logic has evolved in the world of strategy, mainly due to the progressive increase of two factors: uncertainty and malleability (Figure 1 below). Uncertainty is the difficulty in predicting the behaviour of business variables (demand, cost, raw materials, etc.) and malleability is the ability to change the “rules” by establishing new products or business models that challenge incumbent businesses.
During the decades of the 60’s and 70’s – characterised by relatively stable environments (low uncertainty and malleability) – analytical logic was the backbone of strategic theory. In fact, most of the leading strategic models of that time and many later developments (SWOT analysis, Porter’s five forces analysis, the BCG matrix, decision trees, scenario planning, PEST analysis, resources and capabilities)3 and even some recent developments (such as the Balanced Scorecard) focus on analytical logic. Currently, the majority of strategy manuals are based on strategic analysis.
In the 80’s, after the oil crisis and the increased market volatility and uncertainty, institutional logic gained interest in the world of strategy. This boom was driven by the belief that the most successful companies in the world, such as HP, J&J, Disney and GM considered excellent4 and visionary5 at that time – had managed to weather the crises and uncertainties by following principles that stood firm for decades and were the real backbone of their strategy. From then onwards until present day, the first “obligatory” step in practically any strategy exercise is defining the vision, mission and values of a company, which clearly shows that institutional logic has become increasingly relevant.
More recently, increased malleability of the markets driven by new technology (e.g. IoT, Big Data, social media, internet platforms, artificial intelligence) and the apparent loss of competitiveness or failure of many excellent companies has drawn attention to systemic logic to explain why disruptive businesses are able to beat incumbent giants. In seeking to imitate these disruptors, or as means of preventing disruption, increased malleability has sparked the emergence of new strategic tools based on systemic logic, such as blue ocean strategy,6 lean startup,7 dynamic capabilities,8 and, more recently, representations of business models.9 A trend that is booming today as a means to stimulate disruption and innovation.
Why the Future Requires Integrated Logic
In order to deal with this progressive increase in uncertainty and malleability, some authors10 propose a contingent solution where different ways of making strategies are used, depending on the environment encountered. Following this principle, we would say that analytical logic is appropriate for stable environments, institutional logic for uncertain environments and systemic logic for malleable environments. The reality, however, is somewhat more complex and, although this contingent approach may be useful in the short-term, in the medium and long run it has considerable limitations.
This is mainly due to two factors. The first is that it is increasingly difficult to consider an environment as stable. Either brought on by social (wars, political changes, migration), economic (crisis, globalisation, concentration, speculation, displacement of the economic axis) or technological factors (social networks, the internet of things, big data) our current reality is characterised by constant change. The second is that uncertainty and malleability have joint drivers and high correlation. Increased malleability leads to uncertainty in the markets, and in turn, increased uncertainty spurs the creativity of companies to seek new ways to survive by reinventing themselves through new business models.
Due to these factors, realistically, the future for companies today is most likely the quadrant of high malleability and uncertainty. Here it becomes more and more necessary to develop what we call integrated logics (see Figure 2 below), a way of doing strategy in which the three types of logic are simultaneously combined in a balanced way. Hence, in the medium or long term, all companies and institutions will need to integrate logics.
This form of strategic thinking is not new at all. Prominent scholars, like Henry Mintzberg, have extensively argued the benefits of integrating logics,11 and the biographies of great strategists in history provide abundant insights into how they skilfully handled different types of logic. We could, for example, consider the lessons that D. Yoffie and M.A. Cusumano derived from the study of Bill Gates, Andy Grove and Steve Jobs.12 The masterful way in which they build their strategies is a good example of how the three logics guide their strategic decision-making. Obsession with detail and quick handling of information. Strong principles that orient and focus the strategies, and the ability to see the bigger picture and create new game-changing rules. What is remarkable about these great strategists, and difficult to achieve, is the way in which they integrate the three logics simultaneously, creating consistent strategies over time.
But now, what is new today, is that this ability to “jump” from one type of logic to another – something exceptional in the past times – is becoming an imperative for all companies. Progressively, what used to be an extraordinary trait of great minds is now becoming a necessary condition for survival. A reality that arises a new question to managers: how to learn the ability to integrate the different logics in making strategic choices?
Help with Integrating Logics
Ever since we started investigating the influence of logics on strategy development, we have sought ways to encourage integrated logics thinking in management. The first step is to acknowledge the benefits of integrating logics and understand the crucial role of each of them. But this understanding is usually not enough, as change needs to overcome the inertia, and more difficult than changing reasoning, it is the way of reasoning that needs to be changed. As facilitators of change, until now we have seen that it can be of great help to apply three fundamental tips:
1. Create balanced teams. One of the first things we noticed was that although we all can potentially use the three logics, people tend to show propensity for one of the types of logic. This can be clearly seen in the different functions of a company. For example, entrepreneurs often have a greater ability in systemic logic, financial departments tend to use analytical logic, institutional logic usually prevails in the areas of HR and CSR, and in general management there is typically a greater ability to integrate logics. But beyond the role in the company, either due to issues related to personality or temperament, studies, the career path or type of companies they have worked for, people are often inclined towards a certain type of logic. Thus, the first steps to integrating logics is to ensure that all three logics are adequately represented in strategy teams, and to make sure that, especially the people who are leading the strategy – be it the CEO, the strategy director or external consultants – are able to handle the three logics. This search for balance is important to prevent the domination of one of the logics in a team, or the absence of any of them.
2. Use models and tools from different logics. The second important issue in the integration of logics refers to the tools and models used in the process of strategy generation. Strategy tools generally focus on one or two types of logic, but rarely on all three types. The BCG matrix, for example, is used to study the business portfolio from an analytical perspective, but it provides little information about the mission or values of the company, or the shelf life of the business models analysed. The same applies for Osterwalder’s Business Model Canvas, as it focuses on systemic and analytical logic, and hardly refers to the principles and values of the company. And in the common methodologies to define the mission and values, the connection with the business model remains neglected or at best implicit. Therefore, to promote integration, the tools used should represent a balance of the different logics. If all the tools are geared toward a certain type of logic, by mere design, you run the risk of hindering the integration of logics. As a general rule, in the process of strategic planning, it is good to have at least one specific tool or process for each of the logics. Then, periodically, this toolkit should be updated with new tools and models of the three types.
3. Develop your own integrated-tools. During our research on logics integration, we have encountered many managers that seem to “tune” existing strategic tools and create new frames that help them to integrate logics. These are, for example, the use of the SWOT analysis to analyse the mission and values, the porter five forces integrated with a business model representation, scorecards that measure the performance of corporate principles, or alterations of the original Osterwalder’s business model canvas that incorporate new areas related to the mission of the organisation. The result of this way of “tuning” existing models and tools is what we call integrated-tools, which are combinations of existing models of different logics, forming new tools that guide and stimulate integrated strategic thinking.
As an example, we present below an integrated tool of a company that combines a low cost business model with a strong culture based on customer service (Figure 3 below). This tool is based on the design model of Casadesus-Ricart,13 extended to the representation of the corporate mission and values, combined with the balanced scorecard. As a result of this integration, we obtain a tool that enables us to see to what extent the various business model hypotheses are consistent and reinforced by the institutional principles of the company. Simultaneously, through scorecard indicators, we can see the degree in which these hypotheses and principles fit the reality of the numbers. In turn, as it is a dynamic tool (using indicators that are constantly evolving), it facilitates and stimulates the periodic reflection of both business models and institutional principles.
When strategising, we face an environment that is rich in drivers of change: new technologies, globalisation, market deregulation, demographic movements, political changes. But we must not forget that these factors do not directly affect the markets. The true actors of the transformation are the companies and entrepreneurs that – through interrelationship and competition – react to change, either by adapting or taking advantage of the opportunities that arise. It is the response to change that, based on the various types of logic to which we have been referring, offers alternative courses of experimentation and innovation.
Each of the three logics presented plays a fundamental role in this transformation process. Institutional logic drives consistency in the way companies react to change, helping them keep focus and harmony in their decisions, and facilitating the necessary motivation and the reasons, to start new courses of action. Systemic logic boosts change, creating new business models and challenging the traditional perspective on the value generation and value capture. And analytical logic reminds us that reality is stubborn and that above all hypotheses and new theories, there are simple and concrete rules that every business must follow in order to ensure its success and survival.
Consistently integrating these three logics is not an easy task, because contrary to what one might think, each logic may offer different solutions, which can even be contradictory. Concentrating on a single logic may seem attractive as it allows strategists to reduce conflict and gives them an apparent sense of security in which “everything fits”. But as a consequence of this myopia we fail to cope with the progressive increase of market uncertainty and malleability that require the effort and persistence in combining the three strategic logics.
In this paper we have presented some ideas to help management overcome the tendency to strategise in a way that is too simple or too intuitive, and face the difficult task of reasoning and filtering the strategy through the different logics. In short, as we have tried to show throughout this article, strategising for the future is about establishing a course of action, which allows the company to navigate between the different logics that ultimately dictate the transformation and evolution of the markets. Leading this process is just one step, but it is an important step for the success of organisations.[/ms-protect-content]
About the Authors
Joan E. Ricart is the Carl Schrøder Professor of Strategic Management. He has been Chairman of the Strategic Management Department at the IESE Business School for 23 years. He is a Fellow of the SMS and EURAM and he was the Founding president of the European Academy of Management (EURAM) and President of the Strategic Management Society (SMS). He has published several books and articles in leading journals such as Strategic Management Journal, Harvard Business Review, Journal of International Business Studies, Econometrica and Quarterly Journal of Economics.
Carlos Rey is Professor of Strategic Management and Director of the Chair Management by Missions and Corporate Governance at Universitat Internacional de Catalunya (UIC). He is Business Strategy and Change Management Consultant for companies such as Coca-Cola, Sony, Repsol or Bristol Myers Squib. Formerly, he developed managing positions in different countries (India, Mexico, United Kingdom, Germany & Spain). He is co-author of Management by Missions, published in six languages, and several articles of strategy, leadership and change management.
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