Making Great Strategy: A Masterclass with Jesper Sørensen

Jesper Sørensen: If you have in your mind a model of the strategy process as being a process of discovering, then you can use that to structure the way you go about learning.

Darius Teter: We’ve talked before about the importance of a strategy for growing your business. On this masterclass, we’ll explain how to build a great one.

Jesper Sørensen: Don’t worry about it being perfect when you start, but then when you take action, you’re going to learn something. Treat that as an experiment, as data that’s going to be generated. So now, how do I have to then adjust my behavior?

Darius Teter: Welcome to Grit & Growth from Stanford Seed, the podcast where Africa and South Asia’s intrepid entrepreneurs share their trials and triumphs with insights from Stanford faculty and global experts on how to tackle challenges and grow your business. Remember this guy?

Jesper Sørensen: Hi, my name is Jesper Sørensen. I’m a professor at the Graduate School of Business at Stanford University. Here at Stanford, I teach courses in strategy.

Darius Teter: Along with Professor Glenn Carroll, Jesper is the co-author of the book Making Great Strategy: Arguing for Organizational Advantage. You may recognize him from episode three, where we spoke about the foundations of a successful strategy. But we barely scratched the surface. How do you build a strategy of your own? What does the process look like? Who needs to be involved, and what’s the outcome? Before you could answer those, there’s an even more important question: What is a strategy? And take it from me — that’s more complicated than it sounds. So I’m going to kick us off with a story. In my previous job, I worked for a large international nonprofit, and right when I arrived, the president wanted to kick off a strategy review. And so we had all the senior leadership in the room, and we started sort of doing unstructured brainstorming. And when I say unstructured, I mean really unstructured.

And this went on for a few months, sort of once every couple of weeks. And finally it was decided that we needed a facilitator. So we had more unstructured conversations with a facilitator, and then it was decided that that facilitator wasn’t doing a great job. So we got another facilitator, and this went on for almost a year and a half. And then we decided, well, we actually needed to talk to the wider world of staff and do some bottom-up brainstorming, also unstructured. So fast forward two and a half years later. We’ve produced a — I think it was like a 36-page strategy, and we present it to our board, and I think we’re proud that we have this thing. But after the meeting, one of the board members pulled me aside and said that was really not a very good document, meaning not a very good strategy. And one of the things I realized was that we never started by defining what is a strategy. So my question to you is: What is a strategy, and what isn’t?

Jesper Sørensen: Essentially what a strategy expresses is the logic of success for the organization. Like how are we going to get the resources that we need in order to accomplish what it is we want to accomplish? What that means is that you need to be able to articulate some sort of theory of how causes lead to consequences, how inputs lead to outputs, how actions lead to desired outcomes. And so I think, you know, in your story, what you’re describing is what sounds like a very extended and very tortured process of coming up with ideas, right? “Here are things that we could do.” And I suspect that everybody who was involved in that process was very sincere about what they were trying to come up with. And in fact, I think they probably all sincerely thought that these ideas that they came up with were aligned with what they saw as the mission of the organization. And I think that’s great. I mean, I think there’s nothing wrong with that, but a list of things that we want to do is not a strategy.

Darius Teter: Good strategy arguments have a few key elements, as we discussed in Jesper’s last episode. They’re built on assumptions.

Jesper Sørensen: Strategy is really mostly about the things that you can’t control. So it’s about, what are customers going to want? What are your competitors going to do? What is the regulator going to do? What are your suppliers going to do? Like, those are all things that you don’t have any control over per se. Like you can influence them, you can shape them, but it’s not like you can sit and you can command them to do things the way you can in an organization, usually. So strategy is about managing all this uncertainty.

Darius Teter: The assumptions are your foundation, and the argument you build on them must be logically coherent.

Jesper Sørensen: In the book, we call that focusing on the logical validity of the argument. And validity is — really, it’s a somewhat strange kind of thing, right? Because it’s asking you to look at whether the conclusion follows from the assumptions as they have been stated. And let’s be clear, there are lots of great strategies that have rested on people making assumptions that, at the time that they were making them, people said, that’s a dumb assumption, right? Sam Walton said, let’s go do discount retailing in rural Arkansas. And most investors were like, that’s dumb, right? There’s a bunch of assumptions in there that don’t make any sense. Turns out they were wrong. But for him to succeed, it was more than just making that assumption. It had to be logically coherent.

Darius Teter: Sam Walton, of course, founded Walmart, one of the largest retailers in the world. His logical argument started with a few key assumptions — that rural Americans generally paid more for goods than their big city counterparts, despite having less income. And if he could offer lower prices to rural Americans, they would go to his big-box stores and drive enough volume to create a thriving business despite slim margins. So every step of Walmart’s strategic argument from in-source logistics to tough negotiations with manufacturers had to result in lower prices. Otherwise, it wouldn’t be valid. There were plenty of reasons to think that Walton’s assumptions were wrong. Rural populations were poorer, they were smaller, and it cost more to transport goods to these remote towns. But right or wrong, every decision Walmart made focused on that equation: lower prices for rural America. Ultimately, for Walmart’s strategy to be successful, their assumptions also had to be true. This is what Jesper calls the soundness of a strategic argument.

We have the validity of an argument, but then we, over time, as we test our strategy, refine it as we discover our strategy. We’re also interested in the soundness, right? What does that mean?

Jesper Sørensen: Soundness is essentially success. And so great strategies are ones where there was a logically consistent argument and all the assumptions turned out to be true.

Darius Teter: But that presents a problem.

Jesper Sørensen: Because strategy formulation is about trying to figure out, how are we going to be successful in the future? While the thing about the future is it hasn’t happened yet, right? And so there’s a lot of things that we’re going to assume about the state of the world in the future that we don’t know to be true today.

Darius Teter: A good strategy benefits from multiple perspectives. But creating the right environment for constructive debate is just as important and difficult as building the argument itself. So now that you’ve figured out the what and the why of strategy formulation, it’s time to focus on the who. So who makes strategy? Is it the responsibility of the leader, the leadership team as a leader, thinking about a forward-looking strategy? How should I think about who needs to be in the room?

Jesper Sørensen: So I think there’s two different ways to think about the question of who makes strategy. So at one level, what I like to emphasize when I talk to executives and mid-level managers is that anybody who is making a resource allocation decision is doing strategy, right? Because strategy ultimately becomes about how you are spending your money and your time

Darius Teter: Choosing A over B, not C, sometimes D.

Jesper Sørensen: Exactly. And a lot of those decisions in modern organizations get delegated, right? It’s not the CEO at the top who’s making all those decisions. So that means at a minimum that everybody who is making those kinds of decisions, (a), needs to be able to think strategically, in other words, to think about what it means to do strategy, and, (b), has to have at least some understanding of what others in the organization think this organization’s logic of success actually is so that they can behave in a way that is consistent with that.

Darius Teter: We’ll talk more about communicating your strategy later in this episode, but this point bears repeating: a strategy only works if everyone follows it. To be successful, everybody at the organization who makes decisions and allocates resources needs to understand the strategy so that their own actions support it. And I think this is really, really crucial for our listeners, because I, from my conversations with a lot of business leaders in the Seed program, either those conversations don’t go well, or because they’re not sure how to manage them, they don’t actually happen. So I remember being in a meeting, it was a company in Kenya, $10 million in annual revenue, and the whole leadership team was there, and they did a strengths and weaknesses analysis. And one of the weaknesses that the staff raised was that they didn’t know what the strategy was, and the leader was surprised. And so this was sort of the, you know, the unveiling of the results of this survey. And one of the sort of bolder members of her team said, “I’m sure you have a strategy, we’re just not sure what it is, but we believe in you, so we think you must have it.” So how does that person take their team, bring them in, and say, okay, let’s actually review this thing together? What are the elements of making that a constructive conversation?

Jesper Sørensen: I think the first thing you need to be able to do is you need to create an environment where there is what we call psychological safety. And what that means is that people feel free to dissent from the dominant opinion and don’t fear retribution if they should do so.

Darius Teter: Is that like an assigned devil’s advocate, or that has to be sort of the general understanding?

Jesper Sørensen: I think that has to be a general understanding. I think a devil’s advocate is a way of ensuring that people are forced to consider the negative, so to speak, and don’t engage in too much group think. But I think in general, what you want is, you want everybody in the room to say, my job does not depend, and my inclusion in the group, so this is not just about the boss — it is very much about the boss, of course. So there’s hierarchical differences in almost any room like this. There’s going to be people who have more formal authority. So the leader has to be very careful about both verbal and nonverbal communication that shapes people’s perception: “Oh, I’m in trouble now.”

Darius Teter: Yeah, no eye rolling.

Jesper Sørensen: No eye rolling.

Darius Teter: Crossed arms, shrugging.

Jesper Sørensen: Right. No frowning, right? Which, you know, for some of us is hard to do, so hard, so that at the very least you need to teach people that just because you’re frowning doesn’t mean you’re upset. It just means that you’re thinking, which is oftentimes, for some of us, the case.

Darius Teter: Just because it’s called an argument, doesn’t mean that things should get heated. There’s a great quote in your book that says, “The unfortunate fact about how strategy happens in many firms is that it all too often takes the form of arguing blue.” What does “arguing blue” mean?

Jesper Sørensen: Arguing blue — that’s a phrase that my co-author, Glenn, came up with. The analogy here is the saying, you know, they were arguing until they were blue in the face. People go into an argument and they say, “I want to win. And I’m going to take whatever it takes, right? Like, I’m going to pick up sticks on the ground and beat you over the head. I’m going to yell really loudly, I’m going to bring in my boss and lean on that. I’m going to use my influence in the room, or whatever else. That’s what arguing blue is about. And that tends not to be very constructive, obviously. One of the things that it does is it prevents people from recognizing the flaws in their own argument because they spend so much time defending it. And that’s problematic because all arguments have assumptions.And the flaws are oftentimes just assumptions that you need to be able to acknowledge.

Darius Teter: Once the ground rules are in place, the team will formulate their arguments. But you’ll want to start somewhere surprising: at the end. In your book, Making Great Strategy, you advocate for starting at the end — at the destination. What does that mean?

Jesper Sørensen: I think the reason you would want to start with, like, “What is it we want to accomplish? What does success look like for us?” is then you can start to say, okay, now here’s all these things that we think might connect to what we want to accomplish. And I think that’s fine. Again, that brainstorming is important. Come up with lots of ideas for what it is that you think is going to lead to what you accomplish, but then ask yourself, well, wait a second, what’s the nature of the connection? How are all these things connected to this?

Darius Teter: How does A get to B, to C, to D?

Jesper Sørensen: How? Yeah. And what am I missing? Like, what is it? Okay, well wait, oh wait, I forgot that for this to actually help us accomplish our goal, government regulators have to allow us to do activity A. And is that actually true? Well, we don’t know. Let’s go find out and then let’s see if that’s right. You know, if I want to expand my operations to a new region, and I want to do it with a new partner, well, we’ve got this partner that wants to work with us, great! But wait a second. Do they really have the capabilities we need? Are their interests really aligned with ours? And so part of what happens in those kinds of brainstorming processes is you come up with too many ideas.

Darius Teter: Businesses don’t exist in a vacuum, and strategies shouldn’t either. A good argument will address your customers and constraints.

Jesper Sørensen: Whether or not your organization is a for-profit organization or a nonprofit organization, you still need to have a strategy that gets the money in the door. And that is what we call creating economic value and about capturing economic value. And I think the way that connects to a strategy argument is that your strategy argument has to be really clear about the constraints under which you’re operating … I operate in an input market, so I’ve got to get inputs from suppliers, and I operate in an output market, and so I’ve got to deal with competitors, and I’ve got to deal with powerful buyers potentially. And I’ve got to deal with potential entrants and so on and so forth. And so you’ve got to think about, okay, what’s my argument for dealing with all of those things? Oftentimes, what they can do something about is competition, and they have lots of rivalry and they’ve got to figure out: How do I win against competition?

Darius Teter: With the arguments constructed, it’s almost time to debate — almost.

Announcer: Ladies and gentlemen, let’s get her ready to rumble!

Jesper Sørensen: The first thing we need to do is make sure that we’ve identified, for each of these two arguments, what are all the necessary assumptions for this to happen. If you have a fundamental belief that the world is going to turn out in a certain way and you want to bet on that, then that’s okay, because that’s what strategy ultimately is going to be about. But the reason we talk about the importance of trying to surface your implicit assumptions is that it’s much better to know what bet you’re placing than to discover that you placed the particular bet after the fact.

Darius Teter: You have this great analysis of what you imagine: What was the Nokia leadership team thinking about when Apple introduced the first iPhone?

Jesper Sørensen: You know, in Nokia’s case, their, I think, implicit assumption, what they were assuming, was that people really cared about call quality and battery life in phones. And that was what Nokia was super good at. They were really good at having calls that didn’t drop, etc., etc. And where the …

Darius Teter: And you could run over the damn thing with your car.

Jesper Sørensen: You could run over with your car and the battery would last forever, like three days without a charge, right? And here comes Apple with this iPhone, right? Where the worst part of the iPhone, everybody said when it first came out, was the phone, right? Because it was terrible call quality.

Darius Teter: It was two G, not three G.

Jesper Sørensen: It was only on the AT&T network in the U.S. which was the weakest network at the time. And by the way, the battery would be drained in the course of half a day, three quarters of a day, right? And so Nokia was like, okay, we’re good, right? What they missed was all the other things that were on the iPhone that really appealed to people, and so on and so forth. So that may be where the implicit assumption was — that actually people just wanted an iPod that could do things more than just play music, right? Like that could also make calls if they really needed to, right? And then suddenly they’re in a lot of trouble. And then once we have that, now we have to have a debate.

Announcer: This is the moment we’ve all been waiting for.

Darius Teter: To have a constructive debate, you’ve got to put aside everything but the logic of the arguments. I believe this is the hardest part of the whole process.

Jesper Sørensen: People need to be able to distinguish between the logical coherence of an argument and whether or not they like the conclusion of an argument. So you could imagine that two people have different points of view of what course of action we should take. So one of them says, we should expand into Madagascar, okay? And that’s going to be really the way for us to grow. And the other one says, no, we should invest more in growing our market share in Kenya, for example. Both of those sides need to be able to step back from those conclusions and be able to assess the other person’s argument without letting the fact that they don’t like the conclusion poison their ability to assess the argument. And similarly, they need to be able to assess their own arguments without being able to let the fact that they love their own conclusion influence their assessment.

Darius Teter: It’s tempting to keep refining your strategy until it feels perfect. But since a good strategy is based on an unknowable future, putting it into practice and learning along the way is how you actually refine it.

Jesper Sørensen: Don’t worry about it being perfect when you start. Go ahead and do the best you can and then take action. But then when you take action, you’re going to learn something. Treat that as an experiment, as data that’s going to be generated to shed light on your theory. And then say, well wait a second. Oh, oh, oh, I see. What we were assuming was that customers really cared about this, and that turns out to be wrong. So now how do I have to then adjust my behavior? And so you have to, as my colleague Baba Shiv says, you have to make the decision, as opposed to being focused on making the right decision. Make the decision, right?

Darius Teter: Jesper is referring to Professor Baba Shiv, who’s also appeared on this podcast. Professor Shiv says there are no good or bad decisions. There are decisions with good or bad outcomes. And the best way to increase the likelihood of a good outcome is with the buy-in of your team. What are some of the other benefits of creating that constructive argument space?

Jesper Sørensen: Part of agreement is trying to understand why are we doing what we’re doing at the end of the day. And what happens, I think, a lot of times in organizations when they do strategy, but it devolves into this kind of “arguing blue” scenario that we talked about earlier, is that there’s a street fight that happens. So a street fight happens between the people who want to expand into Madagascar and the people who want to double down in Kenya, and whoever’s the strongest wins. Now you say, okay, so now we’ve got to switch gears and we’ve got to go, and let’s say expanding into Madagascar won. So now the whole organization’s got to figure out — how do we support expanding into Madagascar? Well, all these people who lost the fight to double down in Kenya are like, it wasn’t a fair fight. Because they’re going to be saying, well, wait a second. What I was trying to do made sense, too.

Darius Teter: You just used a power card on me and lost.

Jesper Sørensen: You just used your power card on me, and you’re just telling me that I was an idiot for wanting to do this, but I’m not an idiot.

Darius Teter: And now you’re asking me to execute —

Jesper Sørensen: And now you’re asking me to execute, right? And so like we talk about in the book, and you know, something I learned from working with Intel over the years, right? Like this norm of disagree and commit. So this idea that we should be able to fight about what the right course of action is, but then once we have made a decision, we should all march in the same direction. That’s much harder to do if the fighting has been in the form of arguing blue.

Darius Teter: It’s harder to commit if you don’t understand the decision and if you don’t think that you were treated fairly.

Jesper Sørensen: Both of them, right? And I think actually the first one is really worth emphasizing as well. It’s also about, like, I don’t even really understand what it’s going to take for us to win in Madagascar.

Darius Teter: Ultimately, the strategy will be carried out by your entire company. Successful execution depends on how well you can communicate it. You’ve often used the term “institutional alignment.” The way I think about that is, does everyone understand where we’re going? And do they understand how their activities, their department, their staff actually contribute to that destination? Your person in finance may not have been involved in the strategy discussions, but it turns out that they’re actually crucial to execution, right? So do they actually see themselves in the strategy? I think everyone — my sort of painful lesson over time is that everyone in the organization needs to understand how they are contributing to the strategy.

Jesper Sørensen: Think about sports as an analogy. Every team has a particular approach by which they want to win in any given sport. So pick it, you know, American football, European football, or soccer, basketball … Everybody has to understand what their role is. So even if you are the fullback on the team in soccer, you need to understand like, well, what’s our approach to trying to score? What’s our approach to trying to defend, etc., etc. And just to use your example — the finance person needs to understand, what is it that the finance task has to be able to accomplish? I think what we see in a lot of organizations is that each one of those functions tends to think about themselves as saying, well, my job as the owner of this function is to be the best in class, so I’ve got to build the best IT organization in the world. Well, no, because if you benchmark against other organizations, like some organizations, IT is essential, the logic of their success. In other organizations, it is not as essential, but it plays a role. And you have to think about how yours fits in.

Darius Teter: Jesper has taught strategy to hundreds of people from executives at Intel to small businesses in Tanzania. But no matter the size, the market, or the country, the principles of strategy still apply.

Jesper Sørensen: What’s always striking to me is how everybody thinks that their strategy problems are totally unique to them. And I think that is true of Seed companies as well, throughout Africa and throughout India. They will say, well, we have a set of unique problems that nobody else has. And I’m not trying to diminish in any way the realities of those problems, but I actually think there’s — what I like to encourage people to see — is that actually there’s comfort in knowing that those problems are the same problems that everybody else has. They’re different in degree, maybe sometimes they’re different in how they manifest themselves, but competition is competition. The set of issues, in some sense, they are analyzable and they’re understandable — and, I think, over time, solvable, if you put your mind to it, which is what makes it possible for me to teach across all those different settings. Because I think it’s true that actually there are a set of truths to how firms win and lose that kind of work across all those settings.

You know, if you’re running a business in Madagascar, that doesn’t mean that all your knowledge of strategy has to be Madagascar-based. One of the great things that I think we’ve seen through the Seed program over the years as that network has grown and as business leaders have been able to connect with each other across sub-Saharan Africa and into South Asia, and so on and so forth, as they start to see, oh yeah, I’ve got all these other people in all these other countries who are dealing with the same things that I’m dealing with, and we’re going to figure this out together, right? And we’re going to help each other and we’re going to make that work.

Darius Teter: A good strategy starts with a logical argument built on assumptions, and it makes a series of bets on an unknowable future. Embrace that uncertainty, because incremental strategies will only produce incremental growth. All too often, strategy formulation happens with only one person or a very small group of people. Consider who else needs to be in the room to improve the quality of your strategic argument. How you have these debates matters. People need to feel safe to make their case. A group of yes-men and yes-women are not going to help you. Everyone in your organization needs to understand the strategy and see themselves in it because their work contributes directly to its success. This is especially true of people who allocate resources within your company. Since you’re making bets on the future, make sure you know which assumptions have to be true for the bet to pay off and adjust if the evidence proves you wrong. The world is littered with companies that clung on too long to their most cherished beliefs. I want to thank Jesper Sørensen again. We’ve been debating strategy for Stanford Seed for six years, and he really does walk the talk.

This has been Grit & Growth from the Stanford Graduate School of Business. I’m your host, Darius Teter. If you like this episode, follow us and leave a review on your favorite podcast app. Erika Amoako-Agyei and VeAnne Virgin researched and developed content for this episode. Kendra Gladych is our production coordinator, and our executive producer is Tiffany Steeves, with writing and production from Andrew Ganem and sound design and mixing by Alex Bennett at Lower Street Media. Thanks for joining us. We’ll be back soon with another episode.