Gerald's latest book Denistry with a Vision (November 2009), guides doctors, dentists and other professions in using TOC, Lean and Six Sigma to improve their practice. (October 2004) Viable Vision explains to executives and managers how to get high leverage out of an organization's change efforts. His Advanced Project Portfolio Management and the PMO is the top selling book in the PMO and Project Portfolio Management space. His first book, Securing the Future, continues to be in high demand in its 11th year of publication. Gerald also authored a chapter on Project Portfolio Management for the American Management Association Handbook of Project Management, 2nd ed. , and a chapter on Critical Chain in Dr. Harold Kerzner's book, Project Management, A System's Approach, 8th ed.

Gerald is a graduate and silver medal winner of McGill University. You may email to Gerryikendall@cs.com. Web site: www.goldratt.com.

CHAPTER 19.

Strategy

H. William Dettmer

The Popular Conception of Strategy

Everybody talks about strategy...

"What's your strategy for finding a job?"

"What's our strategy for getting this project done on time?"

"What strategy can I use to get out of debt?"

"What's our strategy for winning the next election?"

"What's your strategy for getting your spouse to agree to our golf trip to Las Vegas?"

"What's the strategy for turning around the slumping economy?"

"What's our strategy for winning the game next Sunday?"

"What strategy should we use to introduce this new product to the market?"

"What strategy can bring peace to the region?"

"What's your strategy for getting Nadine to go out on a date with you?"

From this list, it should be obvious that the word strategy is used in many different ways to connote a wide variety of meanings.

Strategy's origin is military, dating back as far as the Chinese general, Sun Tzu in the 5th century BC (Cleary, 1991). In modern times, its military aspect is most often associated with Clausewitz, Moltke, Liddell Hart, and, more recently, Boyd. Nearly all military definitions of strategy involve objectives, winning, application of resources, and execution of policy.

The commercial business community tends to see strategy almost exclusively in terms of Marketing or Finance. Michael Porter's (1985) famous "low-cost leader versus differentiation" concept was the basis of his landmark book,Competitive Advantage, the virtual bible of business schools for many years. However, such a narrow characterization ignores the applicability of strategy to other kinds of activities and organizations, such as government agencies and not-for-profit groups-systems that do little or no Marketing and Sales, or are not in business to generate a profit. Moreover, it fails to consider some of the personal, but no less valid, applications of the concept.

Copyright 2010 by H. William Dettmer.

The underlying relationship is not between strategy and a particular type of organization; it's between strategy and systems. Understanding the distinction frees the imagination from artificially imposed constraints on how, and for whom, strategy might be constructively employed.

The System Concept

It is difficult for many people to think conceptually in terms of systems. It's easier for them to pigeonhole systems as "organizations," either formal or informal. Yet, as Table 19-1 shows, the system concept goes well beyond organizations.

In its simplest incarnation, a system is made up of inputs, a process of some kind, outputs, and the environment in which these components exist (see Fig. 19-1).

Any system interacts with other similar (or dissimilar) systems that coexist in the same environment, and with elements of the external environment itself. Some of these other systems might include suppliers, customers, regulatory bodies, special interest groups, competitors, societal groups, educational institutions, etc. The interactions among systems-or lack thereof-are related to the nature of the system's chosen functions and activities.

In view of the far-reaching nature of systems and their interactions with other systems and the environment, it would be myopic to consider the concept of strategy exclusively in terms of narrowly defined organizations or departments such as Marketing/Sales or military operations. Moreover, while strategy can certainly be developed and deployed without any prior knowledge of the Theory of Constraints (TOC), a thorough familiarity with TOC concepts and principles, in addition to systems thinking, enhances the quality of any strategy subsequently developed. More needs and opportunities are likely to become visible.

A Vertical Hierarchy

Besides the "horizontal" conception of strategy across different types of organizations-commercial, not-for-profit, government agency-there's a vertical perspective as well. This vertical aspect is related to system levels.

TABLE 19-1 Types of Self-Aware Systems FIGURE 19-1 Basic system.

Systems are hierarchical. What usually occupies our attention is no more than one level of a larger system composed of multiple levels. An old rhyme characterizes the vertical relationship: Big fleas have little fleas Upon their backs to bite 'em.

Little fleas have lesser fleas, And so on, ad infinitum. (Ramel) Military organizations differentiate among vertical system levels by using different terms, depending on the level under scrutiny. From highest to lowest to highest, this taxonomy is as shown in Table 19-2.

The content of each of these terms decreases in "granularity" as one moves upward in the hierarchy. In other words, tactics are much more detailed, discrete, and narrowly focused than operations. Strategies are much more general and broad than operations, which themselves are more general than tactics.1 TABLE 19-2 System Levels Non-military organizations don't normally make these distinctions, although they could-and perhaps should. Complex systems or organizations experience significant interdependencies among their internal components, the external environment, and other systems.

A Common Denominator

If one accepts that the concept of strategy embodies both vertical and horizontal dimensions, a real need for a common definition of the term emerges. Whether one calls it strategy, operations, or tactics, it answers the same underlying question: How do we get from where we are to where we want to be? Or, expressed another way, how do we achieve what we've set out to do?

Turning this question into a useful definition that suits both the variety of organizational types and the multiplicity of system levels, a "common denominator" definition of strategy might be: How systems or individuals go about closing the gap between a current condition or position and a desired future state.

This definition is sufficiently inclusive to account for systems with multiple layers as well as different kinds of systems. It's not confined to military systems alone, nor is it exclusively centered on Marketing or Finance. Rather, it addresses both means (how) and ends (future state), regardless of the type or complexity of the system.

A Whole-System View

Means and ends don't exist in isolation. Every system having means and ends operates in some kind of environment. The nature of the environment-its economic, social, political, and technical characteristics-defines and delimits the resources and range of options a system can exercise in executing its strategy.

The relationship between a system and its environment naturally implies decisions about how to employ available resources in pursuit of the system's ends-in other words, in executing strategy. In the modern world, neither the environment nor resource availability remains stable for long. The external environment is subject to a wide variety of variables, too. Consider, for example, the extreme fluctuations in international oil prices, the collapse of the U.S. sub-prime mortgage sector, and the failure of huge commercial banks. For most systems-commercial, government agency, or not-for-profit-such external factors, predictable and unpredictable alike, change their respective playing fields in dramatic and uncontrollable ways. Such turbulence continually generates situations requiring choices (decisions), any of which can affect outcomes or ends.

It's almost impossible-certainly impractical-to predict changes in the external environment with any confidence. The same might be true for the availability of resources. It is likewise impractical to preplan for an indeterminate number of contingencies that might happen. Such unpredictability drives a need for rapid, effective decisions, or reactions, during the execution of strategy-perhaps even the revision or replacement of the entire strategy. The point is that in the modern world,strategy can never be static. It's inextricably linked to execution, and it must be continually reevaluated against the evolving conditions of an ever-changing environment.

The OODA Loop

Perhaps the most influential development in the art of decision making in the past 30 years is the OODA loop (see Fig. 19-2). The name is an acronym for observe, orient, decide, and act. However, the OODA loop is considerably more robust than the mere sequential execution of the four steps the name implies.

FIGURE 19-2 The OODA loop. (From Boyd, J. R. The Essence of Winning and Losing. 1996.) In much the same way that the Five Focusing Steps (5FS) guide the management of system constraints in constraint theory (Goldratt, 1990), the OODA loop is a routine that facilitates rapid, effective decisions at all levels-tactical, operational, or strategic-of any kind of system, whether commercial, government agency, or not-for-profit.

The OODA loop is the conceptual brainchild of John R. Boyd, a U.S. Air Force colonel (19271997) who synthesized it from his personal experiences in air-to-air combat, energy-maneuverability theory, policy "battles" in the Pentagon, and extensive research into military history, strategy, and science. However, Boyd's synthesis resulted in far more than the OODA loop alone, which is merely the most visible part of a larger system-level perspective on adjusting and evolving in an ever-changing world. (Coram, 2002; Hammond, 2001; Richards, 2004; Osinga, 2007; Safranski, 2008).

How does the OODA loop facilitate the development and deployment of strategy?

Strategy as a Journey

If one accepts the concept of strategy as summarized in Fig. 19-3, a robust approach to decision making can mean the difference between success and failure in a rapidly changing environment. The first three stages of the OODA loop-observe, orient, and decide-are essential to the creation of strategy in the first place. The last stage-act-clearly applies to deployment of strategy. Nevertheless, it's called a "loop" for a reason-the first three stages also provide the means to detect and respond to the environmental changes that could rapidly render a strategy invalid.

Many companies use an annual strategic planning cycle, meaning that they have a predetermined yearly schedule for reviewing and updating their strategic plans. In other words, they set their strategy for at least a year, then don't formally revisit it until the same time next year. But how responsive is that practice to surprise, catastrophic events? How well would such a practice have served the commercial airlines after September 11, 2001, or commercial industries that depend on bank financing after September 2008? If strategy directs a journey from the current state to some desired future state, it's critical for it to be flexible enough to react immediately to such unexpected surprises. If you were navigating a ship across the ocean and discovered that you had been blown seriously off course, would you wait until the next strategic planning cycle to take corrective action? What if, for some reason, the destination had changed, even without a storm to blow you off course? Would you in any way delay resetting your direction? If not, why would anyone with responsibility for guiding organizations behave any differently?

FIGURE 19-3 Strategy as a journey.

Orientation and Observation

According to Boyd, the orient step is the most critical of all, despite the fact that it appears second in the sequence (Safranski, 2008) That's one reason why he made it more prominent (see Fig. 19-2) than any of the other steps. The orient step is the amalgamation or synthesis of the sum of our knowledge about ourselves, our system, values, customs, culture, experiences (heritage), and the environment (Osinga, 2007). One might oversimplify by saying that our orientation represents our worldview, hard won and tightly held. It's the lens through which we filter sensory inputs of things happening around us or, in other words, the observations we make in real time.2 The orientation step is the one in which a divergence from our expectations is detected. Part of our orientation is the paradigm (Kuhn, 1962) in which we live, the view of the world we create for ourselves based on the factors previously mentioned. These factors all conspire to form our assumptions about the way we think things happen (or should happen). When we observe phenomena or events that don't fit into our orientation, we have what Boyd referred to as a mismatch. The existence of this mismatch is determined when we analyze and synthesize our observations with the basis of our orientation or paradigm. In other words, we examine what is happening in light of what we expect should be happening. This continual analysis-synthesis process is an integral part of maintaining a robust current orientation.

How does observation happen? Sometimes, as in the case of 9/11 or the sub-prime mortgage meltdown, events are thrust upon us in ways that we can't ignore. However, sharp system leaders actively look for changes in the environment and evaluate what effect their observations might have on their orientation-in other words, what mismatches might be emerging. The more this active observation is practiced-and the observations synthesized-the more sensitive one eventually becomes to small changes, which may be indicators of more dramatic changes yet to come. This has relevance to competitive advantage, which will be discussed in more detail shortly.

As Fig. 19-2 indicates, observations include new outside information, such as research or technology breakthroughs. Unfolding circumstances include the entry of new competitors into the market, new laws or regulations, or world events such as skyrocketing crude oil prices, increased activity of Somali pirates in the Indian Ocean, financial chaos in one sector of the economy, or other international geopolitical developments. Unfolding action with the environment specifically refers to the environmental effects of actions the system might take-the other side of the equation from the impact of environmental changes on the system. Implicit guidance and control (at the top-left in Fig. 19-2) represents the changes in a system leader's observations based on the synthesis of new information, even before decisions or actions are contemplated.

Decision and Action

Completion of the orientation step implies that a mismatch or gap between reality and expectations has been identified. The next step would seem to be to decide what to do about it. The decision step in the OODA loop may be deliberate or intuitive. In complex situations, when the decision maker isn't intimately familiar with the environment or the possible options, this step is likely to require deliberation: "We know that things are not the way they should be-now what should we do about it?" A more formal or structured decision process might ensue.

However, if one's knowledge of the system and its environment is comprehensive (usually born of deep experience), it may be intuitively obvious what needs to be done. In this case, decision makers often proceed directly to action. This is reflected in the upper-right part of Fig. 19-2 (implicit guidance and control).

Even if decision making is more deliberate, available options are often logically tested-that is, compared to reality and their potential outcomes assessed-before proceeding to the action stage. This "hypothesis testing" is reflected in Fig. 19-2 in the feedback loop between "Decisions" and "Observations." The purpose of this testing is to help reduce the impact of uncertainty on a decision among several options.