Start with a Theory, Not a Strategy

by Todd Zenger

Well-crafted strategies are road maps to places that yield competitive advantage and generate value for the firm. But once you’ve arrived, they don’t take you anyplace else. That’s a problem for companies under continual pressure from investors to find new sources of competitive advantage.

I recently had lunch with the CEO of a large privately held corporation that illustrated this dilemma. After two decades of strong growth, he recognized that that his strategy had run its course. In the minds of his investors, his success was baked into his company’s current value and they wanted to know where he was going to find more.

He presented to me three broad options for growth: diversify into a rather distant, weakly-related industry; develop and sell new services desired by their somewhat narrow set of existing customers; or expand globally into the same services they provide domestically. He asked which I thought made the most sense.

Of course, I did not give him a straight answer. Instead, I suggested that what he needed was a theory about strategy: a mental model about how his company could create value that would help him assess his three options.

In science, a good theory reveals compelling hypotheses that subsequent experiments will validate. A good corporate theory similarly reveals likely hypotheses about how the firm can create most value. It has three components:

Foresight into the future evolution of their industry,
Insight into what is distinctive and uniquely valuable in the composition of assets and capabilities the company possesses; and
Cross-sight into how combinations of internal and external assets and opportunities can create value.
For a company that has a good corporate theory, selecting the right next strategy should not be a problem; the fact that this CEO and I were having such a conversation about such divergent options revealed the absence of a good theory about what strategies were right for his firm.

I’m not going to pretend that it’s easy to come up with a good corporate theory. And, if anything, companies that have comfortable market positions will find the exercise more challenging than most. Microsoft is a case in point. Although it attained a remarkable position almost decades ago, the company has struggled to find new sources of value creation.

In the long run, firms compete not on their strategies, but on the basis of their corporate theories. For the past several years I have asked students ranging from executives to undergraduates the simple question: If you were given $10,000 to invest in Google, Apple, Facebook, or Amazon, where would you invest?

While the pattern of responses varies, most students quickly recognize that their answers have less to do with assessments of current market positions, and more to do with assessments of each firm’s corporate theory.

Each firm is entrenched in a market position quite distant from the others. Apple makes consumer electronics unrivaled in their ease of use. Google offers a search engine unparalleled in its speed and breadth. Facebook supports a social network unmatched in its reach. Amazon features a web store without equal in scope. But each is guided by a very different corporate theory, distinctly crafted as a reflection of the beliefs and current assets of their firm, which informs how they will move beyond their established and fully valued positions.

These theories (ideally) provide a sense of coherence to the growth initiatives that have pushed these firms into quite disparate and increasingly overlapping market space. Indeed, their theories seem to suggest no limit to the potential for strategic collision. Future results of strategic actions will ultimately determine the worth and accuracy of each firm’s theory.


Bottom line, unlike a strategy, a well-crafted corporate theory can take you beyond the one position or advantage. This is not to say that your theory will necessarily be the best one, but at least it will not be dead on arrival.

(Sources - http://blogs.hbr.org/2014/06/start-with-a-theory-not-a-strategy/)