How to Develop a Strategy

Peter Drucker

Drucker’s views on strategy were quite different from those taught by others. He did not believe in "portfolio management" or quantitative methods for strategy development. Drucker felt that every situation had to be approached individually and with common sense based on history. This is probably one reason that Drucker, although a self-proclaimed "non historian," used historical examples to illustrate his concepts. And though the word "strategy" comes from the Greek word, "strategos," he did not believe that "business is war" or that one should look at business as an act of warfare.

Business Is Not War, But . . .

However, he recognized that there were principles in common that strategy for any organization, of any purpose, which might be shared with military strategy. The military or any organization operates on a "theory of business." Drucker wrote that strategy converted this theory of business into performance; that its purpose was to enable an organization to achieve its desired results in an unpredictable environment.

How Drucker Did It

In practice, Drucker first looked at a company’s overall objectives and whether they matched the results of his injunction to determine what business the company was in, what the business should be, who was the customer, what the customer wanted, and what the customer termed successful in fulfilling this want. Then the leader looked at what the events that had happened and what they actually meant. Drucker called the results of this analysis, "certainties." Pleasant or unpleasant, the "certainties" had to be faced squarely. Another words he started with an analysis of the situation in the marketplace and identifying those certainties that would be faced.

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What to Do About Risk

Drucker knew that risk could not be avoided. In fact, he believed that some risk was a requirement for success. Little or no risk meant that the corporation was not aiming high enough. The future was always unknown, and unknowns mean risk. He felt that the risks from unknowns could best be dealt with by taking the initiative to create one’s own future. Therefore, in developing strategy, a leader had to take the actions to achieve the goals he or she had established. Of course major threats had to be identified along with alternatives of action, should these threats become realities.

Four Questions that Must be Incorporated

Drucker recognized that any company’s strategy had to incorporate the answers to four questions:

  1. What opportunities the company wants to pursue and what risks it is willing and able to accept.
  2. The scope and structure of the organization’s strategy, including the right balance among such aspects as specialization, diversification and integration.
  3. Acceptable trade-offs between time and money and between in-house execution versus using a merger, acquisition, or joint venture or some external means to reach its objectives and attain its goals.
  4. The organizational structure appropriate to the company’s economic realities, the opportunities, and it performance expectations.

A recognition that strategy had to be based on these four questions led to a methodology which Drucker adopted which was more inferred than spelled out as a "by the numbers" process.

Drucker’s Methodology and Principles of Strategy Development

I saw that what Drucker did was to integrate goals and objectives (what the business should be) with the variables of the situation and the resources needed along with his judgment based on his own observations. This latter was the most difficult. I knew his judgment involved certain principles. These included the following that you must consider when developing strategy:

1. Commit Fully to a Definite Objective
Drucker made it clear that the definite objective was what the business should be. This is why he devoted so much importance to defining this issue. The objective must be precisely defined, and then you must commit fully to it.

2. Seize the Initiative and Keep It
There are many historical situations describing individuals or organizations that have a great idea, but delay in developing it or bringing it to market. Maybe they never do and someone else does and is highly successful. Or maybe they do, but someone else gets in just a little bit sooner. So this principle says you must get the initiative and keep it until you achieve your goal. Drucker emphasized not theory, or even planning, but action.

3. Economize to Mass Your Resources
You can’t be strong everywhere because your resources will always be limited. The idea is to economize where your efforts and resources are not critical and concentrate them where they are more important. You must concentrate superior resources at the decisive point in the situation. This is exactly what Drucker was saying when he asked Jack Welch his two famous questions. "If you weren't already in a business, would you enter it today?" and "If the answer is no, what are you going to do about it?" GE owned some businesses earning less money than others. As a result, the company was expending resources less than optimally. It wasted them on businesses with less potential, and so didn’t have the resources to invest in those with much greater potential. Welch made the decision that if a GE-owned business was not first or second in its industry or could become so, it should be axed. This was the first of many strategies that led to his increasing GE’s market capitalization by $400 billion during his 20 year tenure.

4. Use Strategic Positioning
To achieve any strategic objective, you will need to make changes and maneuver due to environmental or other unexpected factors that may occur. You may need to modify your approach and your positioning in the marketplace, even as you continue to work toward an objective. That’s why if what you are doing isn’t working you need to change or modify your strategy. It’s true that persistence is an immensely valuable trait for reaching any goal. However maintaining a faulty strategy in pursuit of a worthwhile goal is foolish or worse.

5. Do the Unexpected
When you have competition, it is most effective to surprise your competition and do the unexpected. This principle can also be profitably applied with customers, so long as the surprise to them is a pleasant one. For example, giving your customers, or those you service in an organization, more than they expect is almost always a valuable surprise.

6. Keep Things Simple
Someone at NASA once calculated that if every single one of the parts in one of NASA’s rockets was 99.9 percent reliable, the rocket would fail 50 percent of the time. We would have to curtail our space program in short order. The more things that can go wrong, the more will go wrong. If you want less to go wrong, keep your strategy simple where fewer things can go wrong.

7. Prepare Multiple Simultaneous Alternatives

Since some actions inspired by your thinking are going to fail, you should always have an alternative action that can secure an alternative objective thought through and ready to be implemented.

8. Take the Indirect Route to Your Objective
Moving directly against any human thought or endeavor always arouses opposition. People hold on all the more strongly to their previously held notions. No one likes to be sold anything, either a product or an idea. However, most are eager to take advantage of a bargain or an idea which will benefit them. The difference is subtle, but the results can be decisive. The direct route will always lead to the strongest opposition. The same principle holds true in a situation where there is competition that must be faced and this principle should be integrated into your strategy. This concept was first uncovered and fully analyzed by B.H. Liddell Hart, probably the greatest strategist of the last century.

9. Practice Timing and Sequencing
The Bible says that there is a time for every purpose under heaven. Implementing the "right" strategy at the wrong time or in the wrong sequence can be just as ineffective as if the strategy was all wrong. You’ve heard the saying, "he was ahead of his time." Yet, someone with the same idea at the right time may be extraordinarily successful. Bottled water is very successful today, and some branded names command very high prices. Yet some years ago, the idea of anyone paying for bottled water, unless from Lourdes, would have been considered a joke.

10. Exploit Your Success
Don’t stop or slow down when you are achieving your objectives. Not staying continually ahead of your competition is simply giving your competition another chance to stop you.

In summary, to develop strategy the Drucker way:

  • Decide on your objectives
  • Find the "certainties" in the situation
  • Bring together the certainties, the resources required, and the variables of the situation
  • Decide on action steps to implement the strategy using the 10 principles above
  • Take action

Adapted from Drucker on Leadership (Jossey-Bass, 2010)