Recently John Chambers, CEO of Cisco, said something that caught my eye: “We have moved from selling boxes to partnering with customers on their outcomes.” What got my attention was the word outcomes. Outcomes are what customers get, not what we sell. Defining these requires outside-in, not inside-out thinking. John Chambers is not alone. The CEOs of both General Motors and IBM are repeatedly stressing the same imperative – to become a customer-focused company or fail. In a company I worked with recently, the CEO implored me, “Please help us transform ourselves from an inside-out to and outside-in company.”

The amazing thing about these recent calls for an outside-in approach is that this is age-old thinking. Legendary Harvard Marketing professor Theodore Levitt laid out the compelling logic for this in a trailblazing article in 1960 called Marketing Myopia.  And in 1999 Stephan Haeckel in his excellent book, Adaptive Enterprise, summed up the challenge by saying that to compete successfully companies must shift their mentality from “make and sell” to “sense and respond.”

All this is dead simple, right? I can’t find anyone who disagrees that outside-in thinking is a key to success, particularly in today’s turbulent competitive environment. And yet most organizations lament that they are not good at it. Why is it so hard to pull off?

I think there are 4 reasons for this gap between aspiration and reality:  human psychology, misleading advice, organizational barriers, and confusion about the relationship between strategy and planning.

1) Human Psychology

The psychological factor is intriguing. Research shows that during informal conversations where there is no agenda, most discussions lapse naturally into internal thinking. Hence conversations in the company cafeteria are most likely to be about the internal workings of the organization, gossip about its people, rumors of reorganization or downsizing, fears of a takeover, and so on.  A favorite topic: “My boss is worse than your boss.” Rarely will we hear a meaningful exchange of ideas about the key trends in the competitive environment or the hierarchy of customer needs.

Based on my 20 years as a CEO, I can testify that this inside-out mindset is pervasive. It is the natural default condition. This is where we find comfort and security in a world we know and enjoy the titillation afforded by gossip. The truth of the matter is that outside-in thinking is an unnatural act. Without a forcing mechanism, it hardly ever happens.

2) Misleading Advice

This is a sorry tale. A number of concepts and analytical frameworks promoted by outside “experts” have pulled companies in exactly the wrong direction. Over many years, executives have been fed a steady diet of inside-out thinking by some influential consulting firms and strategy gurus. These have served to entrench inward-looking mindsets which then become what Howard Gardner called “engravings on the brain.” The list of popular frameworks is a long one. Among them: SWOT Analysis; the Product Matrix of cash users, stars, cash cows and dogs; the Core Competency philosophy; Values Workshops; Management by Objectives; the Balanced Scorecard.

What’s wrong with these, you might ask? Nothing intrinsically. They can all be useful if applied in the right sequence. But they all start in the wrong place – inside. The element that informs the best answers is missing: insights about the external environment as the first order of business.

A few years ago, Anthony Mayo and Nitin Nohria from Harvard Business School tackled a big question: What will be the most important competency for sustaining competitive advantage in the 21^st century? Their research identified a survival imperative they called “Contextual Intelligence,” defined as “an enterprise’s ability to make sense of the forces shaping the business environment and seize on the resulting opportunities.”

The truth of this became all too real for me recently when I was invited to advise a study group which had been asked to reexamine an out-of-date aspect of industrial policy and recommend changes. For 3 months they had toiled away and then, in their own words they “hit a wall.” It quickly became apparent to me that their problem was that they were asking themselves the wrong question: “What should we do?”  (This is a variant of Management By Objectives). The harsh reality is that the world does not care what we do; people care only about the value they receive. So we turned the process around and asked a set of outside-in questions starting with an analysis of the interests of the beneficiaries this policy was designed to serve.

In rapid order the group came up with four “value gaps”, ie. the gaps between what the beneficiaries valued most and what the current policy was offering them. These value gaps represented the roadmap to a new policy, and the recommendations were unanimously approved by the policy makers. The pivotal factor was simply turning the question from inside-out to outside-in. Organizations asking inside-out questions will invariably “hit a wall” or end up pursuing misguided strategies.

The big challenge is to create a core process that will force systematic outside-in thinking in an organization. It won’t happen by simple exhortation or ad hoc exercises. Invoking Howard Gardner once again we need to employ “mental bulldozers” to clear away those stubborn engravings on the brain.

I suggest there are 4 questions a sound strategy process must answer for us, in this order:

1. What are our customers’ needs and the key features of the market in which we must compete for advantage?
2. What do we aim to achieve and what few things must we do outstandingly well to win the competition for value creation in this environment?
3. How will we align our business system and inspire our people to achieve superior execution?
4. How will we continue to learn and adapt as the environment changes?

Note that the process is outside-in. And also that there are actually three questions — the fourth question is the ability to refresh the answers to the first three.

Based on these governing principles, I have translated these four questions into a dynamic 4-step process called Strategic Learning: Learn, Focus, Align, Execute. The essential starting point of this process (the Learn step) is accomplished through what I call a Situation Analysis which is designed to create penetrating insights into the competitive environment and needs of customers. This first step is designed to cultivate the kind of contextual intelligence defined by Mayo and Nohrita. All else follows from there. (For further details about the Strategic Learning process, please visit my web site: williepietersen.com)

3) Organizational Barriers

The division of organizations into different functions is calculated to serve a useful purpose–to ensure that there are deep skills in the activities that matter. But this structure also carries the risk that these functions become hard-walled, inward looking silos. This happens all too often. What gets lost as a consequence is the ability of an organization to operate holistically, as one integrated system. To quote an ancient sage, “The parts of a chariot are useless unless they act in accordance with the whole.”

For an outside-in mindset to have any potency, it must be acted on by the total system acting in concert. Instead, we often hear one of two things; that this external perspective is the exclusive job of Marketing and Sales or that it is the preserve of senior management. In staff functions such as HR, Finance, Operations and R&D an understanding of the external environment is frequently undervalued or we simply hear the deadening phrase, “That’s not my job.”

I am not arguing that all staff functions should become experts at market research and environmental scanning techniques. But as Peter Drucker reminded us, success occurs outside the boundaries of a company; inside is where we mobilize the necessary resources and count the money. If corporate functions are to establish priorities with the ultimate customer in mind, then this requires at minimum a working knowledge of industry trends, the needs of customers and the actions of competitors.

Here is the process I recommend for staff functions as they go about their planning.

– First, establish a line of sight to the needs of the company’s customers and the realities of the external environment

– Second, clarify how the company is aiming to win the competition for value creation for the customers it seeks to serve

– Finally, establish a winning proposition and priorities in alignment with these corporate goals

It is common for staff functions to think of themselves as “cost centers.” This is a purely internal perspective. While efficiency is necessary, it is not sufficient. Instead, I urge staff functions to think of themselves as “value centers.” This clarifies the strategic mission for every function in an organization: to create greater value than the costs they incur. This will occur only if they operate with an outside-in approach and thereby contribute positively to the creation of competitive advantage for their organizations.

4) Confusion About the Relationship Between Strategy and Planning

A major source of confusion concerns the difference between strategy and planning. Many executives struggle to distinguish between the two. In fact there is a fundamental difference between the aims and outputs of strategy and those of planning, and confusing the two can compound the problem of inside-out thinking.

Let’s examine the differences.

Strategy is about doing the right things. It harnesses insight about the external environment to make the most intelligent choices about where to compete and how to win the competition for value creation. Its primary role is to create an intense focus on the few things that matter most for the achievement of competitive advantage. It is quintessentially outside-in.

Planning is about doing things right. It flows from the choices made in the strategy process and provides orderliness, discipline and logistical rigor. Its purpose is not to create breakthrough thinking, but to produce predictability through forecasts, blueprints and budgets. Its orientation is largely internal.

A good way to understand the difference between strategy and planning is to think about running a railroad company. Strategy defines where you will lay the railroad tracks. Planning ensures that the trains will run on time.

I am not arguing that planning is unimportant. Both strategy and planning are vital, but one is not a substitute for the other. Because their outputs are so different, it is a toxic mixture when we combine strategy and planning in one process (and then dodge the issue by calling it “Strategic Planning”). The evidence suggests that such a combination is likely to produce 90 percent planning and only 10 percent strategy. Planning then becomes a substitute for strategy, and over time such companies will lose the ability to think and act strategically.

To instill this crucial outside-in capability the golden rule is: strategy first, and planning afterwards.

Strategy as a concept was born in the military, and all its great precepts can be derived from military thinking. Over the years I have done a number of workshops at the Army War College in Carlisle, Pennsylvania. I have learned a great deal from these learning sessions. One of the paramount principles that is emphasized by the military is that “intelligence  precedes operations.” Quoting numerous examples, the military academy stresses that if superior intelligence is not completed prior to launching operations, “people will die.” Exactly. And so will companies. To avoid this fate we must learn the unnatural act of outside-in thinking.

“Tactics without strategy is the noise before defeat.”

– Sun Tzu

There has been much hand wringing recently about the role of business strategy. The cause for alarm is simply this: in a world full of surprises and disruptions, no competitive advantage is sustainable for very long. True enough. And this is certainly an important reality. But what should we actually do about it?

This is where viewpoints start to diverge. Some have begun to argue that the traditional concepts of strategy should simply be ditched in favor of pursuing an opportunistic stream of innovative activity. Out with the old products, in with the new. No longer do we need the rigors of mapping out an actual strategic roadmap.
So why does this approach worry me? I’m all in favor of innovation. Who isn’t? My concern is that this argues for exactly the wrong philosophy. It is now more important than ever to strengthen the foundations of acting strategically, not to abandon them.

Let’s examine these foundations. Strategy is, and always has been about answering three crucial questions. Where will we compete? How will we win? What will be our priorities for success? The answers to these questions will determine our destiny. Strategy is about making choices that cascade through an organization. The alignment of our business system, asset deployment and support of our people in pursuit of a common cause is essential for success.  We can’t achieve this strategic coherence through an ad hoc approach. This is true in military strategy, in national policy and also in business strategy.

So back to our challenge. What should we do about the fact that the competitive environment is changing faster than ever? Abandoning the three questions is certainly not the answer, because this would remove our navigation system.  Instead we need to add a fourth question. How can we master a learning-based process for refreshing our answers to the three questions as the environment changes?

Our need for a sustainable competitive advantage has not gone away. But its essential nature has changed. We will not find it in a particular product or service – the shelf life of these is getting shorter and shorter. Our only sustainable advantage is the organizational capability to be adaptive through a process of rapid learning. This requires a robust process for understanding patterns and trends more quickly than competitors, and then updating our choices accordingly. Successful organizations move from one focus to another in a cycle of renewal; they never allow themselves to become unfocused.

The answer is not to reject the fundamentals of strategy. Choice-making is its wellspring. Our survival imperative is to master strategic agility.