Why are so many strategies ineffective?

The CEO's job of developing a strategy that generates and captures value — and continues to do so over time — has never been more difficult. Consequently, a corporation that has long dominated its market may be blindsided by competitors who are more adept at shaping consumer preferences, fail to anticipate new technologies, or miss the boat when it comes to innovations that shape consumer preferences. In the young venture business, success is possible if your business can raise hundreds of millions of dollars, attract tens of millions of customers, and achieve lofty market valuations. Once your business can't turn a profit or fend off competitors, though, you'll face severe consequences.

All too frequently, those failures occur as a result of the CEO's lack of a holistic approach to strategy. At a number of innovative new businesses, CEOs excel at identifying opportunities to create value by meeting unmet customer needs—but do not adequately analyze what it would take to capture a sufficient portion of that value. Or they are seduced by the initial success of their new business models, expand too quickly, expand their firms' scope too far, and fail to invest in the capabilities necessary to sustain a long-term competitive advantage. Traditional corporate leaders frequently make the following errors: Some underestimate the extent to which new technologies and business models can add value to the products and services offered to customers. Others are so inextricably linked to their unique market position that they are incapable of adapting when customer tastes change. These leaders either ignore certain components of what I refer to as the comprehensive strategy landscape or fail to recognize their interdependence.

Strategic adaptation must evolve into an iterative, continuous process of hypothesis generation, experimentation, learning, and action.

Today, a comprehensive strategy must include carefully coordinated choices about the business model with the greatest potential for value creation, the competitive position that captures the greatest share of that value, and the implementation processes that adapt constantly to the changing environment while developing the capabilities necessary to realize value over time. CEOs must develop a strategy that incorporates all of these components. To accomplish this, they must take the following steps:

Recognize opportunities. This requires a continuous assessment of the external world—developments in technology, demographics, culture, geopolitics, and disease, to name a few current "hot topics." These changes and trends create opportunities for businesses to capitalize on. For example, the Covid-19 pandemic has accelerated the growth of numerous opportunities across a range of sectors, from telemedicine and online education to home delivery services.

Define the optimal strategy for capitalizing on a given opportunity. CEOs must develop a business model that maximizes the potential value of their offering in order to convert an opportunity into strategy. The model should describe the "job to be done" for customers, which has an effect on their willingness to pay for the product or service, as well as the potential market size. Additionally, the model should specify the configuration of the assets—technology, distribution channels, and so on—that will be used to create and deliver the offering (and thus determine its cost), as well as the method of monetization, or how all of this will be paid for. Additionally, the model will suggest how the value generated might be distributed among the players pursuing it (for example, whether a few winners will reap the lion's share due to scale economies or network effects), as well as key aspects of possible strategies (such as whether being a first mover is important).

Determine a strategy for capturing the near-term value generated. This necessitates the development of a strong competitive position. To accomplish this, the CEO must consider three factors. The first is the industry's allure: Regardless of the amount of value created, an industry is only attractive if its structure enables participants to earn a reasonable return. (One of Michael Porter's five forces framework's contributions was the recognition that not all industries are created equal.) The second is competitive positioning. Developing a differentiated value proposition for a defined customer segment and a distinct configuration of activities remains the only way to create an advantage that enables you to outperform the industry's average rate of return—even when others pursue the same business model. (See "Can You Describe Your Strategy?" Harvard Business Review, April 2008.) The third type of interaction is competitive: To determine the sustainability of any advantage, you must forecast how rivals will interact. Behavioral and game theory approaches may be beneficial in this instance.

Construct value over time. To continue capturing value, a business must constantly adapt its strategy execution—adjusting its activities and developing new capabilities as the external environment changes. This does not always require the CEO to rewrite the entire strategy; it is more about making incremental adjustments in response to new realities. Lay the groundwork for long-term success. The strategic choices made by the firm and its interactions with competitors ultimately determine its financial performance and, more importantly, the resources available to develop assets and capabilities to support future moves.

Developing strategy across the entire landscape is a continuous and iterative process. A firm's successful performance enables it to refresh and expand its skills and resources, enabling it to pursue new opportunities and respond to external change with new strategic choices.

The Incumbent's Error

Established company CEOs frequently place an excessive emphasis on defining how their firms will capture value and insufficient emphasis on new ways to create value and how firms' activities and capabilities must evolve over time. One reason is that approaches centered on capture (such as the five forces) have been extremely successful in long-established and stable industries, and have become ingrained in the strategy process as a result. However, CEOs of mature businesses should ask themselves: When was the last time our annual strategy process generated a truly revolutionary idea, such as ride-sharing or mobile banking? When did it become possible for us to be the “disruptive” innovators?

Take a look at the list of the most valuable companies in the United States, and you'll see that developing and implementing novel business models to address previously unmet, unspoken, or even unknown customer needs has been the focus in recent years. These companies did not generate trillions of dollars in value by outperforming their competitors. They had no competitors when they were founded. Indeed, the types of businesses they founded were previously unheard of.

The good news for incumbent company leaders is that the emergence of new approaches does not have to spell the end of their businesses. Indeed, if they approach strategy holistically, they may discover that those business models offer attractive opportunities due to their higher value creation.

For instance, would you rather make a one-time sale of a physical product or develop a long-term client relationship and deliver tailored solutions that add more value to the customer and potentially generate significantly more profit for you? As some legacy businesses have discovered, the latter is the opportunity that new digital business models present to firms that can leverage data and analytics effectively. Komatsu is now offering subscriptions to its Smart Construction platform, which manages all construction site activities, including drone surveys, dump truck scheduling, and autonomous earthmoving equipment operation. The platform reduces the total cost of construction projects by well over 15%, generating far more value than the revenue generated by the sale of bulldozers, which was the only revenue stream available in Komatsu's previous model. Siemens, in a similar vein, uses artificial intelligence to predict and thus avoid train maintenance issues. The increase in uptime enables it to switch to performance-based rail service contracts, which generate thousands of dollars per day, rather than just the initial cost of a train.

No incumbent should respond to every new business model; doing so would be tantamount to whack-a-mole. Rather than that, a firm must develop a strategic approach for assessing the value-creation potential of models and then deciding whether to pursue any new ones based on the outcome of competition among alternative models.

By utilizing available tools, strategists could have predicted, for example, that video on demand (streaming) would eventually supplant Netflix's original DVD mail-order service and Blockbuster's traditional video stores. The superiority of the value proposition for the customer's job, which was "delivering personal video entertainment," indicates streaming's absolute dominance. When purchasing criteria such as convenience, the ability to make an impulse purchase, access to recent best sellers, and a large back catalog are considered, video on demand outperforms both of the previous business models. As if that weren't enough, the cost of delivering movies and television shows via the internet is significantly less than the cost of delivering them via physical stores or the mail. Given these benefits, it's unsurprising that nearly everyone now pays monthly subscription fees to streaming services.

In comparison, a similar analysis indicates that Amazon's online business model, which consists of a retail website, a small number of fulfillment centers, and fleets of delivery trucks, will never completely supplant Walmart's long-standing business model, which consists of traditional brick-and-mortar stores supplied by a national network of distribution centers. When comparing how well each model accomplishes the task at hand, it becomes clear that Amazon's model excels at providing home delivery for a very broad range (hundreds of millions) of items, whereas Walmart's model excels at providing immediate availability at a low price for a more limited number of items (a few hundred thousand). Each business model has a unique proposition that appeals to a different segment of the market at a different time for a different product. And a comparison of their asset bases' cost positions reveals that Walmart's logistics system is more cost effective for everyday items that consumers pick up in rural or suburban stores, whereas Amazon's is more efficient for long-tail items and home delivery in densely populated geographies. Neither business model completely trumps the other. Both will survive, which is why each company is scrambling to replicate the other's asset base, with Amazon acquiring Whole Foods and Walmart investing billions in online expansion and fulfillment center expansion.

The Entrepreneur's Error

Many entrepreneurs, in their excitement to capitalize on new opportunities they identified before others, fail to recognize that the more value their business model generates, the more competition they are likely to face. Netflix has been imitated by dozens of credible companies, including Disney, and Casper, the inventor of the bed-in-a-box business model, now faces 175 competitors. Entrepreneurs are frequently seduced by their immediate success and commit to investments that never yield a worthwhile return. WhatsApp, for example, is now competing against a slew of other free messaging apps, but its owner, Facebook, has yet to monetize any of its 2 billion users.

When a business is pursuing a successful new business model in the face of fierce competition, it is critical to employ the three value-capture frameworks in the landscape's center—industry attractiveness, competitive positioning, and competitive interaction. Consider an investment opportunity that investors are currently enamored with: electric vehicles. Tesla had the highest market capitalization of any automobile company and the sixth-highest in the United States in early April (it reached $672 billion on April 12), surpassing the combined market capitalizations of Ford, GM, Toyota, Daimler, and Volkswagen. Tesla has undoubtedly identified and exploited an appealing business model, but it is unclear whether it will ever generate a profit. Why, when the business model generates such high levels of value for customers? The answer is found in the impact that a novel business model has on other aspects of the strategy landscape.

To capture sufficient value, a business must operate in an attractive industry with a sustainable competitive advantage. Regrettably, the electric vehicle industry of the future will resemble the automobile industry of today. Every automobile manufacturer in the world, as well as every company with an interest in electric motors, is entering the market. (Even Dyson, the vacuum cleaner company, invested half a billion dollars in a car design and manufacturing facility before realizing its error.) Given the low entry barriers associated with electric vehicles as a result of their simplicity of design and lack of components (in comparison to an internal combustion engine), additional companies are likely to enter. Indeed, the faster electric vehicles are adopted globally, the faster competitors will enter the race, and the faster the industry's attractiveness will deteriorate.

Tesla also does not appear to have a sustainable competitive advantage. While it may have a brand aura and a performance edge today, Porsche and other performance manufacturers such as BMW and Mercedes will soon challenge its design and engineering capabilities. Additionally, it lags far behind other automakers in terms of cumulative manufacturing experience and overall scale, making its manufacturing cost position unenviable. Indeed, the need for scale has prompted Tesla to expand its model lineup—it now produces seven—which increases annual production to about 500,000 but introduces inefficiencies.

Tesla also appears to be having difficulty executing its strategy effectively. The automaker has long struggled with quality issues in the United States. (Consumer Reports has discontinued its recommendation of the Models S and Y.) If you are unable to achieve operational efficiencies, regardless of how exciting your business model is, you are doomed to fail.

Implementation Is Critical to Long-Term Value Realization

Developing a viable business model and a distinct competitive position capable of capturing value today does not guarantee success in an environment where opportunities are constantly changing. To achieve long-term value, businesses must strike a balance between agility and control, allowing project teams to experiment with new configurations while consistently investing in future capabilities.

As I previously stated, the challenge for established businesses is frequently not in creating a completely new competitive position, but in fostering entrepreneurial activity that results in incremental but continuous improvement. Indeed, the majority of managers today are involved in strategy through projects that adapt operational activities, rather than through a one-time change management process to execute a new strategy.

Consider a hamburger chain that has been successful in targeting young men with a low-cost strategy. Mobile technology is a hot topic, and it represents an opportunity—one that is even more significant now that the Covid-19 pandemic has reduced indoor dining and increased takeout. The desire of the restaurant chain to capitalize on it generates a flood of proposals that would affect nearly every aspect of the business. Do we redesign the menu to include items that can be prepared ahead of time? Should the restaurant's layout be altered to accommodate a separate pickup location? Are store relocations necessary in anticipation of changing customer traffic patterns?

Frequently, CEOs underestimate the extent to which new technologies and business models can enhance the value delivered to customers.

Every day, strategy is realized in developing plans to realign the firm's activities—not in its initial grand design. While these adaptations may appear tactical, they are fundamentally strategic in nature because they span multiple functions within the firm and necessitate systemic change. Nonetheless, far too many CEOs overlook them.

On the other hand, entrepreneurs can fail if they adjust their product-market fit too frequently in response to the latest consumer test, jeopardizing their ability to develop the organizational capabilities necessary for long-term success. Nasty Gal, for example, was an early pioneer in online fashion retailing but went bankrupt due to excessive expansion efforts that overstretched an organization lacking effective leadership and weakened customer attachment to the brand.

For both established and emerging businesses, the solution is a strategic approach that promotes experimentation within clearly defined boundaries established by the CEO. Each exploratory project should have a defined, objective process, a timetable, metrics, decision-making milestones, and follow-up reviews. CEOs, on the other hand, cannot and should not become involved in the minutiae of projects; this would be simply overwhelming.

Control is first established by adhering to a well-articulated and well-communicated "classic" strategy that demonstrates how the firm will outperform competitors pursuing the same business model. This establishes boundaries that the organization will not cross, ensuring that any solution proposed by the project team fits within the chosen value proposition, activity configuration, and business scope. (For more information, see "Lean Strategy," HBR, March 2016.)

This section of the strategy landscape conceals a source of competitive advantage that takes advantage of the elements' interdependence. Strategic adaptation must evolve into an iterative, continuous process of hypothesis generation, experimentation, learning, and action. The more quickly a business cycles through the process, the more effective it is in the market. Indeed, as George Stalk Jr. and Sam Stewart of the Boston Consulting Group have noted, the more a firm's cycle time can be compressed, the greater its competitive advantage.

The second control mechanism is in the tactical project selection process. The CEO must be able to see through the fog of immediate pressures and identify and support a small number of long-term initiatives that will serve as the guide for the individual experiments. Typically, these become "corporate" initiatives, even if nothing of the sort is ever announced in smaller firms. They are not objectives in the traditional sense, as they lack a time frame and specific metrics, but rather broad themes that govern the sequencing, selection, and design of multiple projects. They must be incorporated into every ongoing change initiative within the organization that crosses silos and boundaries.

These large-scale initiatives should be kept to a manageable number—probably seven or fewer—to ensure that each is adequately funded, monitored, and promoted on a continuous basis. They cannot change on a regular basis; otherwise, they will be viewed as passing "flavors of the month" that can be ignored or met with lip service.

CEOs of mature businesses should ask themselves: When was the last time our annual strategy process produced a truly revolutionary idea, such as ride-sharing or mobile banking?

The CEO must own and champion these higher-level strategic initiatives. Only the firm's chief executive officer has the perspective and authority to ensure that sufficient investment is made in developing the capabilities they will require. One example is Joe Kaeser's "digitalization" initiative at Siemens. Another example is Adidas' Creating the New initiative, which Herbert Hainer initiated and which Kasper Rrsted is continuing; it is focused on speed (in order to offer consumers "exactly the products they want to buy whenever, wherever, and however they want to buy"), key strategic cities (in order to spot emerging trends), and open-source innovation (collaborating with third parties in industry, sports, and entertainment). A third example is Bob Iger's 14-year commitment to investing in high-quality branded franchises, technology, and globalization. Each CEO accepted personal accountability for shepherding progress in designated areas.

The outcome of these "must-win" battles is critical to long-term success. While these broad themes or initiatives are not corporate strategies, as they are frequently referred to, their pursuit is a necessary component of a comprehensive strategy.

The Importance of Integration Throughout the Landscape

Edward Jones, a St. Louis–based brokerage firm that I have advised for 20 years, is an illustrative example of a firm that has integrated its strategy across the entire landscape. It embarked on a plan to increase the value it created for clients in 2020, led by Penny Pennington. The plan is being implemented through a series of projects that will revise numerous business practices at the firm. None of them, however, will alter the firm's current customer base or competitive positioning: providing trusted personal guidance to conservative individuals who prefer to delegate their financial decisions to financial advisers located across the country.

Edward Jones has been performing exceptionally well, with profitability well above the industry average. It employs the most brokers of any firm in North America, manages nearly $1.5 trillion in assets, and consistently ranks among Fortune's 100 Best Companies to Work For. Therefore, why did Pennington and her leadership team determine that it required significant change?

The issue does not stem from the firm's positioning. The target customers—conservative individuals seeking guidance on their financial future from a trusted adviser—have not vanished. If anything, information overload and increasing time demands have increased the value placed on this service by consumers (traditionally 23% of the market). Nor is the firm's value proposition any less significant to those customers: the security and peace of mind that come with knowing your investments are secure.

The issue is also not one of competitive imitation. No competitor has been able to duplicate the firm's 17,000 locations across North America.

The issue is that traditional portfolio management's attractiveness has been eroded by environmental changes: the rise of fintech companies, such as Robinhood, with new business models enabled by new technologies; a demographic shift as Baby Boomers begin spending down their accumulated assets; new regulations requiring greater attention to smaller accounts; and investor preferences for passive investing. These and other developments have diminished the perceived value of the services Edward Jones has historically provided. Today, completing a transaction online is completely free. Portfolio allocation based on individual risk preferences is offered at a cost of 0.2 percent by a robo-adviser. Fees for index fund management are as low as 0%. As a result, while simple portfolio management is still extremely useful for customers, it does not provide sufficient value for brokers like Edward Jones to thrive.

The solution is to maintain the organization's competitive position. Edward Jones would be positioned in the most price-competitive segment of the market if it expanded its customer base to include day traders. If it shifted away from its model of entrepreneurial advisers embedded in communities, it would forfeit its cooperative, client-first culture. The best hope for avoiding commoditization is to pursue business model innovation that adds more value and potentially monetizes it in ways other than a transaction commission.

Edward Jones is thus following the lead of other professional services firms in transitioning from a product-based, or "transactional," business model to one focused on financial life "solutions." The firm now offers customized advice and solutions for lifelong needs, not just purchases of mutual funds or blue-chip stocks, through a five-step process that begins with documenting individual goals. While this approach necessitates a greater level of engagement with customers, it generates significantly more value for them.

Numerous entrepreneurs fail to recognize that the more value their business model generates, the more competition they will almost certainly face.

Edward Jones has identified several must-win battles in its efforts to successfully transition to the financial life solutions model, including diversity (while approximately half of Generation Z is nonwhite, less than 15% of the firm's advisers are members of minority groups); intergenerational wealth transfer (Millennials will inherit an estimated $40 trillion in assets); and multichannel distribution (to effectively serve a full range of clients regardless of net worth and to complement in-person services with digital interactions). The firm has formed teams, each of which focuses on a specific aspect of a larger initiative—for example, how to enter urban markets with a sizable minority population—in order to develop and test solutions to those challenges. Specific projects will come and go, but the emphasis on developing the capabilities necessary for long-term success will remain constant.

Take note that we must consider the entire strategy landscape in order to comprehend the change underway at Edward Jones. To begin, novel threats and opportunities are emerging as a result of new developments (in demographics, regulation, and the performance of capital markets, for example). Second, the industry's diminished value capture is undermining the established business model. Third, even if the competitive positioning remains unchanged, the business model itself must be retooled to generate more value. Fourth, the revisions will occur as part of larger strategic initiatives.

The most critical lesson is that businesses of all sizes must integrate all elements of the complete strategy landscape in order to craft a resilient strategy. While competitive positioning is critical for value capture, an effective strategy process must begin with an open and creative discussion of the value potential of alternative business models and conclude with an execution approach that guides ongoing experimentation and operational adaptation while investing in underlying capabilities.

Strategy has always been about bringing the organization together around a common goal. Today, it must be expanded to encompass all aspects of the business model, competitive positioning, and capabilities necessary for long-term success. By managing the entire strategy landscape, CEOs of early-stage ventures significantly increase the likelihood that their firms will not crash and burn, while leaders of established businesses ensure that their organizations are continually renewed.

The original version of this article appeared in the Harvard Business Review's July–August 2021 issue.

David J. Collis is an adjunct professor of business administration at Harvard Business School and the winner of the McKinsey Award for the best HBR article of 2008.