2. Strategic thinking

The strategy process and the strategist

The strategy process connects the strategy, the organisation and the strategist. First the strategist thinks about the strategy (the strategic thinking process). From there a strategy is formulated, which the organisation then implements. For most organisations implementation is the hardest step.

Four cognitive activities

1. Identifying: becoming aware of opportunities or threats and recognising their importance.
2. Diagnosing: understanding the structure of the problem and its underlying causes.
3. Conceiving: coming up with solutions and, if there are several, choosing the best one.
4. Realizing: taking concrete action to solve the problem and evaluating the consequences.

This order seems logical, but in practice the activities are intertwined or happen at the same time. Strategic thinking is not objective observation but subjective interpretation.

Cognitive limitations and cognitive maps

Strategists have a limited information sensing ability, a limited information processing capacity and a limited information storage capacity. To cope, people use cognitive maps: a person's perspective on how the world works, including beliefs about which issues are important and about the cause-and-effect relations between them.

A homogeneous top management team makes weaker strategic decisions, because everyone shares the same knowledge, background and way of working. This increases the risk of blind spots, cognitive rigidity and missing new opportunities and threats.

The paradox of logic and intuition

Even in the analytical perspective, strategic thinking can never be fully rational. Decisions are made with incomplete information and limited cognitive abilities: bounded rationality (Simon, 1957). People try to act rationally, but only within limits. In the analytical view creativity can generate ideas, but these must then be evaluated logically and critically. The process does not always go neatly step by step; strategists sometimes return to earlier steps when new information appears.

In reality organisations need both perspectives. The example of Berkshire Hathaway shows this: during the dotcom bubble Warren Buffett was considered old-fashioned because he did not invest in internet companies. He kept to rational analysis and only invested in businesses he understood and that had a durable competitive advantage. When the bubble burst, his approach proved right. Rational discipline remains important, but organisations must also stay open to new ideas and adaptation.

Ways to manage this paradox:

• Navigating: building mental time-outs into the process, for example a creative hour within a rational process.
• Parallel processing: organising activities in separate units so that people with different thinking styles and skills are assigned separately; not every problem needs the same amount of logic or intuition.
• Embracing: putting analytical and holistic thinkers in one team. This creates tension but can lead to unexpected solutions and innovations.

Dynamic capabilities

Three definitions are discussed:

• Teece: the firm's ability to integrate, build and reconfigure internal and external competences to address rapidly changing environments.
• Eisenhardt: the organisational and strategic routines by which firms achieve new resource configurations as markets emerge, collide, split, evolve and die.
• Nelson: the organisational processes through which firms develop, strengthen and improve their routines.

According to Teece, success comes from learning, coordination, innovation and flexibility, not only from low costs or quality.

Readings on intuition and the psychology of strategy

Reading 2.2 (Dane and Pratt): intuition consists of fast, unconscious judgements based on experience and pattern recognition. Intuition works best when people have a lot of expertise or experience in the domain and when decisions are complex or subjective.

Reading 2.3 (psychological foundations of dynamic capabilities): strategic decisions result from a combination of analysis, intuition and emotions. Organisations that combine these recognise opportunities faster, have fewer blind spots and support change better.

Textbook deepening: De Wit, Ch. 2 (Strategizing)

The sections below add the theory from the textbook chapter on strategizing to the lecture notes above.

Cognitive activities, maps and abilities: the computer metaphor

The human ability to know is called cognition. De Wit uses a computer metaphor (Figure 2.1):

The four cognitive activities in more detail

Identifying and diagnosing are directed at defining the problem; conceiving and realizing at solving it (Figure 2.2). Alternative names:

In the structured, clockwise approach the activities are labelled recognizing, analysing, formulating and implementing: extensive internal and external scanning and selection of priority issues, detailed data gathering and analysis, evaluating options and choosing the best one, and planning and controlling implementation. In practice thinking is messier: identification is subjective sense-making (Weick) that determines which issues make the strategic agenda; diagnosis may be intuitive reflection; solutions are often invented (envisioned through analogy, metaphor, brainstorming or fantasy) after a period of incubation, rather than selected; choosing involves more judgement than calculation; and acting often precedes or accompanies the other activities, because strategists need experience with a problem and must test assumptions by experimenting.

Cognitive heuristics

Because of limited processing and storage capacity, people use cognitive heuristics (Janis): mental rules of thumb that simplify a problem by focusing attention on a few key variables, offering simple decision rules and limiting in advance the set of solutions considered. Heuristics also help to categorise, label and store information in manageable chunks. The limited sensing ability means that the senses only pick up the physical consequences of complex interactions, not the underlying causal relationships, so mental representations are necessarily based on circumstantial evidence.

Cognitive maps in more detail

Cognitive maps are also called cognitive schemata, mental models, knowledge structures or construed reality. They are formed over time through education, experience and interaction, and in turn steer the senses: they act as an interpretive filter or perceptual screen (Starbuck and Milliken) that selects which information is noticed and blocks out other data as noise. They also provide a repertoire of problem-solving responses, called scripts or recipes.

• Tacit knowledge: much knowledge is gained through direct experience and is never codified into rules (Polanyi, Nonaka). Intuition is therefore not mystical but thinking guided by tacit knowledge. Intuitive thinking is informal (largely unconscious, based on variables not explicitly identifiable) and holistic (keeping an integrated view instead of breaking things into parts).
• Shared cognitive maps: groups enact a shared reality by exchanging interpretations. The shared map is called the dominant logic (Prahalad and Bettis), common paradigm (Kuhn) or belief system. It exists in firms, families, industries and nations. Because people belong to several groups (nation, firm, industry, profession, religion, political party), an individual's map combines elements of several dominant logics, which can be inconsistent. Shared beliefs are literally "common sense" and stay tacit until conflict between groups forces people to articulate them; articulated paradigms become more mobile.
• Cognitive rigidity: once formed, maps resist change. People overestimate confirming information, underestimate disconfirming information and actively seek support for current beliefs (Schwenk): "believing is seeing". Learning takes place within the bounds of a paradigm. When beliefs are shared in a firm, industry or country there is no intellectual sounding board and deviating has social and political costs. "Old ideas never change; they eventually die out" (Kuhn). For strategists, who must identify change before competitors do, this rigidity is especially worrying.

Why the tension between logic and intuition exists

Intuition is necessary and beneficial: it contains a vast amount of tacit knowledge, gives a richer assessment of qualitative information, is faster (Kahneman) and better at capturing the big picture, and avoids paralysis by analysis (rationality gone rampant under big data). But intuition is also unreliable and imprecise: it jumps to conclusions and is inherently biased because it focuses on a few variables (Tversky and Kahneman). Relying on it too much can end in a corporate gravestone reading "extinct by instinct" (Langley).

The demand for logical thinking

Logical thinking is conscious and rigorous, based on formal rules: each step follows validly from the previous one. Strategists need it to critically test the assumptions of their cognitive maps against facts instead of organizational folklore and industry recipes, and to make tacit beliefs explicit. In identifying and diagnosing, logic helps avoid emotional interpretation, exposes bullish or bearish bias and discards outdated theories by testing hypotheses. In conceiving and realizing, it helps break with routines (programmed courses of action that were once deliberately conceived and later internalised, March and Simon) and habits (programmed courses of action that developed unconsciously), and it separates fantasy from feasibility.

The demand for intuitive thinking

Intuitive thinking is an informal and holistic judgement process that combines many inputs with unconsciously stored information and uses emotions ("hot cognition"; logical thinking is "cold cognition", Bernheim and Rangel). It is fast and often correct (Barnard: insight "in a flash"); logic is often used afterwards to justify an insight generated intuitively. It is especially needed to challenge an existing cognitive map: a paradigm cannot be contradicted in a way that is logically consistent with that paradigm, so strategists must recognise patterns in seemingly unrelated incidents and make leaps of imagination. New strategies are not analysed into existence but generated. Logic and intuition are partly incompatible, both for individuals and within teams ("opposing styles lead to opposing people"), which is why this is a paradox.

System 1 and System 2

The two thinking systems are also known as System 1 (fast, intuitive, automatic) and System 2 (slow, deliberate, controlled) (Kahneman, 2011). Logic makes strategic reasoning rigorous, consistent and precise instead of haphazard, ad hoc and general; intuition makes it comprehensive, flexible and fast instead of fragmentary, rigid and slow.

The analytic reasoning perspective in more detail

Strategic reasoning is predominantly a logical activity (Andrews; Teece). Options are identified by matching external opportunities to internal strengths and screened on criteria such as internal consistency, external consonance, competitive advantage, organizational feasibility, potential return and risk; the best is chosen by comparing scores and the acceptable level of risk. This resembles a chess grandmaster (Simon). The bounded rational strategist improvises when information is lacking, but bases inferences on known facts and articulates assumptions so they can be debated, like the scientific method (hypotheses formulated and tested). Creativity techniques (brainstorming, six thinking caps) are useful to escape outdated frames, but logic is needed to "sift the sane from the zany". Emotions matter for purpose and motivation, but determining the optimal strategy is a rational undertaking. Intuition ("frozen knowledge") saves time but is hard to verify and unreliable, so cognitive maps should be written down and checked for inconsistencies. The best preparation is training in the scientific tradition.

The holistic reasoning perspective in more detail

Strategic problems are wicked (Mason and Mitroff), ill-defined or unstructured, open to limitless interpretations, with no fixed set of solutions. Chess is a tame problem: clear definition, all options known (an average 40-move game involves about 10 to the power 120 possibilities, Simon), and even grandmasters were beaten by IBM's Deep Blue. In business, opportunities and threats are not waiting to be discovered: a situation is viewed as an opportunity, and a strength can be turned into a weakness by a lack of vision, so a SWOT analysis is really an interpretation. Options are not deduced from facts or picked from a 2 x 2 matrix but dreamt up, and cannot simply be scored and ranked under fundamental uncertainty. There is often no time for full analysis, so strategists must trust the reflexes of the unconscious mind, leaving the safety of analysis and living "among the rubble of demolished certainties". Logic is often a hindrance, because rigidly following rules turns deviating signals into confirmations of the old map. Strategic reasoning resembles frame-breaking in the arts; openness to intuition can be activated with metaphors, contradictions and paradoxes. Example: Richard Branson, who describes "intuition based on experience" (e.g. starting an airline after bad experiences on other airlines), with brainpower coming later.

Managing the paradox: additional detail from the book

Navigating means temporal separation: building in "mental time-outs" (Sadler-Smith) so creative ideas can incubate. Parallel processing follows the nature of the problem: increasing production efficiency is a complex but tame problem suited to analysis, while new business development is a wicked problem suited to holistic reasoning. Embracing means mixing individuals with analytical and intuitive cognitive styles (Hodgkinson and Clarke) and different educational and cultural backgrounds; this is demanding and requires capabilities such as integrative thinking (Martin) and complexity maturity. The Samsung case illustrates embracing: founder Byung-chul Lee built a holistic, Japanese-influenced chaebol; his son Kun-hee Lee launched the "New Management Initiative" (1993: "change everything except your wife and kids"), slowly injecting Western analytical best practices (merit-based pay, strategy formation) by hiring Western MBAs and sending insiders abroad, creating a holistic-analytical combination.

Strategic thinking in international perspective

• Societal level: scholars contrast the West (US, Western Europe: reason, formal decontextualised rules) with East Asia (China, Korea, Japan: intuition, holistic reasoning) (Nisbett et al.). Erin Meyer: Westerners build arguments in a specific way (principles first in France and Spain, applications first in the US), Asians more holistically. Pioneers of the strategy field (Chandler, Ansoff, Porter) were rooted in the rationalist tradition (Mintzberg, Strategy Safari); over 70 per cent of US managers score Sensing, Thinking and Judging on the Myers-Briggs indicator. The Japanese management alternatives of the 1980s (Pascale) challenged this view.
• Industry level: biotechnology and creative sectors favour holistic thinking, accountants favour analytic reasoning, and entrepreneurs tend to balance the intuitive and the deliberate.
• Personal level: the mind has a dual-process structure. Individuals have a natural inclination, their decision style; a decisional fit occurs when the way a decision is made matches that style, so the decision feels better and causes less regret. Styles are not "chronic": they depend on situation and domain, and domain expertise tends to increase reliance on intuition. Environments that penalise a style create a feedback loop that reinforces the bias.

Readings of Chapter 2 in the book's framing

Reading 2.1 (Teece) represents the analytic pole: sensing (and shaping), seizing and reconfiguring should be conducted consciously, explicitly and rationally. Teece links sensing to entrepreneurship: Kirzner's entrepreneur uses differential access to existing information to restore equilibrium, Schumpeter's entrepreneur uses new knowledge to destroy equilibria. Reading 2.2 (Dane and Pratt) represents the holistic pole; they define intuition as "affectively charged judgements that arise through rapid, non-conscious and holistic associations" and discuss how domain knowledge, implicit and explicit learning and task characteristics affect intuition effectiveness. Reading 2.3 (Hodgkinson and Healey) is the bridging reading: building on neuroscience and psychology, they argue that the strategist's thought processes are basically intuitive and reflexive (reflexion) rather than rational and reflective (reflection); logic is not unnecessary, but insufficient to arrive at innovative strategies and to gain members' buy-in.