FEATURE - We are used to approach strategic thinking as if our organization is in a position of stability and dominance. What if we start thinking of it as creating better deals with all parties involved?

Words from: Micheal Ballé, Eivind Reke and Daryl Powell

We attended a very clear strategy presentation at a third-generation company. There were strategic goals, key objectives, battles to be won and action plans. It followed the classic strategic framework based on Drucker's management-by-objectives thinking. To try to deepen our understanding, we discussed what the expected gains were - what benefits the company expected from these battles and how likely it was to achieve them. As the discussion progressed, however, it became clear that the key outcomes they needed were in the hands of other players.

Imagine a food business owned by a family. Some of the key factors for sales and profits are:

1. Weather (due to the nature of their product).
2. The distributor.
3. The marketing agency that supports the brand.
4. The machine manufacturer who agrees (or not) to make more or less flexible and robust machines (important for the food company to cope with the huge variation in demand).
5. The people needed to work in production.

As we talked it through, it became clear that the "OKRs," goals and key results, depended on people and processes over which the company had no control. We began to discuss how the current owner's grandfather had started the business and the various deals he had to make to turn a craft store into an industrial enterprise - some good, some not so good, some terrible (especially those with bankers). He would never have thought of strategy as goals, objectives and so on. He would have conceived of it in terms of deals. Not surprisingly, this is exactly how the entrepreneurs we know who started their own businesses think. So why were we sitting there listening to a presentation that assumed that the business could control its own destiny? To find out, we have to take a little detour into learning theory.

Mental models are incredibly sticky. They are the mental maps of the world that we use to understand things, especially invisible things, like the future or intangibles like organizations and relationships. Most of what we experience as learning is "single loop" learning: we see the gap between reality and our expected view of it and try to correct it. In fact, we try to change real life to defend our mental status quo. We set our minds on a few guiding variables related to what we think we want and then react to events to keep them as stable as possible.

Real learning, however, is "double loop" learning. It kicks in when we realize that to achieve the success our hearts desire, we must change our guiding variables; and it is necessary to turn our entire mental model upside down and start thinking and acting differently. When we see where our actions lead us in practice as opposed to our goals, we are - rarely - urged to change our mental models and redefine the variables of our actions. These cathartic "a-ha moments" are rare and often difficult to manage because they involve changing our map of a situation and our understanding of the world. In lean , a typical example is shifting the guiding variable from mass production - maximizing local output through larger, faster machines for a single product - to that of lean production - maximizing flexibility to improve global output through pull and flow. Instead of steering by pushing production, change to increasing flexibility and quality.

If we go back to the presentation we witnessed, the goals -> objective -> actions model we saw in action implies that the company is in a dominant position - or seeking dominance to assert power. This is the American Porter strategy model taught in MBAs. It also implies stability. But what if you are not dominant and operate in an unstable environment, like the company we visited (which depends entirely on access to distribution channels and weather for its sales)?

In a context of low dominance and low stability, we can change our mental models and see strategy as deals with the parties we are completely dependent on. These deals get better, remain stable, or get worse. In fact, we can look at any deal in Masaaki Imaï's lean terms:

When we look at each critical deal that supports our business, we can think in terms of:

• Are we doing deal maintenance?
• What kaizen do we support in the deal?
• Are we looking at innovation opportunities?

If we continue this line of thinking, we can adopt the Toyota vision and look at a value network rather than a supply chain. The supply chain is a construct that implies that we are all like Apple. That our organization is in a position of market stability and complete dominance, where every other player in the supply chain is completely dependent on us. However, this is not the case for most companies. But if we take a value network perspective and combine it with Imai, we can imagine a framework like this:

This simple framework completely redefines our strategic vision, as well as the key skills we need to develop and succeed. For example, it brings persuasive communication, negotiation and conflict management to the forefront of management skills - no surprise when you think about it, but how many executives formally develop their competence in these areas as opposed to calculating, organizing and controlling (the skills they usually need in a dominant environment)? Thinking in terms of deals completely changes our view of the situations we face. Instead of imagining the ideal future state (for us) and the implementation path to achieve it (no matter what anyone says), we need to look at things differently:

1. What is the mutually agreed space for win-win and opportunities to explore for mutual gain, as well as the lose-lose scenarios we both want to avoid in our current business situation?
2. What is the discussion process and how does it involve inviting new information and ideas, organizing physical spaces for discussion (e.g., obeyas or reviews) and facilitating difficult conversations?
3. Emotions and egos should be considered as facts that are part of the deal - identity roles ("I'm an IT manager, how do you expect me to know anything about distribution?"), emotional outbursts and motivational ups and downs are integral to the robustness of the deal.
4. Maintaining the relationship is as important as the object of the deal being discussed and involves a clear give and take - to achieve this, I have to give that gladly.

Lean-practitioners will be familiar with these elements (which are an essential part of any people-centered approach), but they are rarely explicitly viewed as tools for achieving better results. Thinking in terms of deals means changing our view from "who does what to get things done" to "who talks to whom to move things forward?

Taking this to its logical conclusion, management can be seen as constructively organizing solutions to inherent conflicts between players, which, it turns out, is the definition Herbert Simon and James March gave of organizations in the 1950s: "Organizations are systems of coordinated action between individuals and groups whose preferences, information, interests or knowledge differ. Organization theory describes the delicate conversion of conflict into cooperation, the mobilization of resources and the coordination of efforts that facilitates the joint survival of an organization and its members." (From the 1958 book Organizations)

Once one lets go of dominance as a defining variable (who among us is dominant unless you work for a multinational corporation?), we can discover entirely new and more effective ways to think about strategy - and indeed, lean strategy - in terms of creating a communication structure that supports kaizen and teaches people to better solve problems collaboratively.

• Will the deal get better or worse?
• Does the communication structure (such as just-in-time) support a better deal?
• Are people trained in collaborative problem solving?

Our minds believe what they understand; this is a feature, not a bug. Something that is easy to understand is easy to believe. This is why it is so difficult to explore new ways of thinking. Our brain demands that we return to the old thinking we are comfortable with, no matter how wrong it seems in terms of fit-to-fact. Every small business we know has adopted the strategy of dominant multinationals:

1. Set our financial goals.
2. Turn them into operational objectives.
3. Create action plans.
4. Let our managers implement these plans.

But this thinking has deeply hidden assumptions such as:

1. Set our financial goals - we have complete control over our markets.
2. Turn them into operational objectives - we fully understand how operations produce profits.
3. Create action plans - we know and make all the right decisions.
4. Get our managers to implement those plans - our managers have the power and the skills to implement them.

When these hidden assumptions are explained, the wonderful-sounding strategy does not look so promising after all - usually companies find themselves in the situation of having little control over markets, knowing little about how operations produce profits, making both good and bad decisions, and having managers with little power and average skills. Not an encouraging picture, in other words.

If we apply Lean Thinking to the strategic framework, we can come up with an alternative view of strategy:

1. Look at the people who are key to our success (external and internal).
2. Look at the agreement we have with them: is it getting better or worse?
3. Devise a maintenance/kaizen/innovation plan for each agreement.
4. Teach our executives and managers to problem solve together to advance these plans.

Thus, we can build success on the strategic opportunities that arise when people think together and look for opportunities together (and overcome obstacles together) - just as the founder of the food company once did to open a path to success.

He built the business not with action plans, but with deals that allowed him to sell his products, get raw materials and machinery supplied by suppliers and vendors, get people to come work for him and banks to finance his business. After the deals were made, they were maintained and improved, generation after generation. The current owner and CEO improves and maintains these deals to ensure the survival of the company so that it can be passed on to the next generation.

We all say lean is a people-oriented solution, but when all is said and done, we all make the mistake of looking at the mechanism of work by applying standards as rules, or at the mechanism of material flow by applying rules to logistics. But people make agreements; they don't apply rules. People-centric lean means looking at strategy as deals that improve or deteriorate. Because every deal has conflicts and every person has their needs and wants, we apply PDCA as the core way to improve deals by solving problems together and use visual management to create the areas where we can have the conversations that allow us to make those deals and resolve conflicts. So think about it, what hidden assumptions are implicit in your strategic thinking and what deals are you neglecting to maintain, hesitating to renegotiate or not making?

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