In recent years, with the focus on digital transformation, ESG, and other emerging issues, strategy  has had less attention. The dawning AI revolution has put it back on centre stage.

The disruptive nature of AI means that organizations of all types now need to examine their strategies for vulnerabilities and opportunities. Setting the context, professor Walid Hejazi, academic director of executive programs at the Rotman School of Management, refers to a quote from Andrew McAfee, a principal MIT research scientist: “Once in a while, a technology comes along that is so powerful and so broadly applicable that it accelerates the normal march of economic progress.”

McKinsey estimates that generative AI could add $3 to $5 trillion to global GDP, while the IMF predicts that 60 per cent of jobs in advanced economies will be affected — half negatively. Though qualifying this, Hejazi refers to modern business proverb: “You will not be replaced by AI. You will be replaced by someone using AI.” The profound changes that technology is bringing to the business and economic environment require leaders to examine the fundamental drivers and dynamics of strategy. Starting with a definition.

“AI is not a strategy. AI is a tool to achieve a strategy,” points out Hejazi. What are the tactics that you implement to achieve the strategy? And what are operations? Also, who in the organization is responsible for strategy? Who does tactics, and who does operations — the daily management of tasks? Distinct from operations, strategy is about “the big-picture plan for where a company is headed, how it competes, and how it allocates resources across its various operations.”

Rather than go into a formal definition of corporate strategy, Hejazi conjures up the image of the castle from the movie Shrek and the moat surrounding it. Every successful and resilient strategy has two essential things. First, the big-picture business concept — the product, service or both that give the enterprise competitive advantage, or as Hejazi puts it: “The ability to create more economic value than competitors.” And secondly a protective moat protecting it — because if the concept is a winner generating significant profits, there will soon be multiple competitors.

Shrek’s moat was filled with alligators. To defend a company’s position in the market, its moat should be filled with off-putting strategic devices. These, says Hejazi, “generally come from two big buckets — product differentiation or cost.” Apple is perhaps the best example of product differentiation. “With Apple, it is the customer experience, the brand, the prestige and the switching cost. Everything is integrated.”

As for cost as a defence, “If everybody’s doing the same thing, the one with the lowest price wins the competitive battle,” — think Walmart, Aldi and Lidl in Europe, or IKEA. Strategy is not just about keeping up with market trends and ensuring your product is ahead of the game — having a deep and effective moat is also critical.

Hejazi mentions IKEA again in relation to another strategic imperative, one he was reminded of by Michael Porter: “Strategy is deciding to do some things but not others.” IKEA’s strategy was to focus on the young starter-home market rather than trying to do everything for everybody. The service is perfunctory — you collect and assemble the furniture yourself — but the product designs, quality and price are right for the audience. IKEA does not aim at the top-end buyer.

The world and its markets are changing fast; today, more than ever, strategy cannot be static. Leaders must always be looking ahead and around them for threats and opportunities. Hejazi quotes legendary hockey player Wayne Gretzky, “A good hockey player plays where the puck is. A great player plays where the puck is going to be.”

As far as threats, “No moat last forever,” warns Hejazi. “Strategy is a tough discipline, and it’s not a once and done, it’s an ongoing process.” From Kodak and Blockbuster to Nokia to Sears, he pinpoints several high-profile organizations that failed to see where the puck was going, often not realizing who their competitors might be. He notes as example that “with new technologies, companies that used to be partners are now emerging as competitors.”

Threats can also come from not keeping up with market sentiment. Hejazi refers to a Financial Times documentary, Who Killed the ESG Party?, which explained how environmental, social and governance (ESG) from being wildly overhyped, was eventually undermined by corporate ‘green washing,’ geopolitical shocks and political backlash, pushing a host of banks and big companies into strategic U-turns. Seeing where the puck is going is about continuous awareness, next-sensing and innovation.

To develop or tweak a big-picture business concept it is important to evaluate the company’s current competitive position, using financial and market analysis, to identify strengths and weaknesses. Leaders then need to understand where to go to find new competitive advantage. Hejazi recommends these key sources:

Stakeholders: “People that are related to the company communicate back to you what they’re seeing in the market,” he says. For high-level intelligence, this can be board members, investors — people who are out and about in the market hearing about changes that are either here or coming. It can also be customers, employees, suppliers or regulators.

Strategy department: “The people in the company tasked with strategy,” who focus on both internal and external analysis. Internal analysis can cover financial health of the company, but also the organization’s culture and how employee attitudes and working practices might impact strategic decisions. External analysis is about assessing economic and social trends, geopolitical risks and technological change. And when it comes to optimal organizational design, it is also imperative to embed risk management into senior leadership and strategy development instead of siloing it in a compliance department. To this end, scenario planning becomes something all leaders should be expected to perform as part of their responsibilities in steering the organization.

Innovation mindset: Cultivating an agile innovative mindset in the company can be a source of competitive advantage. “It was the change in the mindset among the executives,” Hejazi says, that enabled one of Rotman’s clients to progress and truly emerge as a market leader. Innovations must, however, link the business concept to the company’s manifest capabilities. Hejazi pictures this as a two-axis graph. “The horizontal axis is about the degree to which you have technical competencies — existing competencies and new competencies — driving your strategy. The vertical axis is the business model.”

There are many examples of new strategies coming from new technologies, but Hejazi gives Uber as an example of a success story where competitive advantage was found applying existing technologies in a new business model. He also reminds us that, “90 per cent of innovations are what we call routine and happen using existing capabilities and existing business models.”

The need for strategic agility — a continuously evolving strategy — leads to the question: How can constant change be compatible with efficient implementation?

Having evaluated the company’s competitive position, using financial analysis to reach a strategic decision, agile leaders face a hard reality, which Hejazi calls out: “Change is difficult. Change takes discipline, and whenever we see companies taking shortcuts, they often fail at implementing change.” Adopting new technology and new systems may be difficult, but it is often the human resource that is the real sticking point.

People being naturally conservative and risk-averse tend to resist change. Strategies that involve introducing automation or generative AI, where jobs may be at stake, are bound to cause resistance or slower than ideal rate of adoption.

For example, some clients that approach Hejazi about generative AI have already invested in the technology. The issue now is a lack of adoption internally of the technology. There is also the issue of speed of strategic change; in large, dispersed organizations with growing and mobile workforces, ensuring all corners are up to speed with a new direction is a challenge. “The role of leaders is to really communicate the strategy, to explain the why,” Hejazi says. “People must understand what’s going on, to be prepared for the change that’s coming.”

“This is not about micromanaging, but empowering people to do the right thing.” In a competitive landscape characterized by changing demographics, consumer preferences and technology, employees will understand the need for strategic change — but the way change is managed is key. To ensure the workforce is engaged and committed to change, leaders must foster an open, transparent and innovative organizational culture that drives innovation while keeping all stakeholders fully informed and consulted.

This article was originally published by IEDP, and appeared in the Fall issue of the Rotman Management magazine.