On Friday, February 6, 2009, Northrop Grumman President and Chief Operating Officer Wes Bush addressed the Wharton Aerospace Forum at the Wharton School of the University of Pennsylvania in Philadelphia. Below are his delivered remarks.

Five Characteristics of a Winning Business Strategy

Today I’ve been asked to focus my remarks on corporate strategy and on how my company, Northrop Grumman, approaches this critical function.

Good strategy is a lot like good leadership: you know it when you see it, but there is no set formula, because it has to be “personalized” for each organization. There are hundreds, perhaps thousands, of books written on corporate strategy, and I would not attempt to make a broad definition. Instead, I’ll give you my personal take on it, recognizing that there are many dimensions I won’t have time to address.

At a top level, there are five characteristics I look for in a strategy – hopefully, some of these might be useful to you.

  • First, there is the most obvious, or “text-book” characteristic: the strategy has to derive from a deep understanding of our operating environment’s current state and trends – of our customers, competitors, economic forces, our own business model, and many other variables.
  • Second, the strategy is generated by true creative thinking.
  • Third, the strategy drives planning, decision making and action that create measurable value.
  • Fourth, the strategy has an inherent flexibility to accommodate the reality of a dynamic environment.
  • And finally, the strategy is true to the character of the organization; this is perhaps the most “touchy-feely” item on my list, but I think one of the most important.

To give some meaning to these five characteristics, I will put them into the context of what we do at Northrop Grumman.

I’ll start with the last characteristic on my list: Strategy must be true to the character of the organization. The standard we use at Northrop Grumman for this test is embodied in our vision statement.

We recognize that companies in our industry hold a special trust. Beyond our abiding responsibility to our shareholders, employees and other constituencies, we share a broader responsibility to develop the technologies, systems and capabilities that help defend our nation’s interest.

This recognition forms the basis of our company vision: we aspire to be the most trusted provider of systems and technologies that ensure the security and freedom of our nation and its allies.

This vision is at the heart of all our activities, including our formation and execution of strategy. Each company views its mission in a somewhat different way, but its strategy needs to have its foundation in the basic character of the organization.

Now, let me go back to the first characteristic of strategy, the traditional conception. Every strategy must be underpinned by a solid grasp of the environment. In our own strategic thought process, we see this environment in terms of three long-term, enduring needs of our customers. These are:

  • The need to assure U.S. military dominance;
  • The need to confront irregular challenges such as terrorism; and
  • Finally, the need to safeguard populations and critical infrastructures, which we refer to as “securing the commons.”

We see these enduring needs as generating enduring demand from our customers. To address the needs, we must plan and invest to create new capabilities as our customers’ needs change to address new threats.

I think you are all familiar with these three enduring needs, but just to summarize:

The need to assure U.S. military dominance stems from America’s unique position as a superpower and the need to protect our vital interests around the world. As we look to the future, we can project situations in which our nation faces challenges from near-peer competitors with considerable military strength.

Our country’s national security requirement is quite clear – our forces must be able to succeed against any adversary while working closely with allied and coalition forces to defend our shared interests.

Our ability to do so will rest on key activities such strategic deterrence, power projection, global awareness, global command and control, and logistics and support.

The second enduring need – to confront irregular challenges – has been a dominant factor in recent years. The wars we are now waging in Iraq and Afghanistan are the most prominent, but U.S. military activity against irregular adversaries is taking place all around the world.

Our forces must be equipped to defeat this aggression and ensure post-conflict stability. In particular, they must have capabilities for special operations, force protection, information operations and security assistance.

The third enduring security need of our forces is one we term “securing the commons.” We take a broad view of this challenge – the “commons” include our populations and public spaces, critical infrastructures, including the cyber domain, shared lines of communication and commerce, and even our environment. Securing the commons is a shared responsibility among our military and intelligence agencies, federal civil agencies, state and local governments, and our allies.

Northrop Grumman, given the great diversity of security offerings that I mentioned earlier, has a very strong presence in supporting all three of these enduring needs.

Understanding these needs and how they are evolving helps us see how we can support our customers. This “marketplace” understanding, though, has to be integrated into a more complete view of the business before we are equipped to do strategic analysis in depth.

We have developed a portfolio analysis tool to help us make this assessment. We take our $34 billion business and decompose it into a portfolio of roughly 100 different business elements. We fully characterize each of these in terms of its products, technologies, customers, competitors, competitiveness, financial performance and balance sheet. We also consider impacts resulting from the interdependencies of these business elements.

In this detailed model of our portfolio and in the model of our customers’ enduring needs, we have powerful tools for strategy formulation and assessment.

However, it takes more than tools to build a strategy. All too often, we see people get stuck in over-reliance on analysis.

Such tools need to be employed in a process of genuinely creative thinking – another of the key characteristics I look for in a strategy. Strategizing, as I think many of us soon recognize, is not simply a matter of selecting the best approach from among the available options. Strategy development employs innovation to create a wide range of alternatives, and this can be a source of substantial competitive differentiation.

How do we generate such creative thinking. With strategy, just as with technology innovation, a proven way of doing this is by involving a lot of smart people from around the company. A winning strategy is not developed in secrecy by a few insiders at headquarters; it should be a process harnessing the creative power of many perspectives. We follow this principle proactively at our company – and it really pays off for us.

Another vital characteristic of good strategy is that it drives actionable decision making.

If a strategy briefing doesn’t compel you to take action, you’re not really engaged in a meaningful strategic process. Strategy’s purpose is transforming thinking into practical successes. So, when we establish strategies in the business, we demand a plan of action and a process for measuring outcomes.

Last, but not least, a good strategy has an inherent flexibility to accommodate the reality of a dynamic environment

We all have business plans for the next few years. We all know that these plans are, to some degree, wrong as soon as we write them down. We face a shifting security environment shaped to a significant extent by unpredictable external events and the political responses that they motivate.

In 2000, the Bush administration entered office with a primary security focus on China as a rising, potentially competing power. Within months, 9/11 fundamentally altered U.S. priorities, organizations and resource allocation for the next eight years. More recently, of course, unexpected events have taken the form of a disastrous financial crisis.

But this unpredictability is a fundamental feature of our business, and it provides both risk and opportunity. We try to mitigate those risks and maximize those opportunities. We do this by fully understanding the key assumptions that underpin our plans, by examining alternative futures using scenario analysis, and by identifying and watching for signposts that can indicate the onset of change.

Northrop Grumman’s growth strategies and associated financial targets depend, of course, on some basic assumptions we are making about the next few years.

Our plans, for example, assume the success of internal actions we are taking to raise the bar on operating performance. However some of our assumptions about the future relate to factors over which we have little control. A number of these assumptions are narrowly-focused – for instance, covering key programs or budget elements. Others are broadly-focused – for instance, covering the degree to which social spending will generate growth opportunities. While we believe our basic assumptions are sound, they carry uncertainty, and that uncertainty brings risk.

So a part of our approach is to examine this risk more closely by considering how the company would perform under conditions in which our key assumptions are not fully realized. We organize these alternatives within a number of future scenarios that cover the next five years. We assess how each of these alternative futures would be likely to affect our company’s performance – both absolute performance and performance relative to our main competitors.

This scenario exercise is valuable not only for discerning risks in our strategic planning, but also for helping us prepare alternative plans.

Companies that are ready with “Plan B” will often have time enough to resort to it if they detect the winds of change starting to blow.

Therefore, we pay careful attention to signposts of changes that can spell the difference between successes and reverses for our business. Of course, we stay in the loop on policy development in both the executive and legislative branches, but we keep a wide aperture on signposts.

We look for such things as changes in global macroeconomics; the military actions and investments of America’s peer competitors; patterns of terrorist events; events associated with key resources such as food and energy, and weather-related disasters or pandemics. Any of these could be indicators of a new, relevant reality. Understanding these early indicators and being able and willing to react to them is what turns risk into opportunity and competitive advantage.

Let me sum up today’s message:

Strategy is a critical function for our industry, and we practice it at Northrop Grumman at many levels. We develop our corporate strategies through an analytic and data-driven process, based on a deep understanding of our strategic landscape, a well-defined approach for competing effectively within it, a rigorous examination of investment alternatives, and a careful regard to uncertainty, risk and opportunity. But beyond the analytic process, we embrace innovation and creative thinking in the development of strategic alternatives.

We believe that this approach has built a diversified security company well equipped to serve a broad range of customer needs and likely future needs – and also to adapt successfully to unanticipated changes we will encounter in an uncertain future.