In 1742, the Whitbread company started brewing beer. Over 250 years, the company grew to be one of the UK’s top brewing companies.
But in the 1980s, the company faced existential challenges. International beer brands were taking over. And competition authorities would soon force the decoupling of beer production from distribution and retailing. Whitbread was in trouble. Their business model was about to get broken.
Create a new future.
However, people in the UK were increasingly eating out, away from home. And Whitbread had the real estate and cash flow to open up that opportunity – and to exploit it.
It was the mid-1980s when I joined Whitbread as director of Retail Strategy. So what was my job? To design the strategy for creating a powerful new corporation.
My job was to build strong plans.
And we certainly delivered on that strategy! Over the next decade, we developed ten powerful restaurant and hotel chains, creating new markets and pushing competitors aside as we went. One of those came from acquiring the tiny Costa Coffee store chain - later sold to Coca-Cola for over $3 billion.
Taking that experience, I then taught strategy at London Business School. But everything I knew about strategy was about to change.
From static strategy to dynamics.
The strategy tools I started teaching at LBS were OK, but they fell short of what the team and I at Whitbread had actually done. We didn’t just say, “That’s the place in the market we want” – we had comprehensive, joined-up plans, continually updated, to make that happen.
Luckily, my LBS colleague John Morecroft showed me what “system dynamics” could do. A straightforward method developed at MIT in the 1960s that captures how the real world works (not just for business but for any economic, social or environmental field).
It’s all about “resources.”
At the time, Strategy academics were interested in how “resources” enabled a business to perform. However, they misunderstood what those resources are, and how they work together, like a machine, to drive sales and profits.
But that was precisely what system dynamics could do! All I needed was to specify those resources correctly and figure out how they were connected, then build the system model and kick it into life.
That key piece of paper.
I can still recall sitting in that Boston hotel lobby, trying to figure it out. An hour later, I had drawn this picture - a visual structure for how any business works.
The logic of this structure is simple, but unavoidable ...
Customers drive sales and revenue
Products, marketing and price win and retain customers
Staff and capacity provide the means to satisfy customers' needs
Staff, capacity and marketing drive costs
Take those costs from revenue to get profit, which grows our cash
Some cash we re-invest; some pays tax and interest; the rest goes to the owners
Certain cases need small adaptations, such as for cost-of-goods and gross margin, or for intermediaries like retailers. But this is essentially the “strategic architecture” of any business, and indeed many non-business organisations.
Bring strategy to life.
Add the numbers to everything on that picture and how those numbers depend on each other. Suddenly, your business model is not some stone statue, but a living entity - a "digital twin" that matches the real business. So you can simulate your plans against any range of scenarios with real-world data, helping you make bulletproof, joined-up decisions.
And this doesn’t just work for the overall plan. It works for any function or team - a Marketing strategy or HR plan for example. It works for any challenge or opportunity that your business faces.
This changes the way you make plans and decisions.
Seeing your business this way transforms how you develop plans, tackle challenges, and make decisions. Because instead of looking at isolated, static numbers, you will look at how the whole system works. You can see the few key levers and how to use them to steer that system.
Ever since I drew this picture, I've taught this method at business schools worldwide. Written books. Built models to solve business challenges. Developed simulation-based learning games. Created courses for leaders and analysts.
Embraced by leaders
Senior leaders and analysts across diverse industries have used the method. From banking to software. Consumer brands to transport.
Leaders and analysts use this framework to make strong plans and big decisions. From optimising marketing impact to averting business collapse; fixing service quality to raising finance for new ventures.
Today, I would like to share this with you.
Your planning and decision-making are about to get a whole lot better.