Are You an Inspiring Leader?
IN OUR WORK WITH CLIENTS IN RECENT YEARS, my colleagues and I have noted considerable confusion and stress around the role of strategy and the effectiveness of the annual planning process. So much so that we decided to take a serious look at ‘the state of strategy’ in an ever-changing world.
When we looked at the literature, we found several views. One was that ‘strategy has been eclipsed by technology’; another was that ‘the possibility of even having a strategic plan is killed by the velocity of the modern world’. Many practitioners were also asserting that what makes the difference between a mediocre company and a great one is not strategy at all, but execution.
We began to wonder: Is strategy still relevant? We set out to analyze 135,000 U.S. companies over a 65-year period, asking, What is the difference between successful and unsuccessful companies?
A clear pattern emerged: When we compared the top quartile of all companies to the bottom quartile, we found that whatever constitutes ‘doing things in a differentiated way’ is becoming more important — not less. There is actually increasing inequality between the highest-performing companies and the lowest-performing companies in each industry, and this tells us that strategy is definitely still important.
Of course, much has changed since the early days of strategy. Today’s strategists face factors like globalization, changes in geopolitics, technology, Millennial values, and connectivity combined with cheap computing power — to name just a few. However, it became clear that one of the most important characteristics of modern business is that the diversity of strategic environments has grown substantially.
We realized that we were asking the wrong question. The question was not, ‘Which approach to strategy is most relevant today?’ but rather ‘Which approach to strategy should be used under which circumstance?’ Modern companies, we found, need to adopt a contingent approach to strategy that depends on three characteristics of the business environment they face: predictability, malleability and harshness. Companies facing high unpredictability, for example, will require a different approach to strategy than the one employed by traditional players facing a more stable environment.
To help discriminate between different types of strategic environments, we have constructed a tool called the Strategy Palette ( Figure One), which measures three characteristics of the competitive environment. The vertical axis for unpredictability represents the question, ‘Can we plan?’ If you can plan, you should, but if you can’t, you will be wasting your time. The horizontal axis tracks malleability — in other words, your ability to shape your
environment, rather than treating it as a given. Clearly, if you can shape the environment you should, but if you can’t, you will be wasting your time.
The third axis, harshness, concerns how attractive the business is in terms of profitability, cash flow and growth. If you are in a position where the emphasis is on short-term survival, that entails one approach to strategy; whereas if you have plenty of growth options, different approaches apply.
This line of thinking gives rise to five possible approaches to strategy, which make up the strategy palette.
1. Classical Strategy
In environments that are stable and predictable, we can employ a classical planning-based approach to strategy, whereby the algorithm is ‘analyze, plan and execute’. Despite the claims made by some, this approach is not dead — it is just no longer a panacea. For example, one place where traditional planning still applies is in the confectionary industry. When we spoke to Paul Michaels, then-president of the Mars Company, he told us that candy sales grow with GDP and people tend to stick with their favourite childhood brands. So, within a reasonable margin of error, one can in fact forecast the future — and therefore strategy is all about scale, economy, efficiency and execution.
That doesn’t mean that things are easy for a company like Mars. Because its competitors are likely doing the same thing, some innovation is required, even within the classical form of strategy. For instance, one of Mars’ innovations concerns the simplicity and communicability of its strategy. Very few people are involved in the strategic process, and they submit themselves to the discipline of being able to explain its outcomes to anyone in the company in under 20 minutes. The reason: Strategy is not effective unless it is understood by all and is well executed. Even within the classical approach to strategy, innovation is a must.
2. Adaptive Strategy
Moving on to increasingly exotic forms of strategy, Tata Consultancy Services (TCS) — the world’s second largest IT services company — is in a doubly unpredictable business: Not only is it hard to forecast which technologies companies will employ going forward, but individual clients exhibit high variation in their actual use of the technology. This led TCS to conclude that it is better off not trying to plan, but instead, to regard its business as ‘a portfolio of experiments’. Every customer deployment is, in a sense, an experiment, and it yields a successful or unsuccessful outcome. If the experiment is successful, they try to codify the learnings and then scale and apply them to other clients. Importantly, TCS does this continuously. Clearly, this approach is quite different from traditional planning; it’s more like an evolutionary
process in Biology. The algorithm here is ‘create variance; select what works and then scale it up; and continuously iterate on this process’.
3. The Visionary Approach
The third approach is the one used by entrepreneurs in situations where a market does not yet exist and is therefore wide open to being shaped. This is what entrepreneurs have done for centuries: They create a vison, realize that vision and then scale the resulting business model. When I began my career in consulting in 1989, most of the time I was advising large companies on how to compete with other large companies. We had lots of decade-long battles between the number 1 and number 2 in an industry; but today, I more commonly find myself advising large companies defending against disruption caused by small upstart companies leveraging some new technology or business model. What is new here is that today’s large companies must be able to create new spaces too — and disrupt themselves by creating new businesses before they are disrupted by outside visionaries. This approach works best when you have an opportunity to create or re-create an industry single-handedly by applying a bold vision at the right moment.
4. The Shaping Approach
This approach involves platforms and ecosystems, and it has yielded some of the most stunning examples of business success today. Amazon, Alibaba and Red Hat are essentially cultivating ecosystems and leveraging the capabilities and assets of other companies to reshape their industries. The shaping approach contains elements of malleability because it involves orchestrating ecosystems, but also elements of unpredictability, because the strategists don’t actually control or own all of the assets. Shaping strategies are essentially strategies of co-evolution. The algorithm here is one of ‘creating influence, cultivating an ecosystem and co-evolving with that ecosystem’. The trick, of course, is to have a platform that somebody wants to join, so there must be mutual benefit in the economics of the ecosystem. This approach works best in unpredictable and malleable environments.
5. Strategic Renewal
Because of the rate of change today, literally hundreds of large companies are embracing this approach to strategy, which entails preserving organizational viability by fixing an acute mismatch between your current business model and the competitive environment. Although many companies have been through this several times, the rate of failure is very high: About 75 per cent of companies that set out to renew themselves actually fail to restore their profitability to sector-median levels of returns in the short and medium term. We found that the biggest cause of this failure is a failure to pivot from the early stages of a renewal process — where cost reduction and cash flow are key — into successfully creating growth and long-term value.
The New Strategic Skills
For any large organization, the ability to concurrently run the business and reinvent it has become a determinant of long-term success. It is not sufficient for every organization to pick one of these approaches to strategy; instead, you need to pick the right approach for each part of your business. The key for today’s leaders is to understand in which environment(s) they are playing, what the bases of competition are, and then choose the right approach to strategy and execution accordingly.
For most large organizations, it’s the trio of adaptive, shaping and visionary strategies that is both under-represented and hardest to get their minds around. Furthermore, incumbents are faced with the challenge of mastering the art of running multiple approaches to strategy under the same roof. Embracing the contradiction between the analytical discipline of a classical strategy and the more creative adapting, shaping and visionary approaches requires strategic ambidexterity.
Not surprisingly, each approach also entails a different approach to execution. For example, let’s contrast the classical approach with the adaptive approach. The classical approach begins with an analysis of a market environment, creating a plan and executing that plan, which is usually stable over a period of time — the ‘planning horizon’. An adaptive approach, in contrast, centres on experimentation: You create variation, select the innovations that are successful, and then scale them up.
These two approaches are very different. In the classical approach, there will likely be a binder called The Strategic Plan. And there will only be one of these for an entire business unit or company. In the adaptive approach, there may not even be a written plan. Instead, there will be a widely understood general direction and the plan will emerge from a population of experiments and will constantly shift.
In the case of the classical approach, if we ask, ‘Which comes first, the planned strategy or the execution?’ the obvious answer is that the plan comes first, because only when we have a strategy do we get to execute it. But in the case of an adaptive strategy, it is the trial and error — in other words, the execution — that comes first, and strategy emerges from execution.
If large organizations want to apply the right approach in the right circumstance, they must develop three key capabilities:
The first is the ability to undertake ‘disciADAPTIVE CAPABILITY. plined experimentation’. Running a portfolio of business experiments requires every bit as much discipline as does classical
execution — albeit of a different type. First, it requires the discipline to understand the environment well enough to be able to target your experiments. Second, it requires you to stay very close to your customer, because it is at the customer interface where experiments and learning most often take place. Third, it requires the capability to run an evaluation process, so that unsuccessful bets can be closed down and resources constantly recirculated to other experiments. Fourth, it requires an ability to delegate and decentralize — because the initiative-taking itself is local — but also to scale and share knowledge of successful experiments across the enterprise. Last but not least, being adaptive requires a culture that tolerates failure in individual cases and values speed over accuracy, since the strategy will slowly emerge through continuous experimentation and innovation.
This entails an ability to shape the external SHAPING CAPABILITY. environment and create new spaces — and in our experience, this is typically a bottleneck for large organizations. One might think that the biggest companies with the most influence, financial resources and scale would be in the best position to shape their environments; but in our experience, that is not the case. In the vast majority of cases it is the mavericks at the edges of an industry — who have no choice but to challenge the status quo — who end up reshaping an industry.
So, how can a large company fully deploy its potential influence and shape its environment? First, its leaders should really start thinking about ‘mutualistic ecosystems’, rather than thinking only about the company itself and its customers. Leaders
For every business, ‘doing things in a differentiated way’ is becoming more important — not less.
need to think hard about possible mutual benefits for those in the ecosystem, and what it takes to be an orchestrator. The key question for anyone running an ecosystem is, ‘Why would anyone want to join our club?’ There must be some significant benefit in terms of brand elevation or risk mitigation, systems cost or cost of accessing customers, or the ecosystem also won’t make sense.
Running an ecosystem requires leaders to be comfortable with not controlling all variables, and to recognize that the system will continuously evolve. Companies that are successfully running platform businesses often have what you might call ‘selectively-managerial’ cultures; in other words, they know when to trust a marketplace mechanism and when to trust a managerial mechanism. And they tend to keep managerial mechanisms away from marketplaces, because marketplaces are self-organizing.
This is the ability to adopt different approaches AMBIDEXTERITY. to strategy and execution at the same time in different parts of your company. What most companies measure most of the time is their current productivity or current financial results, and they measure those using backward-looking accounting measures. Of course, measuring performance is very important because ‘today’s performance pays for tomorrow’s growth’; but at the same time, you need to be generating future growth options through innovation. Companies tend not to have very good metrics for this.
We have found that only about three per cent of companies are truly ambidextrous. By coincidence, about the same
proportion of the human population is able to write fluently with both hands. When we asked ourselves, ‘How can companies gain the ability to both run and reinvent their business at the same time?’ we weren’t able to find a single company that had enough ambidextrous talent so that every team could individually run and reinvent its business. On the bright side, some of the companies we spoke to had organizational fixes for their lack of ambidextrous talent. We were able to identify four distinct ways in which you can structure your organization for ambidexterity:
Many firms, like Pepsico, determine which apSEPARATION. proach to strategy fits for each subunit (be it a division, geographic location or function), and they run these approaches independently of one another. This is the most common approach to ambidexterity, but it may not always work, because a company’s structure tends to be semi-permanent, while its environment may not be.
In these cases, firms manage a common pool SWITCHING. of resources and the pool switches between approaches over time or mixes them appropriately at a given moment. Switching is a more difficult approach to manage, because it requires both flexibility and effective oversight. When leaders decide to change styles, resource conflicts may erupt.
In these situations, the firm’s units selfSELF-ORGANIZATION. organize, and each chooses the best approach to strategy when matters become too complex to manage these choices in a top-down manner.
In the most complex and dynamic EXTERNAL ECOSYSTEMS. of cases, when a firm cannot create or manage the full suite of required strategy approaches internally, companies may need to orchestrate a diverse ecosystem of external parties.
Strategy is far from dead. In fact, it has become more multifaceted and dynamic than ever. The key for leaders is to understand where each part of their business sits on the Strategy Palette, and then embrace an approach to strategy and execution accordingly.
At its very essence, strategy is about problem solving, and in both our professional and personal lives, we have opportunities every day to choose between alternate approaches. By engaging with each opportunity with the right framing and awareness, you can accelerate your own personal learning journey — and generate value for your organization.
The ability to concurrently run your business and reinventit has become a key determinant of long-term success.