You 2.0

Are You an In­spir­ing Leader?

Rotman Management Magazine - - FRONT PAGE - By Martin Reeves

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.

In clos­ing

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.

FIG­URE ONE

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