The New Corporate Strategy

■ Fast track route to mastering cutting edge corporate strategy ■ Covers the fundamentals of strategy, from global stra...

Author: Jim Underwood

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■ Fast track route to mastering cutting edge corporate strategy ■ Covers the fundamentals of strategy, from global strategy to

complexity and from decision making to implementing those decisions ■ Examples and lessons from some of the world’s most

successful businesses operating in the global high tech industry and the media and ideas from the smartest thinkers including Igor Ansoff, Peter Senge and Rosabeth Moss Kanter ■ Includes a glossary of key concepts and a comprehensive

resources guide

STRATEGY

Jim Underwood

03.07

The New Corporate Strategy

Copyright  Capstone Publishing 2002 The right of Jim Underwood to be identified as the author of this work has been asserted in accordance with the Copyright, Designs and Patents Act 1988 First published 2002 by Capstone Publishing (a Wiley company) 8 Newtec Place Magdalen Road Oxford OX4 1RE United Kingdom http://www.capstoneideas.com All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, including uploading, downloading, printing, recording or otherwise, except as permitted under the fair dealing provisions of the Copyright, Designs and Patents Act 1988, or under the terms of a license issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London, W1P 9HE, UK, without the permission in writing of the Publisher. Requests to the Publisher should be addressed to the Permissions Department, John Wiley & Sons, Ltd, Baffins Lane, Chichester, West Sussex, PO19 1UD, UK or e-mailed to [email protected] or faxed to (+44) 1243 770571. CIP catalogue records for this book are available from the British Library and the US Library of Congress ISBN 1-841123-269 This title is also available in print as ISBN 1-84112-238-6 Substantial discounts on bulk quantities of ExpressExec books are available to corporations, professional associations and other organizations. Please contact Capstone for more details on +44 (0)1865 798 623 or (fax) +44 (0)1865 240 941 or (e-mail) [email protected]

Introduction to ExpressExec ExpressExec is 3 million words of the latest management thinking compiled into 10 modules. Each module contains 10 individual titles forming a comprehensive resource of current business practice written by leading practitioners in their field. From brand management to balanced scorecard, ExpressExec enables you to grasp the key concepts behind each subject and implement the theory immediately. Each of the 100 titles is available in print and electronic formats. Through the ExpressExec.com Website you will discover that you can access the complete resource in a number of ways: » printed books or e-books; » e-content – PDF or XML (for licensed syndication) adding value to an intranet or Internet site; » a corporate e-learning/knowledge management solution providing a cost-effective platform for developing skills and sharing knowledge within an organization; » bespoke delivery – tailored solutions to solve your need. Why not visit www.expressexec.com and register for free key management briefings, a monthly newsletter and interactive skills checklists. Share your ideas about ExpressExec and your thoughts about business today. Please contact [email protected] for more information.

Contents Introduction to ExpressExec 03.07.01 03.07.02 03.07.03 03.07.04 03.07.05 03.07.06 03.07.07 03.07.08

Introduction to the New Corporate Strategy What is the New Corporate Strategy? Evolution of the New Corporate Strategy The E-Dimension The Global Dimension The State of the Art New Corporate Strategy in Practice Key Concepts and Thinkers in the New Corporate Strategy 03.07.09 Resources for the New Corporate Strategy 03.07.10 Ten Steps to Making the New Corporate Strategy Work Frequently Asked Questions (FAQs)

v 1 5 11 19 29 37 57 73 83 93 103

03.07.01

Introduction to the New Corporate Strategy Some ground rules for how different strategic approaches should be evaluated. Understanding the different types of strategic approaches is important.

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THE NEW CORPORATE STRATEGY

The field of strategy has come under scrutiny over the past 20 years. As frame-breaking shifts have continually hit the global economy, many theorists and practitioners have come to question the viability of strategic thinking. The introduction of complex systems thinking in the late 1980s and early 1990s seemed to be a step in the right direction. However, the practice of strategy currently appears to be at odds with the realities of the twenty-first century. The practice of strategy might be compared to the situation of the man whose wife walks in wearing an unflattering outfit. When she asks how he likes it, he knows he is in trouble. He cannot win, no matter what he says, or does not say. That is very much the situation with corporate strategy today. A company may be criticized for having poor strategy (which is a common occurrence), but it will certainly be equally criticized if it has no strategy at all. There are two areas in which most people seem to think that they are experts: advertising and strategy. Advertising executives will tell you that, no matter how well a corporate ad does, all sorts of people outside the industry will have an opinion on how it could have been done better. Similarly, strategy (particularly the way in which it was practiced in the past) has been seen as the simple process of identifying a firm’s core competencies, then developing a mission statement to make sure that the workers keep doing what they were already doing. In reality, neither advertising nor strategy is that simple. Good advertising is the result of an in-depth understanding of how the human mind works. It is developed by someone who understands a target market extremely well. Good advertising sells products and makes the most efficient use of the advertising dollar. It is not a simple process. Good strategy is much the same. Contrary to popular belief, it may have nothing to do with a firm’s core competencies. Indeed, those who base a strategic plan on a firm’s historic competencies may find themselves quickly in trouble. And that sort of trouble may be one of the reasons why some consider the field of strategy itself to be in trouble. With the apparent failure of strategic planning in the corporate sector, many questions have been raised. In 1997, an online discussion at the Academy of Management bulletin board dealt with the field of strategy. One professor commented that the apparent failure of

INTRODUCTION

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the practice of strategy in the corporate sector was leading fewer students to have an interest in studying the discipline. Others were even considering dropping strategy courses for the same reason. STRATEGY: THE DIFFERENCE IN PROFITABILITY Although some might think that the field of corporate strategy is in trouble, the reality is quite different. Companies that continually develop and execute good strategy are significantly more profitable than those that do not. Postmortems of companies that fail clearly reveal that their failure was caused by poor strategy. Despite current thinking in many different areas of the field of management, corporate strategy is clearly the key to sustainable profitability in the new economy. Managers need to understand what does not work for firms, as well as what does work. The field of strategy has encountered problems, not because corporate strategy itself has failed, but because the wrong approach to strategy has been employed. Ultimately, strategy is simply and profoundly the foundation of the future profitability of firms. Managers who understand the practice will be much better prepared to lead the global organization in the early twenty-first century – in a time of change and uncertainty.

03.07.02

What is Corporate Strategy? A presentation of a number of definitions involved in the field of strategy. Both older systems as well as newer systems and approaches are discussed.

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Without doubt, a state of confusion exists today in the field of strategy. With the emergence of multiple (and, indeed, contradictory) strategic models, representing various approaches, a number of terms have been adopted. It vital to have an understanding of those terms. Today’s strategist needs to be conversant in the language of all the strategic approaches. THE STRATEGIC APPROACHES Those familiar with the field of strategy will recognize in this chapter a departure from some common terminology. This is because myriad strategic approaches have developed around strategic models that were historically popular. There are probably 20 major college texts that are all presented as ‘‘strategy’’ or ‘‘business policy’’ texts. While some may take a slightly different approach in minor areas, they are generally all the same. Until recently, almost all of the articles written on the topic had as their foundation the same basic assumptions. The various ‘‘schools of thought’’ of the field of strategy are categorized here, based upon the common foundations and assumptions that each group holds. The matrix in Fig. 2.1 was developed for this purpose. All of the strategic approaches can be categorized or classified on the matrix. In some cases, the approaches are combined into a hybrid (see Chapter 6). For the purposes of this discussion, the models will be classified using the following terms: 1 2 3 4

complex-historic (emergence); complex-futuristic (predictive modeling); simple-historic (self-confirming theories); simple-futuristic (extrapolation).

Each strategic model or approach can be studied quite effectively by using this descriptive terminology. It is important to understand each of the generic strategic models as presented on the matrix. Complex-historic The complex-historic approach involves a number of bases or assumptions, including the assumption that the competitive environment is

WHAT IS THE NEW CORPORATE STRATEGY?

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Mental Model

Strategic Frame (Time)

Fig. 2.1

Complex (nonlinear)

Simple (linear)

Historic

Future

Emergence

Predictive Modeling

Self-confirming theories

Extrapolation

Generic strategic models matrix.

highly complex, and therefore uncertain. This means that the emerging or future environment will most certainly be chaotic. Currently very popular, the book Competing On The Edge by Shona L. Brown and Kathleen M. Eisenhardt (Harvard Business School Press, 1998) leans heavily toward a complex-historic mental model. While the Brown–Eisenhardt model may have some characteristics of a hybrid model, in that these writers also deal with the future, the focus remains on the complex nature of the emerging environment. The word ‘‘emergent,’’ as used in this field, is loaded with meaning. Briefly, the idea of ‘‘emergence’’ is based upon the concept that the global business environment is metaphorically the same, or at least nearly the same, as nature. That is, it is highly complex, and constantly adapting in an organic manner. Darwin’s theory of evolution is at the heart of the metaphor. Most of those who subscribe to this view suggest that the complex, chaotic nature of the emerging environment renders impossible any attempt to predict the future. As a result, there is a noticeable focus upon the present. Furthermore, there is an assumption that the organization can ‘‘self-organize,’’ in the same way that nature evolves and dynamically adapts. This view is not shared by all theorists.

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Complex-futuristic The complex-futuristic approach focuses upon understanding the future as a complex system. There are a number of contradictions within this group. For example, Peter Senge, known for his work in systems thinking (a great futuristic tool), is quite involved in the complex-historic area. In some cases, those who are interested in this area have developed approaches, or tools, to assist managers in understanding or predicting future environments. Simple-historic The simple-historic approach focuses primarily on the current organization and its current resources. In some cases, there are hybrid approaches that appear to consider future issues from a complex standpoint, but in almost every case there are problematic assumptions about the firm, such as the ideas of ‘‘competitive advantage’’ and ‘‘core competencies.’’ The simple-historic theorist generally begins a strategic quest with the assumption that the world will continue to buy whatever product or service the firm currently produces. The complex-futurist, in contrast, would generally try to assume nothing about the future (the learning organization approach). Some complex-futuristic theorists use a hybrid mental model, combining the complex-futuristic approach with the simple-historic. In such cases, there is an assumption that the firm can and should assume that it can leverage existing resources or competencies in the future environment. There is a significant level of dissonance between these two models. Some have called these approaches ‘‘self-confirming theories,’’ because they focus upon continuing historic competencies. Simple-futuristic The simple-futuristic approach involves a linear extension of present (historic) trends into the future. If the firm’s revenues have been growing at 10% per year, and the firm has consistently achieved aftertax profits equal to 6% of sales, the simple-futuristic strategist would assume that those relationships will be stable in the future. Regardless of what many companies say they do in the area of corporate strategy, many continue to use this approach as the foundation of their strategic

WHAT IS THE NEW CORPORATE STRATEGY?

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plan. In its simplest form it is called ‘‘budgeting.’’ It is also referred to as ‘‘extrapolation.’’ WHICH APPROACH? The definitions and terms used by each strategist are strongly influenced by the generic strategic model that is being used as a basic construct. The simple-historic strategist will suggest that strategy involves the leveraging of the firm’s (historic) resources and core competencies. The complex-futurist might state that strategy has to do with maximizing future profit. The complex-historic strategist might create a hybrid construct that combines existing competencies and leverage of them in a complex future environment. All of these ideas are out there – along with many more. What does this mean to the manager in Singapore, London, or De Moines? Quite simply, that there are a multitude of strategic approaches, and all are clamoring for the attention of the corporate strategist. More importantly, the strategic approach adopted by a firm has everything to do with the future performance of that firm. In fact, it may have everything to do with the very survival of the firm. The strategic context utilized by the strategist is so important – it is all about profit and performance. A good understanding of all four generic strategic models will help managers to discover the effective strategic approach that will lead their own firm to a future of maximum corporate profit. In Chapter 3, which discusses the evolution of the field of strategy, model-specific terms will be defined and explained as each strategic approach is introduced.

03.07.03

Evolution of Corporate Strategy The field of strategy, like other fields, has been impacted by new thinking from the fields of complexity, chaos, and evolutionary theory. The development of each of those areas is discussed in this chapter.

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Military history is filled with stories about strategy. Almost from the beginning of recorded time, leaders contemplating battle have devised offensive and counter-offensive moves for the purpose of defeating an enemy. In the business arena, the field of strategy had a simple beginning. As time passed, the importance of strategy became increasingly evident. In the chaotic years of the late 1990s – new technologies heightening the rate of change, investment money rushing to find the next technology boom, and little understanding of where it was going to be – the apparent failure of traditional strategic approaches led theorists and practitioners to seek new ways of dealing with a changing world. FIVE PHASES OF EVOLUTION Over the years, the practice of strategy has evolved through five phases (each phase generally involved the perceived failure of the previous phase): 1 2 3 4 5

basic financial planning (budgeting); forecasting (extrapolation); externally oriented planning; strategic management; complex systems strategy: » emergence; » strategic balance.

(The first four phases were adapted from the second edition (2001) of Hunger and Wheelen’s Essentials of Strategic Management, published by Prentice Hall.) THE TWENTIETH CENTURY Early efforts in corporate strategy were generally limited to the development of a budget, with managers realizing that there was a need to plan the allocation of funds. Later, in the first half of the 1900s, business managers expanded the budgeting process into the future. Budgeting and strategic changes (such as entering a new market) were synthesized into the extended budgeting process, so that the budget supported the strategic objectives of the firm. With the exception of

EVOLUTION OF THE NEW CORPORATE STRATEGY

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the Great Depression, the competitive environment at this time was fairly stable and predictable. In the mid-1900s, business managers realized that external events were playing an increasingly important role in determining corporate performance. As a result, they began to look externally for significant drivers, such as economic forces, so that they could try to plan for discontinuities. This approach continued to find favor well into the 1970s. Post-1970s In the 1980s, there was a renewed interest in discovering ways of dealing with an increasingly complex and changing environment. This decade also saw the inauguration of a succession of ‘‘fads,’’ generally all sharing one common characteristic: they proposed a relatively simple solution that promised to resolve the myriad complex problems faced by businesses. In their 1982 book In Search of Excellence (Harper & Row Publishers, New York), Thomas J. Peters and Robert H. Waterman Jr. identified eight things that excellent companies did to achieve sustained profitability, in comparison with those that did not perform well. The only problem with this book, and a number of others like it, was that by the time it went to press a number of the ‘‘excellent companies’’ were already in trouble. Similar books appeared over the 20 years that followed the publication of In Search of Excellence. In response to the entry of Japanese companies into the global market, there was a rash of books about Total Quality Management, or TQM. After the glow of TQM began to dim, a plethora of books on the topic of process re-engineering appeared on the market, alongside a number of books about ‘‘excellence.’’ In every new case, the innovative ‘‘approach’’ put forward by the theorists failed to fulfill its promise of providing the ‘‘final solution.’’ It was during the 1980s that the practice of strategy began to move toward a metaphorical application of an old idea. For many years, management theorists had borrowed the ideas of an economic theory commonly referred to as ‘‘equilibrium theory,’’ or ‘‘equilibrium systems theory,’’ as a basis for developing management theory. For more on this, see Eric D. Beinhocker’s article ‘‘Strategy at the Edge of Chaos,’’ in McKinsey Quarterly (1) 24-39, 1997. Basically, the

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concept was developed around the idea of linearity (and, to some extent, simplicity). Out of that concept ideas such as SWOT analysis (strengths, weaknesses, opportunities, and threats) and ‘‘five forces’’ analysis were developed. The latter is dealt with in Michael Porter’s 1985 book Competitive Strategy (The Free Press, New York). The theory of comparative advantage, which suggests that some countries have unique assets, has become the basis for contemporary strategy. (See Lawrence M. Bellman’s article ‘‘Bricks and Mortar: 21st Century Survival,’’ in Business Horizons magazine, May 2001.) David Ricardo and Adam Smith suggested that, if a country could focus its industries where it had comparative advantage, and avoid areas where others had comparative advantage, it would maximize its relative performance. Strategists modified the idea and called it ‘‘competitive advantage.’’ If it chooses to use that approach, a firm needs to identify its core competencies, competitive advantage, and then convert that identification to a mission. In principle, the purpose of the mission statement is to keep the firm focused upon its unique area of competitive advantage. Further, the mission is supposed to set boundaries and to ‘‘keep it in the box.’’ From the early 1980s to the mid-1990s, approaches based on the equilibrium theory repeatedly failed, and the level of dissatisfaction with this particular approach grew. The new global competitive environment that emerged in the late 1980s demanded a solution. TQM gained a great deal of popularity through the early 1990s, but it soon fell far short of being a holistic solution. The generally accepted failure rate for TQM initiatives during this period was over 80%. In the early 1990s, major consulting firms were overwhelmed with clients who wanted to use process re-engineering as a solution – for everything from sagging profits to product development cycles. Like TQM, process re-engineering failed to deliver, with a failure rate of around 70%. As a result of these failures, many people began to suggest that the real issue was change – and the usual preponderance of books soon hit the market. However, once again, the general view was that the majority of change initiatives added little value to the bottom line. Chaos and complexity Around the mid-1950s, there had been a certain amount of investigation into the idea of cybernetics, or the study of processes. That led some


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people to think about the competitive environment in a very different way. Chaos and complexity theory were introduced. By the early 1990s, complexity theory had taken on a life of its own. At about the same time, the idea of systems thinking was popularized, particularly in Peter Senge’s 1990 book The Fifth Discipline (Doubleday Publishers, New York). The period was characterized by a blending of disciplines, including natural science, social sciences, and business. A number of business theorists moved on from the metaphor of chaos theory in business to complexity theory. Chaos theory had dealt with the unpredictable processes that were observable in science. Those who moved on to complexity theory added an interesting twist to the basic idea of complexity. Complex systems thinking has to do with the fact that the global system or environment is made up of a limitless number of other systems. Theorists hypothesize that complex systems may behave in much the same way as the molecules in a glass of water, which interact randomly. Darwinian theory Alongside this hypothesis relating to complex systems, the idea of using Darwin’s theory of evolution as a metaphor for complexity was developed. Charles Darwin’s father strongly rejected the opinion of the religious conservatives of his time – that is, the idea of a Creator, or God, who created all of existence, and continued to act within that existence. Charles Darwin’s concept focused upon two ideas: first, the idea of natural selection, or the survival of the fittest; second, the idea of evolution. His concept of evolution was based upon the hypothesis that matter was constantly in a state of moving from a lower level of complexity to a higher level of complexity. In his view, this accounted for the similarities between monkeys, apes, and the different races of humans. (It should be noted that many of Darwin’s views about the sequential development of different races, from lower to higher, would be seen today as racism.) Scientific evidence generally refutes these particular views (along with others held by Darwin), but Darwin’s hypothesis has none the less been adapted metaphorically to complexity theory as it is applied in business. Those who subscribe to the theory say that the

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evolution (from lower complexity to higher complexity) that occurs ‘‘naturally’’ in nature must apply equally to businesses. Complexity management theorists go on to suggest that one of the goals of every manager should be to allow the business to emulate nature by ‘‘self-organizing.’’ This theme is clearly revealed in Peter Senge’s 1999 book The Dance of Change (Currency Doubleday Publishers, New York). In one article in the book, entitled ‘‘The leadership of profound change – toward an ecology of leadership,’’ Senge suggests that leaders need to understand more about nature and to manage with that in mind. The CEO, according to Senge, is not the solution to driving meaningful change in the organization. Complex dynamic systems The application of a Darwinian-based theory of complexity has resulted in an alternative to the equilibrium theory of economics – ‘‘complex adaptive systems’’ – which, again, proposes that the economic system is characterized by progressive upward evolution. The positive aspect of the theory is that it turns managers toward thinking about complex systems. There is no doubt that linear thinking (equilibrium-based management theory) can damage a company, but the absence of scientific support for ‘‘adaptive systems’’ (in either nature or in business) may also be problematic when trying to build corporate strategy. A number of people are now using the idea of complex dynamic systems as a way to think about the competitive environment. Moving from the Darwinian presupposition of evolution to a recognition of the complex nature of the environment may present a better opportunity for the corporate strategist. Certainly, the strategist will not be working with a fallacious mental model or assumption. Later in this book, a coherent, systematic approach for using complexity theory as a basis for corporate strategy will be introduced. Interestingly, many of the most successful global competitors today are led by CEOs who intuitively maneuver companies in accord with that strategic model, even though most of them have never heard of it. It is also true to say that companies that profile well using that model tend to be significantly more profitable than those that do not.


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The model does fly in the face of the idea of self-organization and ecological leadership. Significantly, most turnaround CEOs do not walk in the door of a problem-plagued company with the idea of letting it self-organize. As someone once said, ‘‘If you keep on doing what you have always done, you will continue to get the results you always got.’’ The new complexity-based paradigm In 2001, the Academy of Management online bulletin board featured a discussion about the texts being used for graduate-level corporate strategy courses. As the discussion progressed over a few weeks, it became apparent that most professors had abandoned the traditional equilibrium-based strategy text. In many cases, they were using popular business books such as Brown and Eisenhardt’s Competing On The Edge instead of traditional textbooks. There is currently a clear trend toward complexity-based corporate strategy. Emerging research supports the fact that moving from a linear to a non-linear complex mental model of the environment will help managers to lead a more profitable organization. TIMELINE » Prior to 1960: Basic financial planning (budgeting) (still used as part of strategy today). » Early 1960s: Forecasting (extrapolation) introduced as longrange planning. » 1960s and 70s: Externally oriented planning (scenarios, war gaming). » 1980s: Strategic management (including Porter’s work as well as Ansoff’s). » 1990s: Complex systems strategy. » Emergence (based on Darwin, ecological management). » Strategic balance (based on complex dynamic systems – Ansoff).

03.07.04

The E-Dimension Technology and especially the Internet has played a major role in the acceleration of environmental change. A number of these developments are discussed in this chapter.

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Technology and the e-dimension represent a double-edged sword. The new, connected world has created challenges for those who are given the task of developing corporate strategy. Technologies (computers, networks, and so on) are changing, and, at the same time, the way they are connected (the e-dimension) is also dynamic. The corporate planner is dealing not only with changing technology but also with changing ‘‘connectivity,’’ and internal commitments to an effective e-strategy have been difficult for many firms. The e-business boom of the late 1990s became the e-disaster of the early 2000s. The expected e-prosperity evaporated like the oil boom of the late 1970s. In its wake it left defunct companies and disappointed investors. Through it all, though, there remains one clear reality for the corporate strategist: the e-dimension will undoubtedly play an important role in the development of corporate strategy in the new millennium. Over the past decade, I have begun to see in my research a number of changes entering the field of strategy. In ExpressExec: Complexity I point out the way in which many strategy theorists have begun to consider the ideas of complexity and systems thinking. However, one issue that has continually been below the radar of most theorists in the field is that of ‘‘rate of change.’’ In fact, this factor is integral to complex systems theory. My ‘‘10 Forces’’ model (see Fig. 4.1) is aimed at explaining the relevant phenomena. THE ‘‘10 FORCES’’ MODEL Of the 10 forces (see my book Thriving In E-Chaos, published in 2001 by Prima Publishers, Roseville, CA), eight serve as the primary drivers for complexity. (Note the use of the word ‘‘primary.’’ It is recognized that all the forces have an influence on complexity as well as on rate of change. The point is how each one primarily functions.) My research resulted in an important observation related to technology and its effect on rate of change. It became clear that technological forces have a great deal to do with environmental rates of change, as do market forces. For the strategist, this information is critical.

THE E-DIMENSION

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High Unpredictable Rate of Change

Market and Technology Forces

Low Predictable Low

Complexity

High

Economic, Government, Legal, Media, Climate, Moral, Psychological Social, Ideological Forces

Fig. 4.1 The interaction of the 10 forces in accelerating change and complexity.

If complexity increases to very high levels, but the rate of environmental change remains extremely low, managers are less challenged than they would be if the opposite occurred. In highly complex environments, with frequent waves of frame-breaking change, the challenges for managers increase exponentially. Thus, the emergence of the e-dimension, in the form of the Internet and other networks such as Virtual Private Networks, or VPNs, have boosted the rate of environmental change to supersonic heights. Many theorists have attempted to link the inherent difficulties of such change into the broad category of complexity. From a strategic standpoint, this is a mistake, because each set of problems involves entirely different solutions. Failure to recognize this can negate a manager’s efforts to develop strategies in such environments. This might be called a ‘‘root cause’’ analysis. Table 4.1 shows the different aspects of the organization that might be used to address each factor of the 10 forces model, as well as the major factors of rate of change and complexity.

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Table 4.1 Complexity

Rate of change

Mental models (training) Leadership style Systems thinking Corporate culture

Internal technology systems Organizational structure Dispersed power Innovation systems (R&D) Strategic intelligence

Complexity-based issues often involve the reactive agility of the firm (some call this ‘‘emergence’’; I call it ‘‘incrementalism’’). At the same time, rate of change issues are addressed with a focus upon entirely different issues. There will certainly be cross-impacts as various organizational attributes are being manipulated, but it is important to focus on the primary issue of purpose. It is possible to train managers of organizations to think in terms of complexity. However, in the absence of appropriate leadership and cultural attributes, such training will go unused. Unless there is a leadership mentality that values creativity and complexity-based thinking, the predictable result is linear thinking on the part of organizational members. Technology systems can be used to accelerate the speed at which the organization can operate. (Incidentally, process re-engineering is invaluable in this area). Notice also that power must be dispersed. There is a bit of a dichotomy here, because there appears to be a need for strong leadership at the top – to drive empowerment and creativity – and at the same time a need for high levels of empowerment at the business unit level. H. Igor Ansoff (described by Henry Mintzberg as the ‘‘Father of Strategic Management’’) calls this type of power structure a ‘‘bi-centralized structure’’ (see Implanting Strategic Management by Ansoff and E. McDonnell, published in 1990 by Prentice Hall International). Those who write extensively about ‘‘complex adaptive systems’’ take this idea to a somewhat absurd level, suggesting that such

THE E-DIMENSION

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empowerment approaches nature-like behavior and the firm becomes ‘‘self-organizing’’ (see ExpressExec: Complexity for a full explanation of this issue). The reality is quite different from the hypotheses. Successful highly empowered teams are always supported by a rigid culture (that allows and enforces the idea of individual creativity and empowerment) and senior leadership that insists upon (and supports) grass-roots solution development. It is vital for managers to understand and account for the e-dimension in the new millennium. The e-dimension effect has already been observed as a key driver in the new rapid-pace competitive environment. More importantly, it can have an impact upon an organization on a number of different fronts. THE FIRST RULE In developing an e-dimension strategy, it is important to remember the ‘‘first rule’’: the basic business model must make profit-sense. In other words, e-strategies must have a foreseeable profit model embedded in the strategic initiative itself. In the late 1990s and early 2000s, billions of dollars of venture capital and corporate technology investment were invested into e-dimension type schemes that offered no possibility of making a profit. The real mistake that many were making involved two errors in thinking: First, they were afraid of being left behind in the competitive market. Second, a lot of people seemed to think that the e-revolution would somehow self-create a viable profit model. The second issue has a lot to do with the first. The failure to base e-strategies on a viable profit model (the second problem) led many companies and investors to invest out of fear (the first problem). In either case, the decisions were unwise. TWO STRATEGIC DECISIONS In developing strategies for the e-dimension, organizations are faced with two strategic decisions. First, they must decide how the Internet (as well as intranets, etc.) will be a part of the product. Second, they

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must decide how and where internal e-applications will be deployed. One decision is an external product and market decision. The other is an internal capability decision. Both are extremely important. External product decisions The external product decisions basically relate to channels of distribution. ‘‘Channel of distribution’’ is a term that is used to describe how a product is distributed from its original source to the ultimate consumer. The Internet creates a number of problems for a company. A traditional channel of distribution for a business might look like Fig. 4.2.

Ultimate Consumer

Retailer

Wholesaler

Original Manufacturer

Materials Supplier

Fig. 4.2

The traditional channel of distribution.

THE E-DIMENSION

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The introduction of an e-dimension forces the original manufacturer to reconsider all of the other relationships in the channel. For example, if the manufacturer decides to market on the Web, that creates the potential for cutting out both the wholesaler and the retailer in the existing value chain. This process is called ‘‘vertical integration’’ since the manufacturer (in this case) is integrating the traditional services provided by others in the value chain into its service and product portfolio. In principle, this changes the product that is offered by the manufacturer; in other words, changing the product/service offerings changes the overall product. Clearly, as soon as a manufacturer makes the commitment to vertically integrate in this manner, the other players in the value chain will abandon that manufacturer. In some rare cases, this is not the rule. For example, some manufacturers have such strong brands that they have been able to operate successfully with dual distribution chains, both direct (e-strategy) and through distributors. This strategy can, however, create tension between the manufacturer and the rest of the distribution chain. Members of the chain may appear to be accepting the dual distribution scheme, but at the same time may be working on an alternative behind the scenes. This relates to manufacturers who try to sell both directly to the end user and also through their old distribution system. Those in the old distribution system who are smart enough to see the ‘‘writing on the wall’’ (their supplier going direct to their customer) will actively seek a way out. Internal applications The second issue has to do with internal applications. While the customer can see the product applications that relate to the firm’s e-strategy, the same is not true of its internal applications. However, those internal applications may have an equally important impact on the customer. In considering the deployment of Internet or intranet applications in a firm, there are a number of issues. First, there is the security issue. The creation of Web-based portals opens the firm to industrial espionage as well as making it potentially vulnerable to random hackers. In either case, the consequences can be disastrous. Careful planning and security diligence must accompany any such deployment.

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Other considerations include suppliers and internal corporate functions. If an enterprise system is put in place, it will provide the firm with the speed capability needed to do business in an environment of high turbulence. In the same manner, creating the ability for suppliers to communicate in real time accelerates the ability of the firm to operate at higher levels of speed and quality. Internal electronic tools can bring about additional benefits. In many cases, the use of artificial intelligence applications can be effective in replacing people with technology. This can reduce transaction costs as well as improve system reliability. A hybrid system of this type is the American Airlines (Sabre) flight information system. The operational system is used to communicate internally regarding flight departures, delays, arrivals, and gate information. At the same time, some aspects of the operations system are used to notify interested parties of the status of the flight they are taking, or meeting on arrival. In this case, the internal system is used to create an Internet-based customer service product. As a result, the customer can easily obtain the latest flight (or reservations) information, while the airline is able to deploy its reservations personnel in areas that require the participation of a human being. THE FUTURE Those responsible for integrating the e-dimension into corporate strategy over the years 2002–6 and beyond should approach their task with extreme caution. The one certainty about the Internet and VPNs is the uncertainty about their future. Not only are there serious uncertainties regarding the various electronic highways (wired, wireless, etc.); the same is true of the technologies that will be used. There are a number of issues involved. » What devices or combinations of devices will be used to communicate in the future? » How many of those devices will be combined into single products (such as a cellphone and a pager)? » How will those devices communicate? » What services will be involved on those networks (e-mail, corporate networks, telecommunications, etc.)?

THE E-DIMENSION

27

» What protocols (the way that wireless devices communicate) will emerge? » What global or international standards will emerge? For example, will cellphones designed for use in Europe operate in Japan and the US too? » What types of electronic highways will exist at that time? VPNs, Internet, etc.? The answers to these questions will have a great deal to do with corporate strategy because, in the end, companies will have to account for the issues both internally (operationally) and externally (as part of the product itself). Most of those who deal in the industry believe that the changes will be profound. As a result, future changes in corporate strategy will probably be as drastic as the expected changes in the electronic environment. The corporate strategy of a firm will have to change in order to keep that firm at the leading edge of change. Further, corporate strategy will be increasingly holistic (based upon complex systems theory) and important in the survival of the firm.

03.07.05

The Global Dimension Over the last 20 years, the competitive environment has been transformed from a national forum to a global one. One of the important aspects of that transformation has been the different approach used by companies from different countries. This chapter provides an overview of some of those areas.

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The emergence of the Japanese industrial complex in the 1980s had a significant impact on global business. Corporate planners at companies world-wide began to realize that thinking about strategy in terms of competitors in a single country was not realistic. A number of issues have contributed to the creation of a highly complex and uncertain global environment. The Internet has not only raised levels of complexity in the global marketplace, but has also increased the rate of environmental change. A new economic reality emerged in the 1980s. Countries where companies had previously been agriculturally oriented began to encourage technology-oriented activities. In the years that followed, high-value manufacturing industries began to emerge out of what had previously been low-technology countries. In little more than 30 years, the competitive landscape, and the required scope of corporate strategy, had changed completely. Japan’s success attracted the attention of the world business community as its industries grew from post-Second World War obscurity into global powerhouses. Many businesses and countries sought to imitate the Japanese model. France adopted a protectionist strategy that favored local goods and penalized foreign competitors. The Airbus consortium, funded by the governments of France, Germany, and England, signaled the emergence of a new era of governmentindustry competition in the Western world. While the original intent behind the formation of Airbus was job creation, by 2001 the highly subsidized company was challenging Boeing for a majority share of the global commercial aircraft market. (See John S. McClenahen’s article ‘‘Planely Different,’’ at Industryweek.com, July 11, 2001.) Elsewhere in the world, governmental agencies copied the Japanese model by adopting Total Quality Management, and developing a number of initiatives related to it. Many companies worldwide also began to practice TQM, along with kaizen, and other related approaches. ECONOMIC ASSOCIATIONS In analyzing the success of Japan, a number of experts concluded that the loose affiliation of Japan and the Four Tigers (Hong Kong, Singapore, Taiwan, South Korea) had been beneficial to all involved. As a result,

THE GLOBAL DIMENSION

31

a number of trade blocs began to form around the world. In Europe, the European Economic Community was set up to benefit economies within the continent, by lowering or eliminating trade barriers and focusing upon accelerating trade within the bloc. Other regions have followed suit in creating mutually beneficial trade blocs. Ten Far Eastern countries have combined to form AFTA, or the ASEAN Free Trade Area, while a number of economic associations have been set up in the Americas, including Mercosur, a trade bloc made up of Argentina, Brazil, Chile, Paraguay, and Uruguay; and NAFTA, formed by Mexico, Canada, and the United States. In line with the ‘‘10 Forces’’ model, such associations raise the level of complexity of the environment. From a corporate strategy standpoint, this enlarges the scope of the planning function to a global level. That also means that people around the world are either directly or indirectly affected by the competition between the various trade blocs. One additional global factor facing companies around the world is the existence of the Japanese keiretsu organizations. At the end of the Second World War, the occupation forces in Japan realized that the country accommodated giant ‘‘trusts’’, called zaibatsu. A trust in business is a vertically and horizontally integrated company. In the case of the zaibatsu, each was a complex, interlocked organization with holdings in almost every industry. Since trusts are illegal in most countries, the occupying forces ordered the Japanese to dismantle the zaibatsu. The Japanese simply changed the name of the trusts to keiretsu. Today, there are six major keiretsu organizations in Japan. Their names (listed in ‘‘Facts from the corporate planet: ecology and politics in the age of globalization’’ at www.corpwatch.org/trac/feature/planet/japan k.html) are certainly familiar: Mitsubishi, Mitsui, Dai Ichi Kangyo, Sumitomo, Sanwa, and Fuyo. GLOBAL STRATEGIES The reality of the global competitive environment is that companies, regardless of focus, have to think and plan globally. No company, however remote, is insulated from the far-reaching effects of the global economy. The activities of the various trade blocs must also be considered by companies.

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Japanese approaches In the late 1980s, the Japanese car companies proudly made claims that they had brought 100,000 new jobs to the US. This was not the whole story, though. While it was indeed true that Japanese car manufacturers had added 100,000 jobs to the US market, the reality was they had also cost their US competitors many more jobs – around a million, in fact. Some might argue that the US companies deserved what they got, because the quality of their product was inferior at the time. This is probably true, but there’s more to it. First, the 100,000 new jobs were added to members of keiretsu companies. The Japanese brought their own supplier companies to the United States to supply their USbased manufacturing companies. Second, the US factories were mere ‘‘screwdriver plants.’’ That is to say, all of the high-value conversion work (the actual manufacturing processes) on the automobiles was done in Japan. The US plants were mostly involved in simply assembling the cars from imported parts. Another factor was the price structure generally employed by the Japanese. They would ‘‘dump’’ cars in the United States (sell them at or below cost), while selling the same cars domestically at high profit margins. (According to Japanese culture, a Japanese citizen would never consider buying a car overseas at a lower cost.) This practice could be seen as ‘‘managing experience curves.’’ Research done by the Boston Consulting Group in the 1960s revealed that the manufacturing competitor who had made the most units of a specific product (as a direct result of ‘‘dumping’’) would be the low-cost producer (hence the idea of ‘‘experience curves’’). They were using one market to dump in and become the low-cost producer, while making significant profits in all others. They were willing to lose a lot of money in order to control an entire product segment, and to achieve the low-cost leadership position in that segment. Such predatory pricing practices had a devastating effect upon US manufacturers in their own country. What is more, the Japanese would not allow US companies to engage in the same practices in Japan. A complex alliance between the various keiretsu members, the legal system, and the Japanese government made sure that no American cars would be approved for sale in Japan. Other issues in global strategy have originated with the Japanese. JETRO (the Japan External Trade Organization) was formed supposedly


33

to assist American companies in penetrating the Japanese market. In reality, it appears that the opposite has happened. Rather than helping the US companies, JETRO works as an intelligence arm to assist Japanese competitors. MITI, the Japanese Ministry of International Trade and Industry, actively works to coordinate the activities of the keiretsu organizations. Additionally, the ministry acts as an advocate within the political system in Japan, to ensure that Japan’s markets are protected from outside competition. From a global strategy standpoint, it is often easy to predict competitor moves. It is more than reasonable to expect certain competitors to use almost every available industrial espionage tool available. It is possible to determine how competitors conduct intelligence activities and how they use intelligence information to develop strategy (this provides a great opportunity to use disinformation to confuse a competitor). In 1991 I had the opportunity to visit a particular consulting company in San Diego. It was an impressive organization that employed a number of accomplished and reputable professionals from the field of corporate finance. In almost every case, each professional had previously worked for one of the top corporate finance (and acquisitions) firms in the United States. Originally, I simply wanted to get to know the principals of the firm. I had been impressed by their credentials and felt that I would like to get to know them better. As the meeting progressed, I began to realize that this was no ordinary corporate finance or consulting organization. They seemed to have almost no US-based clients. In fact, as I listened to the CEO, it became clear that they had just six clients, who were all paying large fees to the consulting firm. The six clients were the six keiretsu organizations of Japan. Table 5.1 reveals how the firm was an integral part of the strategy of the six keiretsu organizations. Table 5.1

Japanese strategy and technology acquisitions.

Short term (5 years)

Medium term (6–10 years)

Long term (10+ years)

Some targets

Numerous targets

Numerous targets

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The six Japanese organizations were using a well-developed ‘‘stealth’’ strategy. When a Japanese company says that it has a 50-year strategic plan, it means that it plans quietly to acquire emerging technologies of the future. For example, over 15 years ago, the Japanese government-corporate complex set out to dominate flat-panel screen technologies. They methodically either acquired or put out of business those firms (mostly US firms) that could threaten their domination of the technology. That San Diego firm was basically a ‘‘front’’ organization, designed to help the Japanese firms quietly acquire companies that held key patents or technologies, and then to transfer that ‘‘intellectual capital’’ to Japan. The Japanese are so good at this type of strategy that even the US government remains unaware of what has happened until some years later. Counter industrial espionage Chinese military strategist Sun Tzu wrote the following in The Art of War (available from Pelanduk Publications, in a translation by Khoo Kheng-Hor): ‘‘If you are ignorant of both your enemy and yourself, then you are a fool and certain to be defeated in every battle; if you know yourself, but not your enemy, for every battle won, you will suffer a loss; if you know your enemy and yourself, you will win every battle.’’ The generic strategic models matrix (see Fig 2.1) reveals the benefits or weaknesses of each strategic approach. The complex-linear approach involves waiting for something to emerge. Certainly, that does not mean that the strategist needs to spend time anticipating future competitor moves. The same is true of the simple-historic or the simple-futuristic approach. Global strategy must involve counter industrial espionage. A number of years ago, a US aircraft manufacturer observed that a number of foreign competitors had begun to locate offices near its US plants. With the stated goal of introducing their aircraft to the United States, the competitors engaged in what appeared to be normal competitive behavior.


35

It was not long before the US company realized that the foreign competitors were beginning to introduce some of the US firm’s technologies in their products. After a quiet investigation, the company was surprised. The competitors had systematically hired (at exorbitant salaries) a few of the US company’s key design and technology personnel. They had used those personnel to ‘‘compromise’’ some leading-edge designs and technologies, which the firm had spent years developing. In short, the competitors had cut years off the research and development cycle of their products by simply identifying and hiring a few key people.

03.07.06

The State of the Art Many of the approaches in the field of strategy have come into question over the past few years. This chapter discusses the relevant changes and discusses a new strategic approach that is extremely effective for environments of high turbulence.

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‘‘If you keep doing what you have always done, you will continue to get the results you always got.’’ In the eyes of many, corporate strategy has failed. A lot of companies that supposedly had a ‘‘Best-in-Class’’ strategy organization have either entered a period of decline, or failed outright. It is not, however, strategy that has failed. The problem is that corporate planners have failed to change their strategic mental models in harmony with changes in the macro system. Ultimately, the micro system (the firm) that fails to match the macro system (the global environment) will be regurgitated by that macro system. In other words, firms that are not in balance with their competitive environment will ultimately decline, or even fail. The generic strategy models matrix (see Fig 2.1) was created to provide a way of evaluating different strategic models, and to help with an understanding of how each model is positioned. The matrix will be referred to in detail again in this chapter, so it is appropriate to reproduce it here (Fig 6.1).

Mental Model


Fig. 6.1

Complex (nonlinear)

Simple (linear)

Historic

Future

Emergence

Predictive Modeling


Extrapolation


THE STATE OF THE ART

39

As the proponents of complex systems thinking will affirm, the new competitive world has moved from a linear (or highly predictable, somewhat simple) state to a nonlinear (or highly uncertain, complex) state. That does not mean that nothing will continue to be predictable. It means that in the future historic relationships will most likely not be the same as they were in the past. As a result of the apparent failure of ‘‘self-confirming theories,’’ strategy theorists have searched for alternatives. Before looking at where strategy thinking is going, and should go, a brief explanation of current strategic theories is useful. SIMPLE-HISTORIC (SELF-CONFIRMING) THEORIES One group of theories (referred to as ‘‘simple-historic’’ here) are generally based on a number of assumptions (see Chapter 3, on the evolution of strategic thinking). » Equilibrium theory, an economic theory that presupposes the linearity of the environment, can serve as a metaphor for management and strategy theory. » The firm, in accordance with David Ricardo and Adam Smith’s ‘‘theory of comparative advantage,’’ for countries, must seek out its area of ‘‘competitive advantage’’ as the basis for developing future strategy. » The world will want to buy whatever the firm’s competencies allow it to produce. » Incremental adjustments to environmental change will allow the firm to leverage its historic ‘‘core competencies’’ for the purpose of maximizing future profit. The equilibrium-based strategic model involves a succession of steps that are designed to keep the firm ‘‘in the box’’ or focused upon its historic competencies. Some might argue that the use of SWOT analysis avoids this problem, since it analyzes the firm’s strengths and weaknesses. That generally does not hold true, however, because the assumption that the firm’s current/historic strengths will serve the company well in the future tends to override any attempts to engage in discontinuous change.

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The usual sequence of events The equilibrium-based, or ‘‘traditional’’, strategic approach normally follows a familiar sequence. 1 ‘‘Five forces analysis’’: conducted to evaluate the market forces with which the firm is expected to deal. In some cases, the strategist will also identify and analyze the various ‘‘driving forces’’ that may have an impact on the future of the firm. 2 SWOT analysis: a study of the strengths, weaknesses, opportunities, and threats related to the firm. Internal scanning looks at the strengths and weaknesses of the firm (leading to a subsequent identification of the firm’s core competencies). Opportunities and threats are dealt with by external scanning, which identifies not only supposed future opportunities, but also areas of weakness that the firm should avoid. 3 Mission statement: once the firm’s strengths (core competencies) and weaknesses have been identified, the firm is ready to develop a mission statement. The purpose of the mission statement is to keep the firm’s focus on areas where it has competitive advantage and to avoid areas where it has a disadvantage. 4 Objectives: the idea behind organizational objectives is to translate the mission statement (a qualitative statement) into specific targets that support the mission (quantitative statements). 5 Strategies: normally developed at the strategic business unit (SBU) level. 6 Policies: specific policies are developed that will guide the general operation of the firm. Policies might involve setting minimum IRR (internal rate of return) statistics for the use of R&D funds, for example. 7 Programs: SBU strategies are translated into actionable programs that again focus on the SBU level of the firm. 8 Budgeting: the programs are assessed and budgets are developed that will supposedly support each program and the organization’s objectives.


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9 Procedures: finally, each aspect of the plan is converted into specific procedures that ideally will apply to every employee. 10 Feedback/variance analysis: after implementation, performance is compared with goals and objectives in order to assess the firm’s success in putting strategies into operation. In most cases, the senior executives of the firm would engage in some type of product portfolio analysis early on in the process. It is usually advisable to perform such an analysis at the beginning of the planning cycle. Why simple-historic strategies fail ‘‘Basically, we never use the stuff that comes out of our annual planning session. We spend three days in creating this thing called a strategic plan, then we go home and never look at it again. It’s been that way for the last 15 years.’’ Senior manager in international firm This seems to be the norm for a lot of companies. One chief executive suggested that his firm’s annual strategy retreat for board members was excellent when it came to creating better relationships among those members. But he went on to admit, ‘‘I would be surprised if any real strategy came out of those sessions. It seems that no one trusts this strategy stuff any more.’’ Discussions with a number of senior executives reveal that most people have given up on the traditional strategic approach, which is based on mission statements and core competencies. Interestingly, though, most of their companies still use that traditional approach. Why do people continue to use the approach if they no longer trust it? There are a number of answers to that question. First, most undergraduate and graduate schools still teach that approach, almost exclusively. Second, the approach is easy to learn and understand. Third, it is comforting, because it focuses upon what some have called ‘‘self-confirming’’ theory – it confirms that what we

42


have done in the past is good, since we are going to continue to do in the future what we have done in the past (i.e. our future strategy will be based upon our historic competencies). THE REALITY OF COMPETITIVE ENVIRONMENTS From 1991 to 2001, rapid change and high levels of complexity have characterized the global competitive environment. As the rate of environmental change accelerates, and the level of complexity rises, the ‘‘rules of the game’’ change. Such changes mean that the firm must change in harmony with the environment. If it does not, ultimately the environment will eliminate it. Fig 6.2 reveals the problem. For the company that does not change in harmony with the environment, the result is deterioration and, perhaps, demise (Fig. 6.3).

Year 1

Year 2

Year 3

Year 4

Environment begins to change

Environment has moderately changed

Environment has totally changed

Environment has changed again

“Rules of the game” begin to change

Rules of the game changed significantly

New rules of the game

Rules of the game change continues

Year 1

Year 2

Year 3

Year 4

Performance is sustainable

Performance stagnates

Organizational crisis

Organizational demise or reinvention

Fig. 6.2

Fig. 6.3


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Companies are complex systems operating within complex dynamic systems. In every case, the complexity as well as the rate of system change will be different at different points in time. There are a number of implications for this reality. » Simple-historic or simple-linear strategy is insufficient to prepare a firm for environments that involve varying levels of complexity and rates of change. » As a complex system, every aspect of the firm (not just its strategies) must be balanced with the future environment if the firm is to maximize performance. » Imbalances between the firm and the environment result in diminished performance or, in some cases, the demise of the firm. Put simply, complex environmental systems (the competitive environment) require complex mental models of strategy if the firm is to succeed. The use of linear mental models in environments of varying complexity and rate of change is a prescription for failure. WHERE DO WE GO FROM HERE? Corporate and academic strategists are increasingly uncomfortable with equilibrium-based strategies, and the search for an appropriate solution has been ongoing. Five approaches have emerged over the past few years in response to the problems with self-confirming theories. Scenarios and war gaming Scenarios and war gaming can be quite helpful in complex environments. In the case of the former, driving forces are analyzed and a range of possible outcomes is considered. Usually, the strategist will prepare strategies for each possible outcome. Scenarios are classified as complex-future models (predictive modeling) and they have been successfully used for the development of strategy for complex environments for a number of years. War gaming involves the organization dividing its managers into teams, which take on the role of competitors. The game is played in terms of successive ‘‘strategies’’ created by each team. War gaming is a good way of preparing for complex futures.

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Systems thinking Another approach for dealing with complex environments is called systems thinking. Proponents of systems thinking believe that it is possible to consider complex issues and to make ‘‘reasonable inferences’’ about the outcomes of such complex systems. Systems thinking has been widely discussed in corporate circles, but few companies actually utilize the approach, especially at the senior executive level – where it could be most beneficial. Those few leaders who have the intuitive ability to think in terms of complex systems are, and will continue to be, highly successful. Complexity-based approaches Complexity-based approaches, or ‘‘complex adaptive systems,’’ were developed in response to the apparent failure of equilibrium-based approaches. Complexity-based thinkers will fall into a number of different camps. The majority believe that the environment must be understood in terms of its complexity, chaos, and ecological constructs. This group subscribes to the Darwinian hypothesis (upward evolution of a system; see Chapter 3) as a metaphor for the business environment. This kind of thinking has resulted in the idea of ‘‘self-organizing’’ companies. The complexity group falls into two categories. One might be called a ‘‘pure’’ complexity-based group, the other a ‘‘hybrid.’’ In the case of the former, theorists generally apply the concept of emergence to every situation. According to this group, predictive modeling is rendered useless by the chaotic nature of the environment. They would suggest that any attempt to plan for the future is pointless. The hybrid group also assumes that the Darwinian hypothesis may be used as a metaphor for business systems. This particular school of thought is based upon the idea that the firm may compete on the edge of chaos, that is, in a state in which the system is complex-adaptive, but at the same time with a minimal level of predictability in the system (see Brown and Eisenhardt’s Competing On The Edge, and Chapter 2 for a complete explanation of the concept). This group of thinkers has combined the emergent (complexhistoric) approach with the extrapolation (simple-future) approach.


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The emergent or complex-historic group of strategists is by far the fastest-growing group in the field. As those who see the failure of self-confirming theories seek alternatives, the focus on complexity by the emergent group seems to make a lot of sense. However they, too, have their problems. In most cases, the complexity-based theorists find themselves revisiting self-confirming theories. Almost without exception, every approach reverts to some form of ‘‘competitive advantage.’’ In principle, this blending of systems (linear, self-confirming, and nonlinear, complexity-based) creates a high level of dissonance between the systems. THE ANSOFF MODEL In the late 1980s and early 90s, H. Igor Ansoff developed a comprehensive approach for developing corporate strategy. It brought together complex systems thinking, cybernetics, and metrics for measurement of system variables. Over the 15 or so years of development of the system, researchers under Dr Ansoff’s supervision conducted studies of companies around the world. The approach was based upon Ansoff’s strategic success hypothesis. In his Introduction to Strategic Management (1990, no publisher, San Diego), Ansoff stated the following: In order to maximize return on investment, the aggressiveness of the firm’s strategies and the responsiveness of the firm’s management capabilities, must match the turbulence of the environment. The Ansoff model for strategy is a hybrid of complex-future and complex-historic approaches. A complex systems approach to understanding the future environment is used, in order to understand the level of complexity as well as the rate of environmental change. The model also recognizes the need for emergent (complex-historic) behaviors in dealing with the emerging level of environmental change and complexity. The foundation of the Ansoff model is what he calls ‘‘environmental turbulence.’’ The idea of turbulence in the environment has been in management literature for many years. Ansoff added to the concept

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a way of scaling, or measuring the level of complexity and change. Few in the field of strategy have investigated the issue of the rate of environmental change. Significantly, Ansoff developed a way of combining both into the concept of environmental turbulence. The Ansoff turbulence scale The Ansoff turbulence scale is a measure of the future environment. The present environment is not measured since it is, in essence, history. In effect, the current environment has already happened. Ansoff focused upon ways of predicting the level of future turbulence. The Ansoff turbulence scale ranges from 1 to 5. As Table 6.1 reveals, Level 1 turbulence is simple and slow. As the turbulence increases, so does the level of complexity and the environmental rate of change. Table 6.1 Environmental turbulence. (Adapted from H. Igor Ansoff, with permission. All rights reserved.) 1 Slow change

2

Moderate change Low levels of Moderately competition low levels of competition Long product Moderately life cycles long product life cycles Predictable, Predictable, very low low complexity complexity

3

4

Fast change

Very fast Extremely change fast change Very Overwhelming competitive levels of competition

Competitive

5

Moderately Very short short product product life life cycles cycles Predictable, Unpredictable, Chaotic, moderate high levels highly complexity of complex complexity Moderate product life cycles

In order to predict the future turbulence of the environment, Ansoff discovered that two measures of future turbulence can be used: marketing turbulence and innovation turbulence. Marketing turbulence involves a number of areas, as Table 6.2 reveals.

1 2 3

(Adapted from H. Igor Ansoff, with permission. All rights reserved.)

Highly competitive

4

Future innovation turbulence (includes research and development/product bundling) Very low level Low levels of Competitive High levels of Innovation of R&D innovation innovation innovation environment

Future marketing turbulence (includes sales, advertising, and public relations) Marketing NonSlightly Competitive competitive competitive environment

Table 6.2

Very high innovation

Chaotic competition

5

THE STATE OF THE ART 47

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Once the future marketing and innovation turbulence have been determined, the two are averaged, to compute future environmental turbulence. It is important to remember that the model presented here is a highly simplified version of the actual model (which is proprietary). However, the models shown in Tables 6.1 and 6.2, when combined, will provide a fairly good prediction of environmental turbulence for a particular industry segment. An example Let’s consider an example. If an analyst wanted to compute the future environmental turbulence for Wal-Mart, an assessment would probably reveal that future marketing turbulence in three years would be around 4.5 and future innovation turbulence would be around 4.0. When averaged, the future environmental turbulence would be 4.25. Although this is somewhat simplistic, what are the implications of a future turbulence of 4.25? » Product life cycles will be fairly short. » Competition will be very high. » Pricing will be commodity-based, with little opportunity to differentiate. » Niches will tend to disappear. » The environment will be highly complex and change will be very fast. Such simple assessments have been used hundreds of times by managers at hands-on seminars. With rare exception, once they understand the concept of turbulence, they readily see the value of this kind of analysis. In the real world, when the complete model is used (with the appropriate mix of different assessment approaches), the predictions of future turbulence have been consistently accurate. Significantly, the Ansoff turbulence system, unlike traditional complex adaptive systems theory, deals with both the level of complexity as well as the rate of environmental change. ASSESSING STRATEGIC BALANCE In complex systems, the sub-system that is not in balance with the macro system will be regurgitated by it. To put it another way, a firm


49

(a complex system) that is out of balance with its environment (the macro complex system) will underperform those firms that are better in balance with the environment. In cases where the imbalance is pronounced, the firm may even cease to exist. In the Ansoff model, mismatches with the environment are called ‘‘gaps.’’ A gap is the numeric difference between the future turbulence and some aspect of the firm, also measured on a scale of 1 to 5. In using his model, the firm is not compared with the existing environment, but with the future environment. Therefore, gaps have an implication on future profit if they are not corrected. Table 6.3 shows the implications of gaps.1 Table 6.3

The implications of gaps. Gap

Impact on future profit if not corrected

< − 0.5 −0.5 to −0.99 −1.0 to −1.49 −1.50 or more

Range of maximum performance Marginal profit impact Serious profit impact Critical profit impact

Around 1000 studies have been done using the Ansoff model. In using the comprehensive model, almost 50 aspects of a firm are measured. A synthesized version will be used for demonstration here, with the firm being divided into 12 areas. (In his original work, Ansoff divided the firm into eight major areas. Working with his model, I have expanded the areas to 12. While there is research to support the addition of the extra four areas, to this point, the additional research has not been completed that provides each of those areas with the same level of statistical support that was completed on the original Ansoff model.) The best way to understand the strategic profile of an organization is to look at one. Then, each area that is measured will be explained. ABC Corporation, shown in Fig 6.4, is moving toward a future turbulence (3.8) that will be highly competitive, complex, and rapidly changing. Current marketing is ‘‘follower’’ at best. Management is

50


ABC Corporation 1

2

3

4

5

Marketing Innovation Product portfolio Technology applications* CEO attributes Management Culture

gap

Structure Decision systems Strategic planning Strategic capacity Technology applications** *Product technology applications Current profile of **Internal technology systems applications the organization

Future environmental turbulence

Profit Impact of Gaps: Matched Marginal Serious Critical

Fig. 6.4 ABC Corporation. (Adapted from H. Igor Ansoff with permission. All rights reserved.)


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controlling, and the culture is risk-averse. That type of behavior will obviously not serve the firm well in a highly competitive, complex environment. An explanation of each aspect of the organization is appropriate at this point. THE 12 ASPECTS OF THE FIRM Using the model, each major area of the firm is assessed and then compared with the desired profile as determined by the turbulence. Twelve broad areas are assessed. Marketing aggressiveness Marketing aggressiveness (see Table 6.4) involves the sales, advertising, and public relations efforts of the firm. In low turbulence environments, there is little need for aggressive marketing efforts. As the turbulence increases, the need to seize ‘‘first mover advantage’’ becomes a critical success factor. Table 6.4

Marketing aggressiveness. 1

Marketing aggressiveness

Table 6.5

2

3

4

Very low Low Aggressive Very aggressive

5 Overwhelming

Innovation aggressiveness. 1

Innovation aggressiveness

2

3

4

Very low Low Aggressive Very aggressive

5 Overwhelming

Innovation aggressiveness Innovation (see Table 6.5) relates to the firm’s creativity in producing new products. In some cases, it may involve R&D (research and

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development) alone. In others, it may involve creatively ‘‘bundling’’ various aspects of the product, such as product and services. Product technology applications A few years ago, the inclusion of technology in products was less important than it is in the twenty-first century. With the development of the e-dimension, the ability to blend product and technology is increasingly important (see Table 6.6).

Table 6.6

Product technology applications.

Product portfolio technology adaptation

1

2

3

4

5

None

Negligible

Moderate

High

Very high

Product portfolio balance Product portfolio balance (see Table 6.7) has to do with the distribution of products at the introduction, growth, maturity, or decline stage. For low turbulence environments, it is possible to have a majority of products at the mature stage. As the turbulence increases, there is an increasing need to have more products at the introduction and growth stage. This is due to the shortened life cycle of products at higher levels of turbulence. Table 6.7

Product portfolio balance. 1

2

3

4

5

Product Mature Mostly Balanced Skewed – new Significantly portfolio mature products skewed – new products


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Management mentality Management mentality (see Table 6.8) deals with the level of control versus empowerment that the managers of the firm generally exercise. It also corresponds to the levels of creativity and risk-taking that the managers encourage. Obviously, as the turbulence increases there is a need for much higher levels of creativity and risk-taking, and empowerment (which fosters both behaviors). Table 6.8

Management mentality. 1

2

3

4

5

Leadership Highly Controlling Discipline- Empowering Riskstyle controlling oriented rewarding

CEO attributes ‘‘CEO attributes’’ (see Table 6.9) include the CEO’s attitude toward change and toward people. As turbulence increases, the CEO must be more change-proactive and place an increasingly high value on people. Valuing people is important at all levels of turbulence. However, as the turbulence becomes higher, the ability to communicate that valuing of people is increasingly important to profitability. Table 6.9

CEO attributes. 1

2

3

CEO Reject Resist Adapt to attributes change change change

4

5

Push change, value people

Lead change, servantleader

Culture The corporate culture (see Table 6.10) of an organization involves not only the rewards systems of the firm, but the attitude toward change.

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Table 6.10

Culture.

Attitude toward change

1

2

3

4

5

Reject

Resist

Accept familiar change

Seek change

Reward creativity

As the turbulence increases, culture (and rewards) must focus more upon being proactive about change. Structure Structure (see Table 6.11) relates to the formal structure or relationships that are set up in a company. Table 6.11

Structure. 1

Structure

2

3

4

5

Military-like Inflexible Moderately Fluid/ Highly hierarchy hierarchy flexible, adapflexible, bidivisional tive centralized matrix

Decision systems Decision systems (see Table 6.12) involve the speed at which the firm can make decisions as well as the use (or non-use) of early warning systems. Table 6.12 1

Decision systems. 2

3

4

5

Decision Very slow Slow (vari- Moderately Fast (strategic Very fast systems (varifast (compance early intellance analysis) etitive warning igence) analysis) intelligence) systems


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Technology adaptation Technology adaptation (see Table 6.13) has to do with the firm’s attitude toward adapting technology applications in its internal systems. As turbulence increases, the adaptation of leading-edge technology becomes increasingly important to profitability.

Table 6.13

Technology adaptation.

Technology adaptation

1

2

3

4

5

Very slow

Slow

Moderately fast

Fast

Extremely fast

Strategic planning Strategic planning (see Table 6.14) involves the mental model (and thus the approach) that the firm uses to plan for the future. Obviously, the Ansoff model will work (and should be used) at any level of turbulence.

Table 6.14

Strategic planning. 1

2

3

Strategic Budgeting Extrapolation Traditional planning

4

5

Scenarios Non-linear (Ansoff) planning (Ansoff)

Strategic capacity Strategic capacity (see Table 6.15) relates to the number of staff and managers who can do creative strategic work. Training in the areas of systems thinking, scenarios, and complexity can increase the strategic capacity of individuals. Note: the scaling system and the use of eight of the areas profiled in this model were adapted from the work of H. Igor Ansoff, with permission.

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Table 6.15

Strategic capacity.

Strategic capacity

1

2

3

4

5

Minimal

A few

Moderate

Many

Most

A COMPLEXITY-BASED APPROACH In practice, the model is converted into a questionnaire that is administered to various members of the firm. Generally, very few are given to senior executives, because they tend to have a less than realistic understanding of how the internal organization actually works. A number of approaches are used to access external sources in order to determine future turbulence. Good external sources include the literature, such as trade journals or other publications that talk about the industry, and experts in the field, who can be combined into an ‘‘expert panel’’ and provide exceptional (and predictive) information about an industry segment or a technology. When internal managers view the future, they tend to predict lower turbulence than the reality. Generally, their estimates on future turbulence are 1.0 lower than those of external sources and experts, and this can lead to serious mistakes in the development of strategy. The modified Ansoff model allows executives to develop strategy that is founded in complex systems theory. Both complex-emergent and complex-future applications are achieved. Generally, this approach will produce substantially higher organizational profits than other approaches, because this one measures aspects of the firm (and the future) that others do not. Additionally, it is a complexity-based approach, which is extremely well suited for developing strategy for complex dynamic environments. NOTE 1 Ansoff, H.I. et al. (1993) ‘‘Empirical Proof of a Paradigmic Theory of Strategic Success Behavior of Environment Serving Organizations.’’ International Management Review (ed. D.E. Hussey), John Wiley and Sons, NY.

03.07.07

New Corporate Strategy in Practice A number of real-life case studies are covered, with successes and failures of companies from different parts of the world being discussed.

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Although effective strategy may be approached in a number of ways, the Ansoff model is the only one that has been validated by actual research, which relates the areas that it measures to the firm’s performance. This chapter discusses a number of real-life case studies. In some, the name of the firm has been changed, but the studies still give an overview of that firm’s industry in general. All of the case studies reveal the importance of the predictive power of the approach. PACIFIC MANUFACTURING Pacific Manufacturing (not its real name) is a global high-tech company headquartered in the Pacific Rim region. The company made the decision to enter the North American market in the communications area and had limited success. In conducting the study of future turbulence for the market segment of the firm’s products, a number of sources were queried, and an extensive review of relevant literature (trade journals and other publications) was carried out. (In such cases, external strategists may consult as many as a thousand articles, in order to gain some understanding of writers’ thoughts about what the future might hold.) The study was conducted in early 1999 and the future turbulence model was developed for 2002. (It is important to remember that, in using the Ansoff model, the future turbulence is determined, as is the present organizational profile. The two are then compared, and the ‘‘barriers to future profit’’ are identified.) The internal managers’ view of the future marketing turbulence was around the level of 3.8. The literature indicated a level around 4.7, and the expert panel projected a level around 4.2. In assessing the data, the research team concluded that the future marketing turbulence in the product segment would be around 4.3. In other words, this was a highly competitive, complex, rapidly changing, uncertain environment. In looking at the future innovation turbulence of the segment, the expert panel predicted a level around 3.9, the internal managers predicted 3.2, and the literature indicated it would be nearer to 4.4. After considering both assessments, the team concluded that the future environmental turbulence the firm would face would be 4.3 – a very uncertain, challenging environment.

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In looking at the strategic profile in Fig. 7.1, a number of issues need to be understood. First, the scale of 1–5 at the top of the chart will be used to indicate both the future turbulence as well as each present aspect of the firm. The turbulence of 4.3 is actually a description of the competitive environment the firm will face in three years’ time. With that in mind, the turbulence can then be used to prescribe the desired profile of the firm. Strategic Profile: Pacific Manufacturing 1

2

3

4

5 Impact

Marketing

Critical

Innovation

Matched

Product portfolio

Matched

Technology applications*

Matched

CEO attributes

Critical

Management

Critical

Culture

Critical

Structure

Critical

Decision systems

Marginal

Strategic planning

Critical

Strategic capacity

Critical

Technology applications**

Marginal

* Product technology applications ** Internal technology systems applications

Fig. 7.1 Strategic profile: Pacific Manufacturing. (Adapted from H. Igor Ansoff, with permission. All rights reserved.).

Each aspect of the firm has been measured on the scale of 1–5 (the dots). The chart compares the future turbulence (the vertical line) and

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the present profile of the organization. The profit impact of each gap is indicated on the right. This analysis is not good at all, indicating a number of serious problems. The marketing, at 1.3, is −3.0 below what it needs to be in the future. This is twice the gap that would normally be classified as ‘‘critical.’’ In this particular case, the lack of marketing had literally taken the firm out of the competition. The CEO attributes were equally disturbing, as was the assessment of the management of the firm. At Level 4.3 turbulence, a firm must be proactive about risk and creativity. In this firm, the CEO was hypercontrolling, and the firm’s management was compliance-oriented at best. With senior leadership of that nature, it is almost impossible for a firm to survive. The culture and structure of the firm was also problematic. The structure was a steep hierarchy, which always results in high levels of inflexibility. The culture was clearly risk-averse, which has a devastating effect upon both organizational speed (reaction) and its ability to deal with complexity. The number of staff and general management capable of doing creative strategic work – the ‘‘strategic capacity’’ – was also limited. A high strategic capacity is extremely important for firms operating in highly uncertain, complex environments. The firm’s strategic planning was linear. Linear planning may work in linear environments, but in high-speed, complex environments (as characterized by Level 4.3), such planning is a formula for failure at best. Generally, a firm with this type of profile is clearly a candidate for bankruptcy. In the case of this firm, however, this was a US division of a large multinational conglomerate. Its other divisions in other countries were more profitable. When the time came for the presentation of the results of the study, the senior management team did not show up. The team of US managers, the functional heads of the company, did, and they generally agreed with the assessment. Within months, the company had quietly exited the business segment. NORTHEASTERN SERVICES CORPORATION NSC (not its real name) was an international manufacturer based in a northeastern part of the United States. Its industry has been around for centuries but, because the product involved media, it had continued to grow over the years.

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In studying the future turbulence of the industry (the research was completed in 1995), there were indications that the industry would undergo massive changes by 1999. Particularly, the digitization of many of the product-related processes of the industry, plus other technological shifts, would drastically change the environment. Figure 7.2 reveals the strategic profile of the company. NSC’s management, as with many media-related companies, was open and empowering. Also, the firm’s marketing, management, culture, and structure were nicely matched with the emerging future environment. However, there were other problems.

Northeastern Services Company 1

2

3

4

5 Impact

Marketing

Matched

Innovation

Critical

Product portfolio

Critical


Critical

CEO attributes

Matched Matched

Management Culture Structure Decision systems

Matched Matched Critical

Strategic planning

Critical

Strategic capacity

Marginal


Marginal


Fig. 7.2 Strategic profile: Northeastern Services Company. (Adapted from H. Igor Ansoff, with permission. All rights reserved.)

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The firm’s holding company believed that there would always be a market for its products as they had historically been produced and marketed. Apparently, there had been some discussions internally about the changes that new technology would bring about, not only from the standpoint of production and product, but also from a marketing point of view. However, the firm’s holding company was unwilling to invest money in such changes. Also, the firm lacked both the early-warning systems (decision systems) and the strategic planning approach (nonlinear) that would help it prepare for the new environment. By the time the research was complete, the research team was convinced of two things. First, their view was that the industry would undergo a major, frame-breaking shift over the next three years. Second, they believed that, if the company did not make appropriate changes to achieve strategic balance with the new environment, the gaps were so substantial that it could not survive. One of the ironies about the company was that it had a number of very successful, long-term products. It was also quite competent in creating new products. Sadly, two months after the study, the holding company decided to sell off the assets of the firm. It was no longer competitive in the new economy. WHY COMPANIES FAIL It is vital to understand that, for much of the time, managers do not know what to manage. When managers operate under an illusion, which leads them to manage the wrong things, they will become increasingly frustrated and ineffective, no matter how intensive their efforts. The illusion can be created by the equilibrium-based approach, which focuses upon core competencies. Since it is so comfortable for managers to ‘‘self-confirm’’ previous core business and competencies, it is extremely difficult to get them to change. More often than not, the highest levels of resistance to change are in the senior executive suite and among those surrounding the CEO. If the senior executive does not understand that management is the ‘‘leading of organizational learning, transformation, and performance’’, the manager – and the firm – has little hope.

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This may seem logical, yet in comparison to today’s management theories, it is quite radical.

DELTA SYSTEMS GROUP Delta Systems Group (not its real name) had experienced a compounded growth rate over a 20-year period that was the envy of just about every firm in the world. Over the years, Delta had been known for its supportive attitude toward employees. Historically, the firm had been focused on the bottom line, and had consistently been a leader in innovation in the high-tech systems arena. In the late 1980s, an international conglomerate bought out the firm. The management team remained with the firm for a period of time, but ultimately left in a dispute over management style and attitudes of the acquiring company. The firm continued to perform well, in spite of the management changes. In 1993, our team was brought in to conduct a strategic study (see Fig. 7.3) of one of the major divisions of the firm, which worked in an emerging area that was experiencing rapid growth. It became quite clear early on that the entire company’s profile would look quite similar to that of the division that was its understudy. Also, the team suspected that other divisions were suffering similar turbulence pressures, so the results of the study were probably indicative of how the overall global company would profile. After looking at the future environment the firm would face, the team concluded that the environment would be highly turbulent, probably at least 4.2. At the time of the study, the environment was one in which the demand for the firm’s products exceeded the total industry demand. When that particular situation occurs, turbulence is usually fairly low, around the high 2s (2.7 or so). What the team saw, however, was an industry that was going to go from an excess of demand to an excess of capacity. At that level, differentiation strategies fail, because the excess of capacity forces a commodity-type pricing structure in the industry. That situation also drives extensive change in the value chain related to the product.

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Delta Systems Group 1

2

3

4

5 Impact

Marketing

Critical

Innovation

Critical

Product portfolio

Critical


Critical

CEO attributes

Critical

Management

Critical

Culture

Serious

Structure

Serious

Decision systems

Critical

Strategic planning

Critical

Strategic capacity

Matched


Matched


Fig. 7.3 Strategic profile: Delta Systems Group. (Adapted from H. Igor Ansoff, with permission. All rights reserved.)

It was apparent that the party was coming to an end, unless the division could become much more aggressive, creative, and risk-taking. The assessment of the firm revealed that it generally profiled well for a turbulence of 2.8 or so. In terms of marketing and innovation aggressiveness, the firm had a follower approach, as opposed to a first mover approach. This approach works quite well at turbulence levels under 3, but at levels of 4.0 or higher, it is likely to lead to failure. The firm had also lost its entrepreneurial abilities. With the departure of the previous management team, the organization began to take on a steep, inflexible structure. The firm’s culture was equally restrictive,

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favoring those who maintained the status quo against those who were prepared to take a risk to discover the future. Consultant after consultant was retained as the firm began to slide into deep stagnation, with no real results. The senior executive team was given millions of dollars of stock options and other pay, even though the firm was continuing to deteriorate. As Fig. 7.3 illustrates, the firm’s strategic planning and decision systems (early-warning systems) were grossly mismatched too. In 1993, the results of the strategic study were presented to senior executives of the division in a videoconference. As the conference proceeded, it became apparent that some agreed with the implications of the study, but the senior executives in the group rejected them. The division head finally looked at the strategy team and simply said, ‘‘Why should I listen to you? Right now, I have a backlog of orders. There is absolutely no compelling reason for us to change this company as long as that condition exists.’’ The turbulence study had been done for 1997. In 1997, the division was dissolved because it was no longer competitive. The turbulence estimate was proved to have been quite accurate. The firm lost 40% of its value during a 12-month period and, in October of that year, suffered the biggest single-day loss in its history on the New York Stock Exchange. Delta Systems Group was no different from many other companies. It is extremely difficult to get managers to initiate transformation if things seem to be going well. The senior executives at Delta were relying upon self-confirming strategic theories to guide the firm to the future. The problem was that the future had no need for their type of firm. MOTOROLA CORPORATION Sometimes it is difficult to relate a story about a particular firm because certain restrictions preclude the use of its real name. If the company can be named, however, and it is a familiar one, the study can be doubly interesting. This is the case especially if the analysis involves a prediction of future performance, because it will be possible eventually to see whether or not the predictions were correct.

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The following analysis of the Motorola Corporation was developed using information that is in the public domain. The future environment ‘‘measure’’ chosen was three years ahead. The fact that most of Motorola’s product families will be competing in highly turbulent markets within three years means that the planning horizon must be relatively short. Motorola’s markets: 2004 Normally, when computing future turbulence, product markets are segmented based upon turbulence level. In the case of Motorola, the entire company will be analyzed. With the exception of a few of the segments in which Motorola will be competing (for example, radios), the level of turbulence the firm will face in three years will be quite high, at around 4.6. Level 4.6 turbulence involves extremely rapid rates of change and very high levels of complexity. The competitive environment is clearly one that will ‘‘take no prisoners.’’ (It might be appropriate at this point to reiterate one point about turbulence. Environmental turbulence is a systems thinking (or complexity-based model) approach that allows the planner to describe future competitor behavior. Rather than describing one particular competitor, turbulence provides a composite synthesis of all of the competitors in the future strategic segment.) When turbulence is above 4.5, managers are presented with numerous problems. Change is somewhat supersonic in nature. Rather like the pilot of a supersonic jet, managers of companies in ultra-high turbulence must be masters of speed and complexity. The CEO must be intimately involved in creating the ‘‘behaviors that produce performance.’’ This is an extremely important point. Managers who survive and thrive in such high levels of turbulence are not involved in the detail of their organization. Neither are they characterized – and this is very important – as ‘‘hands-off’’ managers. They are integrally involved in areas of organizational learning and transformation. Performance is much easier to manage, and a good CEO will always be surrounded by good operating people. But without the CEO as the focus on the creation of future profit potential (organizational learning), and the transformation of the firm from what it is (or used to be) to what it needs to become, the organization will not be successful.

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Figure 7.4 presents the profile of the Motorola Corporation in late 2001. (The profile was created by making observations about information already in the public domain.) Motorola Corporation 1

2

3

4

5 Impact

Marketing

Critical

Innovation

Serious

Product portfolio

Critical


Critical

CEO attributes

Critical

Management

Critical

Culture

Critical

Structure

Critical

Decision systems

Critical

Strategic planning

Critical

Strategic capacity

Matched


Matched


Fig. 7.4 Strategic profile: Motorola Corporation. (Adapted from H. Igor Ansoff, with permission. All rights reserved.)

It is important to note that the profit impact of the gaps will not materialize unless Motorola management fails to make the appropriate changes in each area over the 36 months prior to 2004. In other words, since the measurement is comparing a future environment and the present profile of the firm, there will only be an impact upon profit if the firm does not correct the problems identified.

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Motorola’s problems The July 16, 2001 edition of Business Week carried an article by Roger O. Crockett entitled ‘‘Motorola: Can Chris Galvin save his family’s legacy?’’ Chris Galvin is the Chairman and CEO of Motorola Corporation. For an indication of the answer to that question, have a look at Fig 7.4. While the article focused on a number of performance issues, such as decision-making and leadership, the strategic profile reveals just how serious Motorola’s problems are. The firm’s marketing lacks the aggressiveness it will need over the next 36 months. The turbulence in 2001 was probably already above 4.0 and the firm’s performance gaps contributed in the first quarter of 2001 to its first loss from operations in 16 years. One of the advantages of the strategic profile (the modified Ansoff model) is that the profit impacts of the performance gap are revealed. Chris Galvin is going to have to understand what needs to be fixed and how fast it must be fixed. One of the problems with the marketing area may be related to products. The firm’s product portfolio appears to be focused on more mature products, rather than on leading-edge products. Motorola is probably still a very innovative company, but it appears to be unable to translate that into product innovation. (This is reminiscent of Xerox’s research lab in the late 1970s and 80s. It came up with a number of products that went on to become high-growth winners. Unfortunately, Xerox failed to recognize the opportunities provided by the products and, in most cases, others acquired them and did well with them.) From the corporate strategist’s point of view, if Chris Galvin is going to turn the company around, he needs to stop listening to customers and begin insisting that his intelligence and research teams learn to anticipate future customer demands. That is where Motorola is falling down. For years, the Motorola intelligence unit has been recognized as the leading group of its type in the world. Apparently, either that team is not asking the right questions (which is an issue of leadership), or senior leadership is not listening to them. Indeed, one of the most obvious and troubling aspects of the Motorola profile is in the areas of leadership. Galvin appears to be a performance-focused executive. At Level 4.6 turbulence, his focus needs to be on restoring the level

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of risk-taking and creativity that has characterized the firm in the past. There is a major barrier to that change. The firm’s leadership style is somewhat controlling (Level 2.1) and risk-averse. That is almost identical to the approach at the IBM Corporation prior to the arrival of Lou Gerstner. A company that is profiled for a stable, low turbulence environment will rapidly fail in a high turbulence environment, especially at Level 4.6. Motorola’s culture is strongly oriented toward internal maintenance of the status quo, versus rewarding those who would discover the next big thing. The Star Tac phone story should serve as a lesson to Motorola’s senior management. Brought out in the early 1990s, the phone was very successful. Most people do not know, however, that the firm’s leadership at that time was already deteriorating to around Level 2.0, as was the culture. According to some reliable sources, the Star Tac phone was not the result of a formalized development program within Motorola. It was the result of a ‘‘skunk works’’ program. ‘‘Skunk words’’ programs are secret developments within a company, generally without any knowledge on the part of the senior executive team. The group that developed the Star Tac phone felt that, if they brought the idea forward, it would be quickly vetoed. That is a predictable outcome from a Level 2.0 management mentality and a Level 2.0 culture. The corporate structure of Motorola is probably somewhat inflexible at Level 3.0. That means that the divisional structure is siloed fairly drastically. (When an organization is ‘‘siloed,’’ different divisions stop communicating and exchanging information. They begin to compete with each other for money and attention, and become unwilling to share assets with other corporate units. This often occurs in a deteriorating bureaucracy.) Siloing provides another barrier to the creation of a company that can engage in continual reinvention. Motorola apparently lacks the early-warning (and early-learning) capabilities that it needs in order to anticipate customer needs as well as competitor moves. That is a pity, since the strategic capacity (the number of staff and management capable of doing creative strategic work) is quite high. This is an indication that the firm lacks the mental models required for success in high turbulence, and that its management and culture ensure that no real ‘‘out of the box’’ thinking occurs.

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Motorola: can Chris Galvin save it? The issue for Motorola is reinvention. As it is currently profiled, the company is clearly not in a position to achieve success in facing the future turbulent environment that will exist in almost all of its product areas. Simple changes in strategy (marketing and innovation) will not be successful unless the support systems are also changed, to create the appropriate level of entrepreneurial behavior that the firm must have in the future. For the outside observer, it will be fairly simple to determine if Motorola will be a thriving entity in 2004. If the highly resistant bureaucracy is replaced with an open, creative, risk-seeking culture and if the leadership, top-down, becomes obsessed with creating an aggressive, empowering culture, the firm has a chance. As the assessment reveals, if those changes are not made, the future does not look rosy. CREATING DYNAMIC, AGGRESSIVE ORGANIZATIONS Despite some popularity in the 1960s and 70s, the Ansoff model is relatively unknown in the United States today, although many of Dr Ansoff’s books are still popular in Europe. The Ansoff Award, co-sponsored by Price Waterhouse Coopers (Europe) and the Ansoff Institute, is awarded every two years to the writer whose work best exemplifies the strategic principles developed by Ansoff. One of the real challenges of Ansoff’s work is simply that many people do not understand it, and attempt to simplify it by suggesting it’s just ‘‘gap analysis,’’ or give it some other convenient description. Two things need to be remembered about it. First, it is the only strategic approach that has been validated by research. His ‘‘strategic success hypothesis’’ could justifiably be called his ‘‘strategic success theory.’’ Second, it is the only comprehensive, complexity-based strategic approach available. The second point is important for a number of reasons. Whether or not the developer of strategy for an organization uses the Ansoff approach (or the modified model), the principles that underlie the model are still extremely valuable. In developing corporate strategy, the planner who uses a complex systems approach to understanding the future should generally be much more successful in creating future profit potential than someone who does not. Further, the planner who

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utilizes a complex systems approach to designing the firm’s strategies should be significantly more successful than someone who does not. Certainly, it is possible to use other approaches in looking at a complex future. In his book Strategic Renaissance (Amacom, 2000), Evan Dudik refers to John Sutherland’s four types of future environments (explained in Sutherland’s Systems: Analysis, Administration and Architecture, Van Nostrand, 1981): » » » »

deterministic (totally linear); moderately variable (generally linear); severely variable (nonlinear, complex); indeterminate (nonlinear, highly complex, chaotic).

As a way of avoiding the detail involved in understanding the turbulence metaphor, Sutherland’s categorizations of environments can be helpful. Again, the important thing to remember is that there are strong links between a manager’s mental models (how the manager sees the environment of the future) and that person’s success in the role. For those who would like to avoid the somewhat technical assessment related to completing an Ansoff strategic diagnosis of an organization, hundreds (if not thousands) of solid research studies link success to certain behaviors in specific environments. For example, numerous articles discuss the need for adaptive cultures in firms that are competing in uncertain environments. There is also a great deal of research around the idea of flexible structures and complex environments. In fact, extensive research has been done on each aspect of Ansoff’s model, and this can be extremely helpful in helping a manager to think appropriately about the creation of a high-performance organization. Ansoff-related research has been conducted all over the world, and there is evidence for the viability of various practices in different countries and cultures. The argument here is simple. Whichever ‘‘model’’ is adopted, it is vitally important to understand the power of a complexity-based model, which accounts for the future environment, the organization as a complex entity, and the need to match strategies and organization to the future environment. This is the key to developing more profitable organizations. Unlike the equilibrium-based strategic approach, it is not simple. It is simply much more powerful.

03.07.08

Key Concepts and Thinkers in Corporate Strategy A revealing look at the key thinkers and concepts in the field of strategy.

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The discipline of corporate strategy is going through a period of substantial change. Many of the older approaches are no longer effective, but it is important for the individual who is interested in the field of strategy to understand both old and new methodologies, for two reasons. First, in spite of their problems, the older approaches still provide the basis for strategic planning at most companies. Second, even though a number of these approaches have questionable value, many may be used in conjunction with newer, more effective approaches. The generic strategic models matrix (Fig 8.1) will be used in this chapter to discuss each of the key thinkers in the field of strategy and the key concepts.

Mental Model


Fig. 8.1

Complex (nonlinear)

Simple (linear)

Historic

Future

Emergence

Predictive Modeling


Extrapolation


Again, it is important to identify the underlying assumptions upon which each strategic approach is based. With that knowledge, it will be much easier to understand the usefulness of each strategic approach. Also, the field of strategy is populated by approaches that may claim to be strategy, but are in reality more appropriate for non-strategy aspects of the firm. A good example of such a tool is Total Quality Management, or TQM. Failure to understand the critical role that quality plays in corporate success can be disastrous, but TQM cannot replace

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75

strategy, and it is wrong to believe that quality is all a company needs to be competitive. Quality is simply the price of admission to play the game. Once in the game, it is strategy that must drive organizational activities. SELF-CONFIRMING THEORIES Self-confirming theories of strategy require the strategist to assume that what the firm has done in the past will be needed in the future. In effect, executives ‘‘confirm’’ that past strategy has been appropriate by adopting it repeatedly over time. Self-confirming theories may be recognized by their historic-simple frame and mental models. Such theories use terms such as ‘‘mission,’’ ‘‘core competencies,’’ ‘‘competitive advantage,’’ and ‘‘sustainable competitive advantage.’’ They are founded in the theory of comparative advantage developed by economists David Ricardo and Adam Smith (see page 14). Generally, self-confirming theories force the assumption of a linear mental model, since it is historic (including present) competencies or resources that provide the constructs for future strategy. Thousands of articles and books have been written on the development of equilibrium-based strategy. In most cases, the difference between one key thinker and another is minor at best, but Michael Porter of the Harvard Business School has generally been more prolific than the rest. Porter has been responsible for the writing of numerous books and articles that have been widely accepted in the field for over a decade. He has been especially involved in the creation or popularization of a number of tools that have been widely used in the discipline. Jay Barney is often credited with popularizing an adaptation of the equilibrium-based model, called the ‘‘resource view’’ of the firm. This particular view – that a firm’s resources must also be analyzed and understood in developing corporate strategy – might simply be viewed as an addition to the traditional self-confirming theories. It is important to understand that self-confirming theories of strategy remain the most frequently used at this time, with well over 90% of all companies making use of the approach, or of some hybrid that is based upon it.

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EXTRAPOLATION In the 1960s, George Steiner did much to focus business managers’ attention on strategic planning, bringing the issue of long-range planning to the forefront. Managerial Long-Range Planning (McGraw-Hill, 1963), edited by Steiner, focused upon the issue of corporate long-range planning. He gathered information about how different companies were using long-range plans in order to allocate resources and to plan for growth and diversification. A number of other linear approaches also developed in the same time period, including ‘‘game theory.’’ Another development was ‘‘operations research,’’ an approach that focused upon the manipulation of models containing multiple variables. Both have made a contribution to the field of strategy. As early as 1989, Rosabeth Moss Kanter was pointing out, in When Giants Learn to Dance (Touchstone, New York), the problems with another historic-linear approach, which she refers to as ‘‘excellence.’’ People tend to love the idea of excellence. It makes for a great book title, whether it involves ‘‘searching for excellence’’ or ‘‘building something to last.’’ Alongside these books were the ‘‘7 things that companies do’’ titles, which again focused upon excellence in practice. ‘‘Benchmarking’’ is a variant of the excellence practice. The underlying mental model suggests that something someone did somewhere at some point in time will work for your firm where it is today (and tomorrow). The reality is that it might work but it might not. Therein lies the problem with linear (simple) historic mental models. Almost without exception, the companies featured in the excellence books encountered problems within a few years of the book’s publication. This is true even for James C. Collins and Jerry I. Porras’ Built To Last (Harper Collins, New York, 1994). PREDICTIVE MODELING Predictive modeling involves a complex mental model and a futuristic (as opposed to historic) strategic frame. Since complex-futuristic approaches involve complexity, there are a number of types of those approaches, including some hybrids. Even though some of the approaches are especially concerned with complexity, some tend to be less holistic or whole-system than others.


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AIS The first approach might be called ‘‘artificial intelligence simulation,’’ or AIS, which involves the creation of a computer-based model in which key variables can be manipulated. The researcher might identify 10 independent variables that appear to drive certain outcomes (dependent variables). In some cases it is possible to base the behaviors of the variables on statistically based relationships. That adds power to the model. Regardless, the AIS process allows the researcher to manipulate variables in order to develop some level of predictive confidence in the future. In some ways, AIS can be similar to war gaming. War gaming War gaming is somewhat similar to using scenarios. There are a number of ways of doing it, but it generally involves the gathering of competitor information prior to beginning the exercise. The information might cover the predisposition or probable behavior of different competitors. Some might use a ‘‘five forces’’ analysis and a SWOT analysis (of each competitor). A modified Ansoff strategic profile of each competitor can be a most valuable tool. In war gaming, the competitors simulate a battle. The exercise facilitator creates ways for the competitors to play out their strategy, based upon the research about the competitor that they were given. In some cases, the senior executives of the client firm will take on the role of strategists for their own firm, while their management team will play the roles of competitors. This can be an extremely revealing exercise, especially when the third or fourth passes or battles are completed. In many ways, the value of war gaming, as with scenarios, is that of organizational learning. War gaming can help internal managers to change their mental models of the competitive environment as well as their perceptions of competitors’ most probable behaviors. One word of caution: there is nothing more boring than a poorly conceived war game, and the services of external facilitators are recommended; make sure that the facilitators selected are at the cutting edge in their field. Those that revert to simple (non complexity-based) approaches, such as SWOT alone, should be avoided. There are some excellent firms that specialize in this area. (See my article ‘‘Perspectives on War Gaming’’ in Competitive Intelligence Review, published by John Wiley.)

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Scenarios Scenarios involve the analysis of future driving forces in an environment. Scenarios tend to focus on a fairly narrow area of the future, but ideally will attempt to account for driving forces, or independent variables, that could have an impact upon the area being studied. Scenarios have two purposes: first, a multiple scenario (i.e. three or four possible scenarios about a specific issue) can provide a complex systems overview of an issue; second, they can be extremely helpful in driving organizational learning. A number of comments have been made regarding ‘‘driving’’ organizational learning and ‘‘managing’’ resistance to change. It is important to remember that dissonant data (information that indicates that the future environment will shift, and that the ‘‘rules of the game’’ will change) is more often rejected by senior managers than accepted. Managing such resistance (which can be measured using the modified Ansoff model) is quite important from a profit standpoint. One of the keys to anticipating future turbulence environments is to ensure that the firm has the level of adaptiveness required for the level of future turbulence. In turbulence levels above 3.0, there is a growing expectation of discontinuous or surprise events. As the turbulence level rises, the ability of the firm to reactively transform is clearly a profit issue. The higher the level of environmental speed and complexity, the higher the negative profit impact if the organization has low levels of adaptive capabilities. As research by Dawn Kelly and Terry Amburgey reveals (see their 1991 article ‘‘Organizational Inertia and Momentum: A dynamic model of strategic change’’ in the Academy of Management Journal, Vol. 34. No. 3. 591–612), internal resistance to change slows the organizational response to discontinuous events. Three types of firm Table 8.1 identifies the ‘‘three types of firm.’’ There are certain key differences in the mental models and behaviors of firms (and their leaders) that tend to survive on a long-term basis, compared with those that do not. Type I firms are usually old, large firms. As non-adaptive entities with large asset bases, the Type I firm may take years to reach crisis


Table 8.1

Asset base CEO

Culture Values Focus Planning Asset base Situation

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The three types of firm. Type I

Type II

Type III

Substantial Control/ Complianceoriented Non-adaptive Stability/ Compliance Historic Self-confirming Large Long-term deterioration

Minimal Control/ Complianceoriented Non-adaptive Stability/ Compliance Historic Self-confirming Moderate Fast deterioration

Variable Change-driven People-focused Adaptive Iconoclastic, risk/creativity Future Complex/future Either Continual reinvention

stage, since the firm can liquidate assets and downsize in an attempt to offset losses from its continual imbalance with the environment. A Type II firm is much like a Type I firm, except that it will deteriorate faster since it does not have the benefit of a large asset base that can be liquidated to stave off insolvency, created by the firm’s continual imbalance with the environment. Type III firms are complexity-driven firms that continually seek to discover the future. As firms age, the level of entrepreneurial behavior tends to decrease and, ultimately, ceases. A true Type III firm usually has leaders who are aware of the problems related to the demise of entrepreneurial behavior on the part of its employees, and are continually seeking to drive such behavior in the organization. In some cases, these firms are classified as ‘‘cults’’ due to their intense focus upon the value of their employees and their corporate tradition. Instead of classifying this as ‘‘cult-like’’ behavior, it should instead be referred to as an ‘‘entrepreneurial support system.’’ The purpose and result of such systems is the dynamic renewal of the firm. Self-confirming theories and extrapolation tend to force a company into a Type I or Type II profile. Michael Ryall, in some excellent research, reached the following conclusion about such theories:

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‘‘. . . I identify and examine a class of normative theories that may cause rational managers to inadvertently destroy firm value. The problem occurs when firms take prescribed actions that result in the outcomes predicted by the theory, even though the theory rests upon premises that are, in general, false. I denote such theories as ‘self-confirming.’ . . . The existence of self-confirming theories is cause for careful consideration: an industry in which the adoption of such theories is widespread will operate well way from its efficient frontier. By their very nature, inefficiencies resulting from self-confirming behavior are resistant to empirical identification.’1 Michael Ryall is expressing what others have said in some form or another. Linear, non-adaptive thinking and planning models can destroy firms. It is that simple. EMERGENCE The emergence camp is divided into at least two or three distinctive groups. Emergence-based theorists begin with the idea of complex systems and chaos theory. Some suggest that the ability to deal with complexity on a futuristic basis is impossible. Others suggest that it is possible to understand some aspects of futuristic systems. A third group imposes naturalistic ecological presuppositions in its theory. Ralph Stacey and Henry Mintzberg tend to hold to the view that it is simply not possible to consider future complex environments. As a result, they suggest that the strategist must wait for events to occur, or emerge, then develop strategy. This approach of ‘‘incrementalism’’ involves the ‘‘after the fact’’ development of strategy for discontinuous events. Mintzberg suggests that, as discontinuous events occur, the firm should dynamically craft strategy (see his article ‘‘Crafting Strategy’’ in The Harvard Business Review, July–August, 1975). Stacey generally agrees with Mintzberg, but in his book Managing The Unknowable (Jossey-Bass Publishers, San Francisco, 1992), he additionally suggests that it is possible to create organizations that are designed to deal with ambiguity and complexity. Others involve themselves in apparently self-defeating arguments. In The Fifth Discipline (Doubleday, 1990), Peter Senge advances the


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idea of systems thinking and suggests that it is possible to observe complex systems and make reliable inferences about such systems. On the other hand, in the multi-author work The Dance of Change (Currency Doubleday, 1999), he tends to take a purely Darwinian emergence view. In most cases, the complexity-based theorists assume the Darwinian hypothesis (upward mutation or evolution of complex natural systems) as a metaphor for management and strategy theory. This idea is developed in what is called ‘‘self-organization.’’ It is also an integral part of the complexity theorists’ response to the linear economic model referred to as ‘‘equilibrium theory,’’ which is called ‘‘complex adaptive systems’’ theory. The evidence clearly invalidates the Darwinian hypothesis, but I strongly support the idea of ‘‘complex dynamic systems,’’ not only as a way of describing the natural environment, but also as a reasonable metaphor for developing management and strategy theory. This approach deals with complex systems without the prepositional fallacies related to complex adaptive systems theory. HYBRID SYSTEMS One of the more questionable adaptations of the various theories comes from those who attempt to combine complex adaptive systems and equilibrium-based theory. These theorists suggest that strategists should apply complex adaptive systems approaches to their strategy, while at the same time developing historic (or even new) competencies. Clearly, there are problems with this combination. Observing the global environment, and accepting the fact that there are two environmental issues that the strategist must address – complexity and rate of change – it is clear that an organization must be continually changing in nonlinear terms in both speed and complexity. Rosabeth Moss Kanter’s useful idea of ‘‘contingency theory’’ (presented in When Giants Learn to Dance) rightly suggests that the organization must be able to respond contingently to future changes in the environment. Her approach is similar to W.R. Ashby’s ‘‘requisite variety theorem,’’ explained in his Introduction to Cybernetics (John Wiley & Sons, New York, 1956).

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The modified Ansoff model is also a hybrid. On one hand, a complex dynamic systems approach to the future is taken. On the other, an emergence approach is viewed as a part of the firm’s ability to respond to discontinuous events. Then, the firm is assessed using a complex model to determine its ability aggressively to create the future strategy the firm needs and the responsiveness capabilities of the firm to address discontinuous events as they emerge.2 THE TURMOIL OF STRATEGIC THINKING Although the field of strategy continues to undergo massive change, there are those who continue to hold on to the approaches of two or three decades ago. Even those who move toward complex systems theory often find themselves attempting to combine the old theories with complexity-based theories. The reality is that firms must learn to deal simultaneously with complex, changing (a speed issue) environments in three time frames. First, they must deal with the far future (three or more years ahead, in current environments), and be prepared for the level of complexity and the rate of the change of that future environment. Second, they must be continually managing their transformation from what they currently are, to what they need to be in the future. This also involves both future complexity and rate of change organizational/strategy issues. Finally, the firm’s management must be able to maximize today. If the team has failed to create an appropriate future strategic profile in the past, this makes the task extremely difficult. At the same time, if any of the three processes is allowed to cease, the firm will find itself in trouble. NOTES 1 Ryall, M. D. 1998. Quotes taken from abstract of the working paper, ‘‘When Competencies are not Core: Self-confirming theories and the destruction of firm value.’’ No publisher, Bradley Policy Research Center, University of Rochester. 2 Underwood, J. (2001) Thriving In E-Chaos. Prima Publishers, Roseville, CA. See also Ansoff, H.I. (1990) The New Corporate Strategy. John Wiley & Sons, New York, NY.

03.07.09

Resources for the New Corporate Strategy An overview of the various resources that are available, with an honest assessment of some of the more current.

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Within the splintered field of strategy, many firms and individuals present themselves as providers of strategy solutions. Even TQM experts sometimes suggest that they can offer a ‘‘total solution.’’ The objective here is to provide a cross-section of the various resources available in the field of strategy. The intention is to summarize the resource, not evaluate it. In searching for a way to develop strategy for a firm, an in-depth study of the mental models that underlie each strategic model is needed. In seeking resources, it is important to understand each one, in order to understand the underlying assumptions (linear or nonlinear; future or historic; simple or complex). WRITTEN WORKS H. Igor Ansoff Dr Ansoff has produced over 100 written works, many of which have been translated for publication overseas. He has acted as consultant to numerous Fortune 500 firms in the United States, as well as to many other companies around the world. He is no longer actively involved in consulting or writing, but his organization Ansoff Associates (www.ansoffassociates.com) still provides consulting services worldwide. A number of Ansoff’s works contribute to a wider understanding of the field of strategy. Corporate Strategy (McGraw-Hill Publishers, 1965) is an excellent starting place. Implanting Strategic Management, co-written with Edward McDonnell (Prentice Hall International, 1990), records much of the research conducted by Ansoff and his associates and reveals a number of ingenious aspects of the Ansoff model. These include his approach to using incremental implementation for managing resistance to change, product portfolio analysis, and issue management systems. For a concise overview of the work carried out by Ansoff and his associates, one article is particularly helpful: ‘‘Empirical Proof of a Paradigmic Theory of Strategic Success Behaviors in Environment Serving Organizations’’ (Ansoff et al. International Review of Strategic Management, 1993). Another is close to being representative of the body of work that he has completed: ‘‘Optimizing Profitability in Turbulent Environments: A formula for strategic success’’ (written

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with Patrick A. Sullivan and published in Long-Range Planning, Vol. 26, No. 5, 1993) focuses upon the profitability relationships and Ansoff’s theories. Richard D’Aveni The best-known work of Richard D’Aveni of Dartmouth College is Hypercompetition (The Free Press, 1994), in which he overtly takes on the traditional self-confirming strategic approaches. Based upon his observations of the real world, the book concludes that the world is no longer linear, and does not reward those who use linear approaches to create corporate strategy. In its place, he suggests, the planner needs to consider a new approach. In assessing the new corporate world, he makes a number of insightful observations in Hypercompetition. » » » » »

‘‘Firms must destroy their competitive advantage to gain advantage.’’ ‘‘Entry barriers work only if others respect them.’’ ‘‘A logical approach is to be unpredictable and irrational.’’ ‘‘Traditional long-term planning does not prepare for the short term.’’ ‘‘Attacking competitors’ weaknesses can be a mistake. Traditional approaches such as SWOT analysis may not work in a hypercompetitive environment.’’ » ‘‘Companies have to compete to win, but competing makes winning more difficult.’’ D’Aveni builds the case for a complex environment and the need to change the organization continually in response to the environment, then proposes an answer to his argument about the ‘‘need for a dynamic theory’’: the 7-S approach. » » » » » »

Superior stakeholder satisfaction. Strategic soothsaying. Positioning for speed. Shifting the rules of the game. Signaling strategic intent. Simultaneous and sequential strategic thrusts.

At the heart of D’Aveni’s ideas is his conclusion that companies need to be focused upon disrupting the market (notice the difference

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between self-confirming theories and D’Aveni’s iconoclastic approach). He suggests that there are three critical factors that enable a firm to deliver sustainable disruption in the market: 1 A vision for disruption. 2 Capabilities for disruption (the organization). 3 Product/market tactics used to deliver disruptions. There are a number of similarities between the work of Ansoff and of D’Aveni. Both suggest that the environment involves some level of complexity and rate of change. Both propose a contingency theory approach – that is, the organization must be designed to respond to the present and future environment. Both believe that the environment of the 1990s began a new period of highly turbulent, unpredictable, changing environments. Pankaj Ghemawat Harvard Business School professor Pankaj Ghemawat has written two books and dozens of articles. His Strategy and the Business Landscape (Prentice Hall, 2001), written for use as a supplemental book, should be in every manager’s library. (I require my graduate students to buy it, even though it is not the primary book for their strategy course, and suggest that they keep it afterwards for their personal library.) Ghemawat systematically discuss the history of strategy, the current state of strategy, and all of the basic tools that are available to the strategist. It is a relatively short book in comparison to most, but it is rich in material and loaded with information. Since much of the book focuses upon self-confirming theories, it is not recommended as a resource for a corporate strategy model, but it is an excellent overview of the field. Rosabeth Moss Kanter Also at Harvard Business School, Rosabeth Moss Kanter is a prolific writer, with numerous books and articles to her credit over the past 10–15 years. She has also served in a consulting role for a number of international companies. The fact that Kanter rejects the self-confirming approach to the development of strategy in favor of contingency design is an important

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underpinning of her work. She believes that the strategist must begin with an understanding of the future environment, then contingently design the firm around that understanding. In her book When Giants Learn to Dance (Touchstone, 1990), she offers seven ideas that describe managers who will be successful in the new corporate environment: 1 They operate without the power of the might of the hierarchy behind them (leadership vs. positional power). 2 They can compete (internally) without undercutting competition. 3 They must have the highest ethical standards. 4 They possess humility. 5 The must have a process focus. (D’Aveni and Ansoff agree with this.) 6 They must be multifaceted and ambidextrous (work across business units/flexible). 7 They must be willing to tie their rewards to their own performance. Michael Porter Also of Harvard Business School, Michael Porter is perhaps the best known of all of the strategy theorists. His numerous articles and books, written over the past 20 years, have been widely read. He is an extremely good communicator and is able to present his ideas with logical precision. Porter continues to be the primary proponent of self-confirming theories of strategy. He would suggest that his ‘‘five forces model’’ and SWOT allow for nonlinear analysis, but most would agree that the overlaying of a linear mental model (self-confirming theory) on top of any nonlinear analysis would render any such argument questionable. Michael Tushman Michael Tushman is well recognized in the academic community but has not achieved the broad recognition that he deserves in the business community. Tushman has written numerous insightful articles that relate to complex environments. While academic in nature, some could be extremely beneficial to corporate managers attempting to deal with discontinuous environments. C.K. Prahalad and Gary Hamel These two theorists are often associated with each other since they have co-authored numerous books and articles together. Their book

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Competing for the Future (Harvard Business School Press, 1994) was very well received by both the corporate and the academic community. Their work has gone through a number of cycles, or changes. Early on, it seemed to focus on self-confirming theories. However, they were quick to comprehend the apparent failure of that model, and began to move more toward a complexity-based model. In their later works they have focused on anticipating the complex nature of the future environment. At the same time, they are not proponents of strategy based upon complex adaptive systems (the Darwinian hypothesis). A very positive aspect of their work is their emphasis on proactive strategies for dealing with future uncertainty. Henry Mintzberg Mention needs to be made of Henry Mintzberg as a contributor to the field. His book The Rise and Fall of Strategic Planning (The Free Press, 1994) was widely read when it was first published, and he has been widely published elsewhere in the field of strategy. He falls in the complex-historic (emergence) category of strategists, although, unlike most in that camp, he does not appear to have adopted the Darwinian metaphor. Mintzberg believes in incremental responses to changes as they emerge in the environment. It is clear that he holds to the idea of a complex environment, yet he also seems to believe that it is not possible to anticipate or to prepare proactively for discontinuous events. His views are the antithesis of Ansoff’s. While there is questionable value in Mintzberg’s work from a strategy standpoint, there is obvious value from a corporate responsiveness standpoint. Ralph Stacey Ralph Stacey has become a prominent contributor to the field of strategy over the past few years. His book Managing the Unknowable (Jossey-Bass Publishers, 1992) was really ahead of the curve among the work of the proponents of complex adaptive systems. Stacey’s work differs from that of many of the others in that particular school, since he suggests that companies need to prepare proactively for

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complexity. Stacey has made a number of excellent contributions in that area. Shona L. Brown and Kathleen M. Eisenhardt Brown and Eisenhardt’s book Competing on the Edge (The Harvard Business School Press, 1998) has been widely heralded in both the academic and the business community. Their work is somewhat of a hybrid of the complex adaptive systems approach (including the Darwinian hypothesis) and the self-confirming schools of thought. In essence, Brown and Eisenhardt suggest that the firm is competing in complex environments, and thus must deal with high levels of uncertainty. Their view is that the firm is constantly in a process of changing its competencies. There is some dissonance between their adoption of competencies and their prescriptions for dynamic corporate strategy. Graduate students should buy this book and keep it for their library, as it contains some excellent ideas on dealing with complex environments. Evan Dudik One of the most exciting works to come out in recent years is Strategic Renaissance (Amacom, 2000) by Evan Dudik, which should be read in conjunction with any study of Ansoff’s environmental turbulence index. It takes a complex systems approach to strategy by suggesting that the planner must understand the level of uncertainty of the future environment (very similar to Ansoff’s turbulence) and, at the same time, that the firm must create a complex adaptive system (the firm itself) if it is to deal with that uncertainty. It is clearly an excellent application of contingency theory. Dudik’s book covers all of the positives related to developing complex mental models and is excellent in presenting contingency approaches for the development of corporate strategy. CONSULTING FIRMS The problems of confusion in the discipline of strategy have carried over into the consulting firms. Despite their protests, with rare exception,

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they do not offer strategic management consulting services. As one employee at one of the big six consulting firms put it, ‘‘We have a group that is called ‘the strategy group’ but in reality they are more tuned in to tactics rather than global corporate strategy.’’ This should not dissuade a firm needing help from approaching one of the major consulting groups, but they must understand what to request. In most cases, the major consulting firms have some of the best ‘‘sector experts’’ around. For example, if the client organization is in the healthcare industry, the average consulting firm probably has five or six key people (per office) who are at the top of their field. But they will not necessarily be strategy specialists; they are more likely to specialize in a particular area, such as information technology for healthcare organizations. When seeking strategic help in a specific area, it is important to look for the most qualified person in the relevant area. Such people can be found at major consulting firms and will be most valuable in assisting with the transformational plan of the organization. The firm needs to adopt a complex systems approach to developing its strategic plan, then to begin to seek the expertise needed for transformation and implementation. The experts employed by the major consulting firms are invaluable in this area. In my own work I use a modified Ansoff approach to developing corporate strategy. In using the model, I normally find 20 to 30 areas of the firm that need to be enhanced if profitability is to be maximized. A consulting firm might be ideally configured and staffed to take my strategic output and assist the firm in developing its transformation and implementation plan. For example, I might discover that the firm needs to change its internal technology capabilities significantly. I cannot assist the firm in that area, but a consulting firm with the right team of professionals is able to take my information and help the client to achieve maximum benefit from my findings. The company needs to control its own strategic planning process. And the plan needs to be founded on a complexity-based system. Once the plan is ready for detailed development, the external consulting firm can be invaluable in effecting the required changes.

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WEB-BASED RESOURCES The Website of Canadian consulting firm Competia, Competia.com, is an excellent resource for intelligence gathering and for articles on the topic of strategy. Another Website focused upon the field of strategy is sookoo.com, which features not only articles about the field, but also provides overviews and links to many of the leading consulting firms.

03.07.10

Ten Steps to Making Corporate Strategy Work A step-by-step process for developing effective strategy. This ‘‘total system’’ view of the process can be very helpful for the corporate strategist.

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There are many approaches to creating organizational strategy. For the purposes of this chapter, only the modified Ansoff approach will be considered. It should be noted that, from a process standpoint, this approach could generally (and should) be followed regardless of which strategic planning approach is being utilized. CARRYING OUT STRATEGIC SEGMENTATION The starting point for any strategic planning process is what H. Igor Ansoff called ‘‘strategic segmentation’’ (Workbook in Strategic Management, No publisher, 1990). Strategic segmentation is different from market segmentation, since the researcher is interested in creating different segments of the environment, based upon the unique ‘‘critical success factors’’ for each segment. This is an extremely important step, yet it is somewhat difficult to understand. Take the example of a bicycle company that makes mountain bikes for off-road use as well as for police departments. In looking at the two segments (Table 10.1), the differences between the two reveal some important issues. Table 10.1

Cost Durability Equipment Channels

Critical success factors – mountain bikes. Mountain bikes

Police bikes

Lowest for perceived value Important Many options Many

Somewhat irrelevant Extremely important Few options Specialty bike and police stores

This is a very simple segmentation, but it reveals that the critical success factors for each segment are probably quite different. As a result, the strategist understands that the turbulence for each segment could be at a different level, which could necessitate entirely different strategies for each segment. For example, if the right organization is put into place (with the right strategies) for the off-road bike, the organization might be inadequate for serving the police bike segment. As the difference in turbulence for each segment increases, the profit impact on one area or another increases.

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What about choosing the area with the highest turbulence and using that as a basis for developing strategy for both areas? That would cause two problems. First, the firm would be overspending in one area, decreasing profit (creating strategies that are more aggressive and costly than they need to be). Second, in the area with lower turbulence, the more aggressive strategies might allow the firm to gain market share and even make higher profits for a short time, but in the end it would increase the level of turbulence for the segment. That in turn would make it much more difficult to maintain profit goals, since the higher the turbulence (and thus the competitiveness), the more difficult it is to make a profit. CONDUCTING A FUTURE TURBULENCE STUDY Normally, the firm will conduct extensive studies of the segment to determine the future level of competitiveness, complexity, and rate of change for that segment. This may involve not only extensive database work, but research with external sources as well. The process is more completely developed in my book Thriving In E-Chaos (Prima Publishing, 2001). DOING A ‘‘REALITY CHECK’’ Carrying out well over 100 studies of future turbulence for major companies has shown me that internal research (and especially the view of senior managers) about the future is usually flawed. Internal estimates of future turbulence are usually 1.0 lower than the actual level of turbulence. There is a very powerful link between the development of effective strategy and understanding the turbulence of the future environment. An error of 1.0 could be fatal for an organization, since it could lead to all the firm’s strategies consistently being developed for a much slower, less competitive, and more predictable environment than the reality. This is the one area where external consultants can really benefit the firm. Not only do they bring their expertise to help the firm develop good tactical strategies, their ‘‘external view’’ will generally also provide the most accurate understanding of future turbulence in an industry. Experience has shown that their predictions of future turbulence can be extremely accurate.

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CONDUCTING A COMPREHENSIVE PRODUCT PORTFOLIO ANALYSIS In the product portfolio analysis, the firm’s senior executives decide which products to invest in, which products to maintain (which involves no investment), and which ones to phase out. This area has traditionally been extremely weak for most firms, for two reasons: first, the equilibrium-based model tends to keep the firm focused on historic areas of success; second, most portfolio balancing processes tend to be much too simplistic for the environment that the firm’s products will encounter. There are two starting points that a company can use. Either the firm’s management can begin the portfolio process with a narrow view that does not allow the firm to migrate to unrelated product areas, or they can proceed with no assumptions about what products (and therefore what businesses) the firm will pursue in the future. The second approach is most beneficial to the company. By beginning with a blank slate, the managers doing the analysis will tend to consider the future growth and profitability of each product, in much the same way as a financial consultant would look for the highest profit fund or stock combination. By limiting the firm to historic areas of supposed competence, the firm will usually find itself in a low ROI (return on investment) situation as opposed to a maximum ROI situation. Ultimately, that means that the managers of the firm must learn to view all resources in terms of liquidity. If the firm’s product portfolio has low future prospects, the firm’s managers should systematically begin liquidating old, low-performing product families and replacing them with new, high-performing product families. This should be done regardless of whether or not the firm has any sort of ‘‘competence’’ in the new product areas. Capabilities can be bought. At least three different analyzes should be done on any product portfolio: » an attractiveness analysis; » the Boston Consulting Group Matrix; » a product life cycle analysis of the firm’s products.


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Future attractiveness is defined as the future profit and future growth of a product. In essence, it has to do with the future profit potential of a product. It is important to remember that, in turbulent environments, it is rare to find a product that has both highly attractive future growth and future profit potential. Generally, in high turbulence environments, profit margins are squeezed, even in high-growth segments. It can be useful to rank each product from best to worst. This can be a somewhat simple process, yet few companies take the time to do it. It forces senior managers to face reality. Even in major companies with few products of even moderate future attractiveness, the managers remain happy, as long as current profits seem to be good. The Boston Consulting Group Matrix combines future attractiveness and experience curves. For manufactured products, this can be an extremely effective tool in further refining the firm’s product portfolio. The third step involves a product life cycle analysis of the firm’s products. As environmental turbulence increases, product life cycles tend to shorten. At Level 3 turbulence, for example, most products will go from the introduction stage to the late decline stage in around five years. At Level 5 turbulence, the cycle is usually 18–24 months. This means that the planner must account for the effects of turbulence on the products. If the levels of turbulence generally seem to be low, the portfolio can be balanced among each of the four areas of the product life cycle curve (Fig. 10.1). Growth

Sales

Introduction

Maturity Decline

Time Fig. 10.1

Product life cycle.

As the turbulence increases, the distribution of products in each stage needs to be skewed to the left. That means that the firm needs to

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overload the introduction and growth stages of the product area. This corresponds to the need for higher levels of innovation aggressiveness at higher levels of turbulence. Also, at higher levels of turbulence, the firm needs to be taking higher levels of risk, due to the level of uncertainty. This means that there will be higher failures of new products, since the level of uncertainty at high turbulence increases. A STRATEGIC DIAGNOSIS This is normally accomplished with a carefully developed questionnaire. Usually, fewer than 20% of the questionnaires will be given to the senior managers of a firm. In using the modified Ansoff model, a number of the questions involve management, culture, and so on. Generally, the senior managers of the firm have an over-optimistic view of organizational values (culture) and leadership style (management). Accuracy is extremely important if the diagnosis is to lead to the development of an effective strategic plan. The strategic diagnosis will result in an analysis of the firm that looks like the profile in Fig. 10.2. Looking at the profit impact of each gap in Fig. 10.2, many of the changes the firm needs to initiate become quite apparent. The technology applications (product) represent a critical gap. An external consultant could be extremely helpful in moving the firm’s product technology strategy forward. If the gaps are not corrected, the outcome could be disastrous. The profit impact categories are based upon extensive statistical data and experience has shown that the predicted outcomes are well founded. GAP ANALYSIS Once the strategic profile has been developed, each specific gap is analyzed. In using the complete modified Ansoff model, over 50 aspects of the firm (sub-divisions of the 12 broad areas) are analyzed. In order to make the analysis as clear as possible, experience has shown that it is very helpful to include three things in the analysis of each gap: » the present level of the attribute under analysis; » the required future level the attribute needs to be in the future; and » the profit impact of the gap.


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ABC Corporation 1

2

3

4

5 Impact

Marketing

Serious

Innovation

Marginal

Product portfolio

Matched


Critical Marginal

CEO attributes Matched Management Culture Structure

Marginal Critical

Decision systems

Marginal

Strategic planning

Critical

Strategic capacity

Matched


Critical


Fig. 10.2 ABC Corporation. (Adapted from H. Igor Ansoff, with permission. All rights reserved.).

The profit impact also helps managers set priorities for change by getting them to focus on the larger gaps first. A typical gap analysis might look like the following. ‘‘Currently the firm’s management (Level 1.0) is highly controlling and directive. In the future competitive environment (Level 4.5), the management of the firm will need to be highly empowering and foster creativity. This is a gap of -2.5, a critical profit impact gap. This needs to be a high priority in the new strategic plan.’’

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Each gap of the firm will need to be analyzed in this process. The details will provide the foundation for the development of the firm’s new strategic plan. DEVELOPING ACCOUNTABILITY MEASURES Goals can be helpful in developing good strategy. In using a complex systems model for strategy, success depends not only on the development of good strategies (marketing, innovation, product portfolio, and product technology applications) but also on an assurance of the ‘‘behaviors that produce profit.’’ Senior executives often talk about making the employee a part of the corporate team, and recognize the importance of creating an open, risk-proactive culture. The problem is that, if managers are not made accountable for how they treat subordinates, nothing will change. It’s that simple. In moving from the strategic diagnosis to the transformation plan, it is vital to develop accountability measurements for every area of the firm. DEVELOPING A TRANSFORMATIONAL PLAN It is important to plan exactly how each aspect of the change in products, assessments, and functions will be carried out. It is important to understand each step of the transformation that is to take place. DEVELOPING THE COMPREHENSIVE STRATEGIC PLAN At this level of planning, it is extremely important to gather input from all parties involved, including all levels. The strategic plan should be as detailed as possible, and each product and functional area should develop its own strategic plan, which will support the overall transformation and strategies of the firm. IMPLEMENTATION AND MANAGEMENT OF RESISTANCE TO CHANGE First and foremost, it is important to use a modular approach in the implementation of major change. This means that major change


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initiatives will be carefully choreographed in such a way that the change involves a series of small changes instead of one giant leap. The greater the change, the higher the likely resistance to change. Another issue is the identification of high-resistance personalities. No matter how much ‘‘change training’’ is given, it is a simple fact that each person has an innate level of resistance to change. In order to maximize the implementation process, high-resistance personalities must be segregated out of early change initiatives. One good rule of thumb is to manage an initiative until it has penetrated around one-quarter of the organization. From that point on, the initiative will normally diffuse through the organization somewhat naturally. Like a symphony, the creation and implementation of excellent corporate strategy is complex and dynamic. When all the players come together in harmony, the result can be beautiful. If an organization looks like this, it usually means that the stockholders are being rewarded with maximum profits. It also usually means that the employees are well paid, and that they love going to work. Winning is fun, and success can be achieved or it can be lost. It simply depends on the commitment that the firm’s management and people are willing to make. KEY LEARNING POINTS 1 Carrying out strategic segmentation. 2 Conducting a future turbulence study. 3 Doing a ‘‘reality check.’’ 4 Conducting a comprehensive product portfolio analysis. 5 A strategic diagnosis. 6 Gap analysis. 7 Developing accountability measures. 8 Developing a transformational plan. 9 Developing the comprehensive strategic plan. 10 Implementation and management of resistance to change.

Frequently Asked Questions (FAQs) Q1: What exactly is corporate strategy? A: Corporate strategic and strategic management are defined in a number of different ways. Generally, the idea of corporate strategy is for the firm to create a battle plan for the future. Perhaps the best definition of strategy is ‘‘the creation of future profit potential.’’ Q2: It seems that most companies simply develop a mission statement, do a budget, and call that ‘‘strategy.’’ Is that what strategy really is? A: In fact, that is the way that a lot of companies do strategy. That process, however, should not mistakenly be called good strategy. Good strategy is comprehensive and future-focused. Q3: What about the new idea called ‘‘complex adaptive systems’’. What is it, and how is it different from what companies have done in the past? A: Complex adaptive systems might be called a good idea gone bad. Most of those who hold that view of corporate strategy also assume

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that the ideas forwarded by Charles Darwin on evolution apply to companies in complex environments. That does not appear to be supported, either in nature or in companies. Q4: So what exactly is this idea of complexity, if we do not buy in to the ‘‘adaptive’’ idea? A: ‘‘Complex dynamic systems’’ is a better way of putting it. The business environment is much like nature, in that there is a chaotic interaction between many forces or systems. A recognition that the business environment is complex (has many forces to deal with), and dynamic (constantly changing at different rates of speed) does conform to reality. Q5: Where do things like ‘‘total quality management’’ and ‘‘process re-engineering’’ fit into a complex systems approach to strategy? A: They fit nicely. When the system is understood in terms of speed and complexity, the supporting role of quality (a competitiveness issue) and processes (a speed issue) becomes clear. Q6: What about all of this interest in ‘‘self-organization’’ that has been appearing in recent popular books? A: Self-organization is based on the complex adaptive systems approach. Those who hold the view believe that businesses need to be left alone so that they will evolve (upward), which is what they believe happens in nature. Q7: How important is the CEO in developing and implementing corporate strategy? Many people seem to be advancing the idea that a CEO is not that important. A: The simple truth is that, without a CEO who initiates the proper strategy, nothing will generally happen.

FAQS

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Q8: What about ‘‘core competencies’’ of the company? Does the new thinking mean that idea has to be thrown out? A: Generally, yes. If the environment is truly dynamic and complex, a focus on what the firm was, or even is, may be more damaging than good. Q9: Where does product portfolio balancing fit? A: It is an extremely important aspect of good strategy. In complex environments, good portfolio management is even more important. Q10: Haven’t a lot of companies given up on developing future corporate plans? A: Certainly, many have. But, just because some approaches do not seem to work, does not mean that companies should give up planning.

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