Thursday, June 5, 2008

New perspectives on business strategy.


I spent yesterday afternoon at the Human Resource Roundtable for Senior Executives (HARRT) at UCLA, listening to Michael Raynor talk about new ways to think about business strategy.

Raynor began with a provocative assertion: "The same behavior and characteristics that maximize a firm's probability of notable success, also maximize its probability of total failure." This idea is the "strategy paradox."

It arises because to succeed, companies have to make bold strategic commitments to the future - to developing markets, products and distinctive capabilities. Yet if their assumptions about the future are wrong, they'll fail, even if they do everything else right because these commitments are difficult to reverse in the short term. This paradox has been largely invisible to researchers up to now because few have researched business failures.

Raynor used Sony Betamax as an example. Sony positioned Betamax as a high-fidelity video recording device to tape television programs. But shortly after it was introduced, consumers decided they preferred to watch newly available rented movies, so the lower-priced VCR won out in the marketplace. Sony had developed a cutting-edge product, understood its customers, and executed its strategy well. However, the strategy failed when customers' tastes unexpectedly changed.

Thus, strategy is always a very risky process. It has been assumed up to now that the best strategies generate the highest returns. But Raynor provided examples to show that the strategies that generate the best returns are also the riskiest.

He noted that many companies respond to strategic risk by avoiding big commitments, by following a middle-of-the-road strategy which usually generates mediocre returns. Hence, the key question:

Is there an alternative somewhere between a successful but risky strategy and a middle-of-the-road strategy?

The short answer, according to Raynor, is that companies should hedge their bets. When they commit to a core strategy, top managers should also create strategic options based on the possibility of alternative future scenarios. For example, Microsoft in the late 1980s simultaneously kept their the options open with different operating systems: Windows, MS-DOS, OS/2, writing applications for Apple, thus positioning itself for success under different industry scenarios.

A handful of leaders (Bill Gates and Rupert Murdoch were mentioned) appear to do this informally. However, to manage uncertainty systematically, companies need to develop "strategic flexibility" - the ability to change strategy quickly when business environments change. This is a multi-stage process that involves developing and managing a broad portfolio of strategic options by making investments that give the company the right, but not the obligation, to make additional investments in the future.

The role of senior management, because it's responsible for longer time horizons and faces higher levels of uncertainty, is to focus on creating and managing these "strategic options," according to Raynor, rather than the actual implementation of strategy. Those lower down the hierarchy, who are responsible for shorter time horizons, should focus on delivering on the commitments already in place.

Raynor's new book, The Strategy Paradox, published by Doubleday, presents a concrete framework for strategic action that allows companies to seize today's opportunities while simultaneously preparing for the promise of tomorrow.
His web site is http://michaelraynor.com

1 comment:

Bueller said...

Very interesting. Definitely not the way most big corporations think. They could definitely use some of this to their advantage. Thank you!