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Article Type: Quick takes From: Strategy & Leadership, Volume 42, Issue 6
These brief summaries highlight the key points and action steps in the feature articles in this issue of Strategy & Leadership.
Masterclass: Identifying the new opportunities and threats in the Creative Economy Stephen Denning
Of the three types of innovation in business today, Clayton Christensen believes market-creating innovations are the most important. These high-risk, high reward innovations – as contrasted with product or efficiency innovation – “transform complicated or costly products so radically that they create a new class of consumers, or a new market.”
The next question is “how to manifest market-creating innovations?” The answer for start-up companies seeking success in the Creative Economy is addressed in Peter Thiel’s book, Zero to One: Notes on Startups, or How to Build the Future (2014, Crown Business). For established companies, John Kotter’s recent book, Accelerate (2013, Harvard Business Review Press) and articles on dual-operating networks offer guides to instituting a corporate operating network capable of achieving market-making innovation.
Thiel’s seven questions
Serial entrepreneur Peter Thiel offers seven tools – framed as questions – for identifying and assessing market-creating innovations. These should start dialogs every business must engage in:
The Engineering Question: Do you have a breakthrough technology?
The Timing Question: Is your timing right?
The Monopoly Question: Do you have something no-one else has?
The People Question: Do you have the right people?
The Distribution Question: Can you sell and market your stuff?
The Durability Question: Will you be still around in 10 years?
The Secret Question: Do you know something nobody else does?
In a discussion of the meaning behind the seven questions, Thiel offers many building-block premises.
Reject the ‘think incrementally’ advice; instead, embrace grand visions, and seek to create something truly great. Small, incremental steps may be a safe path forward, but they won’t lead to the market-creating innovations.
The way to cope with competition is by avoiding it. All truly successful market-creating firms, says Thiel, are de facto monopolies.
As a general rule, everyone you involve with your company should be involved full-time … anyone who doesn’t own stock options or draw a regular salary from your company is fundamentally misaligned. Either be on the bus or off the bus.
The way to build an enduringly successful monopoly is to start by dominating a small market and scale up from there, toward your ambitious long-term vision. If you can’t dominate even a small market, you have no hope of dominating a large market.
Kotter’s dual-operating systems
As an alternative way to Thiel’s, John Kotter proposes a dual operating system – a hierarchy and a network, operating simultaneously, side by side. The hierarchy would continue to manage the existing business, while the network would explore market-creating innovations and assess emerging competitive threats. This is not as radical an idea as it seems. As Kotter points out, “Every successful organization goes through a phase, usually very early in its history, in which it actually operates with this dual structure.”
Seizing opportunities and dodging threats with a dual operating system John P. Kotter
The inevitable failures of hierarchical operating systems to keep pace with innovation and competitive challenges are crippling firms as they try to prepare for a turbulent future. In today’s business world, success equates to customer-focus, efficiency, agility and speed, characteristics of entrepreneurial organizations. Rethinking how to optimize hierarchical organizations to achieve the capabilities of entrepreneurial ones, winning enterprises are choosing to create a dual operating system.
Dual structure: a hierarchy co-existing with an innovation network
A dual network’s structure looks roughly like a constantly evolving solar system, with a guiding mechanism at its center, strategic initiatives as planets and sub-initiatives as moons or satellites. Populated by a cadre of employees from across the organization and up and down its ranks, the network liberates information from silos and hierarchical layers and enables it to flow with far greater freedom and at accelerated speed. It focuses on the demands for innovation, agility, difficult change and big strategic initiatives.
The existing hierarchy – less stressed if it doesn’t have to react to a constantly evolving change mandate – is better able to perform what it is designed for: doing today’s job well, making incremental changes to further improve efficiency and handling those strategic initiatives that help a company make competitive upgrades.
Not new: revisit your beginning
It’s a revolutionary idea, based on the history of corporate evolution. All successful organizations go through an early phase of operating with a dual structure. The problem is that the entrepreneurial network side is informal and invisible to most people. Over time it folds into the single operating system – a hierarchical organization. Thus a level of individualism, creativity and innovation are lost.
Five principles of a dual system
A well-functioning dual operating system is guided by five basic principles:
Many people drive important change, and from everywhere, not just the usual few appointees.
A “get-to” mindset, not a “have-to” one prevails.
Action is head and heart driven, offering greater meaning and purpose to people’s’ efforts.
More leadership, not more management.
Two equally important systems, not just enhanced hierarchy.
If successfully implemented, a dual system allows you to move ahead of tough competition or achieve fiercely ambitious goals. All this can happen without adding expensive staff, disrupting daily operations or missing earnings targets. While the consequences of an increasingly changing world do have a downside, meeting them with a dual operating system also offers a potentially huge upside.
Interview: Boldly leading with a dual operating network – John Kotter addresses some likely practitioner concerns Brian Leavy
There is an ever increasing competitive premium being placed on constant innovation and the ability to continuously reconfigure and recombine resources and activities to maintain a dynamic balance between stability and agility, efficiency and adaptability. To answer the question “How?,” John Kotter offers a dual organization system solution comprised of a traditional management-driven hierarchy focused on delivering day-to-day performance and a strategic accelerator network focused on innovation and agility.
A bold concept, but lingering questions
For the following brief interview, Strategy & Leadership raised a number of questions with Professor Kotter specifically aimed at highlighting and then allaying some lingering practical concerns that CEOs drawn to the dual system idea might still have about adopting the approach and getting it to work within their own organizations. Here is an edited sampling of Kotter’s answers addressing such concerns.
S&L : How will the dual operating system most change corporate leadership’s role in the strategy development process?
Kotter: They will have at their disposal a much more powerful information gathering and processing apparatus than they do today, to help them deal with a more complex and faster moving world. So their role will be less one of having to know everything and direct everything, which is increasingly unrealistic.
S&L : Does my organization have enough entrepreneurial energy?
Kotter: We have found is that in even the most un-entrepreneurial organizations there is 5 percent of the workforce that has the energy and desire, if organized correctly, to be an entrepreneurial force.
S&L : How do you sustain the vitality of the network over the longer term so that it doesn’t end up losing its crusading quality and becoming just more corporate process and ritual?
Kotter: When it succeeds, the organization succeeds, and when people can connect the dots between this new way of operating and the success, it will tend to incorporate into an organization’s DNA automatically over time, and therefore be fully sustainable. But in the early days of a dual hierarchy/network system, simply being alert, all the time, to signs that you are slipping back into business as usual – that is invaluable.
Case: Why Apple's product magic continues to amaze – skills of the world's #1 value chain integrator Will Mitchell
In addition to its stellar designers, what underlies Apple’s ability to bring its designs to commercial stardom and propel shareholder value? The answer: an ability to combine “build, borrow and buy” strategies; and world-leading abilities as a value chain integrator.
The three “Build, Borrow and Buy (BBB)” skills
The company’s lengthy success record proves it knows when and how to develop products and components internally, when to ally with other firms and when and how to acquire and integrate other companies. For example, despite working with such a large and powerful set of partners, Apple harvests much of the economic value in the relationships.
Value chain integration
Value chain integrators (VCIs) are firms that coordinate the direct and indirect relationships of firms and other actors that make up a commercial ecosystem, overseeing the upstream, downstream and complementary activities that need to be accomplished for products to reach markets efficiently. In the competitive dynamics of the consumer electronics sector, Apple has emerged as one of the world’s leading VCIs.
Value chain integration requires mastering three major skills:
Value chain identification – the ability to recognize each of the links that makes up the value chain that delivers value to customers and will deliver future value – from design through delivery and service.
BBB skill – the ability to choose effective BBB strategies for each of the links – which ones will be created internally (Build), which will be out-sourced through simple market relationships and basic contracts or via more complicated partnerships (Borrow) and which will be acquired (Buy).
Value chain coordination – the ability to coordinate key sequences of links along the value chain so that projects maintain agility.
This set of value chain integration skills, particularly the ability to apply them dynamically as Apple adapts to and leads the creation of new market value, underlies the company’s ongoing success.
What makes Apple the VCI leader?
Apple’s three pre-eminent skills as a value chain integrator are:
Identifying and integrating the product development and product life cycle value chain.
Balancing differentiation and complexity. To illustrate Apple’s skills, a comparison to Nokia and Dell strategic choices and capabilities is offered.
Facing critical challenges (five risks) and managing the challenges with five major types of VCI competencies.
Throughout the company, Apple’s leaders and personnel require a systematic view of customer value, the value chain that delivers that value and the competitive and social contexts that shape value demands, so that they can communicate and coordinate activities of multiple vendors throughout the ecosystem rather than simply manage a series of one-to-one relationships.
Masterclass: New insights for corporate strategists from a renowned value investor Joseph Calandro, Jr
Modern value investing analysis can guide corporate strategists and corporate development managers with strategic initiatives such as mergers and acquisitions, share buy-back, and risk management. In particular, there is much that executives can and should learn from investing as Martin Whitman and Fernando Diz explain in their book, Modern Security Analysis (Wiley, 2013).
Three investing practices are presented:
Executives fulfilling the roles of operators, investors and financiers;
Understanding the motivation and practices of “activist investing.”
Whitman and Diz focus on solvency or creditworthiness as a better measure of value, versus “shareholder value,” which can be both highly transitory and subject to short-to-midterm manipulation and volatility. Such a focus affords management options to be opportunistic; that is, to use their superior financial position as an asset in resource conversion activities to create wealth.
Whitman and Diz do not employ either a credit rating or a value-at-risk (VaR)-derived metric to evaluate creditworthiness. Rather, they define creditworthiness or credit capacity, as a function of three factors, all assessed through rigorous bottom-up analysis:
The amount of debt.
The terms of debt.
The productivity in the use of proceeds arising out of the borrowings.
Operator vs investor
Many executives consider themselves operators rather than investors because that is how most of them were trained and received promotions. But there is evidence that top executives’ failure to think like investors is a likely reason why most corporate mergers and acquisitions fail.
Most markets are inefficient as a consequence of the analyses that are employed in those markets. The following characteristics are typical of conventional market analyses that many investors, analysts and executives erroneously employ:
Short-term focus; top-down oriented.
Centered on the periodic income account to the exclusion of the balance sheet and financial position considerations.
Fundamental assumptions of price equilibria, a consequence of which is a focus on “outlooks” instead of underlying values and value drivers.
None of these conventional perspectives facilitate long-term wealth creation; in fact they tend to negate the efficient appraisal and management of corporations and the securities they issue.
The approach, concepts and tools offered in Modern Security Analysis hold great potential for executives who attend to its lessons.
Four blind alleys of scenario analysis Gerald Harris
Scenario analysis is one of the few proven tools that have helped organizations prepare for business discontinuities. In many cases the process, and the learning that flows from the analysis, have enabled organizations to thrive because of their preparation and readiness to take advantage of market or regulatory developments.
When rigorously done, scenario analysis first identifies a wide range of factors that might influence the future. This usually requires consideration of trends and potential game changes in mega areas: economic, social, technological, cultural, political, environmental, financial, regulatory, markets and scientific knowledge. The essence of good scenario analysis is to see these factors in the context of alternative whole systems; this means avoiding common “blind alleys.”
Four common bad practices
Though there are countless ways either macro-environmental or focused-scenario work can go astray, executives must be especially careful to avoid the following four common bad practices that lead to blind alleys:
Mistaking sensitivity analysis for scenarios: Sensitivity analyses are useful as they vary one or a few significant variables to see the impact. They miss changing the context around the selected variables and interconnections between the selected variables that good scenario work will illuminate.
Denying or ignoring threats or key factors causing uncertainty: Relates to the “this cannot happen” mistake of ignoring, or for political or emotional reasons, denying the possibility of change in an area. Group-think is often the culprit.
Normative or wishful thinking: Desired futures can be useful for visioning. But unless they are balanced by a more diverse view of the future they can blind the organization and support misguided investments.
Safe or poorly researched scenarios: When scenario initiatives are given insufficient resources, time and attention the results are not likely to consider a full range of possible futures. Skimping on research can lead to missing critical risk factors and early indicators.
Good scenario analysis is an open-ended learning process in which one “right” answer is not the objective. The work must lead to making better decisions and more informed choices, but as a first step the existing mental map of decision makers or the team must be challenged. Blind alley approaches, like accepting limits to which factors to consider, denying the possibility of challenges and threats that are scary or politically off limits, wishful thinking about the longevity of the status quo and hasty research efforts must be rejected in favor of better practices.
Catherine Gorrell is a veteran strategy consultant newly based in Portland, Oregon (email@example.com) and a contributing editor of Strategy & Leadership.