Emerald Group Publishing Limited
Strategy in the media
Article Type: CEO advisory From: Strategy & Leadership, Volume 43, Issue 1
Craig Henry, Strategy & Leadership’s intrepid media explorer, collected these examples of novel strategic management concepts and practices and impending environmental discontinuity from various news media. A marketing and strategy consultant based in Carlisle, Pennsylvania, he welcomes your contributions and suggestions (firstname.lastname@example.org).
Gary Hamel’s pessimism
Large organizations of all types suffer from an assortment of congenital disabilities that no amount of incremental therapy can cure. First, they are inertial. They are frequently caught out by the future and seldom change in the absence of a crisis. Deep change, when it happens, is belated and convulsive, and typically requires an overhaul of the leadership team. Absent the bloodshed, the dynamics of change in the world’s largest companies aren’t much different from what one sees in a poorly-governed, authoritarian regime – and for the same reason: there are few, if any, mechanisms that facilitate proactive bottom-up renewal.
Second, large organizations are incremental. Despite their resource advantages, incumbents are seldom the authors of game-changing innovation. It’s not that veteran CEOs discount the value of innovation; rather, they’ve inherited organizational structures and processes that are inherently toxic to break-out thinking and relentless experimentation. Strangely, most CEOs seem resigned to this fact, since few, if any, have tackled the challenge of innovation with the sort of zeal and persistence they’ve devoted to the pursuit of operational efficiency. Their preferred strategy seems to be to acquire young companies that haven’t yet lost their own innovation mojo (but upon acquisition most likely will).
And finally, large organizations are emotionally insipid. Managers know how to command obedience and diligence, but most are clueless when it comes to galvanizing the sort of volunteerism that animates life on the social web. Initiative, imagination, and passion can’t be commanded – they’re gifts. Every day, employees choose whether to bring those gifts to work or not, and the evidence suggests they usually leave them at home. In Gallup’s latest 142-country survey on the State of the Global Workplace, only 13 percent of employees were truly engaged in their work. Imagine, if you will, a car engine so woefully inefficient that only 13 percent of the gas it consumes actually combusts. That’s the sort of waste we’re talking about. Large organizations squander more human capability than they use.
[…] Most of the recommended remedies – idea wikis, business incubators, online collaboration, design thinking, “authentic” leadership, et al. – are no more than minor tweaks. They are unlikely to be any more effective than the dozens of “fixes” that came before them. Remember T-groups, total quality management, skunk works, high performance teams, “intrapreneurship,” re-engineering, the learning organization, communities of practice, knowledge management, and customer centricity? All of these were timely, and a few genuinely helpful, but none of them rendered organizations fundamentally more adaptable, innovative, or engaging. Band-Aids, braces, and bariatric surgery don’t fix genetic disorders.
Gary Hamel, “The core incompetencies of the corporation,” HBR Blogs, October 31, 2014, https://hbr.org/2014/10/the-core-incompetencies-of-the-corporation/
Competitive advantage is dead
The European Business Review talks to Forbes’ #6 most influential business thinker, Rita McGrath, about innovation, the end of competitive advantage, and how [corporate leaders] can stay relevant in today’s volatile business environment […].
Rita McGrath: The first thing I want them to think about is how differently they would operate if they assumed their existing competitive advantages would have a shorter life than they may have assumed in the past […]. A second key message is that they need to be building pipelines of competitive advantage – and that requires investing resources in new things and figuring out how to get innovators appropriately rewarded. The third thing would be recognizing that strategy has really changed from being a largely analytic exercise with reams of spread sheets and lots of data about past transactions, and that we have to at least be adding in a future-oriented, somewhat visionary, dynamic component to it […].
You really need to be thinking across three time horizons. There’s today, and frankly the profits you’re making today are an outcome of decisions and actions you took yesterday, so it’s a lagging indicator. Then you need to be thinking about the near term, or the medium term: what are the investments I’m making that are going to replenish the pool of profits for today? What are the options that I’m investing in that may or may not be important to my future? And sometimes with options the problem is that you can’t put a value on them; you don’t know for sure if they’re going to work out or not. But you have to be placing those bets, and this is where managers need to be thinking differently – thinking in portfolio terms, rather than just quarter by quarter […].
When you’re thinking about coping with an unexpected event you can either invest in prevention, so it doesn’t happen, or you can invest in being resilient, so if it does happen you can respond. I think that companies tend to overinvest in prevention, and hope this bad thing never occurs, and they under invest in resilience. What makes a company resilient? Well, things like cross-training for your employees, so that if there’s a downturn in one place you have people who maybe have the skills to build something different.
“The end of competitive advantage,” The European Business Review, November 18, 2014.
Uncertainty and competitive advantage
Every decision involves a degree of uncertainty, and that degree of uncertainty is itself uncertain. Put differently, if our decisions involved no uncertainty, they would be easy, and, again, red teamers would be out of business. Uncertainty frames every decision whether we admit it or not, and red teaming (done well) should help reduce uncertainty.
What generates uncertainty? I’ve sorted its troublesome sources into six bins.
Individual: Every one of us at times exhibits cognitive biases. We tend to misperceive risk in predictable ways. Our awareness is limited, often because we see no need to gather more information […].
Organizational: Take what’s happening in an individual’s head and multiply it by x̂2, where x is the number of individuals within the relevant group. (Yes, the formula is notional, but I’m only half kidding.)
Cultural: Each of us is born into a culture. For the most part, we inherit our culture’s worldview, its ideologies, and its strengths and weaknesses. Just because someone is smart or savvy doesn’t mean he or she isn’t hindered by nearly invisible cultural blinders.
Situational: Few if any decisions can be distilled to one cause, one effect, and one solution, yet we often view them in just these terms, ignoring situational factors such as dynamic complexity (and our limitations comprehending it), delayed learning, too much or too little information, contradictory information, and the influence of time. Then throw luck into the mix, and remember that sometimes a reasonably good decision yields a bad outcome and a manifestly poor one yields a win.
Adversarial: As unlikely as it seems, we often remove the adversary from our decision calculus.
Perceptual: Misperceiving the level of uncertainty associated with any or all of these factors is entirely possible, and not every stakeholder will perceive the same “game.”
[…] If one competitor, however, becomes self-aware, recognizes these sources, explores them, tames them, and – even more powerfully – exploits an adversary’s perception of them, this competitor holds a true advantage.
The best red teamers are aware of the system of uncertainties described above. They consider the problem from the perspective of the system and educate their clients accordingly. This does not guarantee success in every case, but it certainly improves the odds.
Mark Mateski, “Why we red team: the tyranny of uncertainty,” Red Team Journal, November 13, 2014.
The perils of inevitable incompetence
In 1999, in the Journal of Personality and Social Psychology, my then graduate student Justin Kruger and I published a paper that documented how, in many areas of life, incompetent people do not recognize – scratch that, cannot recognize – just how incompetent they are, a phenomenon that has come to be known as the Dunning-Kruger effect. Logic itself almost demands this lack of self-insight: For poor performers to recognize their ineptitude would require them to possess the very expertise they lack […]. Poor performers – and we are all poor performers at some things – fail to see the flaws in their thinking or the answers they lack.
What’s curious is that, in many cases, incompetence does not leave people disoriented, perplexed, or cautious. Instead, the incompetent are often blessed with an inappropriate confidence, buoyed by something that feels to them like knowledge […].
An ignorant mind is precisely not a spotless, empty vessel, but one that’s filled with the clutter of irrelevant or misleading life experiences, theories, facts, intuitions, strategies, algorithms, heuristics, metaphors, and hunches that regrettably have the look and feel of useful and accurate knowledge. This clutter is an unfortunate by-product of one of our greatest strengths as a species. We are unbridled pattern recognizers and profligate theorizers. Often, our theories are good enough to get us through the day, or at least to an age when we can procreate. But our genius for creative storytelling, combined with our inability to detect our own ignorance, can sometimes lead to situations that are embarrassing, unfortunate, or downright dangerous – especially in a technologically advanced, complex democratic society that occasionally invests mistaken popular beliefs with immense destructive power.
David Dunning, “We are all confident idiots,” Pacific Standard, October 27, 2014.
Millennials overturn the marketing apple cart
McDonald’s sales are slumping. Net income for the third quarter 2014 fell 30 percent from a year ago. The world’s number one fast-food retailer is struggling to maintain market share against fast-casual restaurants such as Chipotle which are enjoying explosive growth. The once-heralded marketing behemoth is having its lunch eaten by young upstarts with a new concept.
McDonalds is struggling, in large part, because they are not connecting with Millennials. They don’t even rank among their top ten favorite restaurant chains.
More than maintaining market share, McDonald’s is struggling to remain relevant to a group of customers that is critically important to them. Millennials have different tastes and values than their parents, and McDonalds isn’t cutting the mustard. Millennials are rejecting many traditionally successful brands. Retailers from Coke and Gatorade to brewers and media companies are struggling to understand and respond to these market changes.
“Every retail brand had better be repositioning their offerings and shopping experience to cater to the generational onslaught of the Millennials, who will soon to put to shame the once vaunted purchasing power of the Boomers,” admonishes Robin Lewis, co-author of The New Rules of Retail […].
Kevin Tynan, “What bankers can learn from McDonalds’ millennial marketing misfires,” The Financial Brand, November 13, 2014, http://thefinancialbrand.com/45114/banking-mcdonalds-millennial-marketing/
Harnessing design thinking
Do you really know what your customers want?
That’s never been an easy question. Yet it’s even more difficult to answer today, when companies such as Airbnb, Amazon, Google, and Uber1 have shaken up the competitive landscape by raising the bar on consumer expectations. They don’t just provide useful products and services; they create experiences that people love. They do it by applying a user-centered perspective that unearths opportunities to create products and services that delight and empower customers.
This design approach is forcing business leaders to reconsider their offerings. Within that competitive challenge, however, lies a tremendous opportunity to “re-imagine” the very foundations of a business – from transforming how it engages with customers to becoming an agile, innovative organization.
Three questions to spur design thinking
What a user-centered approach enables companies to do is to take insights into the consumer decision journey and the marketplace and convert them into products and services customers actually want […].
Start with the heart: Design thinking starts with a deep understanding of consumers’ emotions and desires. You’re designing for a delightful user experience, and that can only come from understanding the interaction in various contexts between emotions, intentions, and behavior.
Know who and what are shaping expectations: It’s simply not enough to offer a better experience than your direct competitor; you need to consider your “experiential” competitors. When customers like what disruptors are delivering, that’s what they want and expect from every business.
Test, test, and test some more: The design process should be hyper-iterative, involving constant, rapid, real-time tweaking based on actual customer behavior along the decision journey.
Prashant Agarwal, Mahin Samadani, and Hugo Sarrazin, “What every executive needs to know about design,” McKinsey Insight, November 2014.
Google’s big data secret
The challenge for most big companies is that they grow by acquisition. And so you end up with several separate data systems that don’t communicate easily.
Google has tremendous discipline in this respect. Basically, when we acquire a company, we integrate its software into our way of doing things. What’s great about that is you can take an engineer from one project on Google, move them to another project at Google, and they [are] productive pretty much immediately, because everyone is using the same conventions and the same coding style, the same basic blocks for storing and accessing data […].
And because you have that integrated system, then it’s much easier to access data and use the tools that we’ve developed to do this kind of analytics. So, for example, creating a dashboard for some process. You’ve created some new system, you want to monitor it; you create a dashboard to display that monitor. That’s a half-hour implementation at Google because of these great tools that we’ve developed.
It’s very costly, because when you do an acquisition, you bring somebody in, you’ve got to basically redo their system to align with Google’s […].
I used to have a software company, and one of the things that used to drive me nuts was people saying, “Oh, yeah, we’ll just do it this way for now.” I’ve never seen a “for now” that didn’t turn into a “forever.”
Hal Varian, “Is your organization ready for the impending flood of data?,” Sloan Management Review, Winter 2014.
Better tools for evaluating corporate investments
Let me pose a question: what’s more valuable?
Investing 10 million dollars in a program that will return 20 million dollars in three years with 100 percent certainty […] or
Investing 1 million dollars in a program that will return 3 million dollars in three years with 50 percent certainty?
Basic theory says the first option is more valuable. I can expect to accrue 10 million in profit on an initial investment of 10 million. In the second scenario, if I can find ten similar investments, I can expect to receive 5 million in profit – since I am losing the principle on half of my investments. Even absent the runaway administrative costs that are pervasive in so many corporate organizations, it’s easy to see that 10 million is greater than 5 million, so as a corporate finance executive, that’s where I’ll place my bet. Easy, right?
Unfortunately, it’s potentially too easy. In the above example, the only information I’ve provided is information about the potential outcomes for the investor in the first three years of an investment’s performance. The truth is that most programs don’t simply up and disappear after three years. And the longer they can impact your organization, the more difficult it is for people to project their exact financials with any sort of certainty. If I told you that the million-dollar investment was the experiment that led to the Kindle at Amazon, or the iPod at Apple, you’d likely think twice about suggesting that Option A was the more valuable – even though it might look that way in a simple spreadsheet.
Instead of comparing the above projects with a simple three-year net present value calculation (all too common in corporate America), more executives need to think of project investments as complex options. A small, uncertain, investment can give us the option on extreme upside, while often a larger, more certain, investment might give us no option value at all. And instead of the simple financial tools we’re handed in college courses in corporate finance, when we’re valuing projects based on the option value they confer – we need to be very careful to match the valuation methodology to the opportunity. Complex options require a more complex way of thinking about the investment in front of us.
Venture capitalists pursue investments in much the same fashion. In an interview with New York Magazine, Marc Andreessen recently suggested that the most important question a venture capitalist can ask is, “What if it works?”
Maxwell Wessel, “What net present value can’t tell you,” Harvard Business Review, November 2014.
Knowledge sharing as the ultimate killer app
What made Homo sapiens different from the Neanderthals was most likely our social abilities and behaviors, how we behave as a collective. As a human species we have always been very focused on communicating and transferring knowledge. Not only from one person to another, but also parent to child. This way, the next generation can build further on the collective knowledge of the previous generation.
During the 400,000 years that the Neanderthals lived on the earth, they didn’t develop their tools very much. In fact, the tools they used at the end of their time were similar to the ones they used in the early years. If we compare that to Homo sapiens, the tools we used in the early years cannot be compared with the tools and technologies we have developed since. From creating simple stone tools we have created spaceships that can send people into space and digital communication technology that has the potential to connect all human beings on the earth. What made this possible is our innate drive and ability to share what we know with each other […].
This leads me to the rather obvious conclusion that what has made us, the Homo sapiens, competitive and successful as a human species, are exactly the same things that make an enterprise competitive and successful. It is our ability to communicate and share knowledge to other members of the social groups that we belong to.
Oscar Berg, “Sharing is our competitive advantage”, November 12, 2014, http://www.oscarberg.net/2014/11/sharing-is-our-competitive-advantage.html
Intelligent machines: a complement not a competitor
Computers think straight. People think crookedly. Despite all the frustrations that come with thinking crookedly, we have it much better than our calculating kin. Thinking crookedly is more interesting, more rewarding, flat-out more fun than thinking straight. Emotion, pleasure, art, ingenuity, daring, wit, funkiness, love: pretty much everything good is a byproduct of crooked thinking. To think crookedly – to be conscious and self-aware and kind of fucked-up – is a harder feat by far than to think straight. That’s why it’s been fairly easy for us to get machines to think straight, while we still have no idea how to get them to think crookedly.
“Certainly if you had […] an artificial brain that was smarter than your brain, you’d be better off,” Sergey Brin once said. Certainly Sergey Brin was wrong. He was thinking too straight. The conscious human mind is buggy, impurely smart, and that’s its greatest feature.
Still, thinking straight, really straight, is a useful skill. After all, it provides a perfect complement to our own way of thinking. That’s why we made computers, and it’s why computers are so valuable in so many situations. For a crooked thinker, there’s nothing like being able to call on a straight thinker from time to time […].
In fact, this won’t really be intelligence, at least not as we’ve come to think of it. Indeed, intelligence may be a liability – especially if by “intelligence” we mean our peculiar self-awareness, all our frantic loops of introspection and messy currents of self-consciousness. We want our self-driving car to be inhumanly focused on the road, not obsessing over an argument it had with the garage. The synthetic Dr. Watson at our hospital should be maniacal in its work, never wondering whether it should have majored in English instead. As AIs develop, we might have to engineer ways to prevent consciousness in them.
All along, our all-too-human AI boffins have been pursuing the wrong goal. If the value of our computers lies in the complementary nature of their intelligence, the last thing we’d want to do is turn them into crooked thinkers like ourselves. Who wants a fucked-up computer?
Nicholas Carr, “Thinking straight and crooked,” Rough Type, November 9, 2014, http://www.roughtype.com/?p=5297
The hidden root of the financial crisis
Much, and at times most, of what happens in the mortgage market doesn’t have anything to do with homeownership. A sizable percentage of mortgages – including most of the risky ones that were made in the run-up to the financial crisis – are not used to buy a home. They’re used to refinance an existing mortgage. When home prices are rising and mortgage rates are falling, many homeowners choose to replace their mortgage with a bigger one, taking the difference in cash. In other words, mortgages are a way to provide credit.
Refinancing is a relatively modern phenomenon. According to Joshua Rosner, a managing director at the research consultancy Graham Fisher & Company, by 1977, only 8 percent of homeowners had ever refinanced. By 1999, 47 percent had refinanced at least once. By the peak of the bubble, homeowners were extensively using refinancings to extract cash. Mr. Rosner also points out that while homeownership peaked in 2004, home prices peaked in 2006, because refinancing drove up prices.
One of the most abjectly false narratives about the financial crisis is that risky mortgages proliferated so that people who couldn’t afford homes could nonetheless buy them. Modern subprime lending was not about homeownership. Instead, the 1990s crop of subprime mortgage makers allowed people with bad credit to borrow against the equity in their existing homes. According to a joint HUD-Treasury report published in 2000, by 1999, a staggering 82 percent of subprime mortgages were refinancings, and in nearly 60 percent of those cases, the borrower pulled out cash, adding to his debt burden. The report noted that “relatively few subprime mortgages are used to purchase a house.”
Bethany McLean, “A house is not a credit card,” New York Times, November 13, 2014.