Quick takes

Citation

Gorrell, C. (2007), "Quick takes", Strategy & Leadership, Vol. 35 No. 4. https://doi.org/10.1108/sl.2007.26135dae.003

Quick takes

These brief summaries highlight the key points and action steps in the feature articles in this issue of Strategy & Leadership.

Solving the strategy paradox: how to reach for the fruit without going out on a limbMichael E. Raynor

It is time to revisit and create a new approach to managing strategic risk. Competitive strategy is about commitment. But commitment necessarily exposes a business to strategic risk – the possibility that it has committed reasonably, but wrongly. (Think of Sony’s Betamax.) The new frontier requires adopting practices that enable operating divisions to pursue outsized returns without having merely to accept the risk that has historically accompanied such boldness. The opportunity to readdress managing strategic risk is based upon the following points:

• •

  Fact: success stems from bold vision and firm commitments to specific strategic postures connected to identifiable core competencies. But these very same strategic traits are also systematically associated with higher failure rates. And that’s the “strategy paradox.” Because strategies that position you for greatness necessarily expose you to ruin.

• •

  Fact: the strategy paradox is a consequence of the collision of the need to commit – to a path believed to lead to success – with the irreducible uncertainty of the future. Unpredictability is what makes it all but impossible to know with the necessary precision what to commit to today in order to be successful tomorrow.

• •

  Fact: strategic risk is a consequence of the uncertainty, and uncertainty is a consequence of time: the longer the time horizon one must take into account when making a commitment, the more uncertain one will be of what to do today.

• •

  Point: hierarchies function best when each level is separated from the others by the time horizon associated with the decisions made at that level. This is because when making the trade-off between risk and return is assigned to the same management level, the only choice is temerity or timidity: they must collapse and “balance” two very different time horizons – the long term of strategic commitment with the short term of operational excellence. The result is that they would in all likelihood pull in their horns, since they would be investing for both today and tomorrow, which would dilute financial resources and, more importantly, management attention. They would choose to accept lower economic returns in exchange for a higher probability of mere survival.

Proposed new approach

“Requisite Uncertainty” is a new organizational design principle that separates making strategic commitments from managing the risk created by those commitments. Strategic options create value by reducing risk. Strategic commitments create value by besting competitors, and delivering on plan generates the cash that keeps any organization going. And different layers of the hierarchy are responsible for managing each value-generating mechanism.

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  In a diversified company, for example, operating division managers must make commitments to choose how best to make their division as successful as possible in the medium term – say, three to five years. Corporate management – the next layer up in the hierarchy and responsible for a still longer time horizon – must create the strategic options needed so that divisions, if they happen to have made the wrong (even if entirely reasonable) commitments, can adapt their strategies as required.

• •

  Microsoft and Johnson & Johnson are offered as case studies.

No one can see over the horizon. But by separating the management of uncertainty from the making and management of commitments, the corporate office can take on the role of imagining what one might find there, and begin preparations accordingly. This frees the crew to focus its full attention on the shoals and treasures that are already in view.

Using the cash curve to discuss and discipline innovation investmentsJames P. Andrew and Harold L. Sirkin

The fundamental challenge of innovation is to achieve the required cash payback by managing the overall innovation process with the understanding that payback can come quite directly and quickly, but also that it may take longer, be much less certain, or come back to the company only indirectly, via other products and services.

Payback analysis tool

For managers needing an approach to align and lead their organizations toward payback, a new tool is offered: the cash curve.

There are four “S” factors that have a direct impact on cash payback of innovation:

1. 1.

   Start-up costs or pre-launch investment, also called start-up or sunk costs.

2. 2.

   Speed, or time to market.

3. 3.

   Scale, or time to volume.

4. 4.

   Support costs, or post-launch investment, which includes a variety of support costs and continuing investments.

These four “S” factors can be visually expressed in the cash curve. The curve graphically plots cumulative cash flow over time. It makes clear many of the managerial challenges, assumptions and trade-offs that often get hidden when looking at spreadsheets of annual cash flows and projections. Other tools and metrics such as net present values, various option valuations, and multiple scenario analyses are useful (and valuable), but discussing and debating the shape of the cash curve will make these financial projections more reliable.

Use the cash curve to show what the payback will be if the assumptions you have made are right. This allows you to make a plan based on those assumptions, understand the impact of each assumption, determine which ones are most critical, test the ones with the biggest impact, and to make trade-offs during commercialization. With this perspective, the process can be managed, not simply reacted to.

Benefits

Using the cash curve forces management to raise and discuss key questions and enables better analysis of the risks and opportunities before making a commitment to invest and move forward. (Five case examples are given.) It requires managers to bring together different perspectives on an idea, create a plan that everyone can understand, support, and work to achieve. It becomes a common point of reference for people (in different positions and disciplines throughout the company) to collectively assess the performance of a new product or service throughout the innovation process.

The cash curve brings a steadying influence to the entire innovation process and all those involved in it. This is important because it’s very easy to get excited about the prospects of a new idea, overestimate its potential for payback, and seriously underestimate the risks involved.

Limited-potential niche or prospective market foothold? Five testsKen Hutt, Ruben Gavieres and Betosini Chakraborty

Successful companies eventually discover that the larger they get, the more difficult it is to maintain their growth rate. An observation made by leading strategic theorists Clayton Christensen and Michael Raynor is that much of the management commitment that makes for an effective sustaining strategy is likely to prevent participation in the next wave of growth opportunities. It is very difficult to push a genuinely new idea through specialized processes and metrics designed to enable low-risk, well understood, and incremental product improvements.

So how do you distinguish between limited-potential niche and crucial market foothold opportunities? The distinction is crucial in order to make the case for funding and supporting the small, but potentially important, foothold business areas. Adoption of the Christensen/Raynor disruption theory by all levels of management can be a struggle. This is because most of the existing processes and policies that have made a company successful run counter to incubating new opportunities.

Solution: several straightforward tests are offered that can be very useful when incorporated within a development process. These tests are not intended to be the last word on identifying footholds, but instead a starting point for managers who want to apply disruption theory in a fact-based manner and move beyond experience and intuition.

Initially, footholds look a lot like niches. The crucial difference is that foothold markets evolve and grow in valuable ways, and it is this difference that managers can identify using five tests. These tests are intended to trigger data-gathering to substantiate or highlight the major issues. They are not intended to be only qualitative, but rather also to produce a quantitative product and market strategy. These tests should also be codified into an appropriate evaluation process.

As a starting point, a strong foothold opportunity exists if managers answer “yes” to five tests:

1. 1.

   Does the product provide clear value to new customers?

2. 2.

   Can an initial, viable product be brought to the market sooner rather than later?

3. 3.

   Will the first customers pay for the improvements needed to enter larger markets?

4. 4.

   Will initial applications diffuse the product across traditional market segments?

5. 5.

   Is there limited reliance on third parties for major product improvements?

Examples are given to illustrate how each of these tests works in practice.

After asking all five questions, if your analysis of a potential business opportunity indicates that it is a strong foothold, then it’s likely it has a significant long-term potential for your business.

Bottomline: these tests have been successfully incorporated by several companies into early product- and market-development activities through process steps and metrics – enabling even these large companies to act more like an entrepreneurial start-up.

New business models for the new media worldSaul J. Berman, Steven Abraham, Bill Battino, Louisa Shipnuck and Andreas Neus

The clash between new and traditional media dramatically shows the impact of the Internet and new youthful demographics as economic forces to be addressed. This story is also illustrative for other business segments that will have their similar challenges played out with their competitors.

Conflict points

There are two key points of conflict in the current battle between traditional and new media.

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  First, the contest is real albeit lopsided. The traditional media companies are financially much larger, but the new media (such as YouTube, MySpace, etc.) are growing much faster.

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  Second, a conflict will emerge among existing players – between traditional content owners (such as studios, game publishers and music labels) and media distributors (television affiliates, retailers, motion picture exhibitors, cable and satellite providers and the like). It could pit partner against partner in a struggle for growth: the content owners want open distribution channels for greater licensing volume; the media distributors want closed/walled channels for higher margins.

The next three to five years

Offered are four primary business model possibilities valid through 2010:

1. 1.

   Traditional media.

2. 2.

   Walled communities.

3. 3.

   Content hyper-syndication walled communities.

4. 4.

   New platform aggregation.

Of these models, there will probably be no clear winner. Instead, different companies will pursue divergent models and unique combinations that leverage their historical strengths and assets – and as a result, the market overall will look extremely varied, even chaotic at times.

Preparing for the future

Specific recommendations for incumbent media companies as they face the immediate threat from new entrants and eventual collisions with traditional partners are:

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  Deliver experiences, not just content

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  Leverage virtual worlds

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  Innovate business models

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  Invest in interactive, measurable advertising services and platforms

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  Redefine partnerships, while mitigating fallout

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  Shift investment from traditional business to new models

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  Create a flexible business design.

The current clash between traditional and new media is reaching a fevered pitch. Industry incumbents are responding – but perhaps not quickly or completely enough. While they fight an escalating competitive battle on this front, traditional media cannot ignore the possible division in its own ranks. Content owners and media distributors need a strategy for turning conflict into opportunity and growth as they navigate this media divide.

Rethinking competition in the world auto market: cultural determinants, strategic implications and game rulesHerbert K. Tay

American and volume European OEMs are once again vulnerable. This time, their competitive situations appear dire and may portend diminished roles in the future automotive competitive landscape.

But why? One answer is the deep-seated cultural factors that underlie their chronic vulnerability relative to their Japanese counterparts. Ingrained differences in heritage, social and business culture predispose each automaker to plan and behave in different ways, with long-range consequences – both successful and unsuccessful – for their strategies and actions. These cultural differences are key determinants of how the automotive world order has been shaped and will continue to evolve. Unless vulnerable OEMs comprehend how these differences influence behavior, they are apt to repeat past misjudgments and further impair their positions.

China and other emerging markets offer significant opportunities for the American and volume European automakers to regain ground. However, even in these markets, the Japanese and Korean automakers are advantaged by unique cultural aspects, as well as greater local market knowledge stemming from historical trade ties.

In the twenty-first century, competition will play out among a score of multinational OEMs, while a handful of Chinese and Indian automakers battle to break out internationally and join their ranks. Each automaker has access to more market opportunity than ever, while simultaneously becoming more exposed to an emerging set of common strategic game rules.

Going forward, each automaker needs to comprehend its strengths, weaknesses and cultural proclivities – as well as those of its competitors – in the context of these strategic imperatives to arrive at business strategies that secure its future:

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  Forge a monolithic competitive culture.

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  Focus on business fundamentals.

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  Balance financial discipline and the long-term strategic view.

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  Converge on world cost benchmarks.

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  Produce where you sell.

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  Build supplier partnerships.

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  Cultivate relationships and alliances with governments and policy makers.

Among the vulnerable, the US automakers need a new culture to break Net Present Value’s tyranny. They need accountability and ongoing vigilance, so that corporate behaviors do not revert back to “short term-ism.” Their leaders need to throttle back on “spin” and regain credibility through sustained demonstrated results.

For the volume-brand Europeans, the challenge will be staking some competitive “white space” for upscale future models, while effecting work rule and cultural changes so that costs and productivity stay competitive. They will also need to work more effectively with their Chinese partners and better tailor their products for the China market.

Catherine Gorrell President of Formac, Inc. a Dallas-based strategy consulting organization (mcgorrell@sbcglobal.net) and a contributing editor of Strategy & Leadership.