Strategy in the media

Citation

Henry, C. (2009), "Strategy in the media", Strategy & Leadership, Vol. 37 No. 5. https://doi.org/10.1108/sl.2009.26137eab.001

Strategy in the media

Article Type: CEO advisory From: Strategy & Leadership, Volume 37, Issue 5

Is the era of disruptive innovation over?

For more than a decade, the prevailing view of innovation has been that little guys had the edge. Innovation bubbled up from the bottom, from upstarts and insurgents. Big companies didn’t innovate, and government got in the way. In the dominant innovation narrative, venture-backed start-up companies were cast as the nimble winners and large corporations as the sluggish losers.

There was a rich vein of business-school research supporting the notion that innovation comes most naturally from small-scale outsiders. That was the headline point that a generation of business people, venture investors and policy makers took away from Clayton M. Christensen’s 1997 classic, The Innovator’s Dilemma, which examined the process of disruptive change.

But a shift in thinking is under way, driven by altered circumstances. In the United States and abroad, the biggest economic and social challenges – and potential business opportunities – are problems in multifaceted fields like the environment, energy and health care that rely on complex systems.

Solutions won’t come from the next new gadget or clever software, though such innovations will help. Instead, they must plug into a larger network of change shaped by economics, regulation and policy. Progress, experts say, will depend on people in a wide range of disciplines, and collaboration across the public and private sectors …

Big companies like General Electric and IBM that employ scientists in many disciplines typically have the skills and scale to tackle such projects. Their advantage is in “being able to integrate innovations across these complex systems,” said James E. Spohrer, a scientist at IBM’s Almaden Research Center in San Jose, Calif.

Technology trends also contribute to the rising role of large companies. The lone inventor will never be extinct, but W. Brian Arthur, an economist at the Palo Alto Research Center, says that as digital technology evolves, step-by-step innovations are less important than linking all the sensors, software and data centers in systems.

Today, Mr Arthur said, the unfolding “digitization of the economy” is in some ways a modern rerun of past technology waves, from steam power to electricity. “It’s not individual inventions that matter so much, but when large bodies of technology come together and have an impact across the economy,” he said. “That’s what we’re seeing now.”

Steve Lohr, “Who says innovation belongs to the small?”, The New York Times, May 24, 2009.

Management, measurement, and the smooth sailing fallacy

There’s been a dramatic failure in management governance. And so our basic doctrines of how we manage things are in question and need revision.

At the heart of this failure is what I call the “smooth sailing” fallacy. Back in the 1930s, the Graf Zeppelin and the Hindenburg were the largest aircraft that had ever flown. The Hindenburg was as big as the Titanic. Together these vehicles had made 620-odd successful flights when one evening the Hindenburg suddenly burst into flames and fell to the ground in New Jersey. That was May 1937.

Years ago, I had the chance to chat with a guy who had actually flown over Europe in the Hindenburg. And he had this wistful memory that it was a wonderful ride. He said, “It seemed so safe. It was smooth, not like the bumpy rides you get in airplanes today.” Well, the ride in the Hindenburg was smooth, until it exploded. And the risk the passengers took wasn’t related to the bumps in the ride or to its smoothness. If you had a modern econometrician on board, no matter how hard he studied those bumps and wiggles in the ride, he wouldn’t have been able to predict the disaster. The fallacy is the idea that you can predict disaster risk by looking at the bumps and wiggles in current results.

The history of bumps and wiggles – and of GDP and prices – didn’t predict economic disaster. When people talk about Six Sigma events or tail risk or Black Swan, they’re showing that they don’t really get it. What happened to the Hindenburg that night was not a surprisingly large bump. It was a design flaw …

This smooth-sailing fallacy arises when we mistake a measure for reality. Competent management always looks deeper than the numbers, deeper than the current measures. Incompetent management just focuses on the metrics, on the body count, on quarterly earnings – or on GDP growth or the consumer price index. And that’s how we get into these troubles. We really have to think about the redesign of a lot of institutions and doctrines around measurement. This lesson is fundamental: you cannot manage by just looking at the results meter.

“Management lessons from the financial crisis: a conversation with Lowell Bryan and Richard Rumelt”, The McKinsey Quarterly, June 2009.

Understanding the implicit equations that drive strategy

Operations strategy fundamentally demands trade-offs. Accordingly, equations of one sort or another often come to dominate the thinking of managers seeking to optimize the resources at their disposal to achieve the best bottom-line results. Sometimes these equations are formalized and reflect explicit trade-off decisions, as is the case with the economic order quantity (EOQ) formula, which optimizes setup cost and inventory carrying cost. But more often, managers operate with an implicit set of formulas that may be derived loosely from formal thinking but are in practice based more on trial and error. These heuristics often go unchallenged as they shape the managerial decisions that drive entire industries down a common path. Common, that is, until someone challenges the underlying assumptions and the rote thinking that results from them.

For example, when the Toyota Motor Corporation introduced its new paradigm for what became known as lean manufacturing in the mid-20th century, it might have seemed that it was dismissing the old logic of the EOQ and the mass production mind-set that it had engendered. But a deeper look shows that Toyota actually reframed the EOQ paradigm rather than dismissed it, because the logic of the equation still holds. True breakthrough operating strategies like Toyota’s, in fact, usually result from a reframing of the accepted wisdom.

To drive your own breakthrough strategies, you must first understand the implicit equations that influence management thinking in your industry. Once you define them, you can, like Toyota, reframe the equation to produce a new model of competition … .

Tim Laseter and M. Eric Johnson, “Reframing your business equation,” Strategy + Business, Summer 2009.

What drives radical innovation?

Radical innovation is an important driver of the growth, success, and wealth of firms and nations … our study suggests that firms are special forms of organization that increasingly transcend national boundaries, constraints, and systems. Innovative firms, it would seem, are similar: they share the same cultural practices and attitudes despite differences in location. Yet, this culture is tough to observe, measure, and develop. We have provided a diagnostic tool that can assess the relevant dimensions of culture and enable firms to benchmark themselves against others of their size, history, or industry. Thus, managers can be attuned to these cultural factors, measure them, and foster them to maintain a culture of relentless innovation. Such a focus may bear more tangible fruit than one that relies on government to invest in or protect markets.

Indeed, the appeal for government relief and intervention by firms may well be a cover for cultural deficiencies in their organizations that they may have hitherto overlooked.

Second, we identify specific attitudes and practices within innovative firms that make them special and foster a culture that helps drive radical innovation. The attitudes include a willingness to cannibalize, future market orientation, and risk tolerance while the practices include empowering product champions and providing incentives for enterprise. Firms like Apple that have such cultural attitudes and practices are distinct and excel at radical innovation. They do not have to count patents and engineers! Indeed, Apple’s “best feat may be the culture that helps generate so many folks who’ve gone on to create great products elsewhere”.

Gerard J. Tellis, Jaideep C. Prabhu, and Rajesh K. Chandy, “Radical innovation across nations: the pre-eminence of corporate culture,” Journal of Marketing January 2009.

Economists and the economic crisis

Bankers have deservedly received much of the blame for the financial bloodbath that’s paralyzed governments and transformed societies. But economists are just as much to blame. Possibly more.

Most of them failed to see the weaknesses in financial markets. But they were not only blind. They rejected the possibility of unparalleled disaster because it did not fit their model of rational and efficient markets, of financial innovation effectively transferring risk, of market prices reflecting the state of the world and self-regulation being more appropriate than heavy-handed government intervention.

They espoused the implicit view behind the standard economic models: that markets and economies are basically stable and that when they go off course, it’s a temporary blip. And they ignored phenomena that produced results radically different from their models.

The market’s strength, they said, proved they were right. Back in the late ’90s, there was even talk about a “long boom” driven by technology and globalization.

As John Maynard Keynes wrote in 1936, economists are looked upon as Candides “who, having left this world for the cultivation of their gardens, teach that all is for the best in the best of all possible worlds provided we will let well alone”. That optimism turned out to be dangerous. With mathematical models widely used by banks and the financial system built around their work, and with their access to the corridors of power, economists are in part responsible for unleashing forces that transported us to where we are today. No wonder there has been little consensus about what needs to be done now …

There are two reasons why they failed to warn the public. One possible explanation is that they did not realize their models were fragile. That’s unlikely, as most financial engineers and economists are extremely bright. It is difficult to accept that they would have no idea that their models had certain limitations. A more likely explanation is that they did not believe it was their job to warn the public.

The problem therefore does not lie with economics. It’s more about economists and the hubris of a profession that produced blind spots. The market implosion suggests we probably need to develop more sophisticated early warning systems that indicate bubbles and certainly economics could play a role in that. But what’s needed even more is a reappraisal of the anthropology and social dynamics of the dismal science.

Leon Gettler, “Economists saw danger signs, but failed at disclosure,” The Age, May 27, 2009.

Business Schools and the economic crisis

“I know you’re angry. I’m angry!” declared Harvey Milk, the American politician and gay rights activist, during a 1977 protest against the repeal of an antidiscrimination law. Today, we find ourselves in an economic quagmire where people around the world feel that same kind of intense rage – this time, against big business. Society has lost confidence in many economic institutions – investment banks, credit-rating agencies, and central banks, for instance – and prominent among them is one to which I devoted most of my professional life: business schools …

To reprise the line: I know you’re angry. I’m angry too.

I’m angry about the inattention to ethics and values-based leadership in business schools. We didn’t need the current meltdown to tell us that; the Enron and WorldCom scandals proved it more than seven years ago.

I’m angry about the disciplinary silos in which business schools teach management. I obviously didn’t realize that balkanization had affected my understanding of the Royal Bank of Scotland, but many years ago, I did become aware that carving up management challenges by function would leave academics without a holistic appreciation of the challenges MBAs face.

I’m angry that many academics aren’t curious about what really goes on inside companies. They prefer to develop theoretical models that obscure rather than clarify the way organizations work. Many also believe that a theory’s relevance is enough to justify teaching it. That’s a low bar; almost no theory is entirely irrelevant to business, but only a few are truly important.

Joel M. Podolny, “The buck stops (and starts) at business school,” Harvard Business Review, June 2009.

Customers, competition and commoditization

Conventionally, all of the major frameworks of strategy start by recognizing that the essence of strategy is to achieve superior competitive advantage. That is what everybody adheres to. We found that that as a concept and as a mindset is extremely dangerous, because it puts competitors at the center. And if you do that, then there is a tendency to watch your competitors and try to imitate them.

And that imitation creates sameness. Sameness will never bring greatness, and, even worse, its final result is something which is the worst thing that could ever happen to a business: commoditization. Commoditization means a business in which there is nothing that you can claim that differentiates your offering, and therefore, all you can do is to fight for price. That leads to a very aggressive rivalry. In order for you to win, you have to beat somebody.

It is like strategy as war, and that, as we know very well, is not really the most effective way to manage a business. Wars just create complete devastation; they are the worst thing that could happen to mankind, yet we use that as a simile for management! We felt it was the wrong simile.

Now, if competitors are not at the center of management, then who is at the center? For us, the answer was obvious. The customer is. Therefore, the customer is the driving force. You have to start deeply understanding what the customer’s requirements are and how you can help the customer in the most effective way. This changes completely the way you figure out what actions to do.

Now, instead of trying to imitate somebody, you are trying to separate yourself from the rest of the pack. You try to produce a value proposition which is unique, which is differentiated, which adds value to the customer and expresses a great deal of care and concern for the customer. That value proposition should be based on mutual trust, mutual learning, mutual benefits, and transparency. And, incidentally, strategy now, with all of this advent of new technology, can be made one customer at a time, in what we call a granular way – understanding each individual and providing that individual with a creative value proposition.

Can you imagine the difference in mindset? Instead of strategy as war, the Delta Model tells you to think about strategy as love.

Arnoldo Hax, “Strategy as love, not war,” Sloan Management Review, May 18, 2009, http://sloanreview.mit.edu/improvisations/2009/05/18/strategy-as-love-not-war/

The value of rocking the boat in down times

For months, I have argued that a down economy can be a great opportunity for companies to try something different or start something new.. I don’t mean to minimize the pressures and setbacks that are part of unleashing real change in tough times. If all you’ve got is a spreadsheet filled with red ink and dire forecasts, it’s easy to be paralyzed by fear. But if you’ve got some leadership nerve, and can muster a few good ideas, then hard times can be great times to separate yourself from the pack and build advantages for years to come …

In a paper published by the Journal of Marketing, Peter Dickson and Joseph Giglierano argue that executives and entrepreneurs face two very different sorts of risks. One is that their organization will make a bold move that fails – a risk they call “sinking the boat.” The other is that their organization will fail to make a bold move that would have succeeded – a risk they call “missing the boat.”

Naturally, most executives worry more about sinking the boat than missing the boat, which is why so many organizations, even in flush times, are so cautious and conservative. To me, though, the opportunity for executives and entrepreneurs is to recognize the power of rocking the boat – searching for big ideas and small wrinkles, inside and outside the organization, that help you make waves and change course.

You don’t have to be as bold as Kellogg or as daring as Steve Jobs. But don’t use the long shadow of the economic crisis as an excuse to downsize your dreams or stop taking chances. The challenge for leaders in every field is to emerge from turbulent times with closer connections to their customers, with more energy and creativity from their people, and with greater distance between them and their rivals. The organizations that I admire are determined to offer a compelling alternative to a demoralizing status quo – as the only way to create a compelling future for themselves.

Bill Taylor “Recession leadership: on sinking the boat, missing the boat, and rocking the boat,” Practically Radical, May 18, 2009, http://blogs.harvardbusiness.org/taylor/2009/05/navigating_risk_on_sinking_the.html

Banking booms and speculative bubbles

This wasn’t the first time that something like this had happened. There have been three big banking booms in modern US history. The first began in the late nineteenth century, during the Second Industrial Revolution, when bankers like J.P. Morgan funded the creation of industrial giants like US Steel and International Harvester. The second wave came in the twenties, as electrification transformed manufacturing, and the modern consumer economy took hold. The third wave accompanied the information-technology revolution. Each wave, Philippon shows, was propelled by the need to fund new businesses, and each left finance significantly bigger than before. In all these cases, it wasn’t so much that the bankers had changed; the world had.

The same can’t be said, though, of the boom of the past decade. The housing bubble was unique, and uniquely awful. Each of the previous waves had come in response to a profound shift in the real economy. With the housing bubble, by contrast, there was no meaningful development in the real economy that could explain why homes were suddenly so much more attractive or valuable. The only thing that had changed, really, was that banks were flinging cheap money at would-be homeowners, essentially conjuring up profits out of nowhere. And while previous booms (at least, those of the twenties and the nineties) did end in tears, along the way they made the economy more productive and more innovative in a lasting way. That’s not true of the past decade. Banking grew bigger and more profitable. But all we got in exchange was acres of empty houses in Phoenix.

There’s no doubt that the financial sector needs to be smaller; Philippon suggests that, given the demands of businesses for capital, a normal financial sector would be about the size it was in 1996. Besides just shrinking the industry, though, we have the harder task of making credit bubbles like the one we just lived through less likely. That will require limiting the ability of banks to rely on vast amounts of leverage, which clearly increases risk without adding social value. Many financial innovations also seem to be overrated; it’s not clear that they actually help finance do its core job of channeling capital to businesses. The most important change, though, may be something harder to legislate: Wall Street needs to recognize that its proper role is, as it has been in the past, to follow the real economy, rather than trying to drive it. During the housing bubble, the financial sector essentially tried to create reality. Now’s the time for it to respond to reality instead.

James Surowiecki, “Monsters, Inc.,” New Yorker, May 11, 2009.

Hope for a new General Motors

It has been long in coming, this slow death of what was once the greatest and biggest corporation in the world. The myriad causes of its demise have been thoroughly chronicled, but to my mind one stands out: The custodians of GM simply gave up trying to build the best cars in the world. To accommodate a host of competing interests, from shareholders and bondholders to labor, they repeatedly compromised on excellence. Once sacrificed, that reputation has proved impossible to recapture.

GM has made strides in quality after decades of churning out troubled cars. Cadillac, in particular, has regained a little of its lost luster. But can anyone say GM builds the best cars in any category? Can it rival a Toyota Prius or Honda Insight for fuel efficiency and reliability? A Lexus, BMW or Infiniti for luxury and performance?

In other words, the new, government-controlled GM likely to emerge from bankruptcy faces an uphill battle in a highly competitive global market. That doesn’t mean the effort is doomed. Indeed, it seems to me that the sharper the break with the past, the better …

Can the US field a world-class auto industry? I don’ t see why not. Cars aren’t a commodity like steel, an industry largely lost to foreign competitors. They are complex, highly sophisticated, individualized machines that despite over a century of progress still have room for improvements in fuel efficiency, performance and safety. What US companies need to recapture is an unrelenting commitment to quality.

James Stewart, “No reason GM can’t make the Cadillac of comebacks,” The Wall Street Journal, June 3, 2009.

Craigslist and disruptive innovation

The usual financial formula at newspapers into the 1970s looked like this: the circulation revenue – what customers paid to subscribe or to buy single copies – covered the cost of printing and distributing the paper, and for the cost of the circulation department itself. Display advertising and preprinted inserts paid for all the other expenses: the newsroom, the ad department, the building, the business office, and so on. This meant that the income from classified advertising was pure profit, and as a result, newspapers were able to earn operating profits of 20 to 30 percent from the 1920s right through the Depression and World War II and into the 1990s, despite losing audience and overall ad market share.

The promise of that kind of profit margin kept the market value of newspaper properties high, encouraged the creation of newspaper chains fueled by leverage, and created a corporate culture that discouraged innovation and strategic planning. But along the way, personal computers, Moore’s Law, Metcalfe’s Law and other technological trends eliminated most barriers to entry – newspaper competitors in the form of alternative weeklies and more recently hyperlocal web sites could be started from proverbial kitchen tables to erode the monopolies of the dailies.

And then in 1999 along came Craigslist, another kind of kitchen-table startup with a classic piece of disruptive innovation for which newspapers were totally unprepared – free classified ads. Craigslist now offers classifieds online free, nationwide, in almost any category. It charges only for a few categories in a few markets, which is all it needs to cover costs and make a profit. With just 28 employees, operating out of a San Francisco storefront, Craigslist’s impact has been to cut in half the classified advertising volume of the entire daily newspaper business in the last 10 years, an impact of about $9 billion. And Craigslist’s web traffic as measured in pageviews is now six times as much as that of the entire daily newspaper industry.

Martin C. Langeveld “Out of print: the future of news, newspapers and journalism,” The Monday Evening Club, April 25, 2009, http://mondayeveningclub.blogspot.com/2009/05/out-of-print-future-of-news-newspapers.html

Finding opportunity in hard times

History has shown that hard times can provide as much opportunity as pitfalls. Want proof? Motorola, Hewlett-Packard, and Xerox are just three innovation-driven companies that were founded during the Great Depression. More recently, both Apple and Microsoft began in the midst of an economic trough in the mid-1970s.

In this post and the next, I’d like to share ways in which design thinking can provide a roadmap that will help you position your company to not only survive the recession, but thrive through the recovery.

Dialing back the virtual office

I can’t tell you how many companies I have worked with that have encouraged or tolerated a large degree of geographic dispersal among employees and management teams. “We’re virtual, and proud of it,” one told me. “It doesn’t matter where you live anymore,” many employees of virtualized companies have argued. “We travel all the time anyway,” has been another frequent mantra.

But I recently encountered a company that is moving the other way. Eclipsys makes software for healthcare providers. The company’s headquarters is in Atlanta. Last week, it changed CEOs. The previous CEO, Andrew Eckert, lived in Silicon Valley. By all accounts, he did a good job in the role, and the company has been doing well. However, the board of directors felt that the company couldn’t be managed successfully from afar, and held discussions with Eckert about moving to Atlanta. He was committed for both family and career reasons to stay in California, however, and declined to move. The board decided to change leaders, and Philip Pead, who had previously headed and sold a healthcare software company in Atlanta, got the nod as the new CEO. Pead had moved to Miami, but is returning to Atlanta to run the company.

Pead said this week in an address to customers, “You can’t deny how effective it is to be able to sit down and have lunch with another leader and resolve an issue quickly.” My sense is that he’s right and we all know it. However, many companies seem not to want to acknowledge it.

Of course, virtually every large company has some degree of geographical dispersion. Several Eclipsys managers told me that if they insisted on everyone living in Atlanta, they’d lose a lot of great people. And because the company grew partly through acquisition over the last several years, there are several natural centers where employees are based. I don’t get the feeling that there will be massive consolidation at the company, but it seems likely that the top management team will eventually be in the City Too Busy to Hate, as they call Atlanta.

Senior managers, in particular, are a group that benefits from high-bandwidth interpersonal contact. Henry Mintzberg and other researchers have shown that their jobs typically consist of a variety of short, and frequently unplanned, interactions. It’s much easier to accomplish these when you are all in the same vicinity.

Senior managers are not the only group I’ve heard about that are coming back into co-located offices, however. The big push that IT firms such as Sun, IBM, and AT&T made a few years back toward virtual offices for everybody seems to have been dialed back. Many companies allow some work at home, but far fewer seem to support it for five days a week, 50 weeks a year. It seems that “Out of sight, out of mind” has prevailed over “Absence makes the heart grow fonder.”

Tom Davenport, “The return of the non-virtual organization,” The Next Big Thing, May 29, 2009, http://blogs.harvardbusiness.org/davenport/2009/05/the_return_of_the_nonvirtual_o.html

Craig HenryStrategy & Leadership’s intrepid media explorer, collected these sightings of strategic management in the news. A marketing and strategy consultant based in Carlisle, Pennsylvania, he welcomes your contributions and suggestions (Craighenry@aol.com).