I recently attended a meeting with Michael Raynor, to hear him discuss his new book, The Strategy Paradox. Michael is a Distinguished Fellow at Deloitte Consulting, where he works on corporate strategy with senior executives across a wide range of industries. He is co-author along with Clay Christensen of the 2003 bestseller The Innovator's Solution: Creating and Sustaining Successful Growth. The Innovator's Solution is one of the books I used in the graduate seminar I just finished teaching at MIT this semester. It is an excellent book, both well organized and well written - a combination not often found in business and management books.
The Strategy Paradox was published this past February, and was just named one of the best business strategy books of the year by strategy+business magazine. Its tag line is “Why committing to success leads to failure (and what to do about it).” "Most strategies are built on specific beliefs about the future," writes Michael in the opening of the book. "Unfortunately, the future is deeply unpredictable. Worse, the requirements of breakthrough success demand implementing strategy in ways that make it impossible to adapt should the future not turn out as expected. The result is the Strategy Paradox: strategies with the greatest possibility of success also have the greatest possibility of failure. Resolving this paradox requires a new way of thinking about strategy and uncertainty."
He lucidly makes the point that the most successful companies often have more in common with companies that failed and are no longer in business, than they do with companies that have managed merely to survive. The successful companies, as well as many of the failed ones, aimed to be leaders in their industries and market segments. The former made it. The latter did not. Often, the only discernible difference between the two is the element of luck. When you aim for the stars, you take risks, and those risks will often do you in. The best way to improve your chances of survival is to take fewer risks, a strategy that usually leads to mediocre firms.
Michael illustrates his point by reminding us that the opposite of love is not hate but indifference. To love or hate someone requires having intense emotions toward them - versus not caring, as in indifference. It is not often that an author of a business book uses analogies to love, hate and intense emotions to clarify their management arguments.
"The more an organization pursues extreme profits," he writes later in the book, "the more it must differentiate itself from its competition and the more it must make the kinds of strategic commitments that expose it to the ravages - and the rewards - of strategic uncertainty. It is strategic uncertainty that equilibrates risk and return as organizations create their strategies. Unfortunately, higher returns mean higher mortality. That is the essence of the strategy paradox."
So, how should a business manage the risks inherent in making a commitment to a given strategy in the face of strategic uncertainty, an uncertainty that increases the longer the planning time horizon? The answer, according to Raynor, is found in organizational hierarchy. "The traditional hierarchy provides a foundation for managing strategic uncertainty, because hierarchies function best when the levels within them are defined by the time horizons the managers at each level are responsible for."
The job of the lower, more operational and functional levels is to deliver against their commitments. Those at the higher levels in the organization are responsible for managing the strategic uncertainties by understanding the risks inherent in their commitments, and mitigating or hedging against those risks by positioning the company to be able to exploit future strategic opportunities. It is the job of middle managers to keep monitoring the strategy being executed by the functional managers, and as appropriate, modify or change the strategic commitments with the possibilities created by senior management.
According to Michael, companies get in trouble when time horizons at which different levels of management operate are too close to each other. This is a particular problem when, given the short-term pressures that the investment community imposes on a business, everyone up and down the management hierarchy focuses on improving the current competitiveness of the operating units. When the same functional decisions are reviewed, and perhaps modified by different levels of managers, you are adding to the pressures on the operating units rather than being helpful to them in any way. Moreover, if the senior management team is focused on the short term, then they are not fulfilling their main responsibility - to manage strategic uncertainty and create strategic options for the business.
In The Strategy Paradox, Michael offers a specific framework for managing strategic uncertainty, based on an approach pioneered by Johnson & Johnson's corporate venture capital arm. Their Strategic Flexibility framework consists of four distinct phases: Anticipate - build scenarios for the future; Formulate - create an optimal strategy for each of those futures; Accumulate - determine what strategic options are required; and Operate - manage the portfolio of options. Creating and managing a portfolio of real options on alternative strategies at J&J, he says, "allows focused divisions with high-risk, high-return strategies to change their strategic stance in ways they otherwise could not. The result is better overall corporate performance and lower overall corporate risk.
I am very sympathetic to the underlying assumptions in The Strategy Paradox for a number of reasons. First, it acknowledges up front that we live in an intrinsically unpredictable world, one that is getting more so by the day as it becomes more global, integrated and fast-changing. Strategies must, by definition, be based on your best assumptions about the future, but that future will change in ways that you did not foresee. In business, as in our personal lives, events will happen that you never anticipated and to which you must react. Having the resiliency to cope with changing conditions and keep going may very well be one of the most important attributes of a successful business.
Perhaps such an attitude may appear too fatalistic to some. America is a "can-do" country, they might say, where anything is possible. Irving's fatalism is perhaps a byproduct of his Latin and Eastern European Jewish roots. Maybe. But I prefer to view my perspective as realistic. Thinking you can predict an inherently unpredictable future should be classified as delusional. It is definitely not how you want the senior management team to behave, no matter how optimistic and cheerful they are. Life is full of limits - say, the speed of light - and being aware of limits is considered sensible behavior, especially for those in charge of running complex companies.
Finally, The Strategy Paradox strengthens my conviction that businesses and nations that want to be leaders in the 21st century must invest in attracting and nurturing top talent, as well as in research and development, so that they are in a better position to cope with, adjust to and thrive in our fast-changing, unpredictable world. I think of investing in research as a kind of looking out for asteroids. If something might happen in the future that could significantly change the market environment, you want to know about it as early as possible, so you can start getting ready for that eventuality, should it come to pass.
Truly talented people are ambidextrous - they can focus on the task at hand, while simultaneously scanning the skies for what might upset their chosen directions. Listening to such talented people is one of the best ways for the top management of companies to be aware of the risks inherent in their strategies and the options they can pursue to lower those risks. The alternative is not pretty – you wake up one day and find yourself in a changed landscape, one that you never even knew was even coming.