How to make the most of uncertainty

 

Here is an excerpt from another “classic” article featured online by The McKinsey Quarterly, published by McKinsey & Company, and written by Hugh Courtney. To read the complete article, check out the abundance of other free resources, obtain information about the firm, and sign up for email alerts, please click here.

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In extremely uncertain environments, shaping strategies may deliver higher returns, with lower risk, than they do in less uncertain times.

Shape or adapt? For years, executives have regarded the question as perhaps their most fundamental strategic choice. Is it better for a company’s competitive position to try to influence, or even determine, the outcome of crucial and currently uncertain elements of an industry’s structure and conduct? Or is the wiser course to scope out defensible positions within an industry’s existing structure and then to move with speed and agility to recognize and capture new opportunities when the market changes?

As globalization, digitization, and unfettered capital markets raise levels of uncertainty and rewrite definitions of opportunities and risks, this basic strategic choice has morphed into a more complex and high-stakes dilemma. The right strategic bets can return far higher payoffs, far more quickly; the wrong ones carry a much higher risk of systemic failure. Betting big today may fundamentally reshape a market on a global scale to the advantage of a company or quickly produce losses that can throw it into bankruptcy. A company may avoid foolhardy mistakes by waiting for uncertainty to diminish, or it may squander the chance to lay claim to first-mover advantages.

The truth is that no dominant solution exists. You might argue that any good strategy should attempt to shape and adapt by specifying actions designed to increase the probability of some outcomes while simultaneously preparing for others. That approach may work in some cases. Yet the actions a company must take to shape the market are often inconsistent with those needed to adapt. Consider Qualcomm. For the past few years, it has been trying to move the wireless-telephone industry toward its CDMA (Code Division Multiple Access) technology. CDMA, a technical standard that determines how information travels and communicates through a wireless network, is competing with other technologies to become the industry standard for next-generation mobile phones.

Qualcomm realizes that if it wants to shape the industry, it must build a coalition of supporters around the CDMA technology. This approach involves cutting deals with wireless companies to get them on board and convincing consumers that CDMA is superior. To win the standards battle, Qualcomm must be totally committed to the cause or at least look as though it were. If the company tried to hedge its bets by producing chips for a competing technology as well—something an adapter might do—it would undoubtedly undermine its shaping efforts. How could Qualcomm convince its potential partners that CDMA was superior if it simultaneously invested in competing standards?

As the story of Qualcomm illustrates, under uncertainty, shaping actions are often at odds with adapting ones. Shape or adapt is therefore a real choice for most companies most of the time. But how, amid rising uncertainty and ever-greater risks, can a company nail down the right strategic choice?

The different shapes of shapers and adapters

An essential starting point is understanding your alternatives. Shaping and adapting strategies may take many different forms. Shapers generally attempt to get ahead of uncertainty by driving industry change their way. Some, like Qualcomm, aim to increase the probability that a preferred technology or business process will become an industry standard. Others grapple with uncertainty by introducing fundamental product, service, or business-system innovations intended to redefine the basis of competition in an industry: think of the low-price, point-to-point air travel model of Southwest Airlines, Dell Computer’s direct-sales approach, or Netscape Communications’ breakthrough Internet browser, Navigator.

Other shapers try to restructure unstable industry environments by making bold mergers and acquisitions, as BP did in the oil industry, or by breaking up integrated companies, as AT&T did in 1996 by spinning off its equipment provider, Lucent Technologies. Other companies, such as McDonald’s in the 1990s, shape nascent markets by replicating business systems in new geographies. Still others focus on shaping the conduct of competitors; in the 1970s, for example, DuPont built its capacity in the titanium dioxide industry ahead of market demand, thus influencing its competitors’ expansion plans.

Adapters, by contrast, take the existing and future industry structure and conduct as given. When a market is stable, adapters try to define defensible positions within the industry’s existing structure. When high uncertainty prevails, they attempt to win through speed and agility in recognizing and capturing new opportunities as the market changes. They might quickly follow a potential shaper’s lead, as Compaq Computer did when it bet on Microsoft and Intel with early alliances in the 1980s. Other adapters hedge against future market uncertainty when they can identify a limited, discrete set of paths the market may follow. In the late 1980s, for example, software companies could hedge against uncertainty about which PC operating system would emerge as the industry standard by developing products for each of the contenders, notably DOS, Macintosh, Windows, Unix, and OS/2.

Still other adapters build their strategies around constant experimentation in products, services, and business systems. In the credit card industry, Capital One Financial conducted 27,000 tests of products, prices, features, packages, marketing channels, credit policies, account-management approaches, customer service methods, and collection and retention procedures in 1998. [Note: Capital One Financial Corporation, The Innovation Imperative, 1998 annual report, p. 4.] Finally, some adapters manage uncertainty by building flexible organizations designed to respond to changing market needs. Many professional-services firms, for example, focus on recruiting and developing people with general-management skills that will be valuable to clients regardless of how the market evolves.

With such a broad range of approaches, no wonder business strategists can’t agree on a dominant answer to the shape-or-adapt problem. In fact, even individual companies may not consistently choose one alternative across all issues, business lines, and times. Nor do the data support a one-size-fits-all answer. McKinsey research suggests that 86 percent of the biggest business winners from 1985 to 1995 followed predominantly market-shaping strategies. [Note: This research analyzed the 50 "stars" with the greatest sales, profit, and market capitalization growth during the sample period. The stars included not only some computer and retail giants (such as Best Buy, Microsoft, Oracle, Sun Microsystems, The Home Depot, and Wal-Mart) but also lesser-known industrial companies (M. S. Carriers), business-services firms (Omnicon), health care companies (Biomet), and financial-services firms (Advanta).] Yet the research clearly shows that adapters too can win big.

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To read the complete article, please click here.

Hugh Courtney is an associate principal in McKinsey’s Washington, DC, office. This article is adapted from his book, 20/20 Foresight: Crafting Strategy in an Uncertain World, Boston: Harvard Business School Press, 2001.

 

 

The Lean Startup: A book review by Bob Morris

The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses
Eric Ries
Crown Business (2011)

“There is surely nothing quite so useless as doing with great efficiency what should not be done at all.”  Peter Drucker

I selected this observation by Drucker (1963) because it continues to suggest caution when deciding what to do, how and when to do it, etc. Michael Porter also offers a helpful reminder: “The essence of strategy is choosing what not to do.” This is especially true of those who are either planning to launch a start-up or have only recently done so. Given the number of Four and Five Star reviews of this book featured by Amazon as of this moment (136 of a total of 153), Eric Ries has clearly attracted and rewarded the attention of those who share his determination to “improve the success rate of new innovative products worldwide.” He offers a method by which to achieve that objective, based on five separate but interdependent principles best revealed within the book’s narrative, in context.

Ries suggests two primary reasons for the failure of most startups. One is trusting indicators of likely success that are either inappropriate or unreliable such as a good business plan, a solid strategy, and thorough market research. A startup is by nature and unknown quantity, Ries points out, as are its prospects. Also, many entrepreneurs and their investors become impatient, then frustrated, and abandon traditional management practices.  I agree with him that all startups must be managed and only those that are managed well have a chance to survive. It is also important to keep in mind that, at one time, each of the “Fortune 500” was a startup, launched by one or more entrepreneurs who would not be denied.

Credit Ries with pursuing what Jim Collins and Jerry Porras characterize in Built to Last as a Big Hairy Audacious Goal or BHAG:  To provide “a new discipline for entrepreneurial management” that takes into full account “the chaos and uncertainty that startups must face…I believe that entrepreneurship requires a managerial discipline to harness the entrepreneurial opportunity we have been given.” Here’s the BHAG: “change the entire ecosystem of entrepreneurship.”

The Lean Startup movement’s size and impact seem to be rapidly increasing as entrepreneurs worldwide embrace the tenets of a manufacturing revolution that Taiichi Ohno and Shigeo Shingo are credited with developing at Toyota. These tenets by no means preclude traditional functions such as vision and concept, product development, marketing and sales, etc. Rather, what Ries advocates (if I understand him correctly) is a new way of looking at the development of innovative new products by accepting a new way of looking at the management process by which that will be accomplished.

As I re-read this book, I realized that despite all the attention that Ries devotes to startups, much (if not most) of the material in his book is directly relevant to almost all organizations, whatever their size, nature, and birth date may be. This is what Jack Welch had in mind when explaining his reasons for admiring small companies. Here is a brief excerpt from his remarks at a GE annual meeting about 20 years ago:

“For one, they communicate better. Without the din and prattle of bureaucracy, people listen as well as talk; and since there are fewer of them they generally know and understand each other. Second, small companies move faster. They know the penalties for hesitation in the marketplace. Third, in small companies, with fewer layers and less camouflage, the leaders show up very clearly on the screen. Their performance and its impact are clear to everyone. And, finally, smaller companies waste less. They spend less time in endless reviews and approvals and politics and paper drills. They have fewer people; therefore they can only do the important things. Their people are free to direct their energy and attention toward the marketplace rather than fighting bureaucracy.”

As Eric Ries concludes his book, he wonders what an organization would look like “if all of its employees were armed with Lean Startup superpowers.” What indeed.

 

 

Andrea Kates: Part One of an interview by Bob Morris

Andrea Kates

Andrea Kates (akates@BusinessGenome.com) is the founder of the Business Genome® project and author of the visionary bestselling business innovation book, Find Your Next (McGraw-Hill, November 2011). As a business strategist, facilitator, and speaker, Andrea has led more than 250 business innovation initiatives for global corporations, entrepreneurs, and organizations including Royal Dutch Shell (Asia-Pacific), Audi, Allstate, Continental Airlines, GM/OnStar, Hewlett-Packard, JP Morgan Chase, KPMG, the Houston Texans (NFL), and P.F. Chang’s.   Find Your Next was based on her original research with top leaders of rapidly growing companies including GE ecomagination, IndieGoGo, LunaTik, Autodesk, Cisco, and Sharp Healthcare. Find Your Next reveals the keys to a revolutionary model of business innovation that has the capacity to change business as we know it.

Known to many as the next generation’s “brand whisperer,” Andrea created the Business Genome project to help companies adapt to a rapidly-changing global business environment and to gain a competitive advantage by discovering cross-industry opportunities for innovation. Her hallmark CoLabs immerses organizations in the hands-on application of cross-industry insights.

Andrea is a member of the TED (Technology, Entertainment, Design) community and featured 2012 TED speaker (short talk).

This is an excerpt from the first part of a two-part interview of her. To read the complete Part One interview, please click here.

To read Part Two, please click here.

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Morris: Before discussing Find Your Next, a few general questions. First, which person has had the greatest influence on your personal growth? How so?

Kates: No one has ever asked me that question before–it’s not something I generally share with clients. But now that you’ve asked, I’d have to say Twyla Tharp, a choreographer I studied with when I was a teenager. She was trained in both classical ballet and contemporary dance and was one of the first crossover choreographers—she incorporated nontraditional music like Billy Joel’s and David Byrne’s into her works and blended ballet moves with modern and even pop culture dance moves. That’s right, dancing. I may be a business analyst now, but I’ve lived a lot of lives, and one was as a dancer. What does dancing have to do with business? What could a dancer teach a business strategist? She taught me to have tenacity and fierceness, and her influence didn’t stop there.  She actually taught me—through dance—three skills that would impact my career and success in amazing ways:

1. BUILD ON A CLASSICAL, TRADITIONAL DISCIPLINE (ballet) to CREATE A NEW GENRE (modern choreography). Twyla Tharp was never afraid to challenge conventional thinking about classical disciplines (in her case, ballet). That’s what she was known for. That’s what made her something singular. She built on what she knew about classical ballet—which was a lot—and transformed it through works like Movin’ Out—a piece set to Billy Joel music—and Deuce Coupe—a dance set to Beach Boys songs—into something that had popular appeal. She pioneered an entirely new form of creative expression that was much more dynamic and innovative. Her dance transformed the discipline of classical ballet into something that modern audiences could relate to—it fit modern times and modern themes.

2. BRING A TIRELESS WORK ETHIC TO THE JOB, EVERY DAY. Her dedication to her work combined with that radical vision inspired me to look at business—and, really, everything—with the same spirit. She worked hard, and set the bar high. You knew better than to ever come to rehearsal unprepared. Ever. You’d never whine. You’d be thrown out. There were hundreds of people who wanted your spot, so the competition was fierce. And she knew it.

3. WORK WITH ONLY “A” TEAM PLAYERS. Twyla worked only with the best—“A” Team players—dancing greats like Mikhail Baryshnikov, who was a super star in the world of ballet. Twyla was an “A” team player, so that meant I needed to do more than just work with them, with great people. I had to be great. I didn’t make the cut the first time I auditioned for her. I didn’t give up, either.  I looked around, I analyzed what the dancers who’d gotten in had that I didn’t, and I trained myself for months to have it by the next round. That process of goal-oriented self-examination forced me to get where I needed to go. It made me disciplined. It taught me, again and again, how to take principles and ideas applied to one pursuit and reconfigure them on to another.  It was about talent and dedication and people and creativity.

Wouldn’t you know it, Twyla Tharp went on to write two books on creativity for business leaders: The Creative Habit and The Collaborative Habit.

Morris: The greatest impact on your professional development?

Kates: My dad, Phil. He was a psychiatrist who became a stand-up comic when he retired. Of course, as you can guess, that combination made him a great role model because he taught me the power of translating insights into universal stories. It’s what all comics do, really, the really good ones. If you can take an insight and distill it down to something that gets a response from a large audience, you’re onto something powerful.

Dad had an incredible track record for understanding what makes relationships work and what makes people happy. My world is the world of commerce, but I ascribe to the same mindset in what I do—I understand what makes businesses thrive and the people within those businesses successful. I try to help people in a similar way by attempting to translate what makes businesses work into elements that can work for every kind of business person or organization, from entrepreneurs, to large companies, to nonprofit organizations, to government groups, or even think tanks. Anything that works should work for everyone, no matter how large or small they are. How famous or how underrated. If I can take a complicated set of decisions and boil them down into simple questions like “Do you want to buy low and sell high or buy high and sell low?”, then I—with them—can cut to the heart of the issue and formulate a game plan for their “next”—that non-obvious opportunity for growth.

In essence, something I’ve only just realized, I’m doing just what Dad did when he refined a joke until it hit just the right note. You can do the exact same thing with business strategy. With everything.

Morris: Years ago, was there a turning point (if not an epiphany) that set you on the career course you continue to follow? Please elaborate.

Kates: Yes, there was. Isn’t there always? To explain, let me first talk about how I got to where I am in my business thinking. I’ve been doing market research a long time, and when I first started, I focused on how to get businesses somewhere new and different, how to uncover untapped opportunities.  I didn’t want to be one of those tired consultants that told their clients what was obvious to anyone who was paying any attention. I worked with so many different kinds of companies—in industries as diverse as telecom, energy, consumer goods, manufacturing, financial services, healthcare, technology, and even nonprofit. No matter what the assignment was, I always had a knack for asking a slightly different set of questions than I was assigned to ask, because I always believed that the really powerful answers couldn’t result from asking obvious, either/or types of questions. Perhaps that came from my dad, too.

As an example, when I first got involved in focus groups years ago, I didn’t like the kinds of questions we were asking. The questions were simple multiple choice questions like, “Which do you prefer, Cheer or Tide?”, instead of what I ended up asking and I thought would tell us a lot more, “What do you wish you could change about how you do laundry today?” What if they didn’t want Cheer or Tide at all?

Back then, we were somewhat limited to that kind of yes/no, binary thinking. We were driving our questions towards our solutions. It makes sense to do that, and it’s way easier. Analysis is always easier when you can fit answers into neat categories. Life is easier that way, but it doesn’t reflect the real world. Easier wasn’t better, or more insightful. All Cheer and Tide tells you is that the big nut to crack has to do with things like chemical formulations, fragrance, and price. It’s based on an assumption that customers worry about the same things that companies do: the product’s formula.

It wasn’t until later, when we learned how to evaluate “fuzzy data” and answers to open-ended questions came along, that we could finally start to do something with answers that were less black and white. And more informative.

It turns out that my early intuition was spot on, but it took almost ten years for everything else to catch up. So, the turning point was all about asking the right questions—the ones that told you what you actually wanted to know, not just the ones that were problems you could solve right then with whatever you had. Plus, for someone like me—and I suspect for my clients, too—it’s a lot more fun, and a more interesting way of looking at business.

The most significant business growth doesn’t come from incremental thinking. The most significant business growth comes from reading between the lines. That’s what I learned. If customers are honest and say that they don’t want either Cheer OR Tide, but instead don’t want to deal with laundry at all and would rather hire someone to do it for them, we need to be able to listen, understand, and act on that actual preference. P&G did just that recently when it launched Tide’s Pop-Up laundry services—companies are finally finding out what people want and crafting their product and service lines to give it to them. I love it when that happens. When companies listen with new perceptions to what will appeal to customers or when they uncover an unmet need and figure out a way to meet the need. That’s what I mean by reading between the lines.

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To read the complete Part One interview, please click here.

To read the second part, please click here.

Andrea cordially invites you to check out the resources at these websites:

http://www.businessgenome.com/

http://www.youtube.com/businessgenome

http://www.facebook.com/BusinessGenome

http://twitter.com/#!/businessgenome

Find Your Next: Using the Business Genome Approach to Find Your Company's Next Competitive Edge