Clayton Christensen on “The Discipline of Managing Disruption”

To Harvard professor Clayton Christensen, coauthor of How Will You Measure Your Life?, a primary task of leadership is asking questions that anticipate great challenges. Here is a brief excerpt from an interview conducted by Art Kleiner for strategy+business magazine, published by Bain & Company. To read the complete interview, check out other resources, learn more about the firm, obtain subscription information, and register for email alerts, please click here.

Photograph by Evgenia Eliseeva

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This is the second interview we’ve published with Harvard Business School professor and author Clayton Christensen. The first appeared back in 2001. Four years before, Christensen had published The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail (Harvard Business School Press, 1997). When his keenly original theory of disruption first appeared, it seemed like an audacious and counterintuitive view of organizational change. But it soon evolved into conventional business wisdom. And now he is applying it to a deeper question: “What is life for?”

In The Innovator’s Dilemma, Christensen argued that as companies focus their attention on their best and most reliable customers, they can all too easily overlook the threat of disruption from young upstart competitors. Those competitors, exercising their creativity, develop innovative capabilities and reach customers that the incumbents ignore. Sooner or later, the upstarts steal the market with their better, less-expensive new ways of solving customers’ problems.

Christensen has always had an entrepreneurial bent, and this clearly colors his approach. Before arriving at Harvard Business School, he founded the CPS Technologies Corporation, a manufacturer of thermal management materials (originally called the Ceramics Process Systems Corporation), and he is a cofounder of a small Boston-based consulting firm called Innosight. His ideas are particularly valuable for established industries that seek to respond effectively to the disruption coming seemingly out of nowhere.

In recent years, he has applied this approach to healthcare (The Innovator’s Prescription: A Disruptive Solution for Health Care, with Jerome H. Grossman and Jason Hwang, McGraw-Hill, 2008), education (Disrupting Class: How Disruptive Innovation Will Change the Way the World Learns, with Michael Horn and Curtis W. Johnson, McGraw-Hill, 2008), and, most recently, the personal side of leadership.

Written as a reflection on the fulfillment of life’s purpose after a series of severe medical problems (including cancer and a stroke), Christensen’s most recent book, How Will You Measure Your Life? (coauthored with James Allworth and Karen Dillon, HarperBusiness, 2012), has struck a chord with many business leaders. It links the discipline of managing disruption to the kind of long-term thinking that is necessary if one is to step past today’s pressures and build a strong personal and professional legacy. In late 2012, Christensen spoke with strategy+business by phone from his home outside Boston.

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S+B: How did you develop the concept of measuring your life?

Christensen: I had always aspired as a researcher to develop models that were robust enough to relate to any level in a hierarchy, from a national economy to an industry to a corporation to a business unit to a team. A good theory is really a fundamental statement of causality, and it ought to be as applicable to a business unit as it is to a nation, or vice versa.

In all my work, I’ve looked for universal principles—starting with my doctoral thesis in the early 1990s, which was the original study of disruption in the disk drive industry [which I wrote about in The Innovator’s Dilemma]. I was trying to explain why it was so hard for successful disk drive companies to sustain their success, generation after generation. I’d concluded that the success of their past practices made it difficult to react effectively to new disruptive competitors.

At first, when I finished, I thought I had a model that applied only to the disk drive industry. Then I remembered that during the Cuban missile crisis, which had happened when I was a boy in 1962, my neighbors hired a steam shovel to dig a bomb shelter in their basement. The steam shovel was manufactured by Northwest Engineering, a company that died in the early 1980s because its products were made obsolete by hydraulic excavators. So, later, when I knew someone who worked for an excavating company, I went over to see him one night and described what I’d found in the disk drive industry, and he said the same thing had happened with big digging machines. “There must be something to this,” I thought, “if it explains hydraulic excavators and disk drives.”

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To read the complete interview, please click here.

The Thought Leader Interview: Henry Chesbrough

 

Here is the introduction to an interview of Henry Chesbrough conducted by Ron Norton for strategy+business magazine, published by Booz & Company. To read the complete article, check out other sources, sign up for email alerts, and obtain subscription information, please click here.

Photograph courtesy of Henry Chesbrough

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To escape the commodity trap — and to compete effectively in a knowledge-based economy — business leaders of all kinds need to reinvent themselves as innovators in services.

Economists debate whether a service-based economy can be truly robust — or whether prosperity depends on having enough of a manufacturing base to support service businesses. But what if this turned out to be a false dichotomy? That’s the question raised by innovation expert Henry Chesbrough. All successful manufacturers, in Chesbrough’s view, need to come to terms with a fundamental change: the accelerating flows of knowledge and information that are shortening product cycles and commoditizing their products. They can do this, he says, only by reinventing themselves, not as pure manufacturers or service providers, but as hybrid product–service companies that design their business models around creating more meaningful experiences for their customers.

Of course, many manufacturers are already doing this. General Motors does it with its OnStar system; General Electric does it with its infrastructure financing; Ikea, Apple, Inditex (Zara), and many others do it with their own retail outlets; and Taiwan Semiconductor Manufacturing Company does it with its co-creation model for helping customers design computer chips, which it then manufactures to order. On the other side, service companies such as Barnes & Noble, Starbucks, and (most famously, with its Kindle) Amazon have found that they must enter the realm of manufacturing to thrive. Chesbrough goes one step further. He argues that successful product–service hybrids embrace a new kind of innovation, combining “open innovation” (moving outside the organization’s own boundaries) and services. Hence the title of his latest book: Open Services Innovation: Rethinking Your Business to Grow and Compete in a New Era (Jossey-Bass, 2011).

Chesbrough, professor and executive director of the Program for Open Innovation at the Haas School of Business at the University of California at Berkeley, established himself as a leading voice with an earlier book, Open Innovation: The New Imperative for Creating and Profiting from Technology (Harvard Business School Press, 2003). He was the first major academic champion of the open innovation idea, which has made a great difference at Procter & Gamble, Unilever, and many other companies. Open innovation can be defined as revitalizing a company’s future by tearing down the walls between its R&D organization and outside companies and innovators. Chesbrough recalls that when he first considered the book title in 2003, he Googled the phrase and got only a couple of hundred links, most of them to articles on topics such as the opening of new innovation facilities. “There was no real usage of the term open innovation at that time,” he says. “When I did that same search last summer, I got 13 million responses, and most of them were really about this new model of innovation.”

Now Chesbrough argues that the fortunes of advanced companies — and of economies as a whole — will depend on how well they rethink services. His analysis began several years ago as he considered the fact that service-based industries were rapidly supplanting manufacturing-based industries — in developed economies in general, and in the U.S. economy in particular. Today, he points out, services account for roughly 60 percent of economic activity in the top 40 world economies, and fully 80 percent in the United States.

Services, in this context, doesn’t mean such small-scale activities as providing haircuts or washing cars — or even conventional large-scale services such as accounting and retail businesses. Instead, Chesbrough has a vision of knowledge-intensive infrastructure and product lines that evolve into “the engine of growth for the entire developed world.” Breaking out of the old manufacturing-based, product-centric mold, Chesbrough says, will be challenging for business leaders, because it requires them to think of their customers not as purchasers of goods, but as co-creating partners in an evolving relationship. Companies that master new service innovation models and build or add the requisite new capabilities, he promises, will be able “to reach levels of success they have never before experienced in their market or their industry.”

* * *

To read the complete interview, please click here.

Henry Chesbrough is best known as the “father of open innovation” according to Wikipedia. He authored the book Open Innovation back in 2003, before that term came into general use. Today, there are more than 13 million entries for “open innovation”, documenting the rapid rise of this new model of industrial innovation. Open Services Innovation is his latest book, which extends the idea of open innovation into the services sector. Whether you make a product or a service, open innovation can accelerate your time to market, share risks, and boost growth for your business.

Chesbrough teaches at the Haas School of Business at UC Berkeley, and runs the Center for Open Innovation there. You can find out the latest information about open innovation at www.openinnovation.net. You can find out more about Professor Chesbrough at
http://www2.haas.berkeley.edu/Faculty/chesbrough_henry.aspx
.

To read my first interview of him, please click here.

To read my second interview of him, please click here.

Rob Norton is executive editor of strategy+business.

Big Data: The Management Revolution

Here is a brief excerpt from an article written by Andrew McAfee and Erik Brynjolfss for the Harvard Business Review. To read the complete article, check out the wealth of free resources, and sign up for a subscription to HBR email alerts, please click here.

Artwork: Tamar Cohen, Happy Motoring, 2010, silk screen on vintage road map, 26″ x 18″

* * *

“You can’t manage what you don’t measure.”

There’s much wisdom in that saying, which has been attributed to both W. Edwards Deming and Peter Drucker, and it explains why the recent explosion of digital data is so important. Simply put, because of big data, managers can measure, and hence know, radically more about their businesses, and directly translate that knowledge into improved decision making and performance

Consider retailing. Booksellers in physical stores could always track which books sold and which did not. If they had a loyalty program, they could tie some of those purchases to individual customers. And that was about it. Once shopping moved online, though, the understanding of customers increased dramatically. Online retailers could track not only what customers bought, but also what else they looked at; how they navigated through the site; how much they were influenced by promotions, reviews, and page layouts; and similarities across individuals and groups. Before long, they developed algorithms to predict what books individual customers would like to read next—algorithms that performed better every time the customer responded to or ignored a recommendation. Traditional retailers simply couldn’t access this kind of information, let alone act on it in a timely manner. It’s no wonder that Amazon has put so many brick-and-mortar bookstores out of business

The familiarity of the Amazon story almost masks its power. We expect companies that were born digital to accomplish things that business executives could only dream of a generation ago. But in fact the use of big data has the potential to transform traditional businesses as well. It may offer them even greater opportunities for competitive advantage (online businesses have always known that they were competing on how well they understood their data). As we’ll discuss in more detail, the big data of this revolution is far more powerful than the analytics that were used in the past. We can measure and therefore manage more precisely than ever before. We can make better predictions and smarter decisions. We can target more-effective interventions, and can do so in areas that so far have been dominated by gut and intuition rather than by data and rigor.

As the tools and philosophies of big data spread, they will change long-standing ideas about the value of experience, the nature of expertise, and the practice of management. Smart leaders across industries will see using big data for what it is: a management revolution. But as with any other major change in business, the challenges of becoming a big data–enabled organization can be enormous and require hands-on—or in some cases hands-off—leadership. Nevertheless, it’s a transition that executives need to engage with today.

* * *

To read the complete article, please click here.

Andrew McAfee is a principal research scientist at MIT’s Center for Digital Business and the author of Enterprise 2.0 (Harvard Business School Press, 2009). Erik Brynjolfsson is the Schussel Family Professor at MIT’s Sloan School of Management and the director of its Center for Digital Business. They are the co-authors of Race Against the Machine (Digital Frontier Press, 2012).

The Thought Leader Interview: Henry Chesbrough

Here is the introduction to an interview of Henry Chesbrough conducted by Ron Norton for strategy+business magazine, published by Booz & Company. To read the complete article, check out other sources, sign up for email alerts, and obtain subscription information, please click here.

Photograph courtesy of Henry Chesbrough

* * *

To escape the commodity trap — and to compete effectively in a knowledge-based economy — business leaders of all kinds need to reinvent themselves as innovators in services.

Economists debate whether a service-based economy can be truly robust — or whether prosperity depends on having enough of a manufacturing base to support service businesses. But what if this turned out to be a false dichotomy? That’s the question raised by innovation expert Henry Chesbrough. All successful manufacturers, in Chesbrough’s view, need to come to terms with a fundamental change: the accelerating flows of knowledge and information that are shortening product cycles and commoditizing their products. They can do this, he says, only by reinventing themselves, not as pure manufacturers or service providers, but as hybrid product–service companies that design their business models around creating more meaningful experiences for their customers.

Of course, many manufacturers are already doing this. General Motors does it with its OnStar system; General Electric does it with its infrastructure financing; Ikea, Apple, Inditex (Zara), and many others do it with their own retail outlets; and Taiwan Semiconductor Manufacturing Company does it with its co-creation model for helping customers design computer chips, which it then manufactures to order. On the other side, service companies such as Barnes & Noble, Starbucks, and (most famously, with its Kindle) Amazon have found that they must enter the realm of manufacturing to thrive. Chesbrough goes one step further. He argues that successful product–service hybrids embrace a new kind of innovation, combining “open innovation” (moving outside the organization’s own boundaries) and services. Hence the title of his latest book: Open Services Innovation: Rethinking Your Business to Grow and Compete in a New Era (Jossey-Bass, 2011).

Chesbrough, professor and executive director of the Program for Open Innovation at the Haas School of Business at the University of California at Berkeley, established himself as a leading voice with an earlier book, Open Innovation: The New Imperative for Creating and Profiting from Technology (Harvard Business School Press, 2003). He was the first major academic champion of the open innovation idea, which has made a great difference at Procter & Gamble, Unilever, and many other companies. Open innovation can be defined as revitalizing a company’s future by tearing down the walls between its R&D organization and outside companies and innovators. Chesbrough recalls that when he first considered the book title in 2003, he Googled the phrase and got only a couple of hundred links, most of them to articles on topics such as the opening of new innovation facilities. “There was no real usage of the term open innovation at that time,” he says. “When I did that same search last summer, I got 13 million responses, and most of them were really about this new model of innovation.”

Now Chesbrough argues that the fortunes of advanced companies — and of economies as a whole — will depend on how well they rethink services. His analysis began several years ago as he considered the fact that service-based industries were rapidly supplanting manufacturing-based industries — in developed economies in general, and in the U.S. economy in particular. Today, he points out, services account for roughly 60 percent of economic activity in the top 40 world economies, and fully 80 percent in the United States.

Services, in this context, doesn’t mean such small-scale activities as providing haircuts or washing cars — or even conventional large-scale services such as accounting and retail businesses. Instead, Chesbrough has a vision of knowledge-intensive infrastructure and product lines that evolve into “the engine of growth for the entire developed world.” Breaking out of the old manufacturing-based, product-centric mold, Chesbrough says, will be challenging for business leaders, because it requires them to think of their customers not as purchasers of goods, but as co-creating partners in an evolving relationship. Companies that master new service innovation models and build or add the requisite new capabilities, he promises, will be able “to reach levels of success they have never before experienced in their market or their industry.”

* * *

To read the complete article, please click here.

Henry Chesbrough is best known as the “father of open innovation” according to Wikipedia. He authored the book Open Innovation back in 2003, before that term came into general use. Today, there are more than 13 million entries for “open innovation”, documenting the rapid rise of this new model of industrial innovation. In Open Services Innovation, his latest book, he extends the idea of open innovation into the services sector. Whether you make a product or a service, open innovation can accelerate your time to market, share risks, and boost growth for your business.

Chesbrough teaches at the Haas School of Business at UC Berkeley, and runs the Center for Open Innovation there. You can find out the latest information about open innovation at www.openinnovation.net. You can find out more about Professor Chesbrough at
http://www2.haas.berkeley.edu/Faculty/chesbrough_henry.aspx
.

To read my first interview of him, please click here.

To read my second interview of him, please click here.

Rob Norton is executive editor of strategy+business.

Morten Hansen on “How Great Leaders Make Their Own Luck”

Morten Hansen is a professor at University of California, Berkeley, and at INSEAD, France. He was previously a professor at Harvard Business School for a number of years. Prior to joining Harvard University, Hansen obtained his Ph.D. from the business school at Stanford University. In addition to his academic career, Hansen was a management consultant with the Boston Consulting Group in the London, Stockholm and San Francisco offices. He was part of the research teams for the international best-selling books Built to Last and Good to Great. Hansen’s research on collaboration has won several prestigious awards, including the best article awards from Sloan Management Review and Administrative Science Quarterly, the leading academic journal in the field. Several of his Harvard Business Review articles have been bestsellers for a number of years. He regularly consults with companies on collaboration and gives keynotes at leadership conferences. His new management book is Collaboration: How Leaders Avoid the Traps, Create Unity, and Reap Big Results (Harvard Business School Press, 2009) and, more recently, Great by Choice: Uncertainty, Chaos, and Luck–Why Some Thrive Despite Them All, co-authored with Jim Collins (HarperBusiness, 2011). A native of Norway, Hansen holds a Master’s degree in finance from London School of Economics, and a Ph.D. in Business Administration from Stanford University where he was a Fulbright scholar.

To watch an interview of Morten during which he shares his thoughts about “How Great Leaders Make Their Own Luck” please click here.

To read my interview of Morten and Jim Collins, please click here.

 

 

 

Five Minds for the Future: A book review by Bob Morris

Five Minds for the Future
Howard Gardner
Harvard Business School Press (2009)

On nurturing “potentials that are distinctly human”

I have read and reviewed all of Howard Gardner’s previous books and consider this, his latest, to be the most valuable thus far. In it, he identifies and explains five separate but related combinations of cognitive abilities that are needed to “thrive in the world during eras to come…[cognitive abilities] which we should develop in the future.” Gardner refers to them as “minds” but they are really mindsets. Mastery of each enables a person:

1. to know how to work steadily over time to improve skill and understanding;

2. to take information from disparate sources and make sense of it by understanding and evaluating that information objectively;

3. by building on discipline and synthesis, to break new ground;

4. by “recognizing that nowadays one can no longer remain within one’s shell or one’s home territory,” to note and welcome differences between human individuals and between human groups so as to understand them and work effectively with them;

5. and finally, “proceeding on a level more abstract than the respectful mind,” to reflect on the nature of one’s work and the needs and desires of the society in which one lives.

Gardner notes that the five “minds” he examines in this book are different from the eight or nine human intelligences that he examines in his earlier works. “Rather than being distinct computational capabilities, they are better thought of as broad uses of the mind that we can cultivate at school, in professions, or at the workplace.”

The “future” to which the title of this book refers is the future that awaits each of us. That is, Gardner is not a futurist in the sense that others such as Ossip K. Flechteim, Bertrand de Jouvenel, Dennis Gabor, Alvin Toffler, and Peter Schwartz are. If I understand Gardner’s ultimate objective (and I may not), his hope is to help as many people as possible — regardless of their age, gender, and circumstances — to cultivate their minds by taking full advantage of any and every opportunity available to them; moreover, to do all they can to enrich and then sustain the same process of cultivation initiated by others.

Simply Effective: A book review by Bob Morris

Simply Effective: How to Cut Through Complexity in Your Organization and Get Things Done
Ron Ashkenas
Harvard Business School Press (2009)

“Make it as simple as possible…but no simpler.” Albert Einstein

Ron Ashkenas is one of my intellectual heroes. I have read, reviewed, and highly-admire his countless HBR articles as well as his previous books, notably The Boundaryless Organization, The GE Work-Out, and Rapid Results, and thus was eager to read his latest which, he explains, “is meant as a resource for managers, consultants, and others who want to engage in [an] ongoing and never-ending quest [to] engage their colleagues in an ongoing dialogue about the sources of complexity and their implications, and experiment with different approaches until they figure out what works”…or at least what will probably work for them and their organization.

Others have their reasons for praising this book. Here are three of mine. First, Ashkenas follows Einstein’s admonition (quoted in the title of this review) by explaining how to complete the immensely difficult transition to what Oliver Wendell Holmes once characterized as “the other side of complexity.” For example, he provides Assessment 1-1 (Pages 21-25) so that his reader can complete a self-audit by which to determine the major sources of complexity in her or his organization. He also identifies the four sources of complexity (i.e. structure, products, processes, and management behavior) and the major complexity-traps and explains how to avoid or escape from them.

I also admire how skillfully Ashkenas inserts statements throughout his narrative from those who have extensive first-hand experience with simplicity initiatives. For example, here is what a former vice chairman of GE, Floyd Trotter, has to say about the thought process that can be built into an entire culture. “We teach managers that they need to start with the `answer,’ which is that their business needs double-digit earnings improvement every quarter and every year. They quickly realize that sales growth without leverage won’t do it. So they have to figure out how to drive growth while increasing productivity. We don’t complicate it: Material comes in the front door and products go out the back door. We have to get rid of any waste in the middle while also figuring out how to have the products or services be more valuable for our customers.”

Finally, I appreciate Ashkenas’ brilliant use of specificity rather than merely recycling aphorisms, bromides, and prescriptions. In Table 7-1, he provides a “Roadmap for simplicity” that specifies the causes of complexity and the approaches for increasing simplicity in four separate but interdependent areas: structural mitosis, product proliferation, process, evolution, and managerial behavior.

For individuals as well as for organizations, getting to “the other side of complexity” is a continuous process rather than achieving an ultimate objective. Ashkenas clearly agrees with Thomas Edison who once observed, “Vision without execution is hallucination.” For those who are results-driven, cutting through complexity never ends. Fortunately, he offers to them an abundance of insights, observations, and suggestions that can immediately be put to use.

I presume to conclude with two suggestions of my own: First, concentrate primarily on complexity that causes the most serious problems. When doing so, practice ruthless elimination of whatever is wasteful, redundant, obsolete, and/or irrelevant.

Reverse Innovation: A book review by Bob Morris

Reverse Innovation: Create Far from Home, Win Everywhere
Vijay Govindarajan and Chris Trimble
Harvard Business School Press (2012)

How and why reverse innovation can help to reverse the negative trends and tendencies that can weaken an organization

Those who have read one or more of Vijay Govindarajan and Chris Trimble’s previously published books (notably Ten Rules for Strategic Innovators and, more recently, The Other Side of Innovation) already know that they share a unique talent for recognizing and then explaining previously unrecognized – or under-appreciated — business trends and their implications. In this instance, the fact that the dynamics of global innovation are not only changing, they are shifting from rich countries with incumbent economies to meeting unmet needs in developing countries.

Leaders in companies that aspire to accommodate those needs must develop a mindset that is radically different, one whose core concept is reverse innovation. That is, “any innovation that is adopted first in the developing world.” To develop that mindset, leaders must understand the significant differences between rich-country and poor-country needs. “Reverse innovation does not begin with inventing, but with forgetting. You must let go of what you’ve learned, what you’ve seen, and what has brought you your greatest successes. You must let go of the dominant logic that has served you well in rich countries. If you want to use today’s science and technology to address unmet needs in the developing world, then you must start with humility and curiosity.”

In short, think “far from home” before attempting to do business there.

Govindarajan and Trimble identify and explore five need gaps that can serve as paths to success with reverse innovation in macro markets of micro consumers. Understanding the nature, extent, and perils as well as opportunities of these need gaps will serve as the foundation of the radically different mindset to which I referred earlier.  With both uncommon rigor and precision, Govindarajan and Chris Trimble explain

o  What the reverse innovation challenge requires
o  How to develop the reverse innovation mindset
o  How to formulate an appropriate strategy based the five paths
o  How to create “clean slate” innovation in emerging markets
o  “The Reverse Innovation Playbook” (Nine rules to guide and inform strategy, global organization, and project organization

In Part 2, Reverse Innovation in Action,” Govindarajan and Trimble shift their attention to mini-case studies of eight major companies (Chapters 5-12, Pages 75-188), citing real-world situations that demonstrate an abundance of do’s and don’ts during initiatives to develop macromarkets with products that appeal to microconsumers. For example, in Chapter Six, Govindarajan and Trimble explain how Procter & Gamble realized that its success in emerging markets required it to innovate the “Un-P&G Way” because unfamiliar customer needs “trump” leading-edge technology. In Chapter Eleven, “PepsiCo’s Brand-New Bag,” this major multi-national company had to learn how to “think globally but snack locally”

Readers will also appreciate the provision of a “Reverse Innovation Toolkit” in Appendix A. Govindarajan and Trimble include several practical diagnostics and templates that will help business leaders expedite their reverse innovation efforts. In fact, they make brilliant use of reader-friendly devices throughout the book, notably “Playbook Lessons” and “Questions for Reflection. Here in a single volume is probably about as much as any business leader needs to help her or his global company to use reverse innovation to avoid or reverse the negative trends and tendencies that can weaken an organization when it attempts to do business in emerging markets.

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.

*     *     *

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.

 

 

Strategy Essentials You Ignore at Your Peril

Joan Magretta

Here is an excerpt from an article written by Joan Magretta for the Harvard Business Review blog. To read the complete article, check out the wealth of free resources, and sign up for a subscription to HBR email alerts, please click here.

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Michael Porter, the world’s leading authority on competition and strategy, is sometimes the victim of his own success. We use his terminology every day — competitive advantage, the value chain, differentiation, value creation. We think, therefore, that we “know” his work. But in fact, most managers don’t. They talk the talk, but they have turned his powerful ideas into business buzzwords. Competitive advantage, for example, is often used to mean “anything we think we’re good at.” Any plan or program is called a strategy. Managers confuse differentiation with being different.

That’s more than just too bad. I’ve had the rare opportunity to see Porter with fresh eyes — rare because when I approached him some time ago with the idea of writing a concise, practice-oriented guide to his work on competition and strategy, he agreed to give me complete access to his most current work as well as the original classics. My premise in writing Understanding Michael Porter was very simply that clear strategic thinking is essential for any manager in any setting, and Porter’s work lays out the basic principles and frameworks you need to master.

My goal was to present the essential Porter in a form that could be more easily digested and put to work than the original. Having worked directly with Porter for almost two decades, and having applied his ideas during my years as a strategy consultant, I was arrogant enough to believe I wasn’t going to learn anything new. Wrong. When you put that body of work all together, when you integrate the new with the old, you tap into a rich vein of practical and often surprising insights. Not least among them is that most companies think they have a strategy when they don’t.

So as I worked on this book, I kept a list of those insights. Here it is.

[Actually, here are the first four of 1o. To read the complete article, please click here.]

1. Competitive advantage is not about beating rivals; it’s about creating unique value for customers. If you have a competitive advantage, it will show up on your P&L.

2. No strategy is meaningful unless it makes clear what the organization will not do. Making trade-offs is the linchpin that makes competitive advantage possible and sustainable.

3. There is no honor in size or growth if those are profit-less. Competition is about profits, not market share.

4. Don’t overestimate or underestimate the importance of good execution. It’s unlikely to be a source of a sustainable advantage, but without it even the most brilliant strategy will fail to produce superior performance.

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Do these seem self-evident when you stop to think about them? Or do you find, as I do, that they run counter to the way most managers think and behave? That’s why I’d argue that Porter’s work, while never trendy, has never been as timely for so many people working in both the private and public sectors as it is today. Amidst the enormous economic upheaval in many industries and countries around the world, strategy itself has come under fire. Porter’s fundamentals keep you grounded. They explain not only how companies sustain competitive advantages for decades, but also why strategy is even more important — not less so — in turbulent and uncertain times.

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Joan Magretta is a senior associate at the Institute for Strategy and Competitiveness at Harvard Business School. She is the author of Understanding Michael Porter: The Essential Guide to Competition and Strategy.To check out additional blog posts by Joan Magretta, please click here.