Coming up with a strategy is easy; coming up with the right strategy is hard!
I was reminded of this recently by a couple of events.
The first of these was a post by Tim Kastelle, where he outlined the advantages of a small company over a larger one. In that post, Tim points out that large companies can become victims of their own success. They achieve growth through a successful strategy, which reinforces the value of that approach, making it increasingly difficult to change. Size also brings with it the need for systematic planning and execution processes which increase that difficultly due to set planning and review cycles.
In contrast, with little to lose, small companies can change direction almost at the drop of a hat. Without ossified corporate planning processes, they can be nimble, skirting around large incumbents by changing directions as new information and understanding emerge from markets and the product development team.
Of course, this can be a double edged sword. I have worked in companies that have changed their plans so often and so quickly that staff have never had a chance to add value through execution. Chopping and changing direction may be all very well when those changes are worked through at the board, or founder level, but at some point everyone else needs to understand where the company is going and how they can help it to get there. While it’s all very well to expect people to be as flexible as entrepreneurial founders, that’s often a lot to ask. Flexibility without communicated understanding simply leads to chaos.
The second thing that made me think about the challenges of developing a viable strategy was a guest lecture I did at the University of Queensland. That lecture was aimed at conveying the challenges of strategy under conditions of uncertainty. Uncertainty can come from a staggering number of areas, with product/technology and market uncertainty being the usual suspects. The reason for this is that competitive advantage is usually derived from either a novel product or service, or from a novel business model.
The importance of the former was highlighted in a presentation by the Australian Institute of Company Directors where a novel lighting technology was described that allowed an established firm to take a dominant position in retail lighting products. There wasn’t any business model innovation involved here, just a really good idea brought to market through existing sales channels. The strategy was relatively easy to come up with in this case.
Reading Henry Cheesborough’s book on Open Innovation recently reinforced the importance of the latter. He describes some excellent examples – including some from Xerox PARC – that demonstrate that a novel product without a viable business model (i.e. strategy) can be an interesting waste of time. A great idea without a business model to extract value from it remains just an idea.
Another idea contained in reading material for the lecture I did identified the concept of competing on the ‘edge of chaos’. I am sure that working at many of the current darlings of the new wave of digital innovation, like Uber or Airbnb, probably feels like working on the edge of chaos at time. Their strategy will be evolving as their product meets their customers, and market requirements impinge on how their business model operates. Uber in particular is striking unexpected regulatory and legal hurdles in a number of markets. The very public face of this process seems to be a lot of sabre rattling, with Uber voicing an unwavering faith in the validity of its business model and regulators voicing an unwavering faith in their, well, regulations. In the background though, Uber will be refining their strategy on a regular basis, based on emerging information from the marketplace.
This type of dynamic strategy is difficult to pull off, which is one of the reasons that many otherwise well-resourced start-ups with good ideas fail. The commitment to an innovation can lead to strategic inflexibility early in a company’s lifecycle, as well as later in it. One advantage that businesses based on digital products have though is that they can iterate, or pivot, relatively quickly. However, businesses that are involved in the development of manufactured products have less flexibility.
Take, for example, a developer of a clean energy technology I worked for at one stage. They were in the process of developing a product using a small number of multi-skilled people. They potential of the innovation brought investment, which allowed them to hire more specialised people, which in turn allowed the product to make significant leaps forward. However, the investment meant earning a return, and the company had to invest in manufacturing capability to get the product to market. So they had to draw a line in the sand and commit their limited resources to building a highly specialised and expensive manufacturing line, thereby largely locking their design into a particular form – and excluding some other, promising possibilities. Their market was understood relatively well, and although it was pretty dynamic they knew where it was likely to go. As a result, they could match their strategy to the market need with some precision. However, regular the ability to pivot regularly wasn’t really available to them.
Take another example of a company I’ve worked with recently which is working on advanced, next generation medical equipment. This company has what it believes to be a disruptive innovation. That is, an innovation that is lighter, cheaper and better performing in a market where the dominant incumbents are competing on old technology. However, this company also has a competitive, current generation technology in an advanced stage of commercialisation. The strategic challenge for them is whether to dedicate their resources to making money out of the current product, or divert their attention to the next generation product.
Classic disruptive innovation theory would suggest that they back themselves with the next generation technology. But open innovation suggests that the incumbents might actually have the next generation technology too, but have chosen to continue ringing profits from their current generation technology before they disrupt themselves. In this context, the small company can either make some (relatively!) certain returns now, or make nothing and bet the farm on their ability to capitalise on their next generation tech. It sounds like a relatively simple choice, but when you’re living on borrowed time – or money! – then it can be hard to see through the fog of uncertainty to decide on a path. And with this type of technology, pivoting is an expensive and time consuming action that can open the door to competitors as you regroup around a new direction.
There is no simple answer to this though; there are no strategic silver bullets. Good solid planning and rational thought processes are a start. Deriving an understandable strategy that can be communicated and executed is another. So is retaining the flexibility (and the humility!) to junk prior investments in an old strategy in favour of a new one.
Perhaps even more importantly thought is to not be so blinded by the brilliance of an idea that you start to think that the product is the strategy. Choosing the right strategy might be hard, but it remains a core part of any successful business, even in the current age of rapidly accelerated innovation.