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Your StrategY NeedS a

StrategY

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Your StrategY NeedS a

StrategY How to

Choose and Execute the Right Approach

MartiN reeveS : KNut HaaNæS : JaNMeJaYa SiNHa

H a r v a r d B u S i N e S S r e v i e w P r e S S

B o S t o N , M a S S a c H u S e t t S

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co Nte NtS

c Ha P te r 1

Introduction 1

c Ha P te r 2

Classical: Be Big 25

c Ha P te r 3

Adaptive: Be Fast 57

c Ha P te r 4

Visionary: Be First 87

c Ha P te r 5

Shaping: Be the Orchestrator 113

c Ha P te r 6

Renewal: Be Viable 141

c Ha P te r 7

Ambidexterity: Be Polychromatic 173

c Ha P te r 8

Lessons for Leaders: Be the Animator 193

e P i lo g u e

Personally Mastering the Strategy Palette 211

Appendix A: Self-Assessment: What Is Your Approach to Strategy? 215 Appendix B: Further Reading 219 Appendix C: Multi-Armed Bandit (MAB) Simulation Model 223 Notes 227 Index 247 Acknowledgments 265 About the Authors 269

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Your StrategY NeedS a

StrategY

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Chapte r 1

IntroduCtIon Your Strategy Needs a Strategy

How to Select and Execute the Right Approach to Strategy

Strategy is a means to an end: favorable business outcomes. When we think

about strategy, we tend to think about planning: study your situation, define

a goal, and draw up a step-by-step path to get there. For a long time, plan-

ning was the dominant approach in business strategy—in both the board-

room and the classroom. But effective business strategy has never really

consisted of just this one approach. The multidecade plans that oil compa-

nies make would feel inappropriate to the CEO of a software firm that faces

new products and competitors every day and that therefore adopts a more

fluid and opportunistic approach to strategy. Neither would such long-term

plans feel natural to an entrepreneur creating and bringing a new product or

business model to market. What is this broader set of ways in which we can

approach strategy, and which approach is the most effective in which situa-

tion? That is the central question of this book, and we will show that getting

the answer right can deliver demonstrable, significant value.

Today, we face a business environment that is faster changing and more

uncertain than ever because of, among other factors, globalization, rapid tech-

nological change, and economic interconnectedness. Perhaps less well known

is that the diversity and range of business environments that we face have also

Chapter_01.indd 1 3/23/15 11:48 AM

2 Your Strategy Needs a Strategy

increased. Large corporations, in particular, are stretched across an increasing

number of environments that change more rapidly over time (figure 1-1), requir-

ing businesses not only to choose the right approach to strategy or even the right

combination of approaches, but also to adjust the mix as environments shift.

One size doesn’t fit all.

Prompted by the increased uncertainty and dynamism of business envi-

ronments, some academics and business leaders have asserted or implied that

competitive advantage and even strategy more broadly is less relevant.1 In

fact, strategy has never been more important. The frequency and speed with

which incumbents are being overthrown and the performance gap between

winners and losers have never been greater (figure 1-2). Many CEOs are

looking over their shoulders for the upstart competitor that may undermine

their company’s position, and many upstart companies are aspiring to do

just that. It has never been more important, therefore, to choose the right

approach to strategy for the right business situation.

MCap volatility * MCap volatility * MCap volatility *

1960s 1980s 2000s

Revenue growth † Revenue growth †Revenue growth †

Many companies Few companies

Figure 1-1

increasing diversity of environments

Heat map of range of strategic environments faced by companies

Source: Compustat (US public companies); Martin Reeves, Claire Love, and Philipp Tillmanns, “Your Strategy Needs a Strategy,” Harvard Business Review, September 2012.

Note: MCap, market cap.

* Standard deviation over ten years of annual growth in market capitalization (MCap) (log scale).

† Absolute percent revenue growth averaged over the decade (log scale).

Chapter_01.indd 2 3/23/15 11:48 AM

Introduction 3

Unfortunately, it has also never been more difficult to choose the right

approach. The number of strategy tools and frameworks that leaders can choose

from has grown massively since the birth of business strategy in the early 1960s

(figure 1-3). And far from obvious are the answers to how these approaches

relate to one another or when they should and shouldn’t be deployed.

It’s not that we lack powerful ways to approach strategy; it’s that we lack

a robust way to select the right ones for the right circumstances. The five-

forces framework for strategy may be valid in one arena, blue ocean or open

innovation in another, but each approach to strategy tends to be presented or

perceived as a panacea. Managers and other business leaders face a dilemma:

with increasingly diverse environments to manage and rising stakes to get it

right, how do they identify the most effective approach to business strategy

and marshal the right thinking and behaviors to conceive and execute it,

supported by the appropriate frameworks and tools?

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Figure 1-2

increasing gap between winners and losers for uS companies

Source: BCG analysis (August 2014), Compustat.

Note: EBIT: earnings before interest and taxes. EBIT margin across industries is based on an analysis of approximately 34,000 publicly listed, mainly US companies in years when net sales were greater than $50 million; computing quartile average within six-digit GICS industry (unweighted), then averaged across industries (weighted by number of companies per industry per year); excluding outliers (higher than 100 percent margin or lower than minus 300 percent margin) and industries in years with insufficient data points.

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Chapter_01.indd 4 3/23/15 11:48 AM

Introduction 5

In researching and writing this book, we spoke with many business

leaders, and our conversations confirmed their dilemma. Some opined that

strategy as a discipline had been made less relevant by changing circum-

stances. Others explained how traditional approaches to strategy needed to

be replaced by new and more effective ones. One executive even warned

that the word strategy had been banished from use in his company. Many told

us that in businesses as large and diverse as theirs, they couldn’t conceive of

using a single approach to developing and executing effective strategy.

To address the combined challenge of increased dynamism and diversity

of business environments as well as the proliferation of approaches, this book

proposes a unifying choice framework: the strategy palette. This framework was

created to help leaders match their approach to strategy to the circumstances

at hand and execute it effectively, to combine different approaches to cope

with multiple or changing environments, and, as leaders, to animate the

resulting collage of approaches.

The strategy palette consists of five archetypal approaches to strategy—

basic colors, if you will—which can be applied to different parts of your busi-

ness: from geographies to industries to functions to stages in a firm’s life cycle,

tailored to the particular environment that each part of the business faces.

evIdenCe on WhICh thIs Book Is Based

This book is built on a broad body of evidence. Your Strategy Needs a Strategy is the result of half a decade of research within The Boston Consulting Group (BCG) Strategy Institute, numerous conversations with our clients, and a detailed survey of 150 firms from industries as diverse as banking, pharmaceuticals, high tech, and agri-food across major industrial nations in 2012. We also analyzed the conditions in different industries across a sixty-year period to understand how busi- ness environments have changed over time.

To supplement these observations, we conducted more than twenty in-depth interviews with CEOs about their experiences and perspectives

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6 Your Strategy Needs a Strategy

Five Strategy Environments

The Strategy Palette

Strategy is, in essence, problem solving, and the best approach depends upon

the specific problem at hand. Your environment dictates your approach to

strategy. You need to assess the environment and then match and apply the

appropriate approach. But how do you characterize the business environ-

ment, and how do you choose which approach to strategy is best suited to

the job of defining a winning course of action?

Business environments differ along three easily discernible dimensions:

Predictability (can you forecast it?), malleability (can you, either alone or in collab-

oration with others, shape it?), and harshness (can you survive it?). Combining

these dimensions into a matrix reveals five distinct environments, each of

which requires a distinct approach to strategy and execution (figure 1-4).

• Classical: I can predict it, but I can’t change it.

• Adaptive: I can’t predict it, and I can’t change it.

on developing and realizing winning strategies. We also leveraged joint research with our academic collaborators, especially Simon Levin of Princeton University, with whom we explored insights from biolog- ical and evolutionary strategies, which are often associated with com- plex, diverse, dynamic, and uncertain environments.

Finally, we have explored the strategy palette mathematically, by developing a computer model that simulates business strategies and their performance in different business environments. The resulting model is at the heart of a companion iPad app, which will enable read- ers to experience and develop a more intuitive understanding of each approach. To download the iPad app, visit Apple’s App Store and search for “Your Strategy Needs a Strategy.” You can also find it by visiting our website: www.bcgperspectives.com/yourstrategyneedsastrategy.

Chapter_01.indd 6 3/23/15 11:48 AM

Introduction 7

• Visionary: I can predict it, and I can change it.

• Shaping: I can’t predict it, but I can change it.

• Renewal: My resources are severely constrained.

Five Strategy Archetypes

Each environment corresponds to a distinct archetypal approach to strategy, or

color in the strategy palette, as follows: predictable classical environments lend

themselves to strategies of position, which are based on advantage achieved

through scale or differentiation or capabilities and are achieved through com-

prehensive analysis and planning. Adaptive environments require continuous

experimentation because planning does not work under conditions of rapid

change and unpredictability. In a visionary setting, firms win by being the first

to create a new market or to disrupt an existing one. In a shaping environment,

firms can collaboratively shape an industry to their advantage by orchestrat-

ing the activities of other stakeholders. Finally, under the harsh conditions of

a renewal environment, a firm needs to first conserve and free up resources to

ensure its viability and then go on to choose one of the other four approaches

to rejuvenate growth and ensure long-term prosperity. The resulting overrid-

ing imperatives, at the simplest level, vary starkly for each approach:

• Classical: Be big.

• Adaptive: Be fast.

Renewal

Harshn ess

ShapingHi

Lo Malleability

U n

p re

d ic

ta b

ili ty

Visionary

Adaptive

Classical

Figure 1-4

The strategy palette: five environments and approaches to strategy

Chapter_01.indd 7 3/23/15 11:48 AM

8 Your Strategy Needs a Strategy

• Visionary: Be first.

• Shaping: Be the orchestrator.

• Renewal: Be viable.

Using the right approach pays off. In our research, firms that success-

fully match their strategy to their environment realized significantly better

returns—4 to 8 percent of total shareholder return—over firms that didn’t.2

Yet around half of all companies we looked at mismatch their approach to

strategy to their environment in some way.

Let’s delve a little deeper to see how to win using each of the basic colors

of strategy and why each works best under specific circumstances.

Classical Leaders taking a classical approach to strategy believe that the world is pre-

dictable, that the basis of competition is stable, and that advantage, once

obtained, is sustainable. Given that they cannot change their environment,

such firms seek to position themselves optimally within it. Such positioning

can be based on superior size, differentiation, or capabilities.

Positional advantage is sustainable in a classical environment: the envi-

ronment is predictable and develops gradually without major disruptions.

To achieve winning positions, classical leaders employ the following

thought flow: they analyze the basis of competitive advantage and the fit

between their firm’s capabilities and the market and forecast how these will

develop over time. Then, they construct a plan to build and sustain advantaged

positions, and, finally, they execute it rigorously and efficiently (figure 1-5).

Execute

Plan

Analyze

Classical

Figure 1-5

The classical approach to strategy

Chapter_01.indd 8 3/23/15 11:48 AM

Introduction 9

We will see how Mars, the global manufacturer of confectionery and pet

food, successfully executes a classical approach to strategy. Mars focuses on

categories and brands where it can lead and obtain a scale advantage, and it

creates value by growing those categories. This approach has helped Mars

build itself into a profitable $35 billion company and multicategory leader

over the course of a century.3

Classical strategy is probably the approach with which you are the most

familiar. In fact, for many managers, it may be the approach that defines

strategy. Classical strategy is what is taught in business schools and practiced

in some form in the majority of strategy functions in major enterprises.

What You MIght knoW It as

Most readers will be familiar with at least a handful of strategy con- cepts. So that you can relate your existing knowledge of strategy with the five colors of the strategy palette, we will highlight the main related schools of strategy and their associated frameworks and tools in sidebars like this one in the chapters detailing each approach.

For example, we will show how the classical approach is exempli- fied by Bruce Henderson’s experience curve and growth-share matrix or by Michael Porter’s celebrated five forces model. For the adaptive approach, we will describe Kathleen Eisenhardt’s simple rules-based approach to strategy or Rita McGrath’s work on strategies of agility. Similarly, we will discuss how the visionary approach underpins Gary Hamel and C. K. Prahalad’s book Competing for the Future, and how the shaping approach is connected with the growing body of work on platform businesses and business ecosystems.

The aim is not to be comprehensive but rather to show how well- known approaches relate to each other and to the strategy palette, to clarify which should be used when, and to give readers some points of departure for further investigation.

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10 Your Strategy Needs a Strategy

Adaptive Firms employ an adaptive approach when the business environment is nei-

ther predictable nor malleable. When prediction is hard and advantage is

short-lived, the only shield against continuous disruption is a readiness and

an ability to repeatedly change oneself. In an adaptive environment, win-

ning comes from adapting to change by continuously experimenting and

identifying new options more quickly and economically than others. The

classical strategist’s mantra of sustainable competitive advantage becomes

one of serial temporary advantage.

To be successful at strategy through experimentation, adaptive firms mas-

ter three essential thinking steps: they continuously vary their approach,

generating a range of strategic options to test. They carefully select the most

successful ones to scale up and exploit (figure 1-6). And as the environment

changes, the firms rapidly iterate on this evolutionary loop to ensure that they

continuously renew their advantage. An adaptive approach is less cerebral

than a classical one—advantage arises through the company’s continuously

trying new things and not through its analyzing, predicting, and optimizing.

Tata Consultancy Services, the India-based information technology (IT) ser-

vices and solutions company, operates in an environment it can neither predict

nor change. It continuously adapts to repeated shifts in technology—from client

servers to cloud computing—and the resulting changes that these shifts cause in

their customers’ businesses and in the basis of competition. By taking an adaptive

approach that focuses on monitoring the environment, strategic experimenta-

tion, and organizational flexibility, Tata Consultancy Services has grown from

Adaptive

Select

Vary

Scale up

Figure 1-6

The adaptive approach to strategy

Chapter_01.indd 10 3/23/15 11:48 AM

Introduction 11

$155 million in revenue in 1996 to $1 billion in 2003 and more than $13 billion

in 2013 to become the second-largest pure IT services company in the world.4

Visionary Leaders taking a visionary approach believe that they can reliably create or

re-create an environment largely by themselves. Visionary firms win by

being the first to introduce a revolutionary new product or business model.

Though the environment may look uncertain to others, visionary leaders see

a clear opportunity for the creation of a new market segment or the disrup-

tion of an existing one, and they act to realize this possibility.

This approach works when the visionary firm can single-handedly build a

new, attractive market reality. A firm can be the first to apply a new technol-

ogy or to identify and address a major source of customer dissatisfaction or a

latent need. The firm can innovate to address a tired industry business model

or can recognize a megatrend before others see and act on it.

Firms deploying a visionary approach also follow a distinct thought flow.

First, visionary leaders envisage a valuable possibility that can be realized.

Then they work single-mindedly to be the first to build it. Finally, they persist

in executing and scaling the vision until its full potential has been realized

(figure 1-7). In contrast to the analysis and planning of classical strategy and

the iterative experimentation of adaptive strategy, the visionary approach is

about imagination and realization and is essentially creative.

Quintiles, which pioneered the clinical research organization (CRO)

industry for outsourced pharmaceutical drug development services, is a

prime example of a company employing a visionary approach to strategy.

Visionary

Envisage

Build

Persist

Figure 1-7

The visionary approach to strategy

Chapter_01.indd 11 3/23/15 11:48 AM

12 Your Strategy Needs a Strategy

Though the industry model may have looked stable to others, its founder and

chairman, Dennis Gillings, saw a clear opportunity to improve drug devel-

opment by creating an entirely new business model and, in 1982, moved first

to capitalize on the inevitabilities he saw. By ensuring that Quintiles moved

fast and boldly, it maintained its lead and leapt well ahead of potential com-

petition. It is today the largest player in the CRO industry which it created

and has been associated with the development or commercialization of the

top fifty best-selling drugs currently on the market.5

Shaping When the environment is unpredictable but malleable, a firm has the extraor-

dinary opportunity to lead the shaping or reshaping of a whole industry at an

early point of its development, before the rules have been written or rewritten.

Such an opportunity requires you to collaborate with others because you

cannot shape the industry alone—and you need others to share the risk,

contribute complementary capabilities, and build the new market quickly

before competitors mobilize. A shaping firm therefore operates under a high

degree of unpredictability, given the nascent stage of industry evolution it

faces and the participation of multiple stakeholders that it must influence but

cannot fully control.

In the shaping approach, firms engage other stakeholders to create a shared

vision of the future at the right point in time. They build a platform through

which they can orchestrate collaboration and then evolve that platform and its

associated stakeholder ecosystem by scaling it and maintaining its flexibility

and diversity (figure 1-8). Shaping strategies are very different from classical,

Shaping

Orchestrate

Engage

Evolve

Figure 1-8

The shaping approach to strategy

Chapter_01.indd 12 3/23/15 11:48 AM

Introduction 13

adaptive, or visionary strategies—they concern ecosystems rather than indi-

vidual enterprises and rely as much on collaboration as on competition.

Novo Nordisk employed a shaping strategy to win in the Chinese diabe-

tes care market since the 1990s. Novo couldn’t predict the exact path of mar-

ket development, since the diabetes challenge was just beginning to emerge in

China, but by collaborating with patients, regulators, and doctors, the company

could influence the rules of the game. Now, Novo is the uncontested market

leader in diabetes care in China, with over 60 percent insulin market share.6

Renewal The renewal approach to strategy aims to restore the vitality and competitiveness

of a firm when it is operating in a harsh environment. Such difficult circum-

stances can be caused by a protracted mismatch between the firm’s approach to

strategy and its environment or by an acute external or internal shock.

When the external circumstances are so challenging that your current way

of doing business cannot be sustained, decisively changing course is the only

way to not only survive, but also to secure another chance to thrive. A com-

pany must first recognize and react to the deteriorating environment as early

as possible. Then, it needs to act decisively to restore its viability—economizing

by refocusing the business, cutting costs, and preserving capital, while also

freeing up resources to fund the next part of the renewal journey. Finally, the

firm must pivot to one of the four other approaches to strategy to ensure that it

can grow and thrive again (figure 1-9). The renewal approach differs markedly

from the other four approaches to strategy: it is usually initially defensive, it

involves two distinct phases, and it is a prelude to adopting one of the other

Renewal

React (or anticipate)

Economize

Grow

Figure 1-9

The renewal approach to strategy

Chapter_01.indd 13 3/23/15 11:48 AM

14 Your Strategy Needs a Strategy

approaches to strategy. Renewal has become increasingly common because of

the number of companies getting out of step with their environments.

American Express’s response to the financial crisis exemplifies the renewal

approach. As the credit crisis hit in 2008, Amex faced the triple punch of ris-

ing default rates, slipping consumer demand, and decreasing access to capi-

tal. To survive, the company cut approximately 10 percent of its workforce,

shed noncore activities, and cut ancillary investment. By 2009, Amex had

saved almost $2 billion in costs and pivoted toward growth and innovation

by engaging new partners, investing in its loyalty program, entering the

deposit raising business, and embracing digital technology. As of 2014, its

stock was up 800 percent from recession lows.7

Applying the Strategy Palette

The strategy palette can be applied on three levels: to match and correctly

execute the right approach to strategy for a specific part of the business, to

effectively manage multiple approaches to strategy in different parts of the

business or over time, and to help leaders to animate the resulting collage of

approaches (figure 1-10).

Leadership Animate the strategy collage

Ambidexterity Multiple approaches

Five archetypal approaches Classical, adaptive, visionary, shaping, renewal

Lead

Combine

Select and match

Figure 1-10

Three levels of application for the strategy palette

Chapter_01.indd 14 3/23/15 11:48 AM

Introduction 15

(Continued)

The strategy palette provides leaders with a new language for describing and

choosing the right approach to strategy in a particular part of their business.

It also provides a logical thread to connect strategizing and execution for each

approach. In most companies, strategizing and execution have become artifi-

cially separated, both organizationally and temporally. Each approach entails

not only a very different way of conceiving strategy but also a distinct approach

to implementation, creating very different requirements for information man-

agement, innovation, organization, leadership, and culture. The strategy pal-

ette can therefore guide not only the strategic intentions but also the operational

setup of a company. Table 1-1 summarizes the key elements of the strategy pal-

ette and includes specific examples of companies using the five approaches.

Table 1-1

The five approaches of the strategy palette

approaches

Key elements Classical adaptive Visionary Shaping renewal

Core idea, or what it takes

• Be big • Be fast • Be first • Be the orchestra- tor

• Be viable

Type of envi- ronment

• Predict- able, non- malleable

• Unpre- dictable, nonmal- leable

• Predict- able, mal- leable

• Unpredict- able, mal- leable

• Harsh

Industries where approach is most visibly applicable

• Utility

• Automo- bile

• Oil and gas

• Semicon- ductors

• Textile retail

• Not industry specific (create new, disrupt existing)

• Some soft- ware

• Smartphone apps

• Financial institutions in the 2008–2009 crisis

Indicators of the approach

• Low growth

• High con- centration

• Mature industry

• Stable regulation

• Volatile growth

• Limited concen- tration

• Young industry

• High tech- nological change

• High growth potential

• White space, no direct competi- tion

• Limited regulation

• Fragmen- tation

• No domi- nant player, platform

• Shapable regulation

• Low growth, decline, crisis

• Restricted financing

• Negative cash flows

Chapter_01.indd 15 3/23/15 11:48 AM

16 Your Strategy Needs a Strategy

approaches

Key elements Classical adaptive Visionary Shaping renewal

How • Analyze, plan, exe- cute

• Vary, select, scale up

• Envisage, build, per- sist

• Engage, orches- trate, evolve

• React (or antic- ipate), econo- mize, grow

Measures of success

• Scale

• Market share

• Cycle time

• New prod- uct vitality index (NPVI)

• First to market

• New user customer satisfaction

• Ecosystem growth and profitability

• NPVI

• Cost sav- ings

• Cash flow

Related approaches

• Experi- ence curve

• BCG Matrix

• Five Forces

• Capabili- ties

• Time- based competi- tion

• Temporary advantage

• Adaptive advantage

• Blue ocean

• Innovator’s dilemma

• Networks

• Ecosys- tems

• Platforms

• Transfor- mation

• Turn- around

Key examples • P&G under Lafley

• Mars under Michaels

• Tata Con- sultancy Services under Chan- drase- karan

• 3M under McKnight

• Amazon. com under Bezos

• Quintiles under Gillings

• Apple under Jobs

• Novo Nor- disk under Sørensen

• Amex under Chenault

• AIG under Ben- mosche

Key traps • Overappli- cation

• Planning the unplan- nable

• Wrong vision

• Overman- aged eco- system

• No second phase

Table 1-1 (Continued)

The five approaches of the strategy palette

The palette can also help leaders to “de-average” their business (decom-

pose it into its component parts, each requiring a characteristic approach to

strategy) and effectively combine multiple approaches to strategy across dif-

ferent business units, geographies, and stages of a firm’s life cycle. Large cor-

porations are now stretched across a more diverse and faster-changing range

of business contexts. Almost all large firms comprise multiple businesses

and geographies, each with a distinct strategic character, and thus require

Chapter_01.indd 16 3/23/15 11:48 AM

Introduction 17

unpredICtaBIlItY, MalleaBIlItY, and harshness as axes In the strategY palette

Why are unpredictability, malleability, and harshness the right dimen- sions for characterizing the business environment and choosing the right approach to strategy? By considering the fundamental under- lying assumptions of the most familiar and historically appropriate approach, the classical one, and examining what has changed in the cir- cumstances of business, we can demonstrate that these are indeed the right axes to inform the choice of the appropriate approach to strategy.

Leaders taking a classical perspective assume that the world is essentially predictable. Here, it makes sense to draw up long-term plans and invest in analysis and prediction. Additionally, classical leaders don’t believe that they can markedly change the rules of their game, since they consider their environment a given: it is sta- ble and therefore not malleable. Instead, they make the best of the given conditions by positioning themselves optimally.

However, in a rapidly evolving world, these assumptions are chal- lenged in three fundamental ways. First, because of the increased unpredictability in today’s business environment, long-term planning is often no longer viable. Second, because of technological change, glo- balization, and other drivers, existing industry structures are constantly being disrupted. Consequently, industry structure and the basis of com- petition have become increasingly malleable, and individual firms have more opportunities to shape market development. Finally, mismatches between strategy and environment, because of either protracted stra- tegic drift or sudden crises, are increasingly severe and frequent. We therefore need to consider the harshness of the environment, which can require companies to economize and focus on short-term survival.

the simultaneous execution of different approaches to strategy. The right

approach for a fast-evolving technology unit is unlikely to be the same as for a

more mature one. And the approach in a rapidly developing economy is likely

to be very different for the same business operating in a more mature one.

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18 Your Strategy Needs a Strategy

Inevitably, any business or business model goes through a life cycle, each

stage of which requires a different approach. Businesses are usually created in

the visionary or shaping quadrants of the strategy palette and tend to migrate

counterclockwise through adaptive and classical quadrants before being dis-

rupted by further innovations and entering a new cycle, although the exact

path can vary (figure 1-11). Apple, for example, created its iPhone using a

visionary approach, then used a shaping strategy to develop a collaborative

ecosystem with app developers, telecom firms, and content providers. And

as competitors jostle for position with increasingly convergent offerings, it

is likely that their strategies will become increasingly adaptive or classical.

As we will see, Quintiles also employed such a succession of approaches to

strategy as it developed.

Leaders themselves play a vital role in the application of the strategy pal-

ette by setting and adjusting the context for strategy. They read the environ-

ment to determine which approach to strategy to apply where and to put the

right people in place to execute it. Moreover, business leaders play a criti-

cal role of selling the integrated strategy narrative externally and internally.

They continuously animate the strategy collage—the combination of multiple

approaches to strategy—keeping it dynamic and up-to-date by asking the

right questions, by challenging assumptions to prevent a dominant logic

Malleability

U n

p re

d ic

ta b

ili ty

ShapingAdaptive

Classical Visionary

Figure 1-11

Different approaches to strategy required across the business life cycle

Chapter_01.indd 18 3/23/15 11:48 AM

Introduction 19

from clouding the perspective, and by putting their weight behind critical

change initiatives.

Traps: Where It Can Go Wrong

Most leaders we surveyed understand the need to differentiate their approach

to strategy according to the environment: some 90 percent agreed that this is

important. But at the same time, there are a number of challenges to doing

so effectively. Three types of traps were observed to derail good intentions.

Environmental Perception

Though some leaders correctly estimate the degree of malleability and

unpredictability in their environments, we saw that many executives per-

ceive their environments to be significantly more predictable or malleable

than they actually are. There is perhaps a human tendency to believe that we

can predict and control our environment—but in many cases we can’t, and

as we have seen, this inability has important ramifications for our approach

to strategy. In fact, in our survey, environments were most often perceived

as predictable and malleable (visionary), irrespective of their actual measured

characteristics. Consistent with this bias, environments were least often per-

ceived as unpredictable and nonmalleable (adaptive), again irrespective of

the actual measured environment. Additionally, we have consistently found

that firms delay recognition of when they are in a harsh environment that

requires a renewal approach. In principle, a renewal strategy could be pre-

emptive, but in practice, most companies trigger transformations or turn-

arounds only when financial or competitive performance has already begun

to deteriorate.

Selecting the Right Approach

We also saw mismatches in the firms’ selection of their approach to strat-

egy. While the declared approach was most commonly in line with the

Chapter_01.indd 19 3/23/15 11:48 AM

20 Your Strategy Needs a Strategy

perceived environment for classical, visionary, and adaptive approaches,

companies often declared styles that were logically incompatible with their

perceptions of the environment. The firms also tended to confuse adaptive

and shaping approaches when declaring their strategic approach, which is

not surprising given the relative unfamiliarity of the latter. The firms also

declared an intention to use an adaptive approach much more often than

either their own assessment of the environment or an objective assessment

of its degree of unpredictability would seem to warrant. This discrepancy

may be the result of the recent prominence and popularity of the concepts of

agility, speed, and experimentation—an outlook biased toward an adaptive

approach, irrespective of the actual business conditions.

Applying an Approach Correctly

Finally, many leaders choose the right approach to strategy for their busi-

ness environment, but their organizations often stumble in its application.

Our survey showed a strong tendency for organizations to hold on to the

familiar and comfortable practices associated with the visionary and classical

approaches even when the leaders have declared an intention to execute a

different approach. Take planning, for example. Most companies create a

strategic plan. Furthermore, nearly 90 percent of companies surveyed said

they develop these plans on an annual basis, regardless of the actual pace of

change in their business environments—or even what the companies per-

ceive it to be.

How to Use This Book

This book begins by exploring the five core approaches to strategy—the

basic colors of the strategy palette. We then look at how to use these basic

colors in combination—applying different approaches simultaneously or

sequentially in different parts of the business—and the role of leaders in

dynamically orchestrating the resulting strategy collage.

Chapter_01.indd 20 3/23/15 11:48 AM

Introduction 21

Case studies and interviews are used to illustrate each approach, and

each chapter begins with a major case study. Additionally, sidebars in

each chapter examine the strategy palette’s theoretical underpinnings and

illustrate how each approach works, by showing the results of simula-

tions of different environments and strategies. The book ends with a short

epilogue dealing with how to develop individual mastery of the strategy

palette.

Chapters 2 through 6 each deal with one approach to strategy in depth,

exploring

• What defines and characterizes the approach

• When to use it

• How to apply it successfully, including both how to formulate a strategy and how to execute it, and the implications for

information management, innovation, culture, organization, and

leadership

• Tips and traps to guide the practical application of the approach

You will be able to observe each approach in action in case examples and

CEO discussions. A note of caution: our examples feature successful and

respected leaders and companies—but our intention is not to hold them up

as comprehensive or eternal examples of excellence. Conditions change,

competitive advantage fades, and the fortunes of companies rise and fall. In

fact, that is precisely why firms need to shift their approaches to strategy over

time. Rather, we intend to present the firms we feature as clear examples

of the applications of each approach to strategy in a particular business at a

particular point in time.

After we explore the five basic colors in the strategy palette, we look at

more sophisticated ways of using the palette. Chapter 7 shows how firms

can use multiple approaches to strategy successively or simultaneously, for

instance, across geographies, business units, or life-cycle stages. We refer to

this ability to take a multidimensional approach as ambidexterity. Four

Chapter_01.indd 21 3/23/15 11:48 AM

22 Your Strategy Needs a Strategy

techniques can be used to achieve ambidexterity and are optimal in different

situations:

• Separation: firms deliberately manage which approach to strategy belongs in each sub-unit (division, geography, or function) and run

those approaches independently of one another.

• Switching: firms manage a common pool of resources to switch between approaches over time or to mix them at a given moment in time.

• Self-organization: each unit chooses the best approach to strategy when it becomes too complex to select and manage this in a top-

down manner.

• Ecosystems: firms rely on an external ecosystem of players that self- select the appropriate approaches to strategy.

MatheMatICal BasIs of the strategY palette

Why did we select these five approaches—classical, adaptive, vision- ary, shaping, and renewal—and what is the evidence that they are the best ones for each environment? In fact, the different approaches to strategy have sound mathematical underpinnings, which we demon- strate by simulating the environments of the strategy palette. These environments range from highly predictable ones that resemble classical environments, to highly unpredictable and malleable envi- ronments that resemble shaping ones. We then simulated different approaches to strategy and allowed these to compete with each other across a range of environments, noting which approaches performed best through many iterations (figure 1-12). The simulations fully vali- dated the match between the five archetypal approaches to strategy and the business environments that make up the strategy palette (our model is described in more detail in appendix C). In separate sidebars in each chapter, we use this model to show why a particular approach to strategy is the fit best for a specific environment.

Chapter_01.indd 22 3/23/15 11:48 AM

Introduction 23

We used the same simulation model as the platform to develop an iPad app, which is built around a business game in which you can explore which approaches to strategy work well in which environ- ments. You do this by operating the simplest of businesses—a lem- onade stand. The app should enable readers not only to understand how to choose and deploy different approaches to strategy but also to experience and develop a more practical feel for each approach.

Chapter 8 shows what your role as a leader is in creating and animating

the collage of strategic approaches. We identify eight critical roles that lead-

ers play in this respect.

• The diagnostician: Looks externally to assess the business environment and then match it with the right strategic approach.

Simulated time

Unpredictability Unpredictability Unpredictability

Malleability Malleability Malleability

ClassicalClassical Adaptive Visionary Shaping RenewalAdaptive Visionary Shaping Renewal

Figure 1-12

best strategic approaches in different environments (simulation)

Source: BCG multi-armed bandit (MAB) simulation.

Chapter_01.indd 23 3/23/15 11:48 AM

24 Your Strategy Needs a Strategy

• The segmenter: Matches the approach to the organization at the right level of granularity.

• The disrupter: Reviews the diagnosis and segmentation on an ongoing basis, modulating or changing approaches when necessary.

• The team coach: Selects the right people to manage each cell of the collage and develops them, both intellectually and experientially.

• The salesperson: Advocates and communicates the strategic choices in a coherent, integrated narrative, both internally and

externally.

• The inquisitor: Sets and resets the correct context for each strategic approach by asking the right questions.

• The antenna: Continuously looks outward and selectively amplifies important change signals that might otherwise be overlooked or

underestimated.

• The accelerator: Puts weight behind select critical change initiatives to speed up their implementation or to increase their traction to

overcome resistance or inertia.

Finally, the epilogue details the four steps by which individual managers

can develop their understanding and mastery of the strategy palette.

As you familiarize yourself with the different approaches, it can be helpful to

try to apply them to your own business: to assess the environment where you

do business, to decide the best approach to strategy, and to assess the actual

practices that your organization deploys. The short survey in appendix A

will provide a simplified but directional view; a more detailed version is also

available online: bcgperspectives.com/yourstrategyneedsastrategy. Appendix

B lists further reading for those who wish to delve deeper into the different

approaches to strategy. Appendix C gives additional background and details

of our simulations of different environments and approaches to strategy.

Let’s begin our exploration of the strategy palette.

Chapter_01.indd 24 3/23/15 11:48 AM

chapte r 2

cLaSSIcaL Be Big

Mars, Inc.: Winning Classically

If you want evidence that Mars, Inc., operates in a relatively stable environment, just take a look at the dates when its iconic chocolate bars were introduced: the Milky Way, 1923; Snickers, 1930; the Mars Bar, 1932; M&M’s, 1941; Twix, 1979. What were the biggest-selling candies in the world in 2014? Snickers and M&M’s.1 After so many years, these brands continue to underpin the success of the company founded by Frank Mars more than a hundred years ago. As of 2014, Mars has revenues of around $35 billion and eleven brands worth more than $1 billion, and it ranks among the largest privately held com- panies in the United States.2

Mars has earned and maintained market leadership through scale and capabilities—being the biggest and best at what it does. Scale is an important factor in the success of Mars, according to Paul Michaels, president of Mars: “Scale is critical in our business—to drive manufac- turing scale and utilization, costs and value.” Mars is the largest player in the chocolate business and enjoys leading positions in five others— including pet food, with brands such as Pedigree, and chewing gum, with brands such as Wrigley’s Spearmint Gum.

Chapter_02.indd 25 16/03/15 10:56 AM

26 Your Strategy Needs a Strategy

Stability and, as a consequence, predictability, underpin Mars’s approach to strategy. It means that Mars can plan. “Brands, once established in the minds of consumers, are very durable,” said Michaels. “We plan because we operate in relatively stable markets and because it is important to operate our assets efficiently.” Michaels develops plans with a one-year and long-term term horizon. “We elim- inated a somewhat complex medium-term planning process about a decade ago, as it really wasn’t useful,” he said.

Michaels says that the key to successful planning is to ensure that it is a simple process, focused on generating insights on essential issues: “The focus is on things we can control—namely, costs and profitability. The job of strategy for a segment leader like us is to drive category growth, and that’s the thing you should be thinking about all the time.”

The strategy is set from the top, he said: “It’s me, the CFO, and a few others in consultation with the family board.” But then it is widely shared—and communicated in a way that can be easily digested. “We do lots of town hall meetings, and we expect to be able to explain the strategy in an understandable way in twenty minutes.”

In setting the plan, Michaels is guided by five principles, which per- meate the culture of the company: quality, responsibility, mutuality, efficiency, and freedom. Efficiency, in particular, is apparent as you walk into the company headquarters in McLean, Virginia. Worldwide, there are more than seventy thousand employees, or “associates” as Mars prefers to call them. But at headquarters, the offices of the tiny corporate staff reside on just one floor of a small, inconspicuous two-story building. As Michaels wryly noted to us: “A senior executive from Nestlé came here and thought he was in the wrong place.”

The company prizes discipline and efficiency. For instance, even Michaels himself has to clock in.

The headquarters structure reflects the broader approach to organization, which is relatively flat and relies on few but experienced people. “It’s important to keep it simple,” Michaels said. “Extra layers and steps weaken and filter the insights. Strategy is important, but it doesn’t come out of an elaborate planning process.”

Chapter_02.indd 26 16/03/15 10:56 AM

Classical: Be Big 27

After the acquisition of the William Wrigley Junior Company in 2008, Mars was restructured into business units rather than along geographical lines as previously. Michaels explained that the restruc- turing was meant to “deepen our ability to generate insights and build deep capabilities in each area of the business.”

As a private company, Mars is not inhibited by the quarterly reporting cycle, and its decisions can focus on long-term conse- quences. It invests in incremental rather than radical innovation to keep its production processes and brands updated. The one dimen- sion where Mars looks to shape the external environment is by inno- vating to stimulate end-user demand, for instance, by designing its Big Night In initiative to push chocolate sales during historically slower summer months.3

In short, Mars is an exemplar of classical strategy. The company drives scale economies through category and brand leadership in a stable business, rigorous if lean planning, and building deep knowl- edge and capabilities, business by business.

The Classical Approach to Strategy: Core Idea

The classical approach to strategy—strategic planning—will be highly famil-

iar to most readers: it’s probably what you learned in business school and a

process you may participate in annually. The process might be so familiar,

in fact, that it may be applied as a default rather than a deliberate choice.

Therefore, in this chapter, we will focus on a few questions that often go

unasked. For example, when should the classical approach be applied, and

when should it be substituted by another approach? What is the difference

between a strategic planning process that drives insight and impact and one

that is a mere ritual preceding the budget process? What is the link between

having a great classical strategy and having it effectively implemented? First,

though, let’s examine the core idea of classical strategy (figure 2-1).

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28 Your Strategy Needs a Strategy

Like Michaels at Mars, leaders taking a classical perspective face an industry

that is relatively stable and predictable. Therefore, the basis of competition is

also stable, and advantage, once obtained, is sustainable. Hence, the classical

strategist’s mantra is sustainable competitive advantage. Since classical firms cannot

easily change the basis of competition in their industry, they win by striving to

position themselves optimally in attractive markets where they are advantaged.

Advantage can be based on superior scale, differentiation (or, equivalently,

scale within a narrower market segment), or superior capabilities.

Like each of the colors of the strategy palette, the classical approach has

its own characteristic logical flow. Classical firms deploy rigorous analysis to

determine market attractiveness, the basis of competition within a given

market, and their own firm’s current and potential competitiveness, all of

which help them to determine their targeted position and strategic direc-

tion. They then construct a plan to achieve that targeted position. The plan

need not change too often and reflects both how the environment is fore-

cast to evolve and the action steps required to build and sustain advantage.

Finally, classical firms execute the plan thoroughly, focusing every part of the

organization on efficiently striving toward the well-defined goals.

Extending our art analogy, the classical approach is rather like creating a

still-life painting. Since you have in front of you a clear, unchanging image

of what you wish to paint, you need not create multiple sketches or change

things on the fly. Rather, you methodically execute each detail until you

have completed the masterpiece.

When applied correctly, a classical strategy can be very impactful and

create durable and valuable leadership positions. In a stable environment,

Classical

Analyze

Plan

Execute

Figure 2-1

The classical approach to strategy

Chapter_02.indd 28 16/03/15 10:56 AM

Classical: Be Big 29

size, differentiation, or capabilities—being good at what you do—can be

stable sources of competitive advantage. There are no penalties for chang-

ing only gradually, because the environment is predictable and develops

only gradually, without major disruptions. Constant, small improve-

ments in performance can accumulate into a significant and sustainable

competitive advantage.

Size, for example, becomes a self-reinforcing benefit. The larger a firm,

the lower its costs compared with competitors. As a company accumulates

scale and experience, the lower costs can then fund price cuts that increase

volumes, completing a virtuous circle, as succinctly outlined by BCG’s

founder Bruce Henderson: “The payoff for leadership is very high indeed, if

it is achieved early and maintained until growth slows. Investment in mar-

ket share during the growth phase can be very attractive . . . increases in

share increase the margin . . . The return on investment is enormous.” 4

Why Scale Matters: UPS and FedEx

The US express freight and parcel market in the early 2000s is an excellent case study of the merits of scale in the classical approach. That market was dominated by two large players, UPS and FedEx, both of which achieved sustainably lower costs and higher margins than did their smaller competitors DHL and TNT.5 FedEx and UPS were able to maintain their leadership because competitors would have to make prohibitively large cash investments to replicate the scale of these incumbents.

In fact, when DHL entered the US market with its acquisition of local player Airborne Inc., then a subscale competitor, DHL invested nearly $10 billion in the unit. Even that was not enough to buy the scale necessary to sustainably compete with the local giants, however. In 2008, DHL closed its domestic operations to focus on international delivery to and from the United States.6

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30 Your Strategy Needs a Strategy

For industry leaders in classical environments, size offers protection:

because the industry is stable, they can continue to build incrementally on

their scale advantage.

What YOU MIGht KNOW It aS

Most leaders are familiar with the classical approach to strategy. In fact, this is generally what they mean when they refer to strategy. The approach has long been dominant in both business itself and busi- ness school curricula, since the term corporate strategy was coined by Igor Ansoff in the late 1950s.7 Many of the concepts, frameworks, and tools that managers use today have developed out of the classi- cal approach to strategy. Here are some of the better-known ones.

Competitive strategy was further developed and disseminated in the 1960s by The Boston Consulting Group (BCG), at first predomi- nantly for its large manufacturing clients operating stable, relatively predictable businesses. BCG’s founder Bruce Henderson proposed the experience curve, the idea that accumulated experience, and there- fore overall size, can be a source of durable advantage.8 The experience curve has been an important tool in guiding companies on how to man- age costs and prices for long-term advantage. The BCG matrix com- bined scale advantage with the identification of attractive high-growth markets where leadership can and should be established; in the 1970s and 1980s, this tool was used by the majority of Fortune 500 companies to allocate resources across their portfolios of businesses.9 The environ- ments matrix, developed by Richard Lochridge, generalized how the relationship between returns and scale depends on the number and strength of sources of advantage (figure 2-2).10 The tool explained how competition and advantage work in fragmented, localized, and stale- mated markets as well as the more familiar volume markets.

Porter developed perhaps the most comprehensive and best-known perspective on classical strategy.11 His five forces framework explained how industry attractiveness is determined by the interplay of five compet- itive forces (suppliers, customers, substitutes, complements, and rivals).

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Classical: Be Big 31

Companies need to pick attractive industries and win with either differ- entiation or cost—or, equivalently—position and scale.

Birger Wernerfelt, Jay Barney, and C. K. Prahalad and Gary Hamel later focused on how some firms can also achieve superior position- ing by building and leveraging distinct capabilities or competences— somewhat confusingly known as the resource-based view of the firm.12 The resources that confer advantage need to be valuable, rare, inimitable, and nonsubstitutable. BCG’s Philip Evans, George Stalk, and Lawrence Shulman further explored how firms can build advan- tage through building capabilities.13

But why did the classical approach to strategy become the pre- dominant one, to the point of near ubiquity? It was long the approach that best fitted the environments most large companies faced. For much of the latter half of the twentieth century, most business envi- ronments were relatively predictable and nonmalleable—analyzing, planning, and executing was logically the best way to win.

Low High

Potential competitive advantage

Many

Few

Number of ways to achieve advantage

Profitability

Size

Fragmentation Specialization

Stalemate Volume

Figure 2-2

Forms of classical competitive advantage

Chapter_02.indd 31 16/03/15 10:56 AM

32 Your Strategy Needs a Strategy

When to Apply a Classical Approach

Firms should deploy a classical approach in relatively stable and predictable

markets with an established, stable basis of competition. In such nonmallea-

ble markets, there is no imminent risk of disruption and industry conditions

can be taken as given.

An environment is likely to be stable in this way if the underlying drivers

of demand and industry structure develop only gradually, because of entry

barriers or limited technological or regulatory change. For a range of indus-

tries, from insurance to consumer staples to the automotive industry, the

environment has been largely classical in recent decades. The choice of approach to strategy depends on accurately judging the

circumstances facing a firm. So which indicators would suggest a classi- cal environment? Industries that are relatively well established, with high returns to scale; infrequent changes in the size ranking among the leading players; stable, homogeneous business models and core technologies; strong brands; and modest growth rates are more likely to experience the sort of predictable, nonmalleable environment where a classical strategy can thrive. Conversely, new industries with low barriers to entry, low returns to scale, fragmented industry structures, frequent or disruptive technological change, high growth rates, and rapidly evolving regulation are likely to require a different approach to strategy.

The household products space largely fits the classical pattern, in which

end-user demand can be roughly predicted by changes in demographics

and purchasing power. In that industry, the competitive dynamics have

remained relatively stable because of high entry barriers created by strong

brands, scale advantage, and limited fundamental technological change.

Positional volatility is low, and a few companies, like P&G and Unilever,

have stayed on top for decades.14 Returns to scale for consumer staples are

as large now as they were three decades ago. Hence, a firm can decide how

and where to position its products, according to its current brand scale and

positioning; those of its competitors; its capabilities in product development,

manufacturing, and marketing; and its prognosis for the evolution of the

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Classical: Be Big 33

market. And unless there is a fundamental shift in consumer demand driv-

ers, these plans can be stable and reliable.

Before the 1990s, many industries adopted the classical model of strategy.

While numerous industries have since been disrupted by technology and

globalization, many others find that classical conditions still hold true. It is

therefore a dangerous and misleading exaggeration to claim, as some have,

that sustainable competitive advantage and the classical approach to strategy

are no longer relevant.

Nevertheless, some traditionally stable industries do need to adopt

new approaches to strategy. Consider electrical utilities, a stronghold that

historically exhibited deep-seated classical characteristics: demand devel-

oped predictably with economic growth, industry structure remained

stable because of high barriers to entry and regulation, and even major

oil shocks failed to fundamentally change the structure or basis of com-

petition. But with protracted fluctuation in input prices, the rise in

alternative-energy sources, increasing regulatory flux on emissions,

and governmental crackdowns on nuclear energy after the Fukushima

disaster, utilities now need to supplement their classical approach with

a more adaptive one.15 For instance, players increasingly try to diversify

their sources of energy, rolling out new technologies like solar panels and

evolving their business models to add more services, like smart-home

technology.16 Many other industries have similarly moved away from a

classical approach—or need to.

We have seen the power in a classical approach to strategy, but the firm

needs to choose its approach to strategy only after carefully observing the

specific business circumstances it faces. The decision should not be based

on either history, familiarity, general trends in other businesses, or fash-

ions in management thinking. You cannot say a classical approach is valid

today just because it was valid yesterday, but neither is it necessarily invalid

today because of a general shift toward more-dynamic approaches in other

industries.

Nevertheless, we will see that a classical approach to strategy is often

applied, or not applied, for the wrong reasons.

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34 Your Strategy Needs a Strategy

The Classical Approach in Practice: Strategizing

Jack Welch once observed: “In real life, strategy is actually very straight-

forward. You pick a direction and implement like hell.”17 Is it as straightfor-

ward as Welch claims? Let’s find out by examining the classical approach in

practice.

Strategy is often thought of as the product of a cerebral exercise carried

out by planners and later implemented by others. This separation of thought

(strategizing) and action is unfortunate. A strategy cannot succeed unless it

is implemented effectively. We will see that there is an intimate connection

between strategizing and execution and furthermore that the relationship

depends on the approach to strategy taken. We will therefore look at both

steps for each approach and how they relate to each other.

are YOU IN a cLaSSIcaL BUSINeSS eNVIrONMeNt?

You are facing a classical business environment if the following obser- vations hold true:

✓ Your industry’s structure is stable.

✓ Your industry’s basis of competition is stable.

✓ Your industry’s development is predictable.

✓ Your industry is not easily shapable.

✓ Your industry displays moderate but constant growth.

✓ Your industry is marked by high concentration.

✓ Your industry is mature.

✓ Your industry is based on stable technologies.

✓ Your industry’s regulatory environment is stable.

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Classical: Be Big 35

Strategizing at Quintiles

Drug development takes years—from preclinical work, through clini- cal trials, to production. So for a company like Quintiles, the world’s largest clinical research organization, which provides drug develop- ment services to pharmaceutical companies, the business is highly plannable.18

“We are able to adopt a classical approach to strategy because the business is predictable,” said Tom Pike, the chief executive of Quintiles. “We can know the pipelines of biopharma companies with some certainty several years out. There are some changes due to the cancellation of drugs in trials, but that’s a manageable risk that we can plan for. And outsourcing relationships are quite sticky: cus- tomers don’t tend to chop and change too much, because both par- ties invest heavily in building a long-term partnership.”

To develop the plan—a formal document—Pike leads an annual planning process. Since he arrived as CEO in April 2012, he has encouraged a more systematic and more forward-looking approach, running the process in a way that “keeps one foot in today and one foot in the future.” Pike has strengthened the clas- sical disciplines of focus, efficiency, planning, and accountability in a company that has grown very rapidly, ensuring a clear founda- tion for its continued success. He explained that the goal of the plan is to support “a scale and portfolio game, so we are advan- taged through our scale and our diversification across therapeutic areas, clients, and geographies. Quintiles has tremendous assets and competitive advantages, such as our global workforce, our pro- cesses and technology, our scientific and therapeutic knowledge, and our quantitative and analytics expertise. We look at how we can best leverage these capabilities to meet our customers’ needs. Our size has enabled us to scale investments faster than competi- tors and to maintain our leadership.” The strategic plan is focused

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36 Your Strategy Needs a Strategy

on articulating incremental opportunities, Pike said: “Our main business is doing well, so it’s a question of making it even better where we can.”

In addition to reinforcing existing sources of advantage, Pike also encourages Quintiles executives to look to the future and to think how industry developments will affect customers. In an industry where the confluence of genomics, big data, personalized medicine, value-based health care, and other trends are driving accelerating change, this view to the future may eventually require a more adap- tive or shaping approach to strategy and an increasing emphasis on information, collaboration, and innovation. Pike sees opportunities where the company’s capabilities can support the changing needs of a broader range of health-care stakeholders. He acknowledges, “This has to be done at the same time as maintaining the strength that comes from a focused, accountable organization.” The CEO is beginning to layer these new considerations on top of the classical approach.

Classical strategizing is a two-part process consisting of analysis—of

the attractiveness of a market, the basis of competition, and the firm’s

competitiveness—and the construction of a plan that forecasts those fac-

tors, articulates the targeted position, and maps the steps required to

achieve it.

Sound very familiar? It should—in our survey, we found that almost

90 percent of firms intending to employ a classical approach use detailed

forecasts and that 80 percent translate those into long-term plans. But that’s

the risk. Familiarity can breed contempt, and the procedures of strategy can

become mechanical, ritualized, or overly complex to such an extent that

perspective is sacrificed. Following due process or applying the right tech-

niques can easily become a comforting substitute for insight generation. To

generate powerful plans and real impact, the classical strategizing process

needs to use its familiar tools to achieve new, unfamiliar, uncomfortable, and

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Classical: Be Big 37

unanticipated insights that allow you to outsmart competitors. The possibility

of discomfort, surprise, and deviation from last year’s plan are therefore the

hallmarks of a good strategy process. In other words, as our Mars example

shows, clear procedures cannot replace clear thinking.

Analysis

Market Attractiveness: Where to Play Given that the goal of a classical strategy is to identify an attractive position in

a given market, the first step toward success is to correctly identify an attrac-

tive market. This determines where your firm will play and, just as critically,

where it will not. As Michael Porter wrote: “Strategy requires you to make

tradeoffs in competing—to choose what not to do.”19 This observation may

feel trivial or obvious. Nevertheless, firms need to thoughtfully identify their

market, divide it into appropriate segments, and determine the segments’

attractiveness. A firm should avoid the inclination to stick with familiar but

possibly unattractive markets or to neglect unfamiliar but attractive ones.

The worst thing that a firm can do is to pursue growth indiscriminately by

not making any choices at all—growth per se is not a strategy.

To determine where to play, you need to follow a few essential steps. First,

delineate your market, examining established market boundaries with a skep-

tical eye. A thorough industry analysis may lead to surprising insights that

immediately affect a firm’s strategic direction. For example, Deutsche Bahn,

the German railway company, can now compete more effectively with air-

lines because it correctly reidentified its market as medium-distance travel,

which included not only high-speed trains, but also short-haul flights.20

Next, identify and understand industry segments. Many firms default to

segmentations based on easily obtainable data, existing product categories,

business unit boundaries, or demographics, but a good analysis will go beyond

these convenient alternatives to surface the true drivers of demand or natural

competitive boundaries. Multinational alcoholic-beverages company Diageo,

for instance, segments customers by occasion of use, from high-energy occa-

sions with many people (e.g., parties, nightclubs) to low-energy occasions

or individual use, rather than by BU or basic demographics. The resulting

Chapter_02.indd 37 16/03/15 10:56 AM

38 Your Strategy Needs a Strategy

segmentation lets Diageo position its brands more accurately and effectively: for

instance, its premium Scotch brands are often positioned to address low-energy

social occasions or individual use, while vodka brands like Smirnoff address the

higher-energy, social end of the spectrum.21

The last step is to establish an objective view of which segments are

attractive. For a holistic and forward-looking picture, the analysis should

combine metrics like profitability and growth with more qualitative indi-

cators like entry barriers, competitive intensity, and the bargaining power

of suppliers and customers. Avoid being swayed by the data that just hap-

pens to be at your disposal or collecting confirmatory information on seg-

ments where you already play. Otherwise, you risk merely perpetuating

the status quo.

Positioning Play at Huawei

Huawei Technologies, one of the world’s leading telecom equipment companies with annual revenues of approximately $40 billion, has grown consistently through a succession of very deliberate choices about where to do business.22 Guo Ping, one of Huawei’s rotating co-CEOs, told us that the firm’s strategy is “absolutely a positioning play.” At first, Huawei sought to gain a dominant position in China’s rural markets, where it faced less competition from bigger rivals. Then, as it grew stronger, it moved into the country’s fast-growing, but more competitive, urban centers. Only when the firm was suffi- ciently powerful did it expand abroad—first to emerging markets such as Brazil, Russia, and Thailand and then to first-world countries like the United Kingdom, France, and Canada.23 Guo Ping explained: “We depend on scale, so we built it in large, low-competitive-intensity markets before entering more developed markets.” Using the same logic, Huawei originally concentrated on telecom equipment—serving the big telecommunications companies such as Vodafone, British

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Classical: Be Big 39

Telecom, T-Mobile, and Bell Canada.24 Only recently, Huawei broke into consumer goods, providing handsets for underserved markets where it can attain a dominant position—not only in China but also in several countries in Africa.25

Basis of Competition: How to Play In any given classical market, advantage comes from one of three sources:

size, differentiation, or superior capabilities. Even though a market may be

attractive for one group, does that mean it’s attractive for yours? The attrac-

tiveness of a market for your company depends on the fit between the basis

of competition in that market and the competitiveness of your firm on that

dimension. Consequently, you need to determine the basis of competition.

To understand this basis, look at the relationship between the market share

and profitability across all companies in the market. This relationship helps

you understand how the game is played. If there is a strong positive correlation

between market share and profitability, then the market is probably volume- or

scale-driven. If not, the market can be attacked through differentiation in spe-

cialized areas or through local scale in geographically constrained, fragmented

markets. In the worst case, the market suffers from a stalemate, with commod-

itization but high exit costs, in which case, it is attractive to no one (figure 2-2).

Volume, fragmented, and specialized markets can all be profitable and

therefore, superficially seem attractive. However, they each require different

approaches to win. Firms need to understand how profitability is generated

in order to decide whether it’s a game they, or anyone, can win.

Competitive Position: How to Win In the final step of analysis, the firm determines its potential for advantage

over the competitor. In other words, you decide how your firm will com-

pete, by either scale, differentiation, or capabilities.

Emphasize scale if you are currently already among the biggest in your

market. If your business is not in the top three in your industry, winning

Chapter_02.indd 39 16/03/15 10:56 AM

40 Your Strategy Needs a Strategy

could be an uphill battle, even with significant investments to buy mar-

ket share. Underdogs do sometimes win, for instance, if competition is

distracted, but Bruce Henderson advocated selling “pets,” low-share busi-

nesses in low-growth markets. He showed that stable, competitive indus-

tries tend to converge toward an end state in which only three generalist

players can be profitable.26 GE’s Jack Welch set an even higher bar, insist-

ing that GE had to be number one or two in the industries in which it

played.27

To maintain a size-based competitive advantage, the firm needs to fero-

ciously defend market share. Striving for size just for size’s sake is a ques-

tionable approach, though, since sustainable advantage from scale is not

inevitable. Size leaders are not always cost leaders if they fail to proactively

extract the potential benefits of scale by driving operating efficiencies hard.

Henderson said: “These observed or inferred reductions in costs as volume

increases are not necessarily automatic. They depend crucially on a compe-

tent management that seeks ways to force costs down as volume expands.

To this extent the relationship is of normal potential rather than one of

certainty.”28

In the absence of scale, differentiation can be an attractive alternative, par-

ticularly when the targeted niche segment is sizable and when the firm can

make its products distinct enough to avoid competition from cost-leading

mainstream players. Successful differentiation necessitates offering cus-

tomers in a niche segment a product that is sufficiently valuable and dis-

tinctive. Distinctive doesn’t mean novel for its own sake, since unwanted

extra features can raise complexity and costs. It means uniquely and valu-

ably addressing a specific consumer preference. Niche players need to excel

at uncovering, distinguishing, and addressing these latent segment-specific

needs in defensible ways. Consider, for example, outdoor clothing com-

panies. Because they make clothes with specialized functions for outdoor

enthusiasts, these firms can compete effectively in the highly competitive

fashion and clothing industry.

Finally, firms can sometimes win even if they are at a scale disadvantage

in hard-to-differentiate categories by focusing on building and deploying

superior capabilities that are valuable to customers across multiple markets.

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Classical: Be Big 41

Those capabilities need to be hard to replicate (inimitable, non-substitutable),

meaningfully differentiated (rare), and relevant to customers (valuable). A

good example of a capabilities-based approach is Procter & Gamble’s direction

under A. G. Lafley. In leveraging its core capabilities in marketing and supply-

chain management to position itself robustly in categories new to P&G (e.g.,

air fresheners and razors), the firm realized years of high growth and high

returns across units.29

Positioning to Win at Mahindra

Mahindra, the $16.7 billion Indian diversified multinational company with operations in eighteen sectors, pursues competitive advantage through a rigorous classical approach which focuses on scale and position.30 In some instances, such as in its tractor business, Mahindra is the outright global leader and reaps scale advantage accordingly. But in other business units, the firm wins through specialization and niche positioning. Anand Mahindra, Mahindra’s chairman, explained: “We don’t have one monolithic view of how we’re going to play. We like to be leaders in our segments, but the question is, ‘How do you define your segment?’”

For example, in its auto business (and many of its other units), Mahindra adopts a niche strategy, leading in a well-defined segment of the market. Mahindra told us: “We are the second-largest auto player in India, but we are minnows globally. So globally we have chosen to be only in the SUV and off-road segment, where we dif- ferentiate and also create scale by leveraging back-end operations across mobility businesses.” Likewise, Mahindra said, in its IT business, “absolute scale is not the game: we want to find three to four verticals where we can be the dominant player, like the telecom segment, and win there.”

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42 Your Strategy Needs a Strategy

Planning

Planning and Challenge at Mahindra

Mahindra’s novel multistage challenge-based approach to planning

allows the firm to create robust, detailed plans and budgets that

support the implementation of each business unit’s strategy. All

eighteen units, from the established tractor business to the newer

logistics segment, participate in the Mahindra annual planning cycle.

First, in October, each sector goes through “strategy war rooms.”

Sector leadership presents a strategy proposal, and Mahindra’s

Strategy Group, which functions as an internal consultant, plays

opponent, using a framework of eleven challenge questions. Then

at the Blue Chip Gathering later that month, Mahindra takes its top

five hundred managers through an exploration of coming trends,

themes, and challenges—an exercise that stimulates and reinforces

the strategy setting process. Next, each unit goes through “budget

war rooms” in February, where central leadership works with unit

management to set metrics and milestones and to develop balanced

score cards. Anand Mahindra emphasized clarity and account-

ability: “These plans are drilled down into incredible detail, where

even the shop floor can see their link into the overall business plan

for the year.” Finally, in “operation war rooms” throughout the year,

the leadership checks how the business unit is preceding along

the budget and plan.

Importantly, the firm recognizes, and uses varied approaches for,

differences between businesses. Specifically, Mahindra modifies its

planning recipe depending on the life-cycle stage of the business.

For more predictable, mature businesses, the plans may be rela-

tively fixed, but in newer segments, the emphasis is on refining plans

more frequently according to cumulative learning. And other newer

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Classical: Be Big 43

businesses are managed more autonomously, through an internal venture model. We will explore further these various approaches to developing strategy in the upcoming chapters on adaptive strategy and ambidexterity.

Leveraging their market and competitive analysis, firms can set the strategic

direction and goals by forecasting how conditions will evolve, fixing their

aspiration, and generating a detailed action plan to achieve their goals. Firms

can then cascade the plan down into the operational milestones required to

realize it. Because most managers are likely to be very familiar with classical

business planning—or think they are—we’ll focus on what can make these

ubiquitous planning exercises either more, or less, effective.

Set Strategic Direction Planning processes have a common tendency to become complex, ritualized,

and ineffective. Sound planning should not merely be a prelude to annual

budgeting that affirms and incrementally adjusts the previous year’s plan.

Rather it should be insight centered, tailored to the specifics of the business,

and flexible to changing circumstances.

Successful classical firms do not let short-term performance become the

main emphasis of their planning. A weak process lets managers focus on and

commit to short-term targets while bypassing a coherent, long-term view of

the company’s direction. Conversely, a good plan’s short-term targets and

commitments flow naturally and inextricably from the long-term view.

As we saw in the Mahindra example, challenge is a key part of a strong

strategic planning process and ensures that new, divergent perspectives

are surfaced and incorporated. Live discussion and a culture that val-

ues challenge are therefore essential elements of success. Rigid templates

and routine procedures cannot substitute for these opportunities for live

challenge, and process complexity should not crowd out or dilute these

opportunities.

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44 Your Strategy Needs a Strategy

The planning process should not default to a fixed annual cycle and a

three- or five-year planning horizon but should instead reflect the specific

environment of the firm and how fast it changes. Consider how petrochemical

giant Shell approaches planning. The firm employs a specialist team of fore-

casters that plan as far as eighty years ahead. Ollila Jorman, company chair-

man, explained: “We naturally pay close attention to short-term economic

conditions, but we take a long-term, strategic view of the company’s devel-

opment.”31 However, even Shell updates its plans promptly if circumstances

materially change, as it did in 2013 after learning about difficulties in arctic

and shale gas exploration. As its 2012 sustainability report puts it: “We are

incorporating the lessons learned from these events into our future plans.”32

The main value of a plan is that it creates a predictable path toward compet-

itive advantage. But as the following Mylan example shows, a plan can also,

paradoxically, serve as a good basis for managing moderate uncertainty in two

main ways. First, by recognizing and structuring what can be planned, it can

create the latitude to focus on less predictable or more dynamic elements of

the business. Second, thinking deeply through the assumptions in a strategic

plan can prime management to respond effectively to unexpected develop-

ments. Such emergent strategies may even contradict a plan, even though they

draw on the thoughtfulness that went into constructing it.

Planning with Discipline at Mylan

Mylan, a US-based pharmaceutical company, is an example of a com- pany that plans with rigor, but without rigidity.33 In 2007, the firm had annual revenues of $1.6 billion and operated predominantly in the United States. Today, it is one of the largest generic- and special- ty-drug providers in the world, with annual revenues of $6.9 billion. Mylan looks to capitalize on relatively gradual, predictable, demo- graphically driven growth trends in the health-care industry, as well as on changes in the way health-care is delivered. Heather Bresch,

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Classical: Be Big 45

Mylan’s CEO, explained: “Despite the inherent volatility of our indus- try, it’s still feasible and important to construct high-quality strate- gic plans. This not only allows us to plan but also to be prepared to respond to a variety of scenarios.”

Critical to Mylan’s success is a disciplined strategic planning pro- cess built on deep market analysis and designed to maximize known opportunities while also highlighting new ones, and to avoid ritual- ization—doing things the same way just because that’s how they’ve always been done. “We bring discipline to the process by allowing our various business owners and their key partners to frame the discussion by presenting detailed analysis and recommendations,” said Bresch. “However, we encourage an active dialogue and a back-and-forth amongst our entire team in order to challenge the status quo and the conventional way of doing things. [This planning process] results in greater clarity around why we do what we do, and really defines everyone’s individual roles within the plan and their accountability and ownership for specific results.”

Mylan develops both five-year strategic plans and one-year bud- get plans focused on protecting and growing its core business. The company meanwhile explores and executes on the drivers of future growth and prepares transformative initiatives necessary for long- term sustainability.

Bresch believes that adhering to a disciplined plan has many bene- fits—but only if the process is flexible enough to allow the company to think more expansively where and when it needs to. “Discipline gives us stability, which gives us flexibility,” she said.

Cascade Direction and Goals into Action Plans A clear destination is insufficient by itself—the plan should also include the

map of how to get there. The plan serves to make the strategy executable, by

creating milestones and metrics that detail the targets the company needs to

hit and the actions needed to hit these targets.

Chapter_02.indd 45 16/03/15 10:56 AM

46 Your Strategy Needs a Strategy

Good operational plans also link strategic initiatives directly to the overall

direction of the firm. They ensure that precious resources are only assigned

to projects that are both financially attractive and in line with the compa-

ny’s direction. Too often, the initiative portfolio is only loosely linked to the

strategic plan. In other words, a good plan is a map of the straightest route

possible to winning and a means of aligning all employees’ efforts toward

that goal, with lots of checkpoints along the way.

SIMULatING StrateGY IN a StaBLe eNVIrONMeNt

In a stable environment, managers can simply analyze up front what the best strategic option is and plan their way toward it. This often involves a brief period of analysis or exploration of all known options, followed by a longer period of optimization and exploitation.

100

150

200

250

0 50 100 150 200 250 300

Profit per period

Time

Classical strategy

Adaptive strategy

Analyze, then choose the best option

Figure 2-3

Classical strategies perform well in stable environments (simulation)

Source: BCG Strategy Institute multi-armed bandit (MAB) simulation.

Note: Results averaged over thirty simulations in noncompetitive environment with thirty investment options.

Chapter_02.indd 46 16/03/15 10:56 AM

Classical: Be Big 47

Our simulation of a variety of approaches to strategy in a sta- ble environment bears out the effectiveness of this approach. You explore, or analyze, your options for a limited time until you are sure you have found the best option. The precise duration of the initial period of exploration mainly depends on the number of options and the degree of difference between them.

Once you find the right option, you should plan to exploit it for the foreseeable future. More exploration would be wasteful given that the optimal strategic option does not materially change in a sta- ble environment (figure 2-3). The lemonade-stand equivalent of this approach would be to analyze which location would attract the most customers, open your stand there, and stay put, while optimizing the operations and realizing scale advantages in that position.

The Classical Approach in Practice: Implementation

Each approach to strategy reflects an important and distinctive relationship

between strategizing and execution, or thinking and action, and therefore

a very different set of requirements for executing successfully. While these

requirements may seem clear and familiar for the classical approach, it’s

worth explicitly exploring them since (1) many CEOs we interviewed told

us that execution is at least as hard as strategy to get right and 2) it’s critical to

make deliberate choices about the approach to implementation. We will see

that these choices vary considerably across different approaches to strategy.

That is, implementation does not consist of one universal way, but rather it

varies according to the approach to strategy. Consequently, our conception

of “strategy” needs to be expanded to encompass both thought and action,

as well as culture, organization, leadership, and other business elements that

enable thought and action.

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48 Your Strategy Needs a Strategy

For a strategy to work, it needs to penetrate beyond the management

committee and cascade down and inform coordinated action throughout the

organization. This diffusion is particularly necessary for classical strategy, since

although the plan—usually conceived at senior levels—is important, advan-

tage and value are unlocked by execution at lower levels in the organization.

Therefore, everything about the organization, from information management

to culture, should be focused on supporting the translation of the plan.

Information

Information plays a critical and distinctive role in classical strategy: it informs

the analysis and planning process and allows firms to track execution.

Superior competitive and market information, analysis, and performance

tracking can be game changers in the struggle for competitive advantage.

By managing information better, the classical firm can make a better plan

than its competitors, react quicker to changes in competitive dynamics, and

execute more efficiently.

Successful classical firms invest in mining new sources of information,

or consider existing information in new ways, to derive novel insights to

drive their plans. Alcoholic-beverage multinational Diageo, for instance,

runs many market studies at any time to deeply understand the evolution in

customer needs, demographics, and purchasing patterns. It invests heavily

in analytic capabilities, for example, in its Customer Collaboration Centre, a

state-of-the-art facility to bring consumer, shopper, retailer, and distributor

insights together into an integrated perspective.34

Classical firms can also derive advantage from superior performance-track-

ing. As management guru Peter Drucker said, “What’s measured improves.”35

Effective performance measurement links the high-level strategic plan with

individual initiatives and actions via appropriate key performance indica-

tors that, at each level, roll up to larger goals. Transparent tracking keeps

employees accountable, provides early warning signals of plans going off

track, and highlights when and where intervention is required or assump-

tions need to be reexamined.

Companies can put too much faith in complex standardized reports,

however, instead of focusing on detecting anomalies that could precipitate

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Classical: Be Big 49

either redoubled efforts against the plan or an update in the strategic

direction.

P&G, which primarily operates in predictable, stable household goods

categories like laundry detergent and toothpaste, provides a good example of

how a company can gain advantage through improved performance track-

ing. In the late 1980s and early 1990s, the firm implemented a new inventory

tracking system that monitored stocks across its entire value chain. With

this improved information, P&G could reduce buffer stocks and billing

errors and could proactively spot and fix potential supply-chain inefficien-

cies. Even more important to the top line, P&G reduced stock-outs at retail-

ers by analyzing sales patterns more holistically and adjusting shipments

in line with promotional activity, seasonal patterns, and shifts in customer

preferences. Improved information management helped P&G achieve mar-

ket-share increases of up to 4 percent in the categories it served.36

Innovation

Innovation in a classical strategy is typically occasional, incremental, and

cumulative. It helps firms to gradually realize the potential advantages of scale,

differentiation, and capabilities on which they predicate their plans. Classical

innovation is very different from the disruptive innovation of the vision-

ary approach or the continuous experimentation of the adaptive approach.

Because innovation in classical firms enables the improvement of a known,

unchanging source of advantage, progress tends to be linear and incremen-

tal, and permits a defined end state and precise milestones. As such, the

innovation process itself can be disciplined and lean.

A classical firm needs to manage its innovation process with as much rigor

as it applies to its operating costs. Expected return on investment should

guide decisions. Classical firms often overinvest in low-growth cash-cow

businesses at the expense of providing capital and attention to more promis-

ing, but less familiar growth businesses or initiatives where innovation may

be required. Some of the best-known classical tools, like the BCG matrix,

are designed precisely to address this challenge of allocating resources across

a changing portfolio of opportunities that are varied in potential and stage

of development.

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50 Your Strategy Needs a Strategy

Organization

Since classical strategy relies on a relatively static source of advantage, the

organization needs to be geared toward excelling at what it does repeat-

edly. Therefore, the design principles for classical organizations are spe-

cialization, delegation (the subdivision of tasks), and standardization to

support deep capability-building. Standard operating procedures, a high

level of top-down oversight, minimal process variance, and attention to

detail are all important attributes of a classical organization. This may

sound like common sense for all large firms, but we will see that the

requirements for an adaptive or a shaping approach, which need to facil-

itate continuous experimentation toward unknown or changing ends,

are in fact completely different. What we may regard as universal aspects

of good organization turn out to depend on the approach to strategy we

adopt.

Classical organizations often display a high degree of specialization so

that employees can accumulate expertise over time. In this way, the firm

benefits from the potential of the experience curve in each area of the busi-

ness. Training and skill-building tend to focus on enhancing and reinforcing

expertise in limited, firm- and function-specific areas so that employees can

do their current jobs better.

For classical firms, the devil is in the details, since neglected opportunities

for improving cost efficiency can build over time into competitive disadvan-

tage. Classical organizations therefore emphasize discipline and structure to

ensure that execution is flawless and efficient. As a result, classical firms are

often relatively hierarchical with clear operating procedures. They promote

standardization and minimize variation to reduce costs, often supported by

frequent internal and external benchmarking exercises.

A classical organization poorly executed may suffer the side effects of

these same design choices—conservatism, factionalism, poor horizontal

communication, lack of collaboration, rigidity, and high overall complexity.

No organization—classical or otherwise—can function effectively if these

side-effects are too pronounced. Hence, leaders need to closely monitor for

and address these potential negative side-effects.

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Classical: Be Big 51

Organization at Quintiles

Quintiles exemplifies the classical organizational imperative of excel- ling at a known task. As Tom Pike, the CEO, explained to us, it is a very action-oriented company, focused on “doing,” and continually refin- ing and reapplying to customer programs the knowledge and insights from its people and processes.

Quintiles demands functional excellence from its twenty-nine thousand employees in more than one hundred countries around the world.37 The company provides extensive training and allows employees to specialize, because the company’s fortunes ultimately rest on their ability to deliver “consistent performance flawlessly and efficiently.” Pike explained that the firm hires for expertise: “We need people who can run industrialized processes, we need people who can manage data and advanced analytics, and we need scientific and therapeutic experts.”

To avoid the rigidity that is often a downside of classical organi- zations, Quintiles sometimes undertakes Jack Welch–style “manage- ment work-outs,” intensive problem-confrontation meetings where pressing issues can be raised so that they can be solved.38 “It is sober- ing to think that Jack had his managers spend twenty-five days a year in work-outs just to eliminate bureaucracy,” mused Pike.

Culture

Because a classical firm needs to support the pursuit of excellence in relation

to a static advantage, the culture needs to disciplined, focused, analytically

minded, goal oriented, and geared toward accountability. A classical culture

reflects the mentality of doers: it rewards the systematic and energetic pur-

suit and achievement of known goals and reflects a strong shared sense of a

singular purpose.

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52 Your Strategy Needs a Strategy

Classical cultures are analytical and goal oriented; they respect and stick

to the plan. For instance, Mars is refreshingly transparent internally. The

company displays large, flat screens in its headquarters with its current

financials: sales, earnings, cash flow, and factory efficiency. The data disclo-

sure is designed to motivate employees, whose bonuses are partly based on

the performance of their respective divisions. And the motivation seems to

be working—the workforce turnover at Mars is a low 5 percent.39

Classical firms are sometimes portrayed as impersonal and bureaucratic.

But companies such as Mars manage to achieve a culture that encourages

people to work together to achieve a defined goal in a purposeful, collab-

orative, and rewarding way. There are no moving targets: it is clear where

to focus, so employees can concentrate on getting the job done. Classical

cultures often recognize and value small increments in, or specialized con-

tributions to, performance on the way to achieving larger goals. For this rea-

son, a well-articulated classical culture creates a workplace that offers many

opportunities for personal achievement and that allows employees to feel a

sense of contribution and ownership in the company’s goals.

Culture at Pfizer

Ian Read, the chief executive at one of the world’s premier innovative biopharmaceutical companies, Pfizer, said that the corporate culture is its critical differentiator.40 In a classical business, multiple similar firms are competing with one another. “Scale is comforting,” said Read, pointing to one of the key elements of the classical approach, “but the key competitive weapon isn’t scale—it’s culture.” He went on: “All our competitors have great people; all our competitors have access to capital. The only way to differentiate is [to have] a better cul- ture so that people will come here and give everything they’ve got.”

Pfizer promotes a holistic firmwide (versus individual) performance view, which, for instance, can make it easier for R&D employees to

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Classical: Be Big 53

retire projects into which they’ve put massive time and energy but which are not promising enough to justify continued investment. The culture is built on discipline, accountability, clarity, and focus and, according to Read, is a significant contributor to the firm’s recent per- formance. Pfizer’s market cap has roughly doubled between 2010 and the beginning of 2014.41

Leadership

Focus—the exploitation of a well-defined and unchanging goal and path—

pervades a classical firm’s organization and culture. And, not surprisingly, in a

classical firm, that focus comes from the top. Leaders need to set the high-level

goals, clarify where and how to win, oversee the development of a granular

plan, and encourage the achievement of that plan with relentless focus. At the

same time, the leader needs to take a step back to check that a relentless focus

on execution and efficiency does not result in dysfunctionality through excess.

The CEO plays a critical role in avoiding the ritualization of the strategy

process. Classical leaders must be at the forefront in stimulating their firms to

think differently about their market to reach to new insights. They have both

the latitude and the perspective to question long-held assumptions, existing

market definitions, or an overreliance on easily available information.

During the planning cycle, you as a leader should be taking the 30,000-

foot view of strategy. Rather than drowning in short-term financial delib-

erations, ensure that your managers create and commit to a long-term,

coherent plan. Often, this requires pushing your organization to make dif-

ficult choices, since the best long-term decision may appear at odds with

short-term performance.

Once the plan is set, classical leaders turn their focus to detail and execu-

tion. They need to ensure adherence to—and reverence for—the plan, until

and unless new information arises and necessitates an update.

Finally, leaders need to be on guard against letting focus become an obsta-

cle to necessary change. An organization that is focused on a fixed goal and

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54 Your Strategy Needs a Strategy

methods can fail to spot or react to external changes and its functional silos can

encourage a local instead of firm-level perspective, thus obstructing change.

Leaders can prevent such dysfunction by maintaining an external perspective

and ensuring that the organization is able to flex and change when required.

Leadership at Walmart: Sam Walton

Sam Walton, the founder of Walmart, lived the leadership traits of encouraging both focus and openness to change: he was willing to challenge his own and others’ view on retailing and was gifted with a meticulous eye for detail. He was so meticulous that he was once thrown out of a local grocery store in São Paolo, where the local police found him crawling on hands and knees, measuring the aisle widths of competitors.42 CEO in Aisle 3? That kind of maniacal attention to challenging every aspect of his own business model while pursuing a relentless scale game has enabled Walmart to realize a string of inno- vations that have protected and extended the retailer’s positioning against competition.

Tips and Traps

As we’ve seen, the essential elements of a successful classical strategy are to

analytically define a competitively advantaged position, develop a plan to

achieve it, and create an organization which supports the rigorous execution

of the plan. Implementing these three elements is, of course, no trivial matter.

Our research shows that when leaders perceive a predictable, nonmal-

leable environment, they are understandably most likely to turn to a classi-

cal strategy approach. However, in many cases, the malleability of classical

environments is overestimated and leaders consequently declare a visionary

approach. The classical practices of strategic planning, emphasizing ends

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Classical: Be Big 55

(goals) rather than means (process, capabilities), and prioritizing accuracy

over speed appear to be so widespread and entrenched that they are deployed

almost irrespective of the actual or perceived business environment. We also

noted that leaders surveyed sometimes tend to declare an adaptive style in

classical environments, even though this may not be reflected in the organi-

zation’s actual practices. This tendency to inappropriately declare an adap-

tive approach is probably influenced by the current popularity of adaptive

ideas in the management literature. Clearly, even for the classical approach,

the best-known approach to strategy, there are many opportunities for

misperception and misapplication.

Table 2-1 contains some practical tips to consider and some common traps

to avoid when you are trying to deploy the classical approach.

are YOUr actIONS cONSISteNt WIth a cLaSSIcaL apprOach?

You are employing a classical approach if you observe the following actions:

✓ You are deliberate and precise about where your firm plays.

✓ You analyze the attractiveness of markets and segments.

✓ You analyze the basis of competition.

✓ You analyze your firm’s competitiveness.

✓ You determine your firm’s optimal positioning based on scale, dif- ferentiation, or capabilities.

✓ You predict market developments.

✓ You set precise short- and long-term goals.

✓ You develop long-range, stable plans.

✓ You establish detailed milestones and performance metrics.

✓ You execute with great discipline.

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56 Your Strategy Needs a Strategy

TABLe 2-1

Tips and traps: key contributors to success and failure in a classical approach

Tips Traps

• Be open to surprise: Pursue new, unfa- miliar insights that allow you to outsmart competitors and may require a level of discomfort and surprise.

• Make the tough call: Use your ability to predict to make the best choices for your company’s strategic position. Strategy is not just about where you play, but also about where you don’t.

• Set the right time horizon: Align the planning cycle to the industry, and ad- just plans when materially new insights become available. Once a year? Three times? Once every two years? Make a deliberate choice.

• Be in the top three: When pursuing size- based positioning, starting from a small market share position makes it hard to create sustainable value.

• Chase the experience curve: Cost im- provements don’t come automatically; proactively realize and pocket them when volumes grow.

• Be meaningfully different: Differentiate according to capabilities that are valu- able to consumers and hard to imitate, rather than on those that are easy to build.

• Innovate rigorously: Apply the same rigor to your decisions about innovation resource allocation as you do to your operating costs.

• Ritualization: Some firms apply classical tools and a complex planning process for their own sake and tolerate a lack of both insight and surprise if due process is followed.

• Replacing strategy with budgeting: Allowing short-term metrics and budgets to become the focus of your planning process. A bad strategic plan lets man- agers focus and commit to short-term targets without committing to a coherent, long-term view of the business.

• More of the same: Letting “the way it’s always been” beat “the way it should be” is bound to keep you in a strategic slump. Being classical doesn’t mean not changing.

• Segmentation for convenience: Seg- menting according to known and existing categories, such as current business unit boundaries, rather than attempting a more in-depth analysis, can prevent a deep understanding of customer needs.

• Rigid planning cycle: If you stick to annual planning when your industry’s cycle shortens, or if you build your plans around Wall Street instead of the busi- ness itself, you may fail to adjust to your firm’s specific environment.

• Relying on perpetual advantage: Focus- ing only on existing sources of advan- tage can sometimes lead to problems. While incrementalism is inherent in classical strategizing, large jumps may occasionally be necessary.

• Assuming a classical approach by default: Many firms declare or deploy a classical approach because it is most familiar. Don’t let familiarity be your guide in choosing the right approach for your firm.

• Fashionably nonclassical: Other firms reject a classical style because of the lure of the latest management fad or because of general trends of dynamism and uncertainty in the economy. Follow- ing a trend is not the best rationale for choosing an approach to strategy.

Chapter_02.indd 56 16/03/15 10:56 AM

chapte r 3

adaptive Be Fast

Tata Consultancy Services: Adapting to Grow

Tata Consultancy Services (TCS), the largest Indian company by market cap as of 2014, has grown into one of the most successful technology services firms by evolving rapidly in response to waves of technological change through an ongoing stream of small busi- ness-model innovations.1 This adaptive approach enabled TCS to grow from a small player to a leading global one. TCS’s revenue growth is impressive: $20 million in 1991, $155 million in 1996, $1 billion in 2003, and more than $13 billion in 2014. From establishing India’s first dedicated software R&D center in 1981 to developing India’s first offshore development center in 1985 to entering the bioinformatics market in 2005 and then cloud computing in 2011, TCS has continually evolved by responding to changes in the technology environment and the changes’ impact on corporate customers.2

TCS, while large, is just one of many firms competing in the frag- mented space of technology services, an area that includes soft- ware solutions and services, consulting, engineering services, and business process outsourcing. Most players in this area have just single-digit market shares, so no firm can definitively shape the

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58 Your Strategy Needs a Strategy

direction of the market, and rapid technological change makes for a high level of unpredictability.

In spite of its size, TCS is very externally oriented so that it can cap- ture and harness change. The firm has grown with the environment, as the world economy has shifted from a physical to a digital economy.

With over two decades at TCS before he became CEO in 2009, Natarajan “Chandra” Chandrasekaran has overseen many of the evo- lutions in its service offering. “From an IT architecture point of view,” Chandra told us, “we started during the mainframe environment and have, over the years, adapted to a client-server environment, after which came the internet environment and today’s digital or hypercon- nected environment.” Chandra sees digital technologies fundamen- tally affecting companies in many, often unpredictable ways: “Every business process will get reimagined. Every business model will get reimagined. How the company works internally will get reimag- ined. It is our job to engage with customers on how they think about digital . . . and we will shape our delivery model accordingly.” TCS therefore has to doubly adapt to both changing technologies and changing customer usage environments.

As technology and customer needs change, TCS has responded quickly and appropriately. For instance, the firm recognized early client demand for a business division devoted to proliferating online channels.

This need to adapt requires an external orientation that cascades throughout the organization, from strategizing to organization to innovation. For instance, in setting direction, TCS balances a rough top-down approach with bottom-up challenge, whereby a central group provides critical market information on each industry verti- cal—industry size; growth; and competition, technology, and demand trends—then challenges each business to come up with its own approach to best meet specific customer needs. This way, the even- tual strategic direction emerges from a collection of individual initia- tives that address the specific environmental changes and other new situations that each business segment faces.

Because the future can’t be planned, Chandra does not take a classical portfolio-management approach: “We don’t want to

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Adaptive: Be Fast 59

have [segment-level] cash cows or stars . . . This is about creating opportunities for each business to evolve and grow.” TCS places many small bets and then, depending on the success of each initiative, can reallocate resources quickly across businesses. The approach to inno- vation is experimental and rapid: TCS runs rapid cycles of what it calls the 4E Model—explore, enable, evangelize, and exploit. The model focuses on proactively promoting research across diverse areas, building prototypes, testing, launching, and scaling up.3 Because vast troves of information from disparate sources are critical for varied, rich exploration, TCS has invested heavily in its analytic capabilities to support these efforts.

Chandra told us that “customer-centricity” is the most important part of TCS’s innovation model: “Understanding and often preempt- ing what the customer needs . . . is at the core of our strategic inno- vation, helping us innovate in our business solutions, delivery, and service models.” Several innovations have paid off for TCS. For exam- ple, the MasterCraft suite of tools leverages TCS’s expertise in the automation of the software development process to deliver quicker and higher-quality client support. And the Just Ask product, a social Q&A platform that enables a client to tap into the client’s own tacit individual or crowd knowledge, enables greater collaboration and reduction of time to market.

In addition to innovating in its products and services, TCS embeds innovation at two other levels in the business. At the engagement level, leadership encourages each business unit to think of every engagement as an opportunity for innovation, since each IT services project has unique characteristics. Finally, Chandra fosters an innova- tion-oriented, experimental mind-set at the individual employee level. He explained: “With three hundred thousand employees, we have tre- mendous intellectual horsepower within the company.” For instance, the firm’s Realize Your Potential program runs contests and hack- athons around specific issues faced by customers or by some of the Tata group companies; any employee can participate in these events.4

TCS has achieved the rare feat of being both large and nimble by building a modular organization that is empowered to experiment.

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60 Your Strategy Needs a Strategy

Since Chandra took over in 2009, the firm has grown from 140,000 employees to twice that.5 He said: “The company is very large, but we cannot get rigid, so we created twenty-three units, each addressing a specific group of clients. [The units] have common elements and, at the same time, are able to run with their own strategy. We don’t want hierarchy; we want network.” TCS’s attempts to reimagine how the firm works and collaborates include the Vivacious Enterprise, a social collaboration platform aimed at fostering engagement across TCS’s large and distributed workforce.6 Scale certainly helps TCS—it operates in almost fifty countries, is able to collaborate credibly with large global clients, and is the second-largest pure IT firm after IBM.7

But unlike a classical firm, TCS doesn’t win because it is big; it is big because it wins by taking an adaptive approach.

The Adaptive Approach to Strategy: Core Idea

When the business environment is unpredictable and nonmalleable and

advantage may be short-lived, firms have to be ready to adapt quickly to

succeed. As Chandra realized in the incessantly shifting technology services

industry, an adaptive approach can drive growth and advantage by continu-

ously adjusting to new opportunities and conditions (figure 3-1).

Adaptive

Scale up Select

Vary

Figure 3-1

The adaptive approach to strategy

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Adaptive: Be Fast 61

Like the classical approach, the adaptive approach has its own character-

istic thought flow. Adaptive firms continuously vary how they do business

by generating novel options, selecting the most promising, which they then

scale up and exploit before repeating the cycle.

In terms of our art metaphor, the adaptive approach is like painting a

landscape under changing light conditions. You need to keep your eye on

your subject, work fast, and repeatedly layer brush stroke upon brush stroke

until you have captured the fleeting moment—and then move on to captur-

ing the next scene.

Strategy emerges from the continuous repetition of this vary, select, scale up

thought flow, rather than from analysis, prediction, and top-down mandate.

By iterating more rapidly and effectively than rivals do, adaptive firms out-

perform others, but the classical notion of sustainable competitive advantage

is replaced by the idea of serial temporary advantage. As Rupert Murdoch,

the chairman of News Corporation, noted: “The world is changing very fast.

Big will not beat small anymore. It will be the fast beating the slow.”8

An adaptive approach is therefore fundamentally different from the clas-

sical one: it does not center on a plan, there is no one “strategy,” the emphasis

is on experimentation rather than analysis and planning, advantage is tem-

porary, and the focus is on means, not ends. We will explore some of these

differences and their implications in the following sections, but first let’s look

at another example of adaptive strategy in action.

Why Speed and Learning Matter: Zara

Zara, the Spanish fashion retailer, is a prime example of a company that has become very adaptable in an extremely unpredictable indus- try.9 On the eve of a new season, fashion retailers can hardly predict whether black is the new black or whether some other color is. In fact, even within a season, customer tastes frequently change. Historically, however, most retailers effectively relied on predictions of what

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62 Your Strategy Needs a Strategy

customers would want to wear. And most retailers usually got it wrong and suffered the consequences, having to discount as much as half their stock each year.

Inditex, the holding company of Zara, was no longer happy to bear these kinds of costs and decided to take an adaptive approach to manufacturing and retailing. The holding company introduced fast fashion, in industry parlance, with Zara’s launch in 1975. Instead of try- ing to predict what customers might want, Zara opted to react faster to what they actually buy.

Zara achieved this in two ways. First, it shortened its supply chain, moving production facilities closer to customers and willingly accept- ing the trade-off of slightly higher manufacturing costs to gain more agility. Among other measures, the firm relocated production facili- ties for United States and European markets from East Asia to coun- tries closer to end markets—countries like Mexico, Turkey, and North Africa. Proximity sourcing has been a success factor for Inditex’s model since its origination. The shortened supply chain reduced the time it took to deliver products from the design studio to the main street store to a mere three weeks—an extraordinary five months less than the industry average.10

Second, Zara produces only small batches of each style. In effect, these are real-time, in-market experiments, and the successful styles, those that flew off the racks, were selected for scaling up. The retailer tests many more items than its rivals, thereby keeping its customers engaged and ready for more. In fact, Zara commits six months in advance to only 15 to 25 percent of a season’s line and locks in only 50 to 60 percent by the start of the season, versus an 80 percent industry average. Consequently, up to 50 percent of Zara’s clothes are designed and manufactured right in the middle of the season.11 If harem pants and leather are suddenly the rage, Zara reacts quickly, designs new styles, and gets them into stores before the trend has peaked or passed.

The impact has been significant: in 2010, Zara marked down only 15 to 20 percent of its inventory, in contrast to the industry average of 50 percent.12 Also, even though its direct production costs are higher

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Adaptive: Be Fast 63

than those of competitors that mostly center production in the Far East, Zara’s profit margins in that period were consistently double the average for the industry, and the retailer achieved significantly higher inventory turns to boost its return on capital (figure 3-2).

-5

0 5 10 15 20

EBIT margin (%)

Columbia

Gap Nike

Zara

H&M Victoria’s Secret

Esprit

Number of collections per year

Wholesaler Retailer

Figure 3-2

Zara’s adaptive approach in the fashion industry generates high returns

Source: Capital IQ, BCG estimates; BCG project experience; company annual reports.

Note: EBIT, earnings before interest and taxes.

What You Might KnoW it as

The advantage of adaptability is not a new notion. Charles Darwin first recognized the power of evolutionary processes, or adaptation, in the biological world. And adaptive business approaches—the notion that strategy cannot always be planned and that speed and flexibility can produce competitive advantage—owe a huge debt to biological thinking.

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64 Your Strategy Needs a Strategy

In the late 1970s, Henry Mintzberg argued that companies some- times unintentionally end up capitalizing on emergent strategies. These strategies are not the result of deliberate top-down plans, but rather emerge serendipitously while the intended plan is being pursued.13

In the 1980s, Richard Nelson and Sidney Winter developed the theory of evolutionary economics, suggesting that economic prog- ress is essentially adaptive. BCG leaders Tom Hout and George Stalk around this time pioneered the concept of time-based compe- tition, which held that advantage could be created by reducing cycle times in processes like new product development and production. Time-based competition centered on executing existing tasks faster, whereas adaptation also requires firms to learn how to do new things faster and more effectively too.14

In the late 1990s, Charles Fine developed the notion of temporary advantage, arguing that advantage is increasingly short-lived and that firms need to match their strategy cycle to the industry’s “clock speed.” Around the same time, Kathleen Eisenhardt argued that under high uncertainty, organizations and strategies can become agile by using simple rules that serve as guidelines and principles in place of complex rules and instructions. Rita McGrath also pio- neered the idea of discovery-based planning, where plans are not treated as output forecasts against which performance is assessed but rather as plans for discovery that maximize learning while mini- mizing cost.15

Finally, BCG developed and commercialized the adaptive advan- tage concept in the early 2010s to help its clients react to increasing change and uncertainty. This concept detailed how firms can prac- tically realize bottom-up strategic experimentation to replace top- down planning.16

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Adaptive: Be Fast 65

When to Apply an Adaptive Approach

An adaptive approach to strategy is appropriate when—and only when—

your company is operating in an environment that is both hard to predict

and hard to shape.

So how can you recognize an adaptive environment? Essentially, an adap-

tive strategy is called for when forecasts are no longer reliable enough to pro-

duce accurate and durable plans because of ongoing, substantial change in

technologies, customer needs, competitive offerings, or industry structure.

Such an environment manifests itself in volatile demand, competitive rank-

ings, and earnings; large forecasting errors; and short forecasting horizons.

By these measures, turbulence and uncertainty are now strikingly more

frequent and intense in many industries and persist for longer than in previ-

ous periods (figure 3-3). Until the 1980s, less than a third of business sectors

regularly experienced turbulence. But because of globalization, accelerated

IT Consumer discretionary

Industrials Materials

Financials Health care

Consumer staples Telecom

Energy Utilities

1960 1970 1980 1990 2000 2010

Sector

Time

Key drivers

HighLowUnpredictability*:

Connectivity Digitization

Liberalization of trade

Figure 3-3

increasing unpredictability of returns

Source: Compustat, BCG analysis.

Note: Volatility based on all public US companies.

*Average five-year rolling standard deviation of percent firm market capitalization growth by sector, weighted by firm market capitalization.

Chapter_03.indd 65 3/23/15 9:51 AM

66 Your Strategy Needs a Strategy

technological innovation, deregulation, and other forces, roughly two-

thirds of the sectors now do.17

Over the past thirty years, the turbulence of business operating margins,

largely static since the 1950s, has more than doubled. Also, the percentage of

companies falling out of the top three revenue rankings in their industry each

year rose from 3 percent in 1961 to 17 percent in 2002 and was around 8 percent

in 2013. The value of incumbency has also diminished: the probability that

the top three market-share leaders are also among the top three profitability

leaders declined from 35 percent in 1955 to just 7 percent in 2013 (figure 3-4).

Some industries have been especially hard hit by the turbulence; they

include software, internet retailing, semiconductors, and, as we saw with

Zara, the fashion industry. Most companies in these sectors should be contem-

plating an adaptive approach to strategy—for part, if not all, of their business.

20202010200019901980197019601950

% of companies leaving top 3 ranking position

Position

20202010200019901980197019601950

Share of top 3 industry scale leaders that are also among top 3 profitability leaders*

Returns to scale

Figure 3-4

Sources of traditional competitive advantage are eroding

Source: BCG Strategy Institute analysis, September 2014, Compustat.

Note: Cross-industry analysis based on thirty-four thousand companies in seventy industries: unweighted average. Industries excluded in years where less than six ranks; companies were excluded in years where only sales or earnings before interest and taxes (EBIT) were reported, or if sales were less than $ 50 million, or whose margins were less than –300% or greater than 100%.

*Scale is calculated as net sales, profitability as EBIT margin (on net sales).

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Adaptive: Be Fast 67

Indeed, such is the prevalence of turbulence today that even some com-

panies from capital-intensive industries more typically associated with a clas-

sical approach might also need to consider deploying an adaptive one. Take

mining and metals, for instance. The volatility of metals and minerals prices

from 2000 to 2010 was more than six times that of the previous decade.18

Most mining and metals firms find it hard to make their operations flexi-

ble and adaptive because of the long cycle, large-scale capital investments

involved. Nevertheless, they are increasingly compelled to find new ways

to increase flexibility because even moderate volatility in prices or demand

against a high-fixed-cost base can wreak havoc with earnings. As a result,

several firms in that sector are trying to shorten their capital cycles, spread

investments over an increasing number of smaller assets, share ownership

risk, make their operations more flexible, and exploit uncertainty by establish-

ing asset-backed trading arms. As Jac Nasser, CEO of BHP Billiton, said in

September 2013: “All resources companies will need to improve productivity

and be flexible enough to adapt to change in this more challenging market.”19

Accurately assessing the environment is therefore critical. But it is clear

from our research that many companies that objectively face an adaptive

are You in an adaptive Business environMent?

You are facing an adaptive business situation if the following observations hold true:

✓ Your industry is dynamic.

✓ Your industry’s development is unpredictable.

✓ Your industry is not easily shapable.

✓ Your industry displays high growth.

✓ Your industry’s structure is fragmented.

✓ Your industry is immature.

✓ Your industry is based on changing technologies.

✓ Your industry is subject to changing regulation.

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68 Your Strategy Needs a Strategy

environment fail to perceive it as such, because they tend to overestimate

the degree to which they can predict or control it. Conversely, even though

turbulence is on the rise overall, the adaptive approach is not a panacea and

must be applied selectively, when appropriate. As we saw in chapter 2, for

many situations, a classical approach is still the right one.

The Adaptive Approach in Practice: Strategizing

Because adaptive strategy emerges continuously from iterative experimen-

tation that is deeply embedded in the organization, thinking and doing

converge. The simultaneous nature of these two activities differs from the

classical approach, which is composed of two sequential phases of (1) analysis

and planning and (2) execution. These activities are performed by differ-

ent parts of the organization. In the adaptive approach, such a separation

between strategizing and implementation would be fatal, slowing down and

blunting the learning process. In this chapter therefore, the section on strat-

egizing covers the entire process from capturing change signals to managing

a portfolio of experiments. The implementation section of this chapter then

deals with the broader organizational context that supports and enables this

process to take place.

Applying an adaptive approach is easier said than done. Leaders increas-

ingly use the vocabulary of adaptation, referring to VUCA environments

(those with volatility, uncertainty, complexity, and ambiguity) and extolling

the virtues of agility and adaptability.20 However, as we will see later, many

of these same firms continue to cling onto the top-down, slow-cycle, plan-

ning-centered practices associated with the classical approach.

The adaptive approach involves reading and digesting change signals to

manage a portfolio of experiments focused on areas of highest opportunity

or vulnerability. The goal is to run the cycle of vary, select, and scale up

more quickly, economically, and effectively than rivals do, to build and

renew temporary advantage.

Unlike classical strategy, adaptive strategy does not have predefined ends,

because these are unknowable in an unpredictable environment. Strategy

Chapter_03.indd 68 3/23/15 9:51 AM

Adaptive: Be Fast 69

emerges and evolves iteratively. Leaders using an adaptive approach would

therefore be missing the point by talking about the strategy. Leadership can

define a domain of focus, a rough direction, or an aspiration, but the specific

strategies are emergent and dynamic. In contrast, the approach to exper-

imentation can be very deliberate. The risk taking and creativity required

by an adaptive strategy may look undisciplined compared with a classical

approach. But adaptive strategy requires an equal level but different sort of

discipline throughout—from generating new options, to determining how

promising ones are tested and selected, to establishing how to reallocate

resources from less promising projects toward those that show potential.

Reading Change Signals

As Niels Bohr, the Danish Nobel Prize–winning physicist once put it:

“Prediction is very difficult, especially if it’s about the future.” So what should

a firm do when it cannot set its direction through prediction?

To react to and harness change, firms need first to observe and to try

to make sense of it. When observing change, firms need to capture the

right information and decode it to discriminate between trivial and signif-

icant changes (the latter changes being those that might be threatening or

constitute opportunities) and between forecastable, knowable factors and

currently unknowable ones that require exploration and experimentation.

To understand the significance of change, firms need also to question and

challenge what they think they know by uncovering and reconsidering

blind spots and hidden assumptions. External change signals might there-

fore point directly at an opportunity or a threat or more indirectly at an area

of uncertainty where the firm needs to gather more information through

experimentation. In this way, experimentation need not be blind, but rather

can be more of a guided learning process.21

Capturing the right data can be immensely valuable to continuously gen-

erate new insights about changes in demand or competition. In Japan, global

grocery chain 7-Eleven gained a significant information advantage in the

early 2000s by leveraging its point-of-sale systems to track not just sales, but

also other variables, such as customer demographics and even the weather

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70 Your Strategy Needs a Strategy

and time of the day. With this data, the firm could test hypotheses about

how these variables drive sales in real time, allowing 7-Eleven to identify

promising or less promising items in a particular context. Thus, pricing,

assortment, promotions, and layout could be optimized to local conditions

on a daily or even multi-hourly basis by location. For example, the 7-Eleven

systems could track the altered demand for lunch boxes from a new nearby

building site and rapidly adjust the assortment on a store-by-store basis.22

Often the relevant information is already available and right under a

company’s nose, originating, for instance, from interactions with consum-

ers, suppliers, and other stakeholders, but the information may need to be

properly captured and decoded through the use of data mining and analyt-

ics. Firms must be able to decode hidden patterns in large data sets and to

react to changes rapidly before someone else does. The days when companies

could secure an advantage by merely possessing information are dwindling:

the information they possess may quickly lose relevance or may harbor hid-

den patterns that need to be teased out.

To understand the significance of change, firms must foster self-awareness

about what they really know and must uncover their own hidden assump-

tions. This information map can shift constantly in a changing environment.

In some cases, firms underleverage new information available to them—what

we might call underexploited knowns, or elephants. There is also much that you

may erroneously think you know—false knowns, or unicorns—and may need to

challenge. Most challengingly, some things cannot be known at the time,

without a change of perspective or further experimentation—double question

marks, or unknown unknowns, to borrow an expression from Donald Rumsfeld,

the former US secretary of defense (figure 3-5).23

Understandably, large companies find it hard to identify and address these

three types of blind spots, since most operate with a classically biased world

view. Firms assume they have a high level of knowledge about the market or

competitive landscape and expect to see only a modest degree of change.

The story of big US car manufacturers and hybrid cars offers a lesson

on underexploited knowns. In the early 1990s, the Clinton administration

challenged the big automakers to design cars that were more fuel-efficient,

against the backdrop of a growing ecological awareness among consumers.

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Adaptive: Be Fast 71

GM, Ford, and Chrysler did develop prototypes—but few reached the

production line.24 This left a gap for Toyota. Its Prius became the first

mass-produced hybrid car and was extremely successful. Cumulatively,

Prius passed the one million vehicles sold mark in 2008 and reached three

million in 2013. In 2009, it was the best-selling car in Japan.25

In other cases, firms may neglect to challenge a false known, a dominant

but increasingly obsolete world view, in spite of abundant signals of change,

because they underrate or ignore information at their disposal. An exam-

ple of a false known is the apparently reasonable assumption that to at least

some significant degree, people use smartphones for making phone calls!

It is easy to imagine both how challenging it is for a long-standing tele-

communications provider to question this belief and the significant strategic

consequences of doing so. Telenor, a Norwegian telecom company, in fact

did question this belief, as we will explore later in this chapter.

Of course, there are always things that a company may not or simply

can’t know—unknown unknowns—without experimenting or a changing

its vantage point. Therefore, adaptive companies need to build a culture of

P re

di ct

ab ili

ty Execute and resource appropriately

Get the facts and realign strategy

Change perspective

Trends

Challenge assumptions, monitor closely

Shift experimentation resources, develop options

Increase experimentation, flexibility

Uncertainties

Knowledge

Extensive Limited

High

Low

Underexploited known

False known

Unknown unknown

Figure 3-5

Tool for segmenting sources of uncertainty

Chapter_03.indd 71 3/23/15 9:51 AM

72 Your Strategy Needs a Strategy

self-challenge, one that encourages the questioning of a company’s domi-

nant logic to uncover and employs techniques aimed at highlighting blind

spots. For instance, they try to look at their own firm through the eyes of an

imaginary or real enemy, engage in war gaming against their own business

model, or try to make an opposing business case or mandate a compulsory

dissenting opinion for each new investment recommendation, in order to

deliberately expand their field of vision.

Managing a Portfolio of Experiments

In a turbulent business environment, a company’s products, services, and

business models can become obsolete very quickly. At the same time, firms

cannot predict which new elements will replace the old ones. Luckily, lead-

ers have a viable alternative to prediction: running a portfolio of strategic

experiments managed with an eye on the twin imperatives of speed and

economy. To do so successfully, firms set the perimeter for experimentation

by reading change signals and generating a sufficient volume of new ideas

to test in areas of interest. Promising opportunities emerge quickly through

disciplined experimentation, with clear rules for selecting and pushing proj-

ects forward. Finally, firms scale up successful experiments by rapidly and

cleanly reallocating resources.

Companies should first decide what to test. They should leverage change

signals to focus on the areas that suggest the highest growth potential, the

biggest threats, or the most important blind spots. Even where you lack a

clear hypothesis, more experimentation yields more information, which

yields more options. Unlike the classical firm, the adaptive firm leans toward

taking action first rather than analysis.

Adaptive firms tap into two sources to make sure that they have suffi-

ciently large numbers of new ideas to test. Either they embrace the natu-

ral variance inherent in the way the company operates, or they proactively

introduce variance by creating a range of experiments and testing them.

Passive works well in activities like trading or selling, where there is signif-

icant natural variance to tap into. Variance gives the adaptive firm a wide

option set to explore. Interestingly, it is precisely this variance that classical

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Adaptive: Be Fast 73

firms try to eliminate from their processes in the pursuit of ever-higher

efficiency levels. For this reason, it can be extremely difficult for a classi-

cal firm to really embrace an experimental approach even when such an

approach becomes acutely necessary.

Google is not yet twenty years old and operates in a ferociously unpre-

dictable market. Its cofounder and CEO Larry Page couldn’t make the point

more strongly: “Many leaders of big organizations, I think, don’t believe that

change is possible. But if you look at history, things do change; and if your

business is static, you’re likely to have issues.”26 As a consequence, Google

experiments on a wide range of options close to and distant from its core

business—from AdWords to more exploratory investments through Google

Ventures or speculative projects such as Google Glass. Many of these ideas

come from the much celebrated 20 percent time program, which lets some

employees spend as much as 20 percent of their time working freely on new

projects of their choice.27

To ensure that experiments function quickly and cheaply, firms need

clear rules for framing, executing, and assessing experiments, applying a

principle of freedom within a disciplined framework. On a portfolio level,

adaptive firms should strictly monitor their economics of experimenta-

tion. They should measure and optimize the number of experiments, the

costs, the success rates, and the speed of progression. Typically, experiments

should be individually small, large in overall number, and quick to come

to a conclusion. Rather than investing a lot of time to evaluate and attempt

to predict the success of each project before it is launched, adaptive firms

continuously validate what is working in practice and iterate frequently on

their portfolio. As management writer Tom Peters has urged: “Test fast, fail

fast, adjust fast.”28

To return to Google: the firm actively measures experimentation out-

comes so that, in light of the results, Google can rapidly reallocate resources

among projects. Over the past ten years, Google has both launched and

killed roughly ten to fifteen products annually without major customer or

organizational resentment.29 While a classical strategist could think that the

adaptive strategy sounds like “try something and see what sticks,” objective

data—rather than disputable gut feel—governs each decision.

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74 Your Strategy Needs a Strategy

siMulating strategY in an unpredictaBle environMent

Classical strategies perform well when an environment is stable, because the attractiveness of the option chosen after careful analysis doesn’t change. However, when we add environmental dynamism and uncertainty to our computer simulation, classical strategies underper- form strategies that invest more in continuously exploring new options.

In an uncertain environment, it is likely that the rewards from a cur- rently exploited option will decrease or that new, potentially better options will arise. Therefore, strategies that continuously invest a pro- portion of resources in exploring new options, or adaptation, should yield improved performance.

Our simulation confirms this relationship. Increasing the degree of uncertainty of rewards per option over time requires a proportionally higher degree and continuity of investment in exploration (figure 3-6).

Figure 3-6

Adaptive strategies perform well in turbulent environments (simulation)

Source: BCG Strategy Institute multi-armed bandit (MAB) simulation.

Notes: Results averaged over thirty simulations in noncompetitive environment with thirty investment options.

100

150

200

250

0 50 100 150 200 250 300

Profit per period

Time

Classical strategy

Adaptive strategy

Continuously explore for new options

Chapter_03.indd 74 3/23/15 9:51 AM

Adaptive: Be Fast 75

Strategizing at Telenor

The telecom industry is a prime example of an industry whose envi-

ronment has undergone a rapid shift from a relatively stable classi-

cal environment to a more rapidly shifting adaptive one. Jon Fredrik

Baksaas, CEO of the Norwegian telecom operator Telenor, described

the change through analogy: “I call it the ‘concrete phenomenon.’

You used to be able to plan: how many houses will be built, how much

cement will you need, and you produced that much. And then you did

it for the next year. And that is fundamentally different today. In our

traditional fixed-line business, we have that degree of certainty, to

some extent, but that’s where it stops.”30

Telenor’s advantage in the historically stable telecom industry

came from its scale and cost competitiveness in operating fixed-

line and mobile-phone network businesses in Norway, Sweden, and

Denmark. However, in the late 2000s, Telenor faced new challenges

with the maturation of its network businesses, the accelerating switch

in revenue contribution from voice to data, and the flurry of new inter-

net-based services introduced by both tech giants and start-ups like

Netflix and WhatsApp. In a short period of time, competition became

more fragmented, consumer preferences and segmentation changed,

and the industry became much less predictable.31

Telenor has succeeded, locally and in emerging markets, by imple-

menting an adaptive approach to strategy, especially in the new areas

of its businesses. For instance, it adjusted the speed and horizon of its

planning to be more iterative, with a focus on seeing what’s happen-

ing and responding quickly, and added quarterly updates and revi-

sions to the plan. “Minimizing delays in getting products to market is

more important than hitting pre-set targets,” Baksaas said.

Additionally, Telenor has adjusted its approach to innovation.

Baksaas gave us an example of why speed to market and novelty are

so important: “I was speaking to an audience and asked how many

had smartphones—ninety percent raised their hands. How many had

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76 Your Strategy Needs a Strategy

iPhones? Seventy percent. And of those, how many had used the phone that morning to make a voice call? Only five percent. Everyone else had used their phone, but they had been using data and apps. So we must adapt our model accordingly.” In practice, that means that Telenor protects and funds innovation through a trial-and-error process in the innovation’s early stages before integrating it into the broader busi- ness. Telenor closely manages its experimentation engine, paying attention to adaptive metrics like cost per experiment, time to market, and percentage of sales from new products. It then scales up success- fully piloted products rapidly, like appear.in, an in-browser group video conversation service. After a test-and-learn period, the appear.in ser- vice is now fully global, serving customers in 175 countries.32

Telenor has also updated its approach to talent management to “nurture and appreciate the risk-takers and innovators.” The firm, for example, developed a forty-person global leadership program that draws from across the organization and works to generate new busi- ness ideas; from this diverse, cross-functional group, eight novel ideas are in the development phase.

Baksaas emphasized that “in an era of unpredictability, the incum- bent has the most to lose.” To combat the natural inertia that comes from comfortable positions of monopoly or scale, Telenor systemati- cally leverages learning and experience from business in areas where the rate of change is the quickest, like Asian markets. There Telenor focuses on reaching and connecting the most consumers the fastest, for example, by driving the development of mobile phones placed at a price point below $20.

The Adaptive Approach in Practice: Implementation

Let’s look at the broader organizational context that supports and reinforces

the adaptive approach to strategy. The approach must be embedded in every

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Adaptive: Be Fast 77

aspect of the organization, with an eye to promoting signal capture, experi-

mentation, and selection by promoting external orientation, bottom-up ini-

tiative, and an agile and flexible organization.

Information

As we’ve seen, information management is critical for both signal capture

and effective management of a portfolio of experiments. Therefore, adap-

tive firms must continuously refresh their data on external change and must

have the analytic capabilities to uncover hidden patterns. These functions

and capabilities need to be broadly embedded in the organization. To man-

age experimentation, information is needed on two levels: information to

manage individual experiments (i.e., data on outcomes and controls for each

experiment) and information to manage the overall portfolio (such as overall

success rate, costs, speed, and aggregate return on investment).

Since the firm that first deciphers and acts on change signals gains advan-

tage in an adaptive environment, the firm’s intelligence about the industry,

the competition, and customer and consumer trends must be excellent.

Adaptive firms, therefore, must invest in developing advanced analytics

capabilities that can capture and leverage disparate, real-time data. Since the

precise applications of patterns cannot be foreseen, the information needs to

be easily and broadly accessible and visualized in a way that makes it easy for

all parts of the organization to tap into it.

Car insurance company Progressive is a good example of a firm that built

competitive advantage by using novel real-time signals to understand risk

in a very segmented fashion. In the late 1990s, Progressive became the first

US insurer to build capabilities in telematics, a technology that reads and

reports data in real time from remote objects. In 2011, the firm introduced

Snapshot, a small telematic device that drivers place in their cars. The device

reports data on driver behavior such as mileage and acceleration and braking

patterns. With that information, Progressive can create an individualized

dynamic risk profile and offer savings of up to 30 percent to low-risk cus-

tomers.33 Additionally, the firm uses the knowledge gained to continuously

refine and update its customer and product segmentation. As a result of this,

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78 Your Strategy Needs a Strategy

Progressive has improved on all major dimensions—sales volumes, retention,

and loss ratio on its customer base. Progressive’s CEO, Glenn Renwick, said,

“I consider Snapshot to be one of the most important things I’ve personally

seen in my career.”34

Good results require accurate data for both the experiment and the cor-

responding control to determine whether the outcome meets the criteria

for advancing or stopping the experiment. Effective experimentation also

requires monitoring and management of overall idea generation, success

rates, experimentation costs, speed of progression and resource allocation

across the portfolio to maximize the yield on experimentation.

The firm needs to extract as much learning as possible from each of

its experiments—including those that don’t work. Failures are critical for

adaptive firms, since these experiments could contain valuable informa-

tion not only on what specifically works and what doesn’t, but also on the

effectiveness of the experimental approach itself. Caesars Entertainment,

a casino operator, leverages the information from the dozens of experi-

ments it conducts in parallel not only to identify the best products for

its customers, but also to fine-tune the experimentation process itself.

Experiments are undertaken in separate, controlled parts of a casino so

that each test can be properly assessed and, if appropriate, rolled out

across the company.35 It is a rigorous process. As Gary Loveman, the

CEO, joked: “There are two ways to get fired from Caesars: stealing from

the company or failing to include a proper control group in your business

experiment.”36

Innovation

Continuous innovation is quite obviously the lifeblood of an adaptive orga-

nization. Since adaptive companies experiment without a predefined goal,

they need a disciplined and iterative innovation process to ensure that the

best initiatives surface fast and economically. Therefore, adaptive innova-

tion needs to be informed by external signals, built on small, low-cost bets,

and iterated upon frequently. And, on a higher level, the process needs to

be tolerant of failure and managed for overall economic optimality. This is

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Adaptive: Be Fast 79

certainly not to say that innovation and novelty are maximized for their

own sake: experimentation is expensive and risky. So the adaptive firm also

needs to adjust its rate of exploration to the circumstances and clock speed

of its environment and then makes sure that the firm also fully exploits its

successes, albeit for short periods.

We dealt with many of the key features of adaptive innovation in this

chapter’s section on strategizing, so let’s now look at some essential dif-

ferences with how innovation is normally conceived and implemented.

Innovation in a classical firm is often somewhat detached from regular

business activities, consisting of occasional leaps driven by an entirely sep-

arate R&D department. In an adaptive approach, innovation is the oppo-

site: small steps, continuous, and operationally embedded. And unlike

the visionary or classical approaches, you may not initially know what

“new” thing you’re looking for, so you will inevitably have failures, set-

backs, and surprises. Therefore, adaptive firms manage individual proj-

ects for speed, incentivizing progression and enforcing short timelines to

push teams to converge quickly on whether something is worth progress-

ing further, requires a change of direction, or needs to be aborted. For

instance, Google requires that project specs be no longer than one page, a

limit that helps reduce any reluctance or regret about changing course or

winding down.37

Organization

The adaptive approach needs an organization that is able to capture and

share external signals and to generate and manage a portfolio of experiments

effectively. The necessary organization design principles, therefore, are to

be externally oriented, information enabled, decentralized, and flexible to

reallocate resources quickly as the focus of experimentation evolves.

An external orientation allows firms to capture external signals effec-

tively. Often, this means that a firm embeds customers into its processes

by building strong feedback mechanisms or by creating user communities

as part of its organizational model. Sometimes, customers are even a main

source of innovation ideas.

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80 Your Strategy Needs a Strategy

Adaptive firms are typically broadly information-enabled and make data

visualization and analytics available throughout their organization, so that

employees can spot change and formulate an immediate, fast response.

This is different from the classical approach, where the analytical tools used

for strategizing are usually concentrated among a small group of expert

professionals.

Because of the need to stimulate bottom-up learning and individual cre-

ativity, adaptive organizations often foster a high degree of autonomy and are

relatively flat and decentralized. The organizations are often characterized

by the existence of informal, temporary, or horizontal structures, like inter-

nal forums, task forces, or councils that break down traditional functional

silos to allow for sharing of information and flexibility in mobilizing around

promising opportunities. Multiple layers, strict hierarchy, and a thick rule

book would greatly reduce a company’s ability to execute a quick about-face

in light of new signals from the environment.38

Safe Innovation Space: Organization at Intuit

Intuit is what its president and CEO, Brad Smith, calls a “30-year old start-up.”39 Despite being an “old”—that is, pre-internet—software company, Intuit has continuously rejuvenated its fortunes by retooling its innovation and experimentation processes to design cutting-edge financial software. Senior leaders at Intuit designed an organiza- tion that functions as a safe innovation space by reducing friction in new-product development and encouraging a philosophy of speed, guided by simple rules.

For instance, Intuit’s organization fosters openness, flexibility, and bottom-up contributions by empowering small, diverse teams of four to six people to identify problems and to prototype solutions rapidly. When an internal task force determined that too many managers were involved in new software releases, making the process inefficient,

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Adaptive: Be Fast 81

unclear, and sometimes demoralizing, the group rolled out a new deci- sion process that grants far more authority to the small scrum teams that best know the product and target customers. Management’s role in each decision is limited to a pair of approvers: one sponsor to remove roadblocks and one coach to provide vision.40

Intuit’s organizational rules and processes serve less to constrain the organization than to empower and focus it. Faced with possi- ble commoditization from free internet services, Intuit has main- tained its leadership through a combination of new products and smart acquisitions, including the personal-finance aggregator Mint .com. Since Smith became CEO in 2008, Intuit stock has more than doubled.41

The adaptive organization is typically modular and flexible, which means

that its units can be recombined quickly, depending on shifts in the envi-

ronment or the decision to scale a particular experiment. Standardized

(plug-and-play) interfaces enable the organization to morph to address

changing needs by rapidly shift resources. Take Corning, the maker of

Gorilla Glass, which has been used as a cover material for iPhones through

2014, along with nearly twenty-five hundred other devices across thir-

ty-three major brands.42 As we will explore in chapter 7, Corning doesn’t

know far in advance when device manufacturers will begin to build a new

product or what the specs will be. But the company’s flexible organizational

structure, lack of silos, and common incentives allow it to adjust roles and

reallocate resources quickly to mobilize around new opportunities.

Culture

An adaptive firm’s ability to read and act on market signals and conduct

experiments is underpinned by its culture. Adaptive cultures are therefore

externally oriented and means focused. The culture creates the context for

the generation of new ideas and rapid learning by allowing for a diversity of

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82 Your Strategy Needs a Strategy

perspectives and encouraging constructive dissent, rather than compliance

with a single mandated direction.

In contrast to the expressly goal-oriented, disciplined culture in the

classical firm, the adaptive approach requires a culture of openness and

playfulness to encourage the generation of new ideas. The culture promotes

challenge by allowing constructive dissent and promoting cognitive diver-

sity. And because adaptive organizations rely on individual creativity and

initiative, they articulate a set of common behaviors and a common purpose

in the place of precise endpoints.

Netflix, for instance, is unique in the way it first codified an explicit set

of adaptive management beliefs and principles. Here is an example from

its “Reference Guide to Freedom and Responsibility Culture”: Process-

driven companies are “unable to adapt quickly, because the employees are

extremely good at following the existing processes . . . we try to get rid of

rules when we can. We have a culture of creativity and self-discipline, free-

dom and responsibility” that benefits from “highly aligned, loosely coupled

teamwork . . . the goal is to be big and fast and flexible.”43

The culture at Netflix has underpinned sustained viability and superior

operational and financial performance in a highly turbulent industry. As

Netflix has evolved from providing mail-order DVDs to streaming digital

media to developing independent content, its stock price rose tenfold from

2009 to 2014, and Netflix became the largest source of internet traffic in

North America in 2013.44

Leadership

Adaptive leaders lead through setting context, rather than goals. They do this

by orienting the organization externally, creating an experimentation-friendly

culture, specifying the rules under which experiments are conducted, and

highlighting the areas where experimentation is to be focused. Reed Hastings,

CEO and founder of Netflix, summarized this important quality of leader-

ship: “The best managers figure out how to get great outcomes by setting the

appropriate context, rather than by trying to control their people.”45

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Adaptive: Be Fast 83

Culture and Leadership at 3M: William McKnight

William McKnight officially became president of 3M, an industrial con- glomerate, in August 1929—just two months before the Wall Street crash. Over the next twenty years, he ran a company that needed to cope with a great deal of change. His achievement stands as the clas- sic case of a leader creating the context within which his team of bril- liant innovators could shine.

McKnight formulated a set of management principles that could be remarkably applicable to any innovative technology companies’ culture today: delegate responsibility to stimulate individual initiative; tolerate mistakes to avoid dampening the spark of creativity; allocate free time in the working week for people to pursue their own inter- ests; establish platforms so that great ideas can be shared across the organization.

As he prepared to step down from his role as president in the late 1940s, McKnight set down these principles in a code for the lead- ership team that would be assuming the day-to-day control of the company:

As our business grows, it becomes increasingly necessary to dele- gate responsibility and to encourage men and women to exercise their initiative. This requires considerable tolerance. Those men and women, to whom we delegate authority and responsibility, if they are good people, are going to want to do their jobs in their own way. Mistakes will be made. But if a person is essentially right, the mistakes he or she makes are not as serious in the long run as the mistakes management will make if it undertakes to tell those in authority exactly how they must do their jobs. Management that is destructively critical when mistakes are made kills initia- tive. And it’s essential that we have many people with initiative if we are to continue to grow.46

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84 Your Strategy Needs a Strategy

Today, these principles continue to set the context for 3M’s employees. The company encourages its R&D staff members to exercise their initiative by giving them as much as 15 percent of their time for “tinkering,” often on basic research topics with no obvious or immediate commercial potential.47 In other words, “Google Time” has been around far longer than Google. These organizational and cultural elements are central to 3M’s enduring success. 3M often exceeds its own goal to generate 30 percent of its sales from newly launched products.48

Tips and Traps

As we have seen, successful adaptive strategy hinges on continuous, dis-

ciplined execution of signal-guided, iterative experimentation rather than

preset goals. To conduct such experiments effectively, you must accept the

are Your actions consistent With an adaptive approach?

Your approach to strategy is adaptive if:

✓ You aim to capture and decode change signals early.

✓ You create a portfolio of options and experiments.

✓ You select successful experiments.

✓ You scale up successful experiments.

✓ You reallocate resources flexibly.

✓ You iterate (vary, select, scale up) rapidly.

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Adaptive: Be Fast 85

limits of your knowledge and your powers of prediction and prepare for the

future by creating and exploiting options, rather than by deriving a single,

unchanging plan through analysis and prediction.

Volatile, unpredictable environments and adaptive strategies are much

discussed and are, superficially at least, familiar to most managers. Not sur-

prisingly, then, a quarter of the companies in our survey declared that they

had adaptive approaches to strategy, and more that 70 percent think that

plans should evolve. Nevertheless, many companies acknowledged that

they have insufficient adaptive capabilities: only 18 percent and 9 percent

saw themselves as expert at reading signals or managing experimentation,

respectively. Few companies, however, appeared able to identify adaptive

environments accurately, and many companies tended to read such envi-

ronments as more predictable or malleable than they actually are. Moreover,

even when firms declare an adaptive approach, the practices the companies

actually used—planning, prediction, emphasis on ends rather than means,

and the like—tended to be decidedly nonadaptive. Our survey painted a

clear picture of many companies recognizing the importance of adaptive

approaches but having insufficient knowledge or experience of how to oper-

ationalize this understanding. Hopefully, this chapter and the tips and traps

presented in table 3-1 will help remedy this gap.

TAble 3-1

Tips and traps: key contributors to success and failure in an adaptive approach

Tips Traps

• Know what you know and don’t know: Look externally, beyond the obvious, to spot new opportunities in a world in constant flux. Continuously look for information that challenges long-held beliefs.

• Practice goal flexibility and means discipline: Experiment within a broad direction, and prepare to be surprised, but manage the experimentation process with discipline.

• Overconfidence in your own beliefs: Knowing the future in a world that is uncertain is an oxymoron. Even if your world view is spot-on, rapid change can outdate it in an instant.

• Silencing dissent: Avoid hearing only what you want to hear. Consider signals contrary to your beliefs a gift intended to help you see something new.

(Continued)

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86 Your Strategy Needs a Strategy

TAble 3-1 (Continued)

Tips and traps: key contributors to success and failure in an adaptive approach

Tips Traps

• Don’t bet the firm: Use a portfolio and a series of many small, economical experiments instead of pinning your company’s future on a large, single bet.

• Choose speed over accuracy: Force convergence quickly, toward either continuation or termination of the experiment. Detailed preemptive analysis and precise goals are a waste of time and resources when the target is unknowable and shifting.

• Iterate frequently: Signs of success emerge organically after cycles of testing, evaluation, adjustment, and further testing. Look often to learn faster.

• Select with discipline: Set clear rules up front for selecting and scaling up promising experiments to support speedy self-direction and limit both gut-feel decisions and inertia.

• Learn from failure: Recognize that failure is inherent to experimentation under uncertainty and yields valuable information to inform future experimentation.

• Be organizationally flexible: With frequent experimentation comes frequent success and failure, both of which drive change. Organize so that resources can be reallocated quickly and smoothly.

• Understand the practicalities: An understanding of and intent to graft an adaptive strategy onto a classical organization will not be effective. Learn the very different operational disciplines of an experimentation-driven approach.

• Planning the unplannable: In a world that changes quickly, investing in elaborate predictions and plans is futile.

• Rigid directions: If you are unwilling to change your direction as new information arises, even though the present direction will probably not survive the tides of change, then you are setting your company up for failure.

• Move slowly: Your success will depend on how much faster you can introduce new products or business models than your competitors can. So inertia and complexity can be fatal, even if sought in the name of perfection.

• Bet the company: Large experiments that fail can drag down the firm. Experimentation is only a viable alternative to planning when the risk and cost have been reduced through an effective approach.

• Punish failure: Condemning or shaming failed efforts can kill individual appetite to generate the new ideas that fuel your future success. An open-minded culture is key to success with an adaptive approach.

• Faddish application: An adaptive approach is more necessary in today’s unpredictable business environments, but following the crowd is a poor logic for selecting it. Instead, look at the specifics of your particular environment.

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CHAPTE R 4

VISIONARY Be First

Quintiles: Building a Vision

Dennis Gillings was a thirty-year-old professor of biostatistics at the University of North Carolina when he first started helping phar- maceutical companies analyze data from their clinical trials. “Back then,” he recalled, “I felt there was an opportunity to build a business that . . . would complement my activities as a professor and enable a small consulting income.” But the more consulting he did, the more he realized that there was an opportunity to build something big- ger. “What I noticed as I was consulting was that things were a bit inefficient. I remember going inside a pharma company and thinking, ‘Wow, it doesn’t need to cost all this money.’”1

In 1982, he cofounded Quintiles Transnational as a first step toward what was, even then, a truly global vision. In doing so, he pio- neered what has become known as the CRO—or clinical research organization—industry, in which companies like Quintiles don’t just analyze data, but actively manage clinical trials and other activities. “I realized that I could grow the business globally and expand to drug development,” he said.

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88 Your Strategy Needs a Strategy

Gillings’s clarity of vision and urgency to achieve it guided the company throughout this period. Gillings said, “That plan never really changed.” To bring it to life, he drew up a few high-level milestones, which didn’t resemble the meticulously detailed planning docu- ments characteristic of the classical approach at all. “I always laugh about strategic plans,” he said. For instance, when the plan to form a single European market was announced in the late 1980s, Gillings anticipated the impact of regulatory convergence across Europe and realized that he needed to lay the groundwork to support a bet on the pan-European union. “In 1989,” he explained, “all I did was to draw a little map with years along the x-axis, and then I put countries on it: the US and UK we had, and then we would do Germany, Ireland, France, Italy. And I then said we have to do Asia . . . I built the whole world on an axis over a nine-year period.”

Gillings saw quite early that CROs had massive potential but that, to claim it, he had to grow the business quickly. “I decided we needed to make acquisitions if we were going to grow faster than anyone else could. In the 1990s we went from $10 million in revenue in 1990 to $1 billion in 1998 . . . we could only grow a hundredfold by being fast.” He recognized that although he was creating a new market, others— including players with superior resources—would likely enter the space. So Gillings moved fast to beat larger but less nimble potential competitors.

Quintiles succeeded because Gillings had the courage not only to move quickly but also to persist in the face of skepticism. “I had to not listen to almost all the advice I got. I may look pig-headed, but I tend to be a bit logical and I thought, ‘I don’t know how that advice can be cor- rect.’ For instance, I got criticized for going global so early because it was expensive and I got used to the fact that other people disagreed with me, and I decided I was right. Every cultural group takes the same drugs, for the most part, so ultimately, drugs will be developed much more globally, and if you’re there first, you’ll gain an advantage!”

In retrospect, he needn’t have worried. “I overestimated what our potential competitors could do,” he said. But at the time, it was

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Visionary: Be First 89

difficult to gauge where they stood. Therefore, the only thing to do was to grow quickly, to race against oneself instead of a particular competitor. “I’m glad I did—we managed to become much bigger because I was very aggressive between 1990 and 1998.”

Today, Quintiles is the world’s largest provider of drug develop- ment and commercial outsourcing services, with a network of more than thirty thousand employees in more than sixty countries. Over the past decade, it has conducted forty-seven hundred trials with 2.7 million patients. It has helped develop or commercialize all of the top fifty best-selling drugs on the market.2

Gillings attributes much of the firm’s success to good timing. “There was a zeitgeist and we tapped into it,” he explained. “If I had been born fifty years earlier, it wouldn’t have been good timing.” Partly, though, it was his realization “that it could be a multibillion dol- lar industry and . . . to accomplish that, we had to grow quite quickly.”

But Gillings’s single-mindedness, a distinctively visionary char- acteristic, also drove the successful development of Quintiles. He achieved the ultimate visionary payoff: “If you pick a big idea and do it well, the company gets to a leadership position in the whole space in which you operate.”

The Visionary Approach to Strategy: Core Idea

In some environments, a single firm can create or re-create an industry and,

as a result of that power, create the future with some degree of predictabil-

ity. Under those circumstances, a firm is in a position to employ a visionary

approach. As Gillings’s story illustrates, you must be capable of single- handedly

developing new markets or disrupting existing ones. Alan Kay, a pioneering

American computer scientist, summed up the visionary perspective well: “The

best way to predict the future is to invent it.”3 Your brand name may even come

to define the product category for years to come, as with Xerox or Hoover.

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90 Your Strategy Needs a Strategy

A visionary approach involves three steps (figure 4-1). First, you need to

envisage an opportunity by tapping into a megatrend early, applying a new

technology, or addressing customer dissatisfaction or a latent need. Second,

you need to be the first to build the company and the product that realize

this vision. Finally, you must persist in pursuing a fixed goal, while being flex-

ible about the means to overcome unforeseen obstacles. In terms of our art

analogy, the visionary painters of the surrealist school imagine rather than

observe a vivid image of what they wish to represent and which they then

strive tirelessly to bring to life on canvas.

Timing is critical. By being first, you have the advantages of superior size

that come with being ahead of your rivals: you can set the industry stan-

dards, you can influence customer preferences, you can develop a superior

cost position, and you can take the market in a direction that suits your

company.

Even though visionary approaches are most frequently associated with

entrepreneurial start-ups, large, more-established firms increasingly need

to familiarize themselves with the approach too. As the large corporation

finds itself disrupted by small outsiders more and more frequently, at a

minimum, it needs to know how its small, visionary competitors think

so that it can react to or, even better, preempt them when the circum-

stances are right. As Gary Hamel, a business writer, noted: “Out there in

some garage is an entrepreneur who’s forging a bullet with your compa-

ny’s name on it.” 4 A deep understanding and appreciation of the visionary

approach can serve as a first line of defense for market incumbents.

Visionary

Envisage

Build

Persist

Figure 4-1

The visionary approach to strategy

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Visionary: Be First 91

Why Timing Matters: 23andMe

In 2006, Anne Wojcicki cofounded 23andMe, a personal genomics company that provides analysis of individuals’ DNA. Her firm is a clear example of a company employing the visionary approach. In the mid-2000s, Wojcicki was working as a health-care investment analyst when she came up with her vision for transforming the space she cov- ered: “I was at a dinner with a scientist . . . and we got talking about health care and about data. Theoretically, if you had all the genotypic and phenotypic data in the world, could you solve health care? The answer is yes.”5

From this guiding insight, she developed 23andMe with two col- leagues in 2006, formulating its mission “to accelerate the develop- ment of new treatments, gain a better understanding of wellness and disease prevention, and provide greater access to those who want to understand and use their genetic data in order to manage their health and well-being.”6

Her timing couldn’t have been better. Wojcicki connected the dots between exciting developments in biotechnology, information technology, and e-commerce. At the turn of the millennium, Craig Venter, an American biologist, became the first person to map the human genome, at a cost of $100 million.7 In the following years, the cost of sequencing the human genome fell exponentially while, simultaneously, IT opened up new frontiers to combine, analyze, and share increasingly large volumes of data.8 For Wojcicki, these developments heralded a new opportunity: to offer consumers the chance to test their own genome, combine it with phenotypic data from questionnaires they fill in, and play the results back to them in a user-friendly, personally relevant, and intelligible way while aggre- gating a large and statistically powerful database of genetic infor- mation to drive new research. When 23andMe introduced its core product, an individual genomic analysis of a consumer’s saliva, it was named the invention of the year by Time magazine in 2008.9

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92 Your Strategy Needs a Strategy

Though that product was initially introduced at $999, 23andMe quickly lowered its price to $99 in order to attain the fast growth that would give it critical mass and leadership.10 The drive for scale is baked into every aspect of the vision. So far, 23andMe has administered seven hundred thousand tests.11 Wojcicki’s goal is twenty-five million. “Once you get to twenty-five million people, there’s just a huge power because of the types of discoveries you can make. Big data is going to make us all healthier.” Scale rein- forces its leading position by making the proposition attractive to an even wider audience, she said: “Suddenly [our] data becomes incredibly valuable to pharmaceuticals, hospitals, and other large organizations.”

As with most firsts, there have been challenges, but Wojcicki has persisted. Some states, for instance, tried to block 23andMe’s tests on the basis that they are not ordered through physicians. More recently, in November 2013, the US Food and Drug Adminis- tration (FDA) ordered 23andMe to stop marketing its health reports because the agency determined that the service is technically a medical device and therefore requires FDA clearance as such.12 In response to such setbacks, Wojcicki maintains deep faith in the end state but a willingness to be flexible about the means by which it is realized.

Clearly, there is a long way to go—and she knows she will have to persevere amid skepticism and opposition from vested interests in the health-care industry that may be uncomfortable with the model. But Wojcicki is unfazed by the challenge. She said that her early career working with the Wallenbergs, the Swedish billionaire family that runs one of Europe’s most prominent investment businesses, taught her “the concept of putting capital at risk, dreaming big, and thinking about how society would or could change.” She continued: “Some investors want to invest in radical change—only one out of fifty might be successful, but it will be radically successful. I want to take big bets. I’m in this for the radical change.”

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Visionary: Be First 93

When to Apply a Visionary Approach

You should deploy a visionary approach to strategy when you have an

opportunity to create or re-create an industry single-handedly by applying

a bold vision at the right moment. That is, a visionary approach is appro-

priate when your company faces an environment that is malleable and,

because of your firm’s timely action and power to shape it, is predictable to

you. Visionary circumstances can arise when you spot an emerging meg-

atrend before another firm spots or acts on it, when technological change

opens up the possibility to reshape an industry, or when unaddressed cus-

tomer dissatisfaction with the dominant offering creates the possibility of a

new market.

Since there is only a short moment between the opportunity opening up

and the first reaction by other players, timing is critical. Successful visionary

firms capitalize on this gap between the emergence of the opportunity, the

recognition and acceptance of the idea, and the reaction by established play-

ers. Fortunately for visionary entrepreneurs, other firms’ reaction is often

delayed by initial skepticism and organizational inertia. On the demand

side, timing is also critical: too early, and your potential customers may not

be ready to accept your vision; too late, and you are seen as an imitator or a

follower.

In our analysis, we found that many business leaders claim to employ a

visionary approach, whereas fewer environments can objectively be catego-

rized as sufficiently predictable and malleable. This conflict between percep-

tion and reality suggests that leaders may overestimate the extent to which

markets are malleable and a visionary approach is applicable.

Therefore, let’s take a closer look at the three signals that help identify

the pivotal moment in an industry when a visionary strategy can be applied.

One signal is emerging megatrends, large structural shifts that can reshape

the market and that go beyond industry-specific supply and demand con-

ditions. Examples are the aging of the world’s population and the rise of

the middle classes in China, India, and other rapidly developing economies.

Other megatrends include urbanization, nanotechnology, obesity and diet-

ing, wealth disparities, and the loss of trust in institutions.13 Another signal

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94 Your Strategy Needs a Strategy

is the emergence of a new technology, like the automobile or mobile phone,

which may provide entirely novel or disruptive opportunities in existing

markets. A third is consumer dissatisfaction or unmet needs with the status

quo offering. This can be explicit in the minds of consumers, but more often

it is latent—consumers may not have a clear idea of what they are missing.

As turbulence has increased over the past two decades, the risk that

large firms will suffer a disruption to their business model has also increased

significantly. Because of more rapid technological change, especially with

respect to computing power, connectivity, and mobility, we now see more

WHAT YOU MIGHT KNOW IT AS

Many leaders will instinctively associate entrepreneurial start-ups with visionary strategy: young, small, agile firms are often the players that create new markets or disrupt existing ones. However, entre- preneurialism has not always been treated as a fully valid form of strategy, because it is rarely accompanied by sophisticated planning techniques. In the early 1990s, however, academics began to seriously observe and appreciate the relevance of an entrepreneurial approach to strategy as more firms rode the wave of accelerating technological change to rapid success.

W. Chan Kim and Renée Mauborgne’s blue ocean strategy deals with strategies for creating uncontested market spaces. Gary Hamel and C. K. Prahalad, in their book Competing for the Future, suggested that leaders should develop their firm’s ability to mold the future. Clay- ton Christensen’s disruptive-innovation concept explained how some companies can disrupt mature industries by simplifying their products and services, creating a base from which to assault entrenched main- stream competitors, and driving them into margin retreat. And BCG has pioneered the technique of learning from mavericks, a practice that enables large companies to recognize and tap into potentially disruptive entrepreneurial activity on the fringes of their industry.14

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Visionary: Be First 95

frequently than ever the small firms—the Davids—conspicuously unseating

incumbent Goliaths. As discussed in chapter 3, leading firms in an industry

are three times more likely to lose their position in a given year than they

were in the early 1960s (figure 3-4). Low-cost carriers challenge the long-

haul airlines, car rental giants compete against car-sharing companies with

entirely new business models, and cloud storage firms may render hard-drive

manufacturers obsolete. Large, established companies are particularly vul-

nerable, finding it more difficult to mobilize at exactly the right moment,

for several reasons: their commitment to the status quo, the inertia that

often accompanies size, and their natural tendency to filter change signals

through their own dominant logic. If they don’t act, however, the chances

are increasingly high that others will act, to the big players’ detriment.

But at the same time, large companies have a few potential advantages

in capitalizing on a visionary opportunity, if they can overcome their own

inertia: the move may require sizable investment to reach scale quickly

and considerable persistence and resources in the face of potential setbacks.

In fact, well-resourced large firms can develop into formidable visionary

players, as long as they do so at the right time, with the right degree of

boldness.

Betting on the e-Commerce Vision at UPS

One big company that anticipated a major shift in its industry with a visionary approach is UPS. Founded in 1907 as the American Messen- ger Company, the United Parcel Service became one of the biggest parcel delivery firms in the country.15 As such, it succeeded by taking a classical approach, capitalizing on its scale and market dominance (see chapter 2). But in 1994, even before Amazon.com was born, UPS saw that the trends of increased connectivity and digitization presaged a major industry shift toward e-commerce and spotted an opportunity to become “the enablers of global e-commerce.”16

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96 Your Strategy Needs a Strategy

To realize this vision, it invested heavily, resolving to spend $1 billion per year on the required IT systems.17 This boldness attracted the business of some of the biggest e-commerce com- panies, which typically increased their shipping volumes by up to 20 percent per year for about a decade. At the same time, UPS bol- stered its brand image as the preferred online delivery service by making it easy for corporate customers to embed its leading-edge shipping and tracking functionality in their websites. In one high- profile pact, UPS gave eBay users direct access to UPS shipping options, making it simpler for them to ship packages—which had been a hurdle in completing consumer-to-consumer auctions.18 By the year 2000, the results of this far-sighted strategy were clear: UPS owned more than 60 percent of the U.S. e-commerce ship- ping market.19

ARE YOU IN A VISIONARY BUSINESS ENVIRONMENT?

You are facing a visionary business opportunity if the following obser- vations hold true:

✓ Your industry provides a white-space (uncontested) opportunity or is ripe for disruption.

✓ Your industry can be (re)shaped by an individual firm.

✓ Your industry is marked by sleepy incumbents.

✓ Your industry is suffering from unsatisfied consumers and unmet needs.

✓ Your industry displays high growth potential.

✓ Innovation in your industry is subject to few regulatory barriers.

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Visionary: Be First 97

The Visionary Approach in Practice: Strategizing

So how do firms put the envisage, build, and persist triad into action?

Getting it right is hard. The fact that eight out of ten entrepreneurs fail

underlines this difficulty.20

Visionary strategizing is all about envisaging the end point: a new

opportunity and a value proposition that addresses the opportunity. But

a visionary approach then requires a distinctive and coherent approach to

implementation: a charismatic leader and an inspiring vision statement

are necessary but insufficient. Implementation of the visionary approach

corresponds to the building and persisting steps in the triad and requires

appropriate information, innovation, organization, culture, and leadership

to support building the end state fast without being preempted, and a flexi-

bility to overcome unforeseen roadblocks along the way.

Navigating the tension between a fixed goal and flexible means is difficult

and something few companies are able to realize in practice. In our survey,

we found that 95 percent of the companies intending to employ a visionary

approach still use detailed forecasts and plans that outline each step on the

journey as if it could be preplanned, a distinctively classical practice that

potentially leads to rigidity in the means of execution. Let’s see how to align

vision and execution.

Pull something out of midair that has never been tried before but is a sure

enough bet that you can bank you career and firm on it and, in fact, can

expect it to transform an industry. No small task, but that is the central aim of

visionary strategizing: it’s all about envisaging the end point that your firm will

pursue relentlessly. The steps for success are to identify an opportunity with

the right timing, to formulate a vision and a high-level plan that addresses it,

and to communicate the vision broadly to gain market acceptance.

Identify an Opportunity

To start formulating a vision, you need to spot a nascent opportunity before

anyone else acts upon it. There are four signals that point to the all-important

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98 Your Strategy Needs a Strategy

industry turning point and serve as triggers for a visionary approach: the three

signals mentioned earlier—megatrends, individual breakthrough technolo-

gies, and customer dissatisfaction—and, in addition, the activity of players at

the fringes of your industry, the so-called mavericks. It’s key to spot each of

those signals before others do so and to go beyond taking them at face value

but rather to see the possibilities inherent in them to uncover what could be,

rather than just seeing what is.

You need to deeply understand emerging trends to steer into them at the

right moment or to connect the dots between converging trends to identify

a singular window of opportunity. This is the case at 23andMe, where the

vision derived from seeing how new developments in both genetics and dig-

ital technology could permit the emergence of a consumer-driven genetics

opportunity. The key to such trend mapping is to envisage the reality that

could be, as 23andMe did when it priced its products ahead of the experience

curve to bring the price to below $100.21

Going beyond the face value of information is also important in uncov-

ering an opportunity in consumer dissatisfaction or unmet needs. To detect

dissatisfaction signals, you often need to look beyond mainstream demand

or satisfaction scores for existing products or services and focus on pioneer-

ing users, dissatisfied users, lapsed users, and nonusers. For instance, you can

identify and focus on small, poorly served groups of customers at the fringes

of your market or on an opportunity to serve existing demand more simply,

cheaply, or effectively. Importantly, you should not just solicit the views of

your current customers and employees, since the first glimpse of the next

big thing often lies with nonusers. As Steve Jobs, founder of Apple, once

observed: “You can’t just ask customers what they want and then try to give

that to them. By the time you get it built, they’ll want something new.” 22

We have often seen how companies exploiting the white space between

the mainstream products and services offered by incumbents can enjoy suc-

cess. Take, for example, Intuitive Surgical, a surgical-robot manufacturer

founded in 1995.23 The company saw an unexploited opportunity to pro-

vide surgeons with sophisticated tools to help them perform minimally

invasive surgeries, thereby improving patient safety and reducing costs. By

identifying such opportunities and serving needs that had been previously

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Visionary: Be First 99

unaddressed, Intuitive Surgical has seen stellar growth and realized annual

revenues exceeding $2 billion.24

Finally, for large companies, it is always important to monitor the small

companies at the fringes of your industry. These smaller players may have

done something you haven’t considered—tapping into a new technology,

a source of consumer dissatisfaction, or an emerging megatrend—because

they couldn’t feasibly compete with you directly. Looking at large, well-

established, and better-known competitors will more than likely reinforce

your existing beliefs. It’s these smaller companies with new ideas that you

can learn from, partner with, or, if necessary, buy to address visionary

opportunities. GE routinely buys or invests in ten to twenty smaller com-

panies every year to gain access to their innovations.25 We will explore how

to identify and leverage these mavericks later in the chapter.

Formulate Your Vision

Once you have detected an opportunity, you need to create the vision that

addresses that opportunity—to articulate a vivid, bold picture of what you will

build. The vision will often comprise not only a new product or service offering

but also a new business model to fully exploit it. A business model innovation

is one that changes multiple elements of the way you service customers and

create value. It can perhaps best be defined as the reorchestration of all assets

and capabilities of a company to realize a disruptive value proposition. Hence,

a business model innovation requires a quantum leap, rather than incremen-

tal and individual changes in services, products, or operations (figure 4-2). It

might include changing the distribution or revenue model or your value chain

footprint to fully harness the power of a new technology, or the reconcep-

tualization of the product or service. For this reason, the new vision differs

fundamentally from typical vision statements of large companies; these tend

to be nebulously broad affirmations of the companies’ current business models.

For Anne Wojcicki, the opportunity for a new type of company was clear.

“No one had done what we’d done,” she said. “We started saying, ‘We’re

not a health-care company—we are totally outside the established order.’”

This attitude allowed her to think about the possibilities of combining a

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100 Your Strategy Needs a Strategy

product based on genetic testing and ancestry, with a new operating model

that leveraged the power of big data, e-commerce, and a consumer-centric

revenue approach.

Sketching the Plan

Given that a visionary approach involves a fixed goal but flexible means to

overcome hurdles to achieve it, the approach is more like a long-distance road

map that allows for flexibility along the way. Because you are, by definition,

charting unknown territory, you can be sure that some unexpected obstacles

will force you to adjust course. Therefore, a visionary approach does not rely

on the kind of elaborate documentation of detailed financial and operational

milestones that you would prepare for a classical approach, even if some inves-

tors may require them. Instead, it defines high-level milestones to keep you

pointing in the right direction and moving speedily toward your end vision.

As Wojcicki told us: “My dream has always been the end goal: chang-

ing the landscape of how the individual gets health care—but I never had

a strong marriage to a particular path of how to get there.” Although she

Operating model

Value proposition

Business model

Product/service offering

Target segment(s)

Revenue model

Value chain Cost model Organization

Figure 4-2

Business model innovation framework

Source: Zhenya Lindgardt, Martin Reeves, George Stalk, and Mike Deimler, “Business Model Innovation: When the Going Gets Tough,” BCG Perspectives, December 2009.

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Visionary: Be First 101

said the company “need[s] a ‘plan’ to execute on the vision,” the one she has

devised allows for many amendments and has served 23andMe well. “The

one thing that we’re very good at is changing the plan as we hit multiple

roadblocks or unexpected opportunities—like when we got additional fund-

ing and dropped the price [of our DNA test] to $99,” said Wojcicki. “We

changed the strategy from going for profitability to going for growth.” What

hasn’t changed is the vision.

Communicate Your Vision Broadly

Finally, your vision will not be realized until it has been accepted by a crit-

ical mass of customers and investors. The visionary approach may naturally

be met with skepticism since it presents something new that not only may

be unfamiliar but also may even contradict more familiar ways of doing and

thinking about the business. Therefore, as you develop your strategy, you

need to communicate—or rather, overcommunicate—to convince customers

to buy and investors to invest. In particular, you should overcommunicate the

vision to your employees and customers since both groups will become your

advocates and brand evangelists. Finally, you should celebrate and broadcast

early wins that demonstrate that your vision has traction and is credible.

Since you are creating a new market, you are preaching to the uncon-

verted. So you need to dedicate time and effort to inspiring and educating

consumers and investors, including tailoring your message to the level of the

uninitiated. “The average individual just didn’t know why they should get

their genome,” said Ms. Wojcicki. “So educating the individual and getting

them excited about it was our first challenge.”

Speed Is Key: Strategizing at Mobiquity

Another company taking the visionary approach to strategy is Mobi- quity, a US-based professional services firm that helps companies

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102 Your Strategy Needs a Strategy

harness the power of mobile technology—sometimes dubbed “the fifth wave of computing” (after the mainframe, the minicomputer, the personal computer, and the internet PC).26 Bill Seibel and Scott Sny- der founded Mobiquity in 2011 after they detected an opportunity: while many companies were building mobile apps for large corpora- tions, few companies yet seemed to provide a full-service offering to build data structures, business processes, and support platforms to ensure that mobile technologies were fully integrated into the cus- tomer’s business model.

Mobiquity recognized early on the emergence of the mobile tech- nology megatrend. “We realized that there was this train coming down the track that was more transformational and innovative than executives were giving it credit for,” says Snyder, Mobiquity’s presi- dent and chief strategy officer. In fact, Mobiquity expects mobile to account for 35 percent of IT budgets in 2015.27

Snyder resists the temptation to construct formal strategic plans, since “it would be too reactive and constraining for what’s actually happening day-to-day.” Instead, Mobiquity focused on the vision and a general plan to realize it, and this approach has stood the test of time: “The strategy we put together is still 90 percent intact and is still the one we anchor against,” Snyder said. Snyder and Seibel also took care to communicate their vision, starting with the formation of a Wireless Innovation Council, which enlisted major companies like GE, Marriott, and Fidelity and research institutions like Babson College to create awareness and credibility. The council creates an environment where strategic decision makers from different industries collaborate to uncover new innovation opportunities.

Speed has been key to Mobiquity’s success. The pace of mobile technology is fast, and so, as Snyder says, “we had to architect a firm that could run the whole relay race, quickly.” The firm did this by “blend[ing] the best of design agencies like IDEO with the skills of integrators like IBM and scal[ing] it fast.” The concept is to combine the best of strategy, design, and technology with development skills to execute across the full vision. The prize, of course, is first-mover

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Visionary: Be First 103

advantage. “Because we’re one or two years ahead of competition, we can anticipate what the future needs are going to be, design products for that, and then partner with our clients to test and roll them out.” To stay ahead of the curve, Mobiquity also created Mobiquity Labs, a unique environment for rapid experimentation and co-innovation with its clients.

Within two years, Mobiquity had opened twelve offices around the world and developed a client list featuring a major share of Fortune 1,000 companies. Its revenue has gone from $5 million to $24 million with a book of outstanding work totaling $40 million.28

SIMULATING STRATEGY IN A MALLEABLE, PREDICTABLE ENVIRONMENT

In our classical and adaptive simulation of strategic options in stable or unpredictable environments, we assumed that the environment existed independently of any particular strategy or player. However, sometimes companies shape the environment by creating new stra- tegic options, for instance, through white-space innovation or by increasing the value of existing options.

To reflect such an environment, we simulated malleable options that increase in value when a company invests in them for a certain amount of time. The resource investment is high, but so is the poten- tial payoff.

The resulting optimal strategy in a malleable environment is to ana- lyze, or envisage, which option would have the highest reward for a sufficient investment. Once the option with the highest potential is identified, one needs to stick with the option and invest in it to reap returns (figure 4-3). This mirrors what visionary leaders do when they anchor on a vision after a period of lengthy or deep exploration and zealously pursue it.

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104 Your Strategy Needs a Strategy

The Visionary Approach in Practice: Implementation

The organization is the vehicle for realizing the vision, persisting flexibly in

the face of unexpected obstacles, and executing fast to stay ahead of others.

Therefore, the organization’s guiding principles are goal clarity, speed, and

flexibility of means, all the way from information management to organiza-

tional structure to leadership.

Information

As we’ve seen, detecting new opportunities early and acting on them

more quickly and decisively than others is one of the critical success fac-

100

200

300

400

0 50 100 150 200 250 300

Profit per period

Time

Classical strategy

Visionary strategy Thorough analysis to develop a superior option

Figure 4-3

Visionary strategies perform best in malleable environments (simulation)

Source: BCG Strategy Institute multi-arm bandit (MAB) simulation. Note: Results averaged over thirty simulations in noncompetitive environment with 30 investment options.

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Visionary: Be First 105

tors for a visionary approach. To use information successfully, aspiring

visionary firms leverage it by scanning for and identifying opportunities

to create a new market reality, by looking beyond the face value of signals

to uncover the possibility of what could be. As Henry Ford, father of the

automotive industry, reputedly remarked: “If I had asked my customers

what they wanted, they would have said a faster horse.”29 For this rea-

son, the information challenge for visionary companies is one of imagi-

nation, but is informed by real-world signals on trends, technologies, and

customers.

Taking this view of what could be requires you as a leader to step back

and challenge your own established view on your industry and your firm

and to overcome blind spots in your current perspectives. You also need

to look at information beyond the confines of your own comfort zone—

beyond your company, your country, your commercial sector, your cus-

tomers, and the prevailing wisdom—to see new possibilities. Sometimes,

this may require putting some mental, if not physical, distance between

yourself and the day-to-day business. At the height of Microsoft’s dizzying

rise in the mid-1990s, Bill Gates was known for taking two “think weeks”

a year. He retreated from family and friends so that he could consider new

and creative ideas.30

Established companies may find it particularly hard to create such dis-

tance or to look at their industry in a new way. Large firms can employ a

maverick scan, an exercise that allows you to see hints of your industry’s future

by observing mavericks—often small players at the fringes of your industry—

that may be betting against your business model. Then, you identify what

their big idea is and the bet that they are making. Next, you consider what

the implications for your firm would be if their idea proves correct. From there,

you can determine what your response to those ideas is: wait to gain more

information, ignore, replicate, neutralize, or buy. Facebook, for instance,

continuously scans for potential disrupters at the fringes of its industry and

asks what the impact on its own business model would be if these mavericks

were to succeed. Sometimes, this tactic leads to new products and services

or, sometimes, to large-scale acquisitions of businesses, as with Instagram

and WhatsApp.31 Scanning mavericks successfully helps large firms “stay big

by acting small.”

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106 Your Strategy Needs a Strategy

While digital technology creates many opportunities for new vision-

ary strategies, expensive IT systems in themselves are not required to

detect a visionary opportunity. Dennis Gillings made his observations

while consulting big pharma companies, Amazon.com’s Jeff Bezos sup-

posedly read a report on the rise of e-commerce, and Steve Jobs had a

picture in his mind of the unique product created by the combination of

an MP3 player and phone in a touch-screen device. Other approaches—

notably adaptive strategy—often do need powerful computing to sift for

patterns in small changes in the environment. While a visionary firm

may utilize such data-crunching, more important is looking beyond

the obvious for new, disruptive insights. Rather, it’s the search for what

could be versus what is that pervades the initial phases of a visionary

approach.

Innovation

Since the visionary approach creates an entirely new market reality, innova-

tion naturally plays a critical role in defining and realizing the vision. This

innovation is fast and bold, revolutionary but not evolutionary. To ensure

speed and the concentration of resources, innovation efforts generally focus

on a big one-off bet rather than a scattered portfolio of options, especially

for smaller companies with limited resources. When Bezos was asked how

much he was prepared to spend on the Kindle project, he replied: “How

much do we have?” 32

There are three main ways to achieve such innovation: the application of

a new technology, the innovation of a business model, and the application of

existing capabilities from one industry to another.

You can invent, or be the first to apply, a new technology. Across busi-

ness history, many successful companies were the first to make main-

stream use of great inventions: AT&T and the telephone, IBM and the

personal computer, Remington and the QWERTY typewriter. More

recently, in 1999 the American firm TiVo introduced the first consumer

digital video recorder (DVR), allowing viewers to skip commercials or

to record specific shows.33 Because of its first-mover position, the word

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Visionary: Be First 107

“TiVo” became practically synonymous with time-shifted digital video

recording and viewing.

A second way to innovate is to develop a new business model—a dif-

ferent way of delivering value to customers. A good example is Zipcar, the

car- sharing service founded by Antje Danielson and Robin Chase in 2000.

They saw that car ownership rates were declining and, in light of greater

urbanization and the growing emphasis on environmentally friendly activ-

ities, Danielson and Chase saw an opportunity to launch a new way of

renting cars.34

A third way to innovate is to transfer your capabilities from one industry

to another, as Louis Dreyfus Group has done. Founded in 1851, its core

business is agricultural commodities. But, in 1998, it entered the tele-

communications infrastructure business, competing with the established

leader, France Telecom. Despite having no prior experience in that indus-

try, Louis Dreyfus’s knowledge of volatile commodities businesses gave it

an advantage in navigating the boom-bust cycle of the recently deregulated

telecom market. The firm leveraged its ability to choose the right moment

to invest in financing infrastructure and then again to profitably dispose of

those assets.35

Organization

The visionary organization must deliver the vision quickly, with fidelity to

the goal, but also with flexibility to overcome unforeseen obstacles. And

as the vision matures, the organization needs to eventually anticipate the

requirements of the next approach to strategy. To ensure focus on the goal

while avoiding rigidity, visionary organizations combine top-down direc-

tion setting with a flexible, informal organization that minimizes cumber-

some rules and processes. To achieve scale and professionalization as the

vision matures, the organization eventually switches to the organizational

requirements of a new approach to strategy.

Explicit guiding principles and a clear direction, set from the top, help

to focus the visionary organization. Mobiquity learned that lesson quickly

when, initially, the firm did not communicate its direction or individuals’

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108 Your Strategy Needs a Strategy

roles and responsibilities clearly enough and too many people tried to take

the firm’s direction into their own hands. “After a year,” recalled Snyder, “we

realized that we’d hired the best guys, but that we had seventeen former

CEOs in the company. We were like the US Olympic basketball team that

lost the gold medal in 2008: great athletes, wrong team, too many leader-

ship genes. We needed employees who put the firm above themselves.” He

reformed the leadership team, and as Mobiquity expanded, he developed

a more focused approach so that clients would receive a uniform service

whether they were based in Atlanta, Amsterdam, or Ahmedabad. “We had

to get the formula right and then scale it as little geographical business units

that run identically.” In other words, visionary organizations do not need

the same level or kind of organizational diversity we saw in adaptive compa-

nies, because the direction is preset.

While clarity of direction is crucial, only the long-term goal is fixed.

Consequently, firms need short-term flexibility for rapidly spotting and

overcoming unexpected roadblocks. As Bezos said: “We don’t focus on the

optics of the next quarter, we focus on what’s going to be good for custom-

ers.”36 To maintain short-term flexibility, visionary firms are usually infor-

mal, allocate resources with flexibility, and limit their detailed operating

procedures or specialization. They maintain cross-functional teams and

encourage direct communication between top management and the shop

floor to help facilitate rapid decision making and execution. That means

that visionary firms do not require the kind of detailed operating proce-

dures that classical firms employ to increase efficiency or to make execution

consistent.

This mind-set shift is particularly difficult but important for large corpo-

rations attempting to adopt a visionary approach. For these organizations,

entrenched processes do not easily convert into the informal and flexible

ones that support a visionary approach. As we will discuss later in the book,

large firms might therefore need to separate their visionary units from the

core business.

As we saw with Quintiles, which eventually made the transition to

a more classical approach, the visionary approach is more frequently the

beginning than the end of a strategic journey. Hence, successful visionary

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Visionary: Be First 109

leaders anticipate and gradually introduce features of the next required

strategic approach into the organization, usually moving toward a more

classical approach to strategy and execution. An eventual switch toward

another approach is usually necessary because the informality and top-

down focus on a single purpose that make visionary firms great can some-

times self-limit them as they scale and mature. “As a function of size and

age, there will be change,” Wojcicki explained. “We’re 140 people, our

budgets are much bigger [than when we started], and we [now] have peo-

ple who know how to manage! In the early days, it’s great as a start-up

without much management. But after a while, people want to mature and

have more structure.”

Culture

Consistent with the implications for organization, a visionary culture com-

bines a clear sense of direction to ensure speed with a certain degree of flex-

ibility to overcome hurdles along the way. Most importantly, the culture

encourages employees to chase something that others might not yet see, with

a hint of “us against the world.” Such a culture focuses energy on the vision’s

realization and sparks the individual’s passion and creativity to accelerate

that process. Visionary cultures are anchored on their vision, which pro-

vides a cultural pole star. Wojcicki said: “I love the potential of the company.

This may sound trite, but it applies to us and many other start-ups: if we

are successful, 23andMe will truly change the world.” By anchoring on the

mission, employees not only internalize it but also serve as brand or product

ambassadors: ideally, a visionary firm’s employees are its biggest groupies.

The culture also needs to encourage boundless opportunity for individual

initiative that accelerates the vision’s actualization, and such an aspirational

culture can be a powerful recruiting tool. As Wojcicki said: “I need to create

a culture that will bring in . . . the great people to make hard decisions about

supertechnical areas.”

Finally, as the vision matures, the firm shifts its cultural mind-set to

begin moving to another approach. For instance, the firm could become

more externally oriented or systematic in an adaptive or classical spirit.

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110 Your Strategy Needs a Strategy

Leadership

The successful leader of a company taking a visionary approach fully

embodies the envisage, build, and persist dynamic from end to end: you have

the eureka moment, and you set a clear direction. You are the chief evan-

gelist and keeper of the flame; you build the organization to deliver the

vision, communicate the end state, and celebrate early wins. And you

visibly commit—and recommit and recommit—to seeing the vision to

fruition. “I’m convinced that about half of what separates the successful

entrepreneurs from the non-successful ones is pure perseverance,” said

Steve Jobs.37 Finally, you need to guide the firm through the difficult, but

necessary transition to other approaches after the visionary one comes to

a natural end.

Fortunately, charisma and enthusiasm are rarely challenges for the

visionary leader: he or she is often a pragmatic dreamer. “I see myself

as the visionary strategist that’s trying to pioneer in an area that doesn’t

exist,” said Wojcicki. “I’ve always been the kind of person who’s not afraid

of being unemployed or about doing something and not having it work.

I accept the fact that there’s risk—but to me, the worst thing in life is just

to accept the status quo. To sit there and say, ‘This is just the way the

health-care system works.’ I would much, much rather put my time and

effort into changing it . . . The downside is to say, ‘I just accept a broken

system.’”

Finally, the leader must recognize when to shift strategic approaches. As

discussed earlier, business environments conducive to the successful appli-

cation of a visionary approach rarely persist for very long. As we have seen

with Quintiles, the company has already moved from a visionary to a classi-

cal approach. Gillings, its founder, reflected on this transition and said that

visionary firms need to systematize as the firm matures: “As our industry

developed, you saw what I would call a systematization of the visionary

strategy.”

Few people can combine these divergent characteristics. But those who

can do so are equipped to transform their business and their industry.

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Visionary: Be First 111

Tips and Traps

As we’ve seen throughout this chapter, the keys to a successful visionary

approach are being the first to spot and act on a new opportunity before

others do, building a business model to address it, and persisting flexibly in

the face of inevitable roadblocks. But as we also discussed, nearly 80 percent

of entrepreneurs fail—and not just because of bad business ideas.

In our survey, we found that business environments are most commonly

perceived as visionary, despite the actual measured conditions. The survey

betrays a bias toward overestimating how malleable and predictable environ-

ments actually are. Furthermore, judging from the reported practices of com-

panies, the visionary approach is also the most commonly practiced approach

to strategy, again despite the actual declared strategy and environmental

conditions. This conflict between perception and reality probably reflects the

same biases as well as a high degree of familiarity with visionary techniques.

Table 4-1 lays out some of the tips and traps you might encounter when

selecting and applying the visionary approach.

ARE YOUR ACTIONS CONSISTENT WITH A VISIONARY APPROACH?

You are embodying a visionary approach if you observe the following actions:

✓ You observe gaps in the status quo offering of the industry.

✓ You create a vision of what could be.

✓ You build a high-level plan toward the end state.

✓ You persist in realizing your vision.

✓ You adapt flexibly to obstacles along the way.

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112 Your Strategy Needs a Strategy

TABLe 4-1

Tips and traps: key contributors to success and failure in a visionary approach

Tips Traps

• Understand that timing is everything: Take advantage of a turning point in your industry’s or market’s development. Act neither too early nor too late, by spotting and acting on an opportunity before others do.

• Create a bold vision: Be revolutionary (not evolutionary) by looking beyond your company’s or customers’ current world view to envisage a fundamentally new and better way of doing business.

• Be first and stay first: There is no prize for being second in a winner-takes-all game, especially in businesses with net- work effects and stakeholder lock-in.

• Have a clear vision and flexible means: Be flexible in the short-term tactics to pursue the long-term end to navigate un- expected obstacles.

• Communicate, communicate, commu- nicate: Your vision is radical: you need to tell people about it—and inspire them. Only then will your workers work their hardest for you, your investors invest in you, and your consumers buy what you have to offer.

• Set up the next game: If you are suc- cessful, you will become the market leader, and that will eventually require a different approach to strategy. Make sure you’re prepared for this strategic transition.

• Aim for the sky, but kiss the ground: It is hard but necessary to balance idealism and realism. Dream big and attend to the details.

• Confusing detailed planning with clear direction: A detailed plan is not the same as a clear direction. You should expect to adjust your plan as you go. The only thing you should keep fixed is the vision.

• Pursuing a delusional vision: Firms or founders embrace a fleeting fad or be- come obsessed with an idea, not a legit- imate opportunity. You’ll be making a big bet, so be as certain as you can that the odds are in your favor.

• Incrementalism: No visionary leader ever changed the world by taking baby steps. Companies that take this bold approach must have a compelling vision.

• Being slow to act: Every company needs process—but avoid overly bureaucratic procedures that prevent you from being first and staying first. Look for investors who value growth over profitability in the near term.

• Failing to convince: It’s one thing to have a vision, quite another to persuade people of its power. Companies that fail to develop a tight value proposition to educate colleagues, customers, and in- vestors won’t get traction.

• Staying visionary forever: The visionary approach is only appropriate for so long in the company life cycle. Once the business is established, companies may need to adopt other approaches to sus- tain competitive advantage.

• Perception bias: Be careful not to over- estimate the malleability and predictabil- ity of the environment. Apply a visionary approach only where it is justified by careful observation.

• Visionary rhetoric: Leaders are prone to use the word visionary lightly. Be care- ful not to confuse vision as a rhetorical flourish with the selection of the appro- priate approach to strategy.

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chapte r 5

Shaping Be the Orchestrator

Novo Nordisk: Shaping to Win

When August Krogh cofounded Novo Nordisk in 1923 in Denmark, he couldn’t have predicted that his firm would play a critical role in the development of China’s sizable and booming insulin market. The com- pany now controls about 60 percent of the market.1

Novo began building its Chinese insulin operation in the 1990s, well before the coming diabetes threat was widely appreciated or the mar- ket for diabetes care was fully developed. Early entry was critical, said CEO Lars Sørensen: “We came into China very early; we were one of the first international pharmaceutical companies that established a fully owned enterprise [there].”2 When Novo came to China, diabetes awareness was low. There were no established treatment protocols, and Novo had no educated physician base that it could work with to fight the disease. Then, diabetes was thought to affect 2.5 percent of the Chinese population, but the disease was underdiagnosed; today, approximately one in ten Chinese people are known to suffer from the chronic condition—some ninety-nine million patients.3

Initially, Novo tried to collaborate with local pharmaceutical com- panies to enter the Chinese market, said Sørensen, but found that

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114 Your Strategy Needs a Strategy

those firms had little in the way of financial resources or technolo- gies. Instead, Novo turned to other stakeholders to create a con- certed effort to educate doctors, patients, and regulators to raise awareness and pioneer treatments.

Novo invested heavily in physician education to teach the medical community—potential customers and evangelists—about the diabe- tes threat and potential treatments. Sørensen established partner- ships with the Chinese Ministry of Health and the World Diabetes Foundation, and Novo toured the countryside with its Changing Diabetes Bus program to reach remote rural physicians.4 In total, Novo has facilitated more than two hundred thousand training sessions and congresses to improve screening, treatment, and patient education.5

Sørensen said that partnering with doctors and regulators was critical: “What we did initially, which is what we do everywhere in the world, is to start building a relationship with the government, explain- ing to them about diabetes, the problems they have and starting to educate the whole public health sector. To date, we have educated maybe 50,000 to 60,000 physicians in China about diabetes. So you could say our marketing in China has been education.”6

Additionally, Novo reached out to patients to improve grassroots understanding. Its innovative support group, NovoCare Club, has more than nine hundred thousand members and redefines the drug company’s role. More than just a provider of insulin, the company has become a partner in care, offering dietary and lifestyle support and mechanisms to help manage the medication regimen.7

Finally, Novo invested in local communities to get a seat at the table with policy makers. In 1995, the firm opened its first production site, and in 2002, Novo became the first pharmaceutical multinational to open an R&D center in China.8 Sørensen says that these invest- ments gave Novo the opportunity to help drive the development of nationwide clinical treatment guidelines through close work with the government and the China Diabetes Society.

As a result of these interconnected efforts, Novo has grown aware- ness and codeveloped treatment standards to support diabetes care,

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Shaping: Be the Orchestrator 115

earning a leading market position along the way. By 2010, the com- pany’s share of the country’s diabetes care market was twice that of its nearest competitor—in a market where the number of diabetes patients is expected to double by 2025.9

Sørensen explained how this shaping approach is a blueprint for his company’s strategy in other emerging markets: “The strategy we employ is exactly the same in emerging economies . . . Basically, we start by building a relationship with the ministry of health, with the medical association for diabetes and with the patient associa- tions, and then start to educate doctors about diabetes. That means that after they start diagnosing people with diabetes, they can start treating them. We teach them how to treat the patients and they eventually end up buying our products. It’s a very simple model.”10

The Shaping Approach to Strategy: Core Idea

Like Novo, you sometimes get the extraordinary opportunity to shape or

reshape an industry at an early point in its development, when rules have

not yet been written and there is an opportunity for the industry to become

large, attractive, and favorable to you, the shaper. Such an opportunity both

permits and requires you to collaborate with others because you cannot

shape the industry alone—you need others to share the risk, supply comple-

mentary capabilities and resources, and build the market quickly. A shaping

firm operates under a high degree of unpredictability, given the nascent stage

of industry evolution it faces and the participation of multiple stakeholders

that it must influence but cannot control.

In these highly malleable and unpredictable circumstances, in order to

succeed, firms engage other stakeholders to create a shared vision at the right

point in time, building a platform through which they can exercise influence

and orchestrate the collaboration, and finally they evolve the platform and eco-

system by scaling it and keeping it flexible (figure 5-1).

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116 Your Strategy Needs a Strategy

To return to our art metaphor, shaping is like creating a large mural with

the help of many artists. You have to engage them with a compelling shared

vision and, to avoid chaos, deploy your influence to orchestrate the efforts

of the painters. You leverage their creativity by iterating on the emerging

design as you proceed.

When applied successfully, a shaping approach can be extremely reward-

ing: a group of firms or stakeholders together creates a new market with

the shaping firm as orchestrator, often with a disproportionate capture of

rewards relative to latecomers. The parallel efforts of diverse ecosystem par-

ticipants allow for faster innovation at lower costs and risks for any single

participant, which allows the system to grow rapidly and to adapt quickly

to change. Moreover, business ecosystems can be extraordinarily powerful

because they can benefit from strong lock-in and network effects. What’s

more, there is often only room for a single orchestrator and ecosystem to

serve an entire market.

Since shaping firms operate in unpredictable environments, the approach

shares some features with the adaptive approach: the dynamics of the new

industry cannot be fully anticipated and will emerge evolutionarily via mul-

tiple iterations. But, like visionary organizations, shaping firms presume that

the environment is malleable and seek to exploit a window of opportunity

to define or redefine an industry to address a new problem or solve an exist-

ing one in a much better way. However, because the scope of the endeavor

is greater and more unpredictable, instead of making a singular bet and

going it alone, the shaping firm builds a new market collaboratively with

Shaping

Orchestrate

Engage

Evolve

Figure 5-1

The shaping approach to strategy

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Shaping: Be the Orchestrator 117

other players. Even though many firms aspire to a shaping role, they rarely

have the power and opportunity to play a central role in the evolution of an

industry and to reap its disproportionate benefits.

What You Might KnoW it aS

The notion that businesses can be successful by both collaborat- ing and competing with external parties has its origins in ecologi- cal thinking, where concepts like symbiosis, or mutually beneficial relationships between organisms, originated. In the 1960s, Bruce Henderson already drew elaborate comparisons between compe- tition in the natural and business spheres. More recently, complex adaptive systems theory has explored how such dynamic collabora- tive systems behave and evolve.11

Stakeholder management theory, or the notion that external stake- holders should be considered in designing business strategy, emerged in the 1980s. Initially this concept emphasized the wider implications of firm actions but did not focus on the codevelopment of markets.12

The early 1990s saw an increase in high-tech businesses using “deconstructed” business models, with one company orchestrating the activities of many others. Greater connectivity and lower transaction costs fueled the trend. Business theorists like James Moore and, later, Marco Iansiti and Simon Levin formalized the concept of a business ecosystem: a set of firms that could benefit from mutually beneficial coevolution. Around the same time, Adam Brandenburger and Barry Nalebuff published the idea of co-opetition, which held that firms some- times needed to cooperate with potential competitors, rather than just with external stakeholders not directly involved in the value chain.13

In 1999, BCG’s Philip Evans and Tom Wurster, in their book Blown to Bits, explored how the new economics of information redefined the link between businesses and their customers, suppliers, and

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118 Your Strategy Needs a Strategy

When to Apply a Shaping Approach

Firms need to deploy a shaping strategy when there is an opportunity to write or

rewrite the rules of an industry at a nascent stage of its evolution. These circum-

stances can apply in highly fragmented, young, dynamic industries; freshly dis-

rupted industries; and emerging markets. In these cases, a shaping strategy can

stimulate demand, build the economic infrastructure to address it, and minimize

regulatory or other barriers as the market develops. Accelerating technological

change and globalization make these opportunities evermore common.

Young or recently disrupted, dynamic industries, like software and inter-

net services, offer significant upside to companies brave enough to try to shape

them. The opportunities are intrinsically unpredictable: no one could have

forecast with confidence the size, growth rate, and profitability of the markets

created by Facebook or the pioneers of fracking. And such industries are mal-

leable, too: barriers to entry are often low, products are new to regulators, and it

is not obvious which firms or business models will come out on top. Disruptive

innovation can have a similar effect too, thrusting a previously stable, nonmal-

leable industry into a new phase of unpredictability and malleability.

employees. The authors suggested new models for competition in digitally disrupted industries, including the “orchestrator” model, which is central to shaping strategies. Later, BCG elaborated the ideas of system advantage and shaping strategies as an alternative to classi- cal scale and position-based strategies under certain circumstances.14

Henry Chesbrough codified the idea of open innovation, which advocates for the incorporation of external ideas and players in the innovation process to share resources and risks. In 2004, C. K. Prahalad and Venkat Ramaswamy introduced the concept of cocreation of prod- ucts between firms and their customers, arguing that value creation was increasingly shifting beyond the traditional boundaries of the firm.15

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Shaping: Be the Orchestrator 119

Emerging markets, like China and India, are characterized by similarly

unpredictable and malleable circumstances: industries are at an early stage

of their development, with underdeveloped regulation, few dominant play-

ers, and rapid growth. Our analysis suggests that emerging markets are fully

twice as unpredictable and malleable as mature ones. Emerging markets

greatly depend on exports and foreign direct investment and face vulner-

ability to fluctuations in commodity prices and exchange rates, shifting

demographics and patterns of demand, evolving regulation, changing pat-

terns of competition, and high growth rates (figure 5-2).

In these young industries and economies there is usually no dominant

player with the resources or the risk tolerance to own the market single-

handedly. Furthermore, product requirements in new markets are often

unclear or change too quickly to be easily managed by a single player.

Finally, firms may need to interact with a broad set of stakeholders, because

the development of the market depends on shaping regulation or educating

Shaping

Classical Visionary

Size represents revenue sum

A ve

ra g

e u

n p

re d

ic ta

b ili

ty r

a n

Average malleability rank

United States

United Kingdom

Russia

India

Germany

France

China

Brazil

Japan

Adaptive

Figure 5-2

emerging markets are more malleable and unpredictable than developed ones

Source: Compustat, World Bank economic data, BCG analysis.

Note: Nonweighted average of industry environments within the country; uncertainty is measured as market-capitalization volatility and malleability using a composite index of growth, returns to scale, and industry fragmentation.

Chapter_05.indd 119 3/23/15 10:01 AM

120 Your Strategy Needs a Strategy

consumers. Therefore, the way to win is through codevelopment of the

market and industry by multiple players.

Consider mobile phone ecosystems. The Android and iOS operating

systems are much more attractive to customers because Google and Apple

ceded control of app creation to outsiders during the infancy of the smart-

phone industry, inviting external developers onto their platforms in a mutu-

ally beneficial arrangement. At the same time, incumbent players like Nokia

were challenged by legacy software architectures. The Symbian platform,

used by most of the leading mobile phone companies before Android and

iOS emerged, lacked the architectural flexibility and proper app store infra-

structure to create a wide variety of apps quickly.16 Conversely, Apple’s

App Store became the thriving nexus for apps du jour developed by many

players—apps from Angry Birds to Candy Crush.17 Stephen Elop, the former

Nokia CEO, reflected on the competitive dynamic: “Our competitors aren’t

taking market share with devices; they are taking market share with an

entire ecosystem.”18 Nokia has since reinvented itself: it has exited the mobile

devices business to refocus on network equipment, technology licensing,

and location intelligence.19

So what are some of the metrics that may suggest an unpredictable but

malleable environment? Limited forecast accuracy and volatility in market

cap, earnings, or competitive positions can signal unpredictability. Limited

or diminishing returns to scale, high growth rates, lack of dominant incum-

bents, and embryonic and changing regulation suggest malleability.

Shaping conditions are on the rise because of accelerating technological

change, increased global connectivity, the liberalization of trade, and demo-

graphic shifts that create new customer needs. However, external environ-

mental conditions are not the only factor in considering whether you should

adopt a shaping approach. Two other factors are critical: timing and your

ability to orchestrate. Shaping strategists must seize an inflection point in the

early development of a market or in the disruption of an existing one. And a

firm must also have enough influence to attract other powerful stakeholders

to its ecosystem. Most firms have insufficient influence to take a leading role,

which partly explains why successful shaping strategies are rarer than the

other approaches to strategy.

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Shaping: Be the Orchestrator 121

A firm may gain sufficient influence if, for instance, it innovates disruptively

to put itself at the center of an ecosystem, as Apple did with its creation of the

iTunes platform. Alternatively, a firm may secure influence through knowledge

or scale advantage, like Novo in China; through the control of a dominant plat-

form for interaction, like Facebook; or by serving as an access point to a frag-

mented customer or supplier base, like the supply chain orchestrator Li & Fung.

Lack of influence disqualifies firms from leading the shaping approach,

but not from playing a role in an ecosystem: many firms build attractive

businesses by participating in other firms’ ecosystems, utilizing an adaptive

or a classical approach. Zynga, Playfish, and Playdom, for example, have all

developed multi-million-dollar businesses by participating on Facebook’s

platform as app developers.20

Why the Ecosystem Matters: Red Hat

Software provider Red Hat has built a $1 billion business by orches- trating the development of open-source software based upon the Linux language.21 The company supports software development by outside developers, engages with enterprise communities, and monetizes its investments by selling subscriptions for profession- al-grade versions of free software.

How did Red Hat build such a successful business based on open- source software, which is essentially available free of charge, using resources the firm doesn’t directly control? To start with, Red Hat has developed a clear, collaborative vision: “To be the catalyst in commu- nities of customers, contributors, and partners creating better tech- nology the open source way.”22

The firm constantly and deeply engages its external collaborators. Red Hat never acts without considering the implications for its stake- holders, especially software developers. Jim Whitehurst, Red Hat’s president and CEO, explained the importance of developing and

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122 Your Strategy Needs a Strategy

evolving a win-win proposition: “When there are changes to make . . . we interact and consult carefully with all players in the system.” And serving as system orchestrator can require selfless contribution to earn the trust and goodwill of other stakeholders: “We add a massive amount to Linux that isn’t directly relevant to us—we are the largest contributor to virtually all open-source communities in which we par- ticipate. We choose to do it because it’s what our ecosystem contrib- utors use and value.”

By being a responsible contributor to and orchestrator of its eco- systems, Red Hat accrues influence and license to monetize its ser- vices. Whitehurst, again: “Our strategy revolves around ecosystems: Scale is in our DNA for upstream credibility. We then work to build our own downstream commercial ecosystem around versions of open-source technologies that are unique to us.” For instance, Red Hat’s software certification program ensures that major applications from companies like SAP, Oracle, and IBM are guaranteed to work on Red Hat’s open-source products, effectively establishing Red Hat as the industry standard for Linux in enterprise data centers. Through its large contributions to open-source projects, Red Hat can influence the direction of the open-source industry. Simultaneously, the firm creates a path to monetization via industrial-grade versions, certifica- tion services, customer service, and software maintenance, since the open-source community and its customers trust and value the Red Hat seal of approval.

On the flip side, Red Hat doesn’t try to play in markets where it lacks sufficient influence. In other words, the firm carefully chooses where to employ a shaping strategy. Whitehurst explained: “Our key question is, can we construct the world of competition in a way that we can win? It’s not about execution or playing by the rules. It’s about defining the rules.” Without the power to influence, a shaping strat- egy will fail. “If the rules are unfolding in a way that isn’t playing to our strength,” Whitehurst told us, “we will abandon the sector or change technologies: pedaling harder doesn’t work.”

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Shaping: Be the Orchestrator 123

The benefits for Red Hat as the orchestrator are significant. The company believes it can develop, launch, and adjust software much more quickly than traditional closed-source competitors, like Oracle or SAP. As a result of its successful shaping approach, Red Hat has seen its stock go from a low of $8 to over $50 between 2009 and 2014 and is the first open-source software company with annual rev- enues over $1 billion.23

The Shaping Approach in Practice: Strategizing

Applying a shaping approach effectively is easier said than done. In part

because shaping is the least familiar approach to strategy for most firms,

companies tend to use the concept very loosely, to overestimate the malle-

ability of business environments, and to employ practices inconsistent with

a true shaping approach. For instance, we found that roughly two-thirds

of companies intending to use a shaping approach still create detailed long-

term forecasts for their business, a typically classical practice. What’s more,

are You in a Shaping BuSineSS environMent?

You are facing a shaping business situation if the following observa- tions hold true:

� Your industry holds unexploited potential.

� Your industry is shapable through collaboration.

� Your industry’s regulations are shapable.

� Your industry does not have a dominant player or platform.

Chapter_05.indd 123 3/23/15 10:01 AM

124 Your Strategy Needs a Strategy

less than half of firms think that their success depends on collaboration with

others, and only a third actively try to change the external environment by

influencing regulation. Clearly, there is a need to develop a deeper under-

standing of the challenging but powerful shaping approach.

As with the adaptive approach, the shaping strategy eventually emerges

from continuous iteration of three elements—engagement, orchestration, and

evolution of the ecosystem. Therefore, there is no clear separation between

a strategizing phase and an execution phase, unlike a classical strategy. All

three elements should therefore be deeply embedded in the intra- and inter-

company structures and mechanisms.

Strategy setting for the shaping approach begins with engaging external

stakeholders to develop a collaborative vision of the industry’s development.

Then, the orchestrator builds and operates a platform that brings together

stakeholders and allows the orchestrator to exercise its influence to create

and extract value from the ecosystem. Finally, the orchestrator evolves the

platform and the ecosystem by scaling and extending it and keeping it flexi-

ble in the face of external change.

Engage Stakeholders

The benefit of a shaping strategy comes largely from harnessing the resources

and capabilities of other powerful stakeholders, so the orchestrator must

engage others in the setting of strategy. The orchestrator needs to develop a

collaborative shared vision, identifying the best stakeholders to enlist to that

vision, understanding and incorporating those stakeholders’ interests, and

launching the ecosystem at the right time.

Develop a Shaping Vision A shaping vision outlines how the intended collaborators in the ecosystem

can solve a problem dramatically better than any individual company could

and how they can stimulate demand, build the economic infrastructure

to address it, and remove potential constraints, like regulatory barriers, as

the market develops. The vision needs to be mutualistic, emerging either

through iteration with stakeholders or from within the orchestrator’s firm.

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Shaping: Be the Orchestrator 125

The shaping vision needs to be win-win to enlist other stakeholders and

should anticipate that the orchestrator needs to share resources without the

expectation of an immediate return. These collaborative qualities build trust,

goodwill, and influence—advantages that pay dividends down the road. Ideally,

resources shared come at a limited cost, as in the case of Novo: Sørensen’s firm

shared its preexisting knowledge of diabetes care with Chinese doctors and

regulators to secure them as future partners and, eventually, prescribers.

The shaping vision can emerge singularly or collaboratively. For instance,

Novo single-handedly created its vision and then brought stakeholders on

board, whereas Red Hat’s vision emerged through iterative interactions with

developer communities. Regardless, a shaper should think of vision setting

as an ongoing conversation with its ecosystem coparticipants especially since

it may sometimes be difficult to understand external parties’ interests a priori

and because those interests will evolve. Facebook, for example, changed the

rules of its external development platform multiple times since its founding

in 2007 to accommodate changing developer interests.24 Classical strategy is

often called competitive strategy: winning classical firms concentrate pri-

marily on exceeding their competitors. In contrast, shaping strategy is essen-

tially collaborative. In fact, if a shaping strategy is successful, competition

may be a limited concern because of the strong network effects inherent in

an ecosystem structure: the greater the number of participants, the greater

the value of the system to those participants.

The shaping vision does not imagine a precise end state or a final prod-

uct spec. Rather, it details the ecosystem’s mutual value proposition: how

value is created and shared by different players (figure 5-3). This is differ-

ent from the vision in a visionary approach, which essentially imagines a

specific outcome. It didn’t matter to Apple that the most popular app in

2014 was Goblin Sword, and no longer Koi Pond, as it was in 2008, the

year in which the App Store—the realization of the ecosystem vision—was

launched.25 What matters to Apple is that the system itself, rather than any

specific app, stays attractive for developers and users and profitable for itself,

the orchestrator. Several companies successfully deploying shaping strategies

emphasized to us that tending an ecosystem was more about the catalysis

of effective market mechanisms than “managing” toward specific outcomes.

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126 Your Strategy Needs a Strategy

Identify Stakeholders and Understand Their Interests To this point, we’ve stressed the importance of collaborating with multi-

ple stakeholders. But this begs the question—which stakeholders? Whose

resources or talents do you need? In some cases, like the Novo case study,

the set of stakeholders can be easily identified in advance, but sometimes

that is not possible or desirable. If the attractiveness of your platform

depends on the variety and dynamism of its offering, then you need to cast

the net widely. If you are developing a new market, you need key opinion

leaders, firms that build complementary products, customers, and some-

times even competitors (Google Maps is one of the most popular apps in

the Apple store).

The interests of the stakeholders in the ecosystem should be aligned with

those of the ecosystem as a whole. Hence, the orchestrating firm should map

how the interests of stakeholders fit with a potential ecosystem, how they

contribute, and how they might influence other players. Are the stakeholders

>9M External websites and apps

connected to Facebook

>4M Businesses incorporating

Facebook in their interactions

>20M Population of apps

>1M Developers using

standardized open platform

Pinterest Kayak

Badoo

YouTube Amazon.com

Open Table

Fixed charge (30% of revenues)

Universal login facility

Provide content to 1.3 billion users

Revenue stream from users

Users hooked to Facebook

Facebook

Candy Crush SlideShare

BuzzFeed

Stack Social Bandsintown

EMI Music Sony

Skype

Starbucks Coca Cola

McDonald's

Zynga HTC

Microsoft

Peak Games Supercell

Nokia

Figure 5-3

Facebook’s extensive app and web ecosystem

Source: Facebook annual reports; “Floating Facebook: The Value of Friendship,” The Economist, February 4, 2012; Appdata.com; BCG analysis.

Chapter_05.indd 126 3/23/15 10:01 AM

Shaping: Be the Orchestrator 127

interested in obtaining access to your customer base, brand, or IP? Do they

want to leverage your firm’s scale or resources?

Launch Collaboration at the Right Moment Finally, timing is key. Act too early, and market conditions may not be

favorable enough yet to compel others to join; act too late, and an alternative

platform with a different orchestrator may have already gained prominence,

with potential network effects and lock-in making it impossible to catch up.

Orchestrate

Orchestrating the collaboration between many different, often-changing

players requires building and operating a platform that facilitates interaction

and monetization, locks in stakeholders, and provides a focal point for the

shaper to deploy its influence. Let’s look at these steps in detail.

Building a Platform The goal of a platform is primarily to facilitate the direct interaction between

ecosystem participants or between participants and customers. Therefore,

the ideal platform reduces transaction costs for the stakeholders and man-

agement costs for the orchestrator. These would otherwise be prohibitive for

large ecosystems, given their complexity. Successful platforms often provide

feedback to participants so that they can adjust their contributions without

direct, explicit mandates from the orchestrator. Finally, good platforms lock

in value by inducing network effects that make it unattractive for stakehold-

ers to leave or for rivals to build competing ecosystems. How many of us

would wish to desert our app and data collections to move to a rival smart-

phone ecosystem?

For those reasons, platforms are often (digital) marketplaces that facili-

tate interaction at low cost and provide instant, market-based feedback. To

return to the familiar example of Apple’s App Store, developers make apps

in genres where customer demand is visibly the highest; users rate the apps

up or down, depending on the apps’ perceived quality, and “vote with their

fingers.” Developers get feedback and accrue rewards accordingly, but they

Chapter_05.indd 127 3/23/15 10:01 AM

128 Your Strategy Needs a Strategy

cannot easily move their app to another platform, since the app is designed

for the iOS operating system.

But platforms can take different forms, too, including either non-digital

or non-marketplace formats, like the conferences Novo organized for reg-

ulators and doctors, or digital distribution channels like Red Hat’s Fedora.

They can also, for instance, constitute a set of contractual standards that lay

out the rules for collaborator engagement, like Li & Fung’s supplier terms.

Operating a Platform Building a platform is a start, but it’s like a football stadium: there’s no game

until the players are out on the field. Like a good referee (albeit one who also

owns the stadium), shaping firms need to actively manage the platform through

selective control of few key variables. Since it would be impossible and undesir-

able to control everything, the focus is on locking in stakeholders, monetizing

value created, and adjusting the system to maintain win-win outcomes.

Successful ecosystem orchestrators often control the rules and mecha-

nisms of interaction. Doing so allows them to catalyze, rather than directly

manage in detail, the evolution of the ecosystem. Consider the platform

operation of supply chain orchestrator Li & Fung: the company owns no

looms, sewing machines, or textile factories, yet it is one of the largest con-

sumer products trading companies in the world, providing time-sensitive,

high-volume production and distribution services. How? All the work is

done by an extensive network of third-party suppliers that connect with one

another via Li & Fung’s platform, which matches independent production

facilities and retailer needs. Li & Fung specifies the rules that its network

members must follow to remain part of its ecosystem, and it manages its

supplier system according to several principles, like constantly refreshing

the ecosystem and monitoring, benchmarking, and providing feedback to its

stakeholders. In other words, Li & Fung controls how companies participate

and interact and therefore how the ecosystem performs and evolves. The

outcome is unmatched speed, flexibility, and efficiency, with delivery lead

times half the industry average. Finally, Li & Fung captures value by mon-

etizing services like quality assurance via agency fees charged to customers.

As of 2013, its revenue exceeded $20 billion.26

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Shaping: Be the Orchestrator 129

Effective platform management keeps value within the ecosystem by mak-

ing participation in the ecosystem attractive, by maximizing network effects

that discourage potential rival shapers from building a competing base, and

by limiting value portability beyond the collaborating partners. Successful

shapers do this by sharing their resources “with strings attached”—offering

things that only have value inside the ecosystem, like platform-specific tools

for app developers.

Evolve the Ecosystem

The power of a shaping strategy lies in the depth and breadth of stakeholder

contributions, which support the ecosystem’s fast growth and quick adapta-

tion in response to external change. Diversity in and of itself can drive end-

user uptake: as mentioned above, Apple’s App Store trumped Nokia’s in part

because of the former’s breadth. Diversity should therefore be maintained,

even at the expense of efficiency. Shaping firms should also persistently invest

in opportunities to maximize network effects by extending or scaling the

platform. For instance, Alibaba, the Chinese e-commerce giant whose strat-

egy we will explore in more detail below, invested so heavily in getting more

sellers onto TaoBao, its eBay-like consumer-to-consumer marketplace, that it

was unprofitable for eight years.27 But as of 2014, it’s the eleventh-most- visited

website in the world.28

SiMulating StrategY in an unpredictaBle, MalleaBle environMent

In highly unpredictable and malleable environments, companies need to both explore multiple options over time and invest deeply in shaping selected options to ensure success. To model such an environment, we simulated malleable options whose value increases with investment. In addition, we changed their rewards over time to reflect unpredictability. The resulting landscape is challenging for

Chapter_05.indd 129 3/23/15 10:01 AM

130 Your Strategy Needs a Strategy

most strategies: classical ones lose out because they bet on an option whose relative value declines over time. More explorative, adaptive strategies fail to capture the value from deep and prolonged investment into shaping a limited number of options. Finally, a visionary strategy that displays a one-off phase of analysis and subsequent investment into a single option risks obsolescence in the face of changing circumstances.

Rather, our simulation showed that a strategy that invests periodically in exploring and investing in a select set of options and shifting this focus over time will trump others (figure 5-4). Such a strategy resembles the shaping approach, which requires investment in a family of options through an ecosystem. In such an ecosystem, you do not have to know exactly which option will turn out best, but leadership of the ecosystem will put the firm in a prime position to benefit once options crystallize.

100

150

200

250

0 50 100 150 200 250 300

Profit per period

Time

Classical strategClassical strategyy

Shaping strategyShaping strategyShaping strategy

Figure 5-4

Shaping strategies perform well in unpredictable and malleable environments (simulation)

Source: BCG Strategy Institute multi-armed bandit (MAB) simulation.

Notes: Results averaged over thirty simulations in noncompetitive environments with thirty investment options.

Chapter_05.indd 130 3/23/15 10:01 AM

Shaping: Be the Orchestrator 131

Once the system has gained critical mass, the orchestrator must keep the

ecosystem flexible—shaping environments change, and the ecosystem must,

too. As the platform grows, the orchestrator should allow the stakeholder

mix to change to maintain alignment. We see ecosystems fail when they

become rigid. Sometimes, the orchestrator falls prey to the temptation to

overextend its control, alienating stakeholders. Sometimes, it’s the lure of

efficiency and specialization, for instance, when the shaping firm reduces

the number of ecosystem players or the redundancy between them to lower

management costs. Ultimately, these classical tendencies damage the ecosys-

tem’s long-term appeal and adaptiveness by reducing its diversity and dyna-

mism. And if only one player can produce a certain offering, the ecosystem

risks becoming locked into that player’s demands.

Strategizing at Alibaba

The Alibaba Group is the unsung giant of global e-commerce— though that may change after its initial public offering on the US markets on September 19, 2014.29 The company, founded by Jack Ma in 1999, began with the business-to-business portal Alibaba .com, which connects Chinese manufacturers with foreign pur- chasers. Four years later, it launched its consumer variant, Taobao .com. By 2013, the group handled a larger transaction volume than Amazon.com and eBay combined, accounting for more than half of all Chinese parcel mail.30 In the meantime, Alibaba extended its plat- form into other complementary businesses, with associated portals, like AliPay for payment services and Aliyun for cloud computing. The firm has managed to grow at a remarkable 60 percent annually since 2008 by setting an expansive vision, engaging a broad set of stakeholders on its platforms, investing in platform expansion, and constantly evolving its ecosystems.

Chief Strategy Officer Ming Zeng explained to us how Alibaba’s vision recognized the unpredictability of the digital world but

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132 Your Strategy Needs a Strategy

committed to shaping the market: “The original vision was that the internet would change everything, and we wanted to be there. But we did not know payments or B2C or anything—it was, ‘Can we add something to society by leveraging internet technology?’ So first, we started with international trading, then on to SME [small or medium-sized enterprise] growth, then retailing then payments then cloud computing.” Alibaba screens carefully whether to enter any platform business according to the opportunity to stimulate the development of a sizable market. “Don’t be in a business that only offers services to a limited number of customers,” Zeng said. “If a business targets only a specific segment, leave it to a third party.” He told us that Alibaba only wants to be the orchestrator where there are significant network effects. “Our business is a platform business, so everything is a platform. The most important thing is the number of clicks—people using it—whether you have enough critical mass on the platform.”

Alibaba’s orchestration philosophy is market-based rather than managerial. “We try to . . . intervene as little as possible,” said Zeng. Instead, Alibaba pursues win-win relationships by creating incentives at the platform level. “We have a unique competency in the market- place. You need sellers so there’s something to buy, then you shift emphasis to buyers so that more sellers will come. [We can influence] the development of a positive feedback loop to reach scale.” He added wryly, “We don’t put MBAs near marketplaces, because they have been taught to ‘manage’ things.”

Alibaba constantly coevolves its platforms. For instance, it added instant messaging and seller credibility ratings to its Taobao platform to improve trust building between participants, an aspect traditionally important in Chinese commerce and a criti- cal potential hurdle that can keep people from entering into online transactions.

Perhaps most importantly, Zeng realizes that Alibaba’s strategy is collaborative and part of a multiround game: “We are managing dis- ruptive innovation,” he told us. “We disrupt existing paradigms by

Chapter_05.indd 132 3/23/15 10:01 AM

Shaping: Be the Orchestrator 133

leveraging technology so we need to have a clear vision but to be extremely patient to work with partners who may also be newcomers.”

The Shaping Approach in Practice: Implementation

Since the direction of a shaping strategy emerges from the frequent engage-

ment and orchestration of an evolving set of collaborators, the approach

needs to be embedded in every aspect of the “organization” to be effective.

A shaping strategy must however reach beyond firm boundaries, from fos-

tering external innovation to developing an open organizational structure

to leading with an eye toward inspiring and influencing other ecosystem

participants.

Information

An ecosystem orchestrator must facilitate and monitor the relations between

multiple parties and catalyze these interactions to create mutually favor-

able outcomes. This can be challenging given the enormous transactional

complexity of interactions between all the parties in a large ecosystem.

Li & Fung’s network has over 15,000 suppliers; there are more than 275,000

iOS developers in the United States alone.31 Information is the lubricant that

smooths the interaction between orchestrator and stakeholders, facilitates

coordination, and, as the vehicle for constant feedback, stimulates collective

learning, thereby increasing the perceived value of the platform. Therefore,

information needs to be easily sharable, accessible, and current, facilitating a

market-based adjustment mechanism not requiring the constant interven-

tion of the orchestrator.

Most naturally, the (digital) platforms described earlier function as the

information-sharing mechanism, though sometimes orchestrators need to

take a more active physical role, as Novo does with its conferences for the

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134 Your Strategy Needs a Strategy

Chinese health-care community. Ideally, platforms are designed to auto-

matically generate information on customer satisfaction, demand patterns,

and the overall health of the ecosystem and do not need ad hoc orchestrator

intervention to collect and share the information. Successful virtual mar-

ketplaces both collect data from and share it with participants in an easily

digestible and valuable manner.

Alibaba leverages the information it collects to identify new opportuni-

ties to extend its platforms. With its huge data firepower, the firm is driving

an economic transformation in Chinese retailing, delivering more products

faster and to more people via more, new, and different business models.

Feedback can enhance the vitality of Alibaba’s platform and its participants’

offerings. Alibaba sales data gives merchants insights to new opportuni-

ties, and its user feedback lets participating retailers improve their offerings,

while giving Alibaba clues on how to adjust standards as end-user demand

evolves. Zeng confirmed the critical importance of such information for

Alibaba’s shaping strategy: “It’s trial by error. Economists can’t guess this, so

we just keep trying. We get feedback from the market and we make some

adjustments.”

Finally, select quantitative measurements can tell orchestrators whether

the coevolution process is working. Measurements could include capturing

a new-product vitality index, ecosystem growth, and combined profitability

or the market share of an ecosystem as a whole. For Apple, measurements

could include, for instance, the profitability and concentration of its app

developers and the market share of end users who have iOS devices versus

other devices, like Android.

Innovation

The very point of an ecosystem is to harness outside resources to support

rapid, parallel innovation. Therefore, innovation mostly happens externally,

drawing on the diversity of participants in the ecosystem but catalyzed by

the shaping firm. Innovating with a shaping approach doesn’t mean directly

managing every innovation; nor should it—a managed as opposed to a mar-

ket-based approach would be infeasible at scale and would curtail the speed

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Shaping: Be the Orchestrator 135

and variety of the ecosystem’s innovations. The orchestrator catalyzes inno-

vation by putting in place incentives and providing feedback to stakeholders

to allow them to innovate in ways aligned with the interests of the ecosystem.

Of course, not all innovation happens externally. The orchestrator’s

innovations are mostly second order—designing and improving the busi-

ness model and interaction platform, which reinforces the shaper’s right

to orchestrate the ecosystem. Facebook innovates internally to contin-

uously improve its platform’s value proposition for outside collaborators

by selectively investing in two areas that help to legitimate its role as an

ecosystem orchestrator. First, it prioritizes improvements to its develop-

ment applications and platform infrastructure so that other parties can

easily collaborate. Second, and perhaps more importantly, it continues to

adapt its user interface, adding features like PhotoStream, Timeline, and

other hooks to maintain interest and engagement from the critical mass

of users that determine the platform’s attractiveness for advertisers and

app developers.

Organization

Unlike the other approaches to strategy we’ve explored, the key unit of

analysis in a shaping context is the business ecosystem, not just the firm

itself. This larger view has implications for organizational structure, culture,

and leadership. Shaping organizations need to be open to, and intertwined

with, the external environment, in order to extend their reach beyond the

boundaries of the firm and build a covenant of trust. Structurally, this

means that orchestrators have few organizational boundaries; they lever-

age and share resources and knowledge externally and give up a certain

degree of control by leveraging the same market-based mechanisms as the

ecosystem itself.

For instance, the orchestrating firm might integrate itself with other stake-

holders by rotating staff, investing in upstream and downstream ecosystem

players, or by sharing IP when it serves the interest of the wider ecosystem.

Google, for instance, regularly holds developer conferences, where it invests

in collaborators by giving them training, offers one-on-one feedback sessions,

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136 Your Strategy Needs a Strategy

or lets collaborators codevelop apps with Google engineers.32 Inevitably, this

open organizational approach can require a mind-set shift—especially for lead-

ers or employees who are used to a clear division between “them” and “us.” It

requires comfort with letting go. Instead of giving strict, detailed operational

rules, leaders set broad guidelines to foster external collaboration.

Culture

The same tenets of going beyond the boundaries of the firm hold true for cul-

ture. The culture of a shaping firm should look outward, have an inclusive atti-

tude toward external parties, and encourage both catalysis rather than control

in stakeholder interactions and collaboration rather than competition.

The firm should stimulate and reward employees for reaching beyond the

boundaries of the company to build relationships. Openness and humility

help to generate the trust necessary to build long-term, successful interac-

tion with ecosystem participants. As Novo CEO Lars Sørensen said: “Then

we have an open culture in the company; we hopefully have been able to

create a culture whereby people feel they can be critical of the decisions that

are being made, all of course with the intention to do a better job.” And,

above all, shaping cultures encourage employees to respect other players

in the ecosystem. Shaping firms often promote a nonmanagerial culture in

which building relationships, rather than directly managing or controlling

them, is most prized.

Leadership

It’s more of the same with leadership, where, counterintuitively, shaping

leaders gain clout and respect through willingness to cede a degree of control.

Shaping leadership extends beyond the boundaries of the firm. The shaping

leader sets the ecosystem vision—often collaboratively—communicates the

vision, builds external relationships rooted in mutual interest, resolves con-

flict, and influences rather than commands. In this way, the leader is more of

catalyst than a manager who strictly enforces his or her will.

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Shaping: Be the Orchestrator 137

Organization, Culture, and Leadership at Red Hat: Jim Whitehurst

Red Hat CEO Jim Whitehurst underlined a number of the organiza- tional and cultural imperatives for a shaping approach. For instance, Red Hat’s organization is strongly focused on building external relationships, which requires hiring very selectively: “Red Hat has been able to influence communities to get things done—to influ- ence creative communities and accomplished techies with big egos where you don’t have control—because we respect the ecosystem. Organizationally, that means that we are surgical in who we hire. We understand the people with the most influence and get them to work for us.”

Red Hat’s decision-making culture reflects a willingness to selectively cede some control since, in a shaping organization, engaging internal and external stakeholders in a fair process can be as important as the outcome of that process. Most energy therefore goes into creating a culture that supports open, trans- parent dialogue:

Our associates have always expected this: tell me why we’re doing what we’re doing, and allow me at least a voice in the decision process. Now, a voice doesn’t mean decision rights. It doesn’t mean you have any say in the answer. But at least you have a vehicle for an opinion to be heard . . . Engaging people in how decisions are getting made means it can take forever to get decisions made. But once you make a decision, you get flawless execution because everybody’s engaged. They know what you’re doing and they know why you’re doing it.33

Whitehurst sees the requirements of a leader in a shaping organi- zation as quite distinct from those in a more classical organization, like

Chapter_05.indd 137 3/23/15 10:01 AM

138 Your Strategy Needs a Strategy

the one he experienced as a chief operating officer at Delta Air Lines. “Red Hat is fundamentally different culturally,” he told us. “I came in thinking I was adult supervision, but recognized that . . . openness generates openness. We have six thousand–plus people in eighty offices around the world who are working in a bottom-up manage- ment system.”

Nor does Whitehurst see the CEO’s role as one of command and control. “Leadership at Red Hat isn’t about internally focused con- trol measures,” he said. “We are the catalysts in communities.” That external view helps him understand his role: “The leader is the ‘cat- alyst,’ not the leader—I don’t rule by fiat and that’s not how I want to position myself in an open-source community. We don’t lead any- thing, because leadership implies that you have control. So, in a way, I’m the chief catalyst for Red Hat. I catalyze, I help direct, but I don’t formally lead. And so that was a key word we spent a lot of time on: [being a catalyst means] credibility; consultation not control; contribution.”

are Your actionS conSiStent With a Shaping approach?

You are embracing a shaping approach if you observe the following actions:

� You select and engage stakeholders.

� You create a shared vision for a better way of doing things.

� You build a platform to orchestrate collaboration.

� You coevolve the ecosystem and the collaboration platform.

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Shaping: Be the Orchestrator 139

Tips and Traps

As we’ve seen, the essential elements of a successful shaping strategy are

engaging stakeholders with an attractive vision at the right time, orches-

trating the ecosystem to push toward outcomes that are mutually beneficial

for all stakeholders, and evolving the ecosystem to keep up with external

changes.

In spite of the rising popularity of the word ecosystem in business, the

shaping approach to strategy is clearly the least widely understood. Indeed,

even leading practitioners whom we interviewed talked freely about how

they are still figuring out how to create and shape advantaged positions

within advantaged ecosystems. No surprise then that unlike the overrep-

resentation of the highly familiar classical and visionary approaches, the

shaping approach was the least frequently encountered approach. It is both

the least declared and also the least practiced approach to strategy. We also

observed much inconsistency between the actual measured environment,

the perceived environment, the declared strategy, and the practiced strategy

for the shaping approach. For example, when companies perceive their envi-

ronment to be malleable and unpredictable, they are more likely to adopt

the practices of an adaptive rather than a shaping approach.

Table 5-1 presents a few tips and traps that firms should heed to sharpen

their game in selecting and applying the shaping approach.

Table 5-1

Tips and traps: key contributors to success and failure in a shap- ing approach

Tips Traps

• Employ selectively: Only pursue markets that are at an early enough stage of development or have sufficient growth potential and that your firm can conceivably orchestrate.

• Bad timing: Starting a shaping approach when the opportunity is already far developed or a rival orchestrator already has a head start can lead to wasted effort.

(Continued)

Chapter_05.indd 139 3/23/15 10:01 AM

140 Your Strategy Needs a Strategy

Table 5-1 (Continued)

Tips and traps: key contributors to success and failure in a shap- ing approach

Tips Traps

• Understand your role: Few firms have the combination of influence and capability to deploy the shaping approach, but many others can benefit from participating in the ecosystem.

• Give generously . . . with strings attached: Develop a win-win proposition that creates and monetizes value in your ecosystem. Network effects reinforce the value of your platform and make it more robust. But limit the portability of intellectual property beyond the ecosystem.

• Build your influence: Develop relationships to harness the energies of other stakeholders. Create a focal point, a platform, from which you can deploy your influence.

• Control selectively: Carefully select where you deploy your influence, and control the mechanisms of interaction and adaptation, not operational activities or outcomes.

• Maintain platform health and attractiveness: Encourage diversity and dynamism in the ecosystem, and avoid hoarding all the gains or prioritizing efficiency at the expense of diversity.

• Value leaks: Don’t let value leak from your ecosystem. Ensure that collaborators have high switching costs or cannot easily export the capabilities or IP you helped them develop beyond the ecosystem.

• Overextending control: Avoid dominating and overmanaging the ecosystem. Vertical or horizontal integration will reduce ecosystem variety and dynamism.

• Allowing rival orchestrators onto the platform: The flip side of too much control is losing control to rival orchestrators with detrimental effects on your firm’s value creation.

• Efficiency at all costs: Prioritizing efficiency and specialization over long-term ecosystem health can hurt a shaping approach. Redundancy and variation keep an ecosystem robust.

Chapter_05.indd 140 3/23/15 10:01 AM

chapte r 6

renewal Be Viable

American Express: Renewing Advantage

When the financial crisis hit world markets in 2008, American Express, currently the world’s biggest card issuer, with $950 billion in billed business, faced very difficult circumstances.1 Defaults on credit card payments rose sharply, consumer spending plummeted, and the funding markets dried up. In previous recessions, Amex’s wealthy cli- entele had kept spending—but not this time.2

The circumstances called for a drastic response, and Ken Chenault, Amex’s CEO, took swift action. He launched an aggressive cost-cutting and restructuring program to focus the organization and to impart a sense of urgency. Chenault explained to us: “First we had to deal with the cost issue. The environment is such that we couldn’t act the way we did precrisis. We had to act immediately—but we had to be thoughtful about it and be governed by both short- and long- term considerations.”

He reduced personnel costs, shedding approximately 10 percent of the workforce and temporarily reducing senior management sal- aries.3 He lowered marketing expenses and the fees paid for profes- sional services, but maintained the budgets for customer service.4

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142 Your Strategy Needs a Strategy

Finally, to raise new sources of funding, Amex entered into the depos- it-gathering business, and, Chenault said, “in a period of only several months, we raised over $8 billion.”

Organizationally, Chenault focused on role clarity and tight plans with clear success metrics: “Personal accountability was driven down through the organization.” But amid the gloom, he was careful to pro- ject a sense of optimism. “The company had been around for 160-plus years. We had faced crises before,” he said, “and we knew it was criti- cal to maintain confidence in prospects for the longer term. Our man- tra was ‘Stay liquid, stay profitable, and invest selectively to grow the business.’”

Chenault’s swift actions saved the day. By the end of 2009, Amex’s stock had recovered to $40 per share, from a low of $10 in March.5

American Express was one of the few financial companies to maintain its shareholder dividend and remain profitable throughout the crisis. Five years later, Amex trades at more than $90, an accomplishment attributable to the second phase of Chenault’s mantra: the plan for future growth.6 We reminded Chenault what he had told investors in 2009: “At the start of the year, the economy appeared to be in a free- fall, the drop in card member spending was accelerating and loan loss rates were rising rapidly. But throughout this time our short-term chal- lenges did not stop us from investing in our future.”7 Chenault acknowl- edged that there were skeptics: “People said to me: ‘You know, Ken, how can you even think about growth at a time when the company is being hit and the economy is in a shambles?” But, he said, “I’ll make the obvious point: don’t waste a crisis. Despite all the craziness that was going on, [Amex was] going to selectively invest in growth.”

Chenault had led Amex through crises before. He took the helm at Amex a few months before 9/11. He knew how the company should react. “While pressure on the bottom line intensifies during weaker times, it is short-sighted to slash and burn all growth investments,” he explained. “Doing so will likely put you at the back of the competitive pack when the economy begins to recover and will end up costing you more in the long run.”8

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Renewal: Be Viable 143

While many competitors were still grappling with losses, he focused on building a platform for future growth. He developed a vision of the future, with Amex as not just a card company but as a broader financial services company supported by a strong digital plat- form, and he invested in technological innovation.9 Chenault looked for ways to drive profits by offering customers more ways to spend their money, like increasing the number of merchants connected to Amex’s iconic membership rewards program.10 He explained: “This is why, even as we’ve cut operating expenses, we have continued to fund major growth initiatives.”11

Amex’s success would not have been possible if Chenault had not ensured that his strategy—to survive and to grow—cascaded through the whole company. Culturally, he encouraged the organization not to “hunker in the bunker.” Chenault was inspired by a saying from his lead director, Bob Walter: “Bob says, ‘Keep your nose to the grind- stone and your eyes on the horizon.’ It might be physically impossible, but it’s a great metaphor . . . It emphasizes the need to focus on the day-to-day, but with a view of, ‘What’s the transformation you’ll bring about?’” Thanks to the efforts of Chenault and his team, Amex is well positioned for future growth, with its stock now up around ninefold from recession lows.

The Renewal Approach to Strategy: Core Idea

A renewal strategy, like the one employed at Amex, renews the vitality

and competitiveness of a firm when it is operating in a harsh environment.

Such a challenge can be caused by a protracted mismatch between the firm’s

approach to strategy and its environment or by an external or internal shock.

When the external circumstances are so difficult that your current way

of doing business cannot be sustained, changing course to preserve and free

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144 Your Strategy Needs a Strategy

up resources, and then later redirect toward growth, is the only way to not

merely survive, but to eventually thrive again. A company must first notice

and react to the deteriorating environment as early as possible. Then, the

firm needs to economize to decisively address its immediate impediments to

financial viability or even its very survival. To do so, it focuses the business,

cuts costs, and preserves capital while also freeing up resources to fund the

next part of the renewal journey. Finally, the firm needs to pivot to one of

the four other approaches to strategy to ensure long-term growth and com-

petitiveness, by resetting the strategic direction of the company in line with

its environment and innovating strategically (figure 6-1).

The renewal approach is unique both because it is temporary and because

it is actually a combination of two approaches to strategy, each with its own

distinct logic. The combination is challenging because the two approaches’

requirements are in some ways diametrically opposed. We will extend this

idea of combinations of approaches in chapter 7.

In terms of our art metaphor, renewal strategy is perhaps like a cubist

painting. Cubism breaks with the complexity of previous schools of art;

objects are analyzed, broken up, stripped of nonessential forms and shapes,

and then reassembled to create a new perspective.

When to Apply a Renewal Approach

You should deploy a renewal approach when your firm faces harsh circum-

stances, because of either a protracted mismatch between your firm’s strategy

Renewal

React (or anticipate)

Economize

Grow

Figure 6-1

The renewal approach to strategy

Chapter_06.indd 144 3/23/15 10:58 AM

Renewal: Be Viable 145

and its environment, or because of internal or external shocks. Such a mis-

match can come about, either because a firm chose the wrong strategy or, more

often, because the environment has changed and the strategy didn’t, leading to

chronic underperformance. Many computer hardware firms found themselves

in this bind as mature technologies were replaced by emerging ones and as value

shifted from hardware to software, services, and connectivity. Their historically

successful business models were outdated in the face of environmental change.

A renewal strategy is also appropriate when external circumstances make

the environment suddenly harsh. Economic or political shocks or instability

may constrain the capital markets, or consumer spending or demand in your

sector may drop off unexpectedly. Sometimes these situations can take place

at the same time with devastating consequences. The financial crisis that

erupted in 2008—and which caused Amex to take a renewal approach—was

an especially severe instance of reduced liquidity and declining demand.

what You Might Know it as

Renewal strategy is a well-known concept and reality, albeit under different names, like transformation, turnaround, or streamlining. In the 1980s, the practices of restructuring and turnaround were pro- gressively codified and popularized, in part because of the lucrative returns generated by successful turnaround firms. Private-equity firms and banks popularized the leveraged buyout and similar finan- cial engineering techniques, like working-capital factoring and novel debt structures that helped companies free up cash in harsh circum- stances. The private-equity industry has made a science of the tech- niques that support the first phase of transformation, maximizing the cash flow of businesses by cutting costs, shedding excess activities, and optimizing capital structures.

Around the same time, companies themselves captured and cod- ified some of the efficiency driving techniques of the “economizing” phase of the renewal approach. In the 1980s, US manufacturing

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146 Your Strategy Needs a Strategy

Finally, large, existential challenges can arise closer to home, such as an

internal cataclysmic event like supply-chain contamination, the breakdown

of important production infrastructure, or a high-profile crisis of trust. When

BP’s Deepwater Horizon drilling rig, owned and operated by Transocean and

on contract to BP, spilled oil into the Gulf of Mexico, the accident threatened

the company’s survival not only because of the mishap and its financial con-

sequences but also because of its impact on trust and stakeholder relations.15

Though you may not notice immediately that your firm is entering a dis-

tressed state, once the pain is sharp enough, it’s hard not to recognize that you

need a renewal approach. Protracted competitive underperformance in terms

of margins or sales growth, sharp drops in free cash flows, or reductions in

available capital are all signs that the long-term survival of the firm may be at

risk. The need for strategic renewal is increasing. Abbott, Bank of America,

Conoco Phillips, Daimler, Ericsson, FMC, GlaxoSmithKline—this is just the

companies developed activity-based costing, which helped them to link activities to profitability and to streamline selectively without harming performance. In the early 1990s, Michael Hammer and James Champy introduced the concept of business process reengineering, building on BCG’s idea of time-based competition: activities that are not part of main processes that ultimately serve the customer should be minimized. Only a few years later, over 60 percent of Fortune 500 companies had engaged in some form of reengineering.12

BCG later developed delayering. The concept suggests that the number of organizational layers a company has is a surrogate for its complexity and inefficiency and that reducing excess layers and increasing spans of control improves the competitiveness of a firm.13

Finally, in the mid-1990s, academics and practitioners alike gave increased attention to the softer side of change. Authors like John Kotter argued that without considering human factors and building large-scale change management capabilities, transformations are bound to fail.14

Chapter_06.indd 146 3/23/15 10:58 AM

Renewal: Be Viable 147

start of an alphabet of firms that have publicly announced transformation

efforts over the past few years. Why the rise? There are two primary reasons:

first, the accelerating pace of change and, second, the expanding reach of

economic crises because of the increasing interconnectedness of economies.

Today’s businesses face more and faster change, raising the likelihood that

a company’s approach to strategy will become mismatched to the chang-

ing environment. Our analysis reveals that businesses now progress more

quickly through the different stages in their life cycles—from question mark

to star to cash cow to dog—and overall life cycles are therefore also increas-

ingly compressed: in 75 percent of industries, the average time a firm spends

at any stage of its life cycle has halved (figures 6-2 and 6-3).16

Therefore, leaders must be ever vigilant for change and must ensure that

their strategies don’t get out of step with their environment. In addition,

economic crises seem to be deeper and to go beyond the sectors in which

the crises started, because of the increasing interconnectedness of the global

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

60.0

0.0

40.0

20.0

Average span of public listing for companies active in a given year

Figure 6-2

Decreasing lifetime of companies

Source: BCG Strategy Institute analysis (September 24, 2014), Compustat.

Note: Cross-industry analysis based on thirty-four thousand companies in seventy industries (unweighted average), excluding companies with unknown start or end of public listing (listed and reporting sales in 1950 and/or still listed and reporting sales in 2013) and companies never reaching peak sales of greater than $2 billion.

Chapter_06.indd 147 3/23/15 10:58 AM

148 Your Strategy Needs a Strategy

economy. Formerly, crises were often confined to their industry or geog-

raphy of origin. For instance, the South American debt crisis in the 1990s

stayed largely in that region, and the oil crash in the United States in the

1980s primarily affected only the energy sector.

The environmental factors that trigger the need for an adaptive approach—

turbulence, faster change, and more fundamental change—are the same as those

that trigger the need for renewal. Adaptation, as we discussed, is not always

easy, but when a firm misses the baby steps of adaptation, then a large, riskier,

one-shot change in the form of a corporate transformation becomes necessary.

Why Focus Matters: Bausch & Lomb

The story of Bausch & Lomb, an eye care products manufacturer, exemplifies when and how to use a renewal approach. In 2010,

High

Low Low

High

Growth

Market share

? Average quadrant lifetime* 3.8

1992 2012

High

Low Low

High

Growth

Market share

? Average quadrant lifetime* 1.9

Figure 6-3

Competitive positions change two times faster today than in 1992

Source: Compustat data on publicly listed companies from 1980–2012.

Note: Excludes industries in which circulation decreases.

*Average time any single firm spends in a specific growth-share matrix quadrant.

Chapter_06.indd 148 3/23/15 10:58 AM

Renewal: Be Viable 149

Brent Saunders was appointed to lead the turnaround of the com- pany, which had fallen out of step with its competitive environ- ment over a sustained period. “There were telling signs,” he said. “Three CEOs in three years; no growth in thirty years; moving from being the market leader in most categories in which it competed to being the market laggard in those same categories; and enormous complexity.”17

First, he needed to persuade people that the company should take a renewal approach, and so, as he told us, he looked for “some of the indisputable facts . . . to show that we need to do something different.” On nearly every key metric for the company—sales per employee, growth rate over the past thirty years, innovation record—Bausch & Lomb was last in its peer group. Saunders showed others the case for change: “Probably the most compelling statistic was our willingness to recommend B&L as a place to work and a cus- tomer survey of doctors’ willingness to recommend B&L products. It was awful.”

Recognizing that Bausch & Lomb was woefully out of sync with its environment, Saunders responded with a three-part plan (sta- bilize, grow, and break out) that focused on stabilizing the entity, creating small wins, and investing in growth via targeted prod- uct development. Saunders explained: “Winning is contagious, so if you can start off by having small, quick wins, in a company like this that hadn’t won for so long, it brings back that muscle memory.”

Indeed, over two years, Bausch & Lomb’s equity value increased by about 2.5-fold; sales grew by 9 percent a year, and EBITDA rose by 17 percent per year, driven by “right-sizing” the organization, targeted growth-focused acquisition, and an incredible string of thirty-four new product introductions.18 In 2013, Valeant purchased B&L for $8.7 billion.19

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150 Your Strategy Needs a Strategy

The Renewal Approach in Practice: Strategizing

Strategic renewal is increasingly important: it’s a high-stakes game that

sometimes affects the very survival of the company. Most leaders are famil-

iar with the approach under the guises of “transformation,” “turnaround,” or

just plain cost cutting. However, executing a successful renewal approach

to strategy is harder than you might think: our analysis demonstrates that

75 percent of transformations fail to create both short- and long-term impact

(figure 6-4).20 To understand why and to define what sets apart successful and

unsuccessful renewals, we undertook a quantitative and qualitative compar-

ison of the long-term performance of two dozen transformation programs.

The resulting pattern was striking. All of the firms we studied underwent

what we call a “first phase” of economizing. But while essential, economiz-

ing alone is not sufficient: unsurprisingly, you really cannot cut your way

to greatness. Painful cost cutting and other defensive measures are famil-

iar approaches for staying afloat, but while they are quick and obvious and

deliver tangible results, they are not by themselves a recipe for long-term

are You in a renewal Business environMent?

You are facing a business situation that calls for renewal if the follow- ing observations hold true:

✓ Your industry or company displays low or negative growth.

✓ Your industry or company is losing money.

✓ Your industry or company suffered from an internal shock.

✓ Your industry or company suffered from an external shock.

✓ Your situation poses a viability risk for you.

✓ Your industry or company is subject to restricted access to capital.

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Renewal: Be Viable 151

success. Just economizing will likely restore total shareholder return to sec-

tor parity at best, but will not stem a decline in long-term competitiveness.

For successful renewing firms, the transformation story doesn’t end

there. No single firm we studied managed to thrive in the long term with-

out embarking on a “second phase” of transformation by pivoting to a new

approach to strategy focused on innovation and growth. We ascribe a high

proportion of transformation failures to firms that never went beyond the

first phase of cost cutting. Hence, for a renewal strategy to be successful in

the long term, a firm must initiate both the first phase of economizing and

the second of growth—in other words, the firm must pivot to one of the

other four approaches to strategy.

Strategizing for renewal begins with a swift reaction to early indica-

tions of a harsh environment; the firm must move into the first phase of

0.0

0.5

1.0

1.5

2.0

2.5

8.04.52.01.51.00.50.0

Long-term relative TSR growth*

Short-term relative TSR growth†

24 percent of transforming companies outperformed both short and long term

Figure 6-4

Few companies succeed in transformation efforts

Source: BCG analysis.

Note: Total shareholder returns (TSR) adjusted by S&P 500 or relevant global industry index growth; 1 = same growth rate as the industry; N = 88 firms undergoing transformation, from 2001 to 2013.

*Five years from start of effort, or until today.

†One year from start of transformation effort.

Chapter_06.indd 151 3/23/15 10:58 AM

152 Your Strategy Needs a Strategy

economizing—the identification of opportunities for cost savings and cap-

ital preservation and strict planning to achieve those benefits. Then, the

firm will be ready for the second phase, a new strategic approach focused

on growth and strategic innovation (figure 6-5).21

React Swiftly to Triggers

Recognizing and responding quickly to signals that your firm is in a harsh

environment is the most critical step to improving the odds of survival: as

in medical situations requiring CPR, the timeliness of the first response in

a potentially life-threatening situation often dictates the outcome. Firms

frequently react too late to a situation of distress. Hubris, lagging financial

indicators, or the lack of an immediate burning platform can make it easy

to turn a blind eye to impending distress. Furthermore, a maturing business

model might throw off lots of cash and appear healthy when, in fact, the

seeds of obsolescence have already been sown. By the time financial pressure

hits, challenges may have already multiplied and progressed significantly.

Some firms can anticipate a harsh environment by recognizing lead-

ing indicators like technology shifts, the emergence of maverick compet-

itors, shifts in how and where smart money is being invested, customer

Time

Phase 1

Economize

Phase 2

New strategic approach

Strategic innovation

Total shareholder

return

Trigger

Figure 6-5

Transformation trajectories

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Renewal: Be Viable 153

dissatisfaction or defection, or declining growth rates. However, such pre-

emptive cases of renewal are surprisingly rare.22 Here, we will focus only on

the more common instances of reactive transformation.

Phase 1: Plan to Economize

Once a firm recognizes the harshness of its environment, it needs to embark

on a first phase of renewal, with two goals in mind: first, the firm must restore

the financial viability of the company and, second, it must then fund the jour-

ney back to growth. To that end, firms draw up a plan to focus their business

by shedding noncore activities, reducing costs, and preserving capital.

Good Intentions Aren’t Enough: Kodak

The story of Kodak exemplifies not only the speed and ferocity of technological disruption but also the incredible sensitivity of the transformation process to making the right decisions.23 Even the most sincere attempts at transformation can get it wrong. In 1975 Kodak owned 90 percent of the US film market and 85 percent of its camera sales. Few brands were as synonymous with their industry. So it was a sad day when the company filed for bankruptcy in 2012.

While it would be easy to see the Kodak story as an example of executive incompetence, the firm, in fact, did many things to adjust to the demise of film and the rise of digital photography. Kodak devel- oped and patented the first digital camera in 1975. It wasn’t until 1981 that Sony announced the first commercial product, the Mavica, but the camera’s quality was low and its price inaccessible to the mass market. Meanwhile, Kodak made continued side investments in new technology throughout the 1980s and 1990s, for instance, switching some of its hiring and M&A from a chemical focus to electronics and engineering.

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154 Your Strategy Needs a Strategy

In an unprecedentedly short period—about four years—the indus- try was fundamentally upended. The year 1999 was the peak year ever for film sales, but by 2003 Kodak had announced publicly that the film business was in secular decline. What went wrong?

Although Kodak made a genuine effort to transform, it just didn’t do so thoroughly or nimbly enough. Kodak’s phase 1 was character- ized by multiple, but insufficient rounds of cuts and layoffs, steps that degraded morale and failed to attract talent to fuel innovation. At the same time, even though Kodak had clearly identified the inevitability and necessity of shifting to digital technology, the company ran into the “proportionality trap.” That is, Kodak did not allocate sufficient resources to develop and expand this new strategy, nor did it antic- ipate the incredible rate of technological change. Falling into the “persistency trap,” Kodak stifled new projects that did not meet the benchmark economics of its existing film business. And, in the “legacy trap,” the company continued to make heavy investments in its core business, not wanting to cannibalize film sales.

To some extent, Kodak’s mistakes are understandable. For instance, it made major capital expenditures in film manufacturing facilities in China in the late 1990s, anticipating that that country would become the world’s last and largest market for film photography. Instead, China leapfrogged film photography altogether. As a source in the company told us: “We wanted to put money into the new technology, but we’d gotten some false security because the speed of technol- ogy substitution had been historically slow. When, in the early 2000s, quality, cost, and usability aligned, we were unprepared.”

In early 2013 the firm emerged from bankruptcy, but as a much smaller operation.

Firms in renewal mode identify opportunities to refocus on their core

activities. They restructure their portfolios by revisiting the industries and

business units they want to maintain and determining which products and

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Renewal: Be Viable 155

customer segments do or do not contribute to overall profitability and cash

generation. At least in the short term, as Per Gyllenhammar, the CEO of

Swedish automaker Volvo, reputedly observed after the stock market crash

in 1987: “Cash is king.”24

Reducing the cost associated with remaining assets can help to restore short-

term profitability and to close performance gaps. Many firms optimize profits

and reduce bloat by cutting into their personnel costs, restructuring their orga-

nizations, or making processes more efficient through lean management, six

sigma, or related approaches. Potential savings lurk in many corners: the cost

of goods sold can be lowered by rationalizing your supplier portfolio, reducing

intermediaries, shifting the geographic sourcing mix, or initiating more col-

laborative efforts like reductions in supply chain waste and lead times. Indirect

costs are often an easy source for savings that do not immediately affect the

customer experience: marketing budgets, discretionary R&D, and indirect

personnel expenses are all candidates for phase 1 cuts to stem the bleeding.

Apart from rationalizing their portfolios or cutting costs, firms can also free

up resources on their balance sheets. For instance, they can reduce asset redun-

dancy, adjust their debt structure, or optimize working capital by improving

inventories, changing supplier terms, and eliminating bad payment practices.

More radically, they can sell and lease back core assets where feasible.

The opportunities that the company identifies then get rolled into a

detailed, milestone-rich plan. Disciplined management of the firm’s phase 1

strategy allows it to “live to die another day.” The firm focuses on high-level

savings targets that cascade down into granular month-by-month plans or

individual targets, reflecting required progress toward the short-term goal of

financial viability.

The guiding principle for the first phase of renewal should be to max-

imize immediate performance while preserving optionality for long-term

growth. It’s a tough balance between “no sacred cows” and “don’t just slash

and burn.” When reducing costs, decisions of what to cut or sell should

hinge on future growth prospects. Firms that “burn the furniture”— selling

off units with high potential—risk cannibalizing their long-term prospects.

Rationalization is necessary, but assets with high future strategic value

should be sold only as a last resort to generate cash. A good approach is to

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156 Your Strategy Needs a Strategy

de-average cuts and investments, cutting deeply in some areas while selec-

tively reinvesting for long-term growth in others.

Even though the first and second phases play out sequentially, they are also

intertwined. First, firms must not cut elements that will be essential for phase 2.

Second, phase 1 funds phase 2 growth, and cost-cutting targets must therefore

reflect this. And, finally, while most of the firm’s attention in phase 1 will be fully

dedicated to saving the firm, leaders need to have their eyes on the horizon, too,

to anticipate and set up the strategizing process for a successful second phase.

Phase 2: Pivot to Growth

Strategizing in the second phase is about doing two things well: defining a

new strategic approach—and investing in the strategic innovation to support

it—and communicating the new strategy.

To set the direction for the second phase of transformation, successful

firms assess their environment to inform their long-term vision. Regardless

of which strategic approach the firm pursues in the second phase, the firm

needs to adjust the focus from a short-term, internal perspective that cen-

ters on efficiency to a long-term, external one that focuses on growth. To

pivot to the new approach, firms need to innovate strategically, often mak-

ing multiple fundamental changes to their business model. The appropriate

approach and accompanying innovation required should be based on the

firm’s assessment of the postcrisis environment.

Earlier in the book, we detailed the various strategic approaches that

might be adopted in the second phase. Here, let’s briefly explore something

unique to the second phase: the need to persuasively communicate the new

vision to overcome inevitable skepticism and restore confidence. Given the

pressure to focus on short-term survival and the possible damage to the

firm’s credibility during its crisis period, leaders must reset the firm’s inter-

nal compass steadfastly and invest in communication of the strategy, both

externally and internally. This helps to bring along outsiders like financial

stakeholders by giving them a new logic to anchor against and to improve

morale with insiders by giving employees a new frame and vision.

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Renewal: Be Viable 157

Strategizing at AIG

Like Amex, American International Group (AIG), one of the world’s big- gest insurers, was engulfed by the global economic crisis that struck in 2008.25 It is perhaps the poster child for a corporate existential cri- sis. That year, it received a record $85 billion bailout from the Federal Reserve and by March 2009 had grown to $182 billion. Its brand was seen as toxic, and its long-term viability was insecure. In the summer of 2009, the federal government recruited Bob Benmosche, a seasoned insurance executive, to embark on a spectacular example of strategic renewal.26

Benmosche and his team prioritized and acted decisively to create value, preserve and simplify the core insurance business, and ultimately pay back the US government. They shifted from an AIG “fire sale” to a thoughtful and methodical plan to divest some businesses, invest in others, and unwind certain portfolios. These actions focused on the remaining, most profitable, parts of the property casualty, life and retirement, and mortgage insurance busi- nesses. “Everything else was for sale,” said Peter Hancock, AIG’s current president and CEO, who was AIG’s executive vice presi- dent for finance, risk, and investments at the time. “The organization needed clarity as to what would be sold and what would be kept. So we decided to preserve the core.” In the remaining assets, the AIG team tackled operational efficiencies. “Looking at big, mature parts of the business and thinking about how to optimize can be powerful,” he said. “We pay $100 million in claims per day; so if you can optimize it by just a little, it pays for a lot.” Finally, Benmosche oversaw a significant streamlining of the organization. Hancock explained: “We’re executing a significant simplification exercise to reduce organizational complexity and to improve decision-making.”

This focus on simplification and solvency fueled the first phase enough to relieve AIG of its creditor burdens and to get back to the

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158 Your Strategy Needs a Strategy

public markets, where it could grow again. By the end of 2012, AIG had paid back the government, including a profit of $22.7 billion, retained its A investment rating, attracted more than $3 billion of credit from private-sector banks, and returned to the stock market.27

But, as Hancock explained: “That wasn’t the turnaround point. That was the starting point!” Hancock was appointed to a new role: as the CEO of the property casualty (PC) business, he had to pivot the unit back to long-term growth. The second phase had begun.

In this new role, Hancock looked toward a classical approach, capitalizing on his business unit’s scale benefits and globalizing the management structure to create synergies and avoid cannibalization. Additionally, he refocused investments to position the firm better in higher-growth areas, like emerging markets: “Importantly, we have created a new source of growth, by giving AIG entities around the globe a sense of common belonging and access to common infra- structure and by creating a limited number of strategic business expansion countries, where we are willing to invest considerable sums with a longer payback horizon.”

From 2011 to 2013, AIG more than tripled its profits, in no small part because of the contribution from PC, in which operating income increased from $1.1 billion to almost $5 billion during this period.28

siMulating strategY in a harsh environMent

In harsh environments, firms win by preserving resources and not expending unnecessary effort on exploration. Our simulation bears this out: when the environment is harsh, exploration carries a high opportunity cost and eats into the limited resources necessary for survival. To model this, we introduced a budget of resources that any single strategy is allowed to use.

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Renewal: Be Viable 159

The Renewal Approach in Practice: Implementation

Strategic renewal is a high-stakes game that demands the full dedication of

the entire organization initially to economize and eventually to grow again.

As Henry Ford said: “Failure is simply the opportunity to begin again, this

time more intelligently.”29 Both phases of renewal, from information man-

agement through structure, culture, and leadership, need to be embedded

in the organization. And that is exactly the challenge: successful renewal

If resources are scarce, the budget is stricter or the opportunity costs get higher, and strategies that overinvest in exploration quickly run out of resources and cease to be viable (figure 6-6).

–150

–100

–50

100

150

0 50 100 150 200 250 300

Time

Profit per period

Renewal strategy

Funds depleted

Exploit and preserve cash

Classical strategy

Figure 6-6

renewal strategies win by conserving resources (simulation)

Source: BCG Strategy Institute, multi-arm-bandit (MAB) simulation.

Note: Results averaged over thirty simulations in a noncompetitive environment with thirty investment options.

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160 Your Strategy Needs a Strategy

requires firms to balance the potentially contradictory requirements of a

short-term focus on restoring the firm’s viability with a long-term focus on

growth.

Information

A successful renewal strategy executes the plan to focus and economize and

then pivots to a new strategy for long-term prosperity. Information manage-

ment supports those ends in three critical ways: detecting warning signals,

informing the development of savings plans, and tracking progress against

those plans. The focusing and economizing steps require the disciplined

execution of financial improvement projects. Detailed action plans, cascaded

into every level of the organization to ensure accountability and frequently

iterated to track progress, support that goal. The information requirements

for the second phase of transformation vary according to the needs of the

specific strategic approach deployed.

In phase 1, firms should use a suite of analytical and measurement tools

to plan and track performance improvement. Every dollar matters, so com-

panies undertake detailed activity-based cost assignments to correctly iden-

tify cash-positive and cash-negative products. Then, they leverage analytical

tools like benchmarking and delayering analysis to identify potential cost

savings. To assess the likely success of each project, successful firms use

methods like DICE, which estimates success based on duration, integrity,

commitment, and effort, highlighting those areas where intervention is

required.30 Finally, once firms are aligned on a restructuring plan, they track

progress against it with tools ranging from simple Gantt charts to more com-

plex project-management software.

We’ve seen some of these information management tools in the classical

approach. Here, as there, the tools must be deployed in an insightful rather

than mechanical manner, to bring out new, if uncomfortable, truths about

the current state and progress of the improvement program. Using tools to

facilitate conversations rather than replace them helps avoid the ritualization

of the process.

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Renewal: Be Viable 161

Information Management at Bausch & Lomb

At Bausch & Lomb, Brent Saunders used the company’s information capability to diagnose the problem it was facing, create a restruc- turing plan, and track progress from stabilization to growth. Once he had developed his plan, he monitored progress in minute detail. “Everything was measurable and everything had a plan that we tracked and measured,” he said. “In fact, I changed the metrics from bottom line and cash flow and, while those remained important, we put a heavier weight than anything on the top line. You can’t cut costs to win with the margins we have.”

As he turned to the future, Saunders developed a vision that was founded on revenue growth and, in particular, on getting products to market. He realized that development was the company’s stum- bling block. So, to reflect this, he told us, “I changed R&D to D&R,” and ensured that the right information was collected to capture this change of emphasis. For instance, he changed incentives to reward the number of products that made it to market instead of the number of projects residing in research.

Innovation

As we’ve seen, innovation is not a major part in the first aspect of renewal,

but it is essential in the second one. For this reason, renewal firms need to

balance two opposing priorities: reducing discretionary costs in phase 1 but

then innovating strategically in phase 2 to renew the business model.

In fact, in the first phase, innovation may be unavoidably reduced to

safeguard the financial viability of the company, with two exceptions. First,

firms should support innovation that leads to short- and medium-term

cost or profit improvements, if the improvements directly fund the renewal

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162 Your Strategy Needs a Strategy

journey. Second, firms should encourage innovation if it could support the

business model changes necessary in the second phase of transformation.

The renewal firm needs to de-average its innovation dollars to make sure

that spending is focused on those two ends.

At the start of the second phase, if not before, once the imminent threat to

viability has been averted, successful renewal companies embark on limited

strategic innovation to test new approaches to drive growth. Often, since

phase 2 may involve uncertainty and exploration, this step can resemble the

adaptive approach: small, low-cost bets with short iteration cycles to limit

cash outlay and get directional answers quickly. Later the firm may invest

in larger-scale innovations appropriate for the specific approach to strategy it

has chosen for the longer term.

Ken Chenault was adamant that Amex should continue to make targeted

strategic investments in innovation to support the business in the short term

and to prepare it for growth in the long term. As we have seen, even during

the crisis, Amex developed a digital platform, an enhanced membership

rewards program, and cobranded partnerships with firms like Delta and

British Airways.

Organization

First, the renewal organization needs to pursue the phase 1 job—a temporary,

life-critical project—with focus and discipline. The project requires rigorous

cost cutting, which may include the restructuring of the entire firm and,

often, the use of a temporary overlay organization to design and oversee the

process. On the other hand, the firm needs then to pivot to a growth-focused

approach to successfully execute the second phase. Given that the two phases

overlap, renewing firms need to consider separating the seeds of growth from

the phase 1 restructuring efforts to ensure the seeds’ protection.

In the first phase, firms streamline to reduce costs and ensure disciplined

execution, often overlaying a temporary program management layer on

the organization to design and keep plans on track. Leaders “right-size”

their company by reducing noncore parts of the organization. On the

personnel side, delayering, a proven method for reducing organizational

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Renewal: Be Viable 163

layers and increasing spans of control, lowers costs and enhances verti-

cal communication and accountability. Operationally, tools like process

reengineering help firms to reduce complexity in processes by removing

steps that do not directly add value to the end product. Often, companies

in renewal mode use strict hierarchy to ensure the diligent execution of

their savings program, with accountability even in the smallest subunits

of the organization.

Because firms in a renewal approach are operating in a sort of tempo-

rary state, they may superimpose a program management office, or PMO,

a dedicated temporary organizational overlay that ensures discipline, can

provide greater objectivity, and drives the tough decisions required to avoid

vested interests impeding progress. The PMO can design restructuring proj-

ects and track and roll up frequent, standardized project reports and met-

rics for regular C-level updates. In addition to providing discipline, a PMO

allows line managers to focus entirely on the ongoing business, while pro-

viding transparency about progress and potential obstacles throughout the

organization.31

For the sake of the second phase, firms need to cut with sufficient

audacity without damaging prospects for growth. It can be difficult to

combine competing short-term and long-term metrics and incentives for

the same teams, especially when team members may be fearful for their

own job security. There are multiple ways to navigate this challenge. For

instance, renewing firms can de-average their organization when handing

out restructuring targets to protect targeted innovation from widespread

cost-cutting efforts. Alternatively, firms can try to directly implement the

steps necessary for the second phase of their transformation, even when

they are still in the first. For instance, Amex intentionally built digital

transformation into the whole organization, rather than create a sepa-

rate digital unit, to position the entire business to meet the future trend.

Sometimes simultaneous attention to phases 1 and 2 is not possible, because

the legacy organization is too far removed from the targeted one. In those

cases, firms can create separate organizational units that nurture and pro-

tect growth while allowing full-fledged restructuring in their existing core

business (see chapter 7).

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164 Your Strategy Needs a Strategy

Culture

A firm in renewal needs to pivot between two very different cultural empha-

ses. First, the firm must be internally focused and approach tasks from the

top down, with an emphasis on execution. Then, it must flip to a completely

different, often polar opposite, mind-set that is externally focused and in

line with the strategic approach to be pursued in the second phase. Don’t

be fooled into thinking this cultural pivot is easy—it is hard but necessary.

As Andy Grove, former CEO of Intel, stressed: “A corporation is a living

organism; it has to continue to shed its skin. Methods have to change. Focus

has to change. Values have to change. The sum total of those changes is

transformation.”32

First, firms in crisis need a heads-down mentality to support disci-

plined, action-oriented execution of the survival plan. Adherence to a

plan should be publicly rewarded, and risk taking discouraged. Where

possible, the company should be very transparent to reduce fear and fric-

tion over cost savings and to help protect lay-off survivors from guilt or

resentment. Firms in phase 1 often unintentionally breed a culture of

pessimism, fueled by job insecurity or low morale over missed targets or

historic lagging performance. To soothe these concerns as much as possi-

ble, celebrate small wins to help maintain focus on the bigger long-term

picture.

Then, leadership needs to catalyze a cultural change timed to coincide

with the pivot to an alternative strategic approach. This change requires firms

to create a new cultural identity and to build the confidence in this identity

so that the firm can pivot toward a more outward-looking, growth-focused,

and risk-taking culture after a period of anxiety and short-term focus. Like

any cultural transformation, this is a difficult task that requires leaders

to truly inspire their employees with a new vision for long-term success.

Additionally, leaders need to heavily endorse the cultural elements that the

next approach to strategy requires, be it the need to foster constructive dis-

sent for an adaptive approach or the commitment to a clear, common goal

in a visionary approach.

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Renewal: Be Viable 165

Organization and Culture at AIG

As described earlier, prior to the arrival of then-president and CEO Bob Benmosche, AIG initially focused solely on solving for constraints by cutting costs and restructuring its organization. After Benmosche, AIG focused on creating value. One way was by reducing or spinning off more than thirty companies with operations in more than fifty countries. “We had to cut some branches off the tree,” said Hancock, “but the tree is still there and it has a big trunk.” Leadership brought closer the three remaining core businesses—property casualty, life and retirement, and mortgage guaranty—through streamlining and centralization, changing the organization, in effect, from a federation to a union. In PC, Hancock radically changed the structure to drive synergies: “I changed the PC business from being a federation of rival insurance businesses—we had five different entities that could compete with one another and undermine our own pricing power— and reorganized on global product dimensions. Those leaders were empowered to optimize risk around the world and to create a critical mass of expertise to underwrite better.”

To position itself for a successful second phase, AIG also renewed its identity to inspire a return to confidence. Benmosche developed a One AIG identity and got rid of the separate brand name Chartis, the temporary name for AIG’s PC business put in place by a former CEO who believed, perhaps correctly at the time, that the AIG brand was radioactive.33 As Hancock said: “We dropped the Chartis brand and went back to ‘AIG,’ and we rebranded the subbrands as ‘AIG,’ too, to create a more cohesive company in terms of incentives and informa- tion sharing under a ‘One AIG’ umbrella.” AIG also worked to restore confidence internally, Hancock said: “The core had to be a credible going concern, but we had [tens of thousands of] employees with five CEOs in five years. The only way to hold on to our customers and to

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166 Your Strategy Needs a Strategy

continue to grow and prosper to the point where we could raise pub- lic equity is if these employees believed this company would survive and thrive. That’s where Bob Benmosche’s personality came in. Town hall after town hall, he showed in his eyes that he believed and that he cared about them.”

Leadership

The key challenge that leaders using a renewal approach face is manag-

ing phases of renewal effectively in spite of their almost-opposing charac-

ters. This balancing act demands ambidextrous leadership that resolves the

apparent contradictions between phase 1 and phase 2 and navigates the com-

pany successfully through both phases of renewal. Leaders on the cusp of a

transformation, therefore, need to embrace some inconvenient and contra-

dictory truths. Renewal requires attention to both the short term and the

long term, to efficiency as well as innovation and growth, to discipline and

flexible adaptation, and to clarity of direction and empowerment.

This means that initially, leaders need to make the hard decisions with

attention to detail, clarity, and speed to support a rapid first phase rollout.

They stay close to performance analysis and tracking efforts and are open

about the state of affairs, even in a prevailing climate of fear. Simultaneously,

they maintain more optimistic, high-level messaging to keep spirits up and

to focus employees and other stakeholders on the longer-term renewal story.

This approach may be easier for a leader brought in expressly for a turn-

around, but the leader who was in place as environmental conditions turned

harsh may be starting from a position of fear, personal disappointment, or

insecurity that he or she needs to overcome to lead successfully.

Renewal leaders need to be at the forefront of thinking about and setting

the broad vision for the second phase. While everyone else is busy “saving”

the company, they need to picture the targeted end state and the foundational

innovation that will support new growth. Then, once the firm’s survival is

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Renewal: Be Viable 167

reasonably secure, they need to communicate the change of gear between

the first and second phases and force the pivot toward a new, external,

growth-directed approach. An effective renewal leader may need consider-

able powers of persuasion and communication, as transformational posttrau-

matic stress may produce organizational inertia. Leaders can facilitate this

shift by communicating early wins on the journey toward the new strategic

approach, by selectively backing critical strategic innovations with additional

resources or organizational visibility, and by communicating patience and

persistence. The leap from the familiar comfort of short-term cost cutting to

exploratory, unfamiliar innovation may feel foreign to the organization, so

top leadership must visibly and confidently take the first steps.

Leadership at Bausch & Lomb: Brent Saunders

Bausch & Lomb’s Brent Saunders explained his role in focusing the company and reacting as early and swiftly as possible to harsh circum- stances: “The day I started, I went to Rochester [where B&L is based] for a town hall with all the employees. I did one-on-ones with key exec- utives, and then I left. For four weeks. I spent virtually the entire four weeks with customers or people who make or sell our products. I did that to have a deep understanding of how customers viewed our com- pany. And I did that around the world and across the business.”

Most importantly, Saunders explained, you have to lead in a top- down manner, focusing on setting, communicating, and tracking the plan: “The plan came from me, very much so. And the plan stayed the plan. Some items changed, but more or less the plan stayed con- stant.” Additionally, discipline and speed are critical, as is displaying great attention to detail. Saunders said: “You have to make tough calls and move quickly. If you’re not willing to make the tough call and drive operational excellence and put the right people in the right seats, it’s probably not for you.”

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168 Your Strategy Needs a Strategy

At the same time, you must prepare the long-term vision and gen- erate employee and market enthusiasm. “The CEO sets the strategy,” said Saunders. In doing so, you need to convey a sense of optimism. “When you’re new, you get a lot of wonderful opportunities to change course more radically, people will hear you out, people are nervous so you can take advantage of that to get them bought in.”

Tips and Traps

As we’ve seen throughout this chapter, an increasing number of firms face

renewal challenges, either as a result of external shocks or because they have

failed to adapt to shifts in the basis of competition. We have also seen that as

widespread and familiar as renewal or transformation programs are, they are

rarely successful in spite of very high stakes. Our analysis of paired compari-

sons of successful and unsuccessful renewal strategies suggests that the value

are Your actions consistent with a renewal approach?

You are embracing a renewal approach if you observe the following actions:

✓ You reduce your cash burn rate.

✓ You limit the use of capital.

✓ You focus your activities.

✓ You create a restructuring plan.

✓ You execute through an overlay structure.

✓ You later pivot toward growth by selectively innovating and investing in new approaches.

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Renewal: Be Viable 169

at stake, calculated as the present value of the difference in total shareholder

return and its duration, is of the order of the value of the enterprise itself.

Nevertheless, three-quarters of such efforts fail to restore short- and long-

term returns to short- and long-term industry averages. The key to a success-

ful strategic renewal is the ability to manage, reconcile, and pivot between the

contradictions of two seemingly diametrically opposed phases—one focused

on solving constraints and the other on growth. Table 6-1 presents some tips

to follow and traps to avoid if companies are to improve their odds of success.

Table 6-1

Tips and traps: key contributors to success and failure in a renewal approach

Tips Traps

• Immediately cut, with courage: Cut deeply enough in the first round: multiple rounds of cost cutting can be demoralizing to the organization and draw out the period before the company can fund and return to growth.

• Turning the page: Make a conscious decision to go beyond the efficiency moves of phase 1 and create a vision for renewal focused on growth and innovation.

• Envisage the future: See (and communicate) what the future looks like, determine which approach to strategy is required in the second phase.

• Support foundational innovation: Innovate across multiple dimensions of the business model to pivot to another approach to strategy. A new product within the current business model frame may not be sufficient.

• Inspire hope: Hardship inevitably breeds a culture of pessimism or insecurity. Paint the long-term vision vividly for employees to show them there is more than short-term survival focus. Reinforce this with quick wins.

• Encourage commitment and patience: Persist in the face of inevitable setbacks and internal opposition to unproven shifts in strategy. Often a vision for renewal requires persistence over a multiyear period.

• Early wins: Companies declare premature victory after phase 1 and fail to declare or develop a second phase focused on innovation and growth.

• Burning the furniture: Firms continue with multiple rounds of cost-cutting and efficiency-improvement measures instead of looking to the future.

• Legacy thinking: Companies fail to shed core assumptions and practices of the legacy model even when these habits are self-limiting or no longer relevant. They thereby undermine the second-phase approach by keeping it too close to the core business.

• Lack of proportionality: Firms make promising moves—such as a series of new business pilots—that are insufficiently bold to address the scale of the challenge.

• False certainty: Companies believe that the course of action for phase 2 can be rigorously planned, and they overemphasize disciplined implementation of a fixed plan instead of recognizing that there is usually high uncertainty in finding a new growth strategy.

• Lack of persistency: Companies often underestimate the time needed to see results (often, inconveniently, up to a decade), and, consequently, they let up too soon.

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170 Your Strategy Needs a Strategy

turning around the SuCCESSFuL coMpanY

Most companies adopt a renewal style reactively, rather than preemp- tively rematching their style to their environment. Our analysis sug- gests that prior to embarking on transformation efforts, less than a quarter of companies had outperformed the market and nearly half were systemic underperformers. The difficulty and rarity of preemp- tive turnarounds for successful companies is, however, no argument against the necessity and possibility of such a turnaround.

Some companies, in fact, manage change preemptively, without the need for risky, step-change transformation initiatives. We stud- ied several disruption-prone industries—industrial goods, consumer discretionary goods, IT, health care, telecommunications, and finan- cial services—over a thirty-plus-year period (from 1980 to 2013). We identified a number of companies that, challenges notwithstanding, managed to generate relatively stable, attractive long-term returns by preemptively evolving their business models, when others in their industries faltered. What was the successful companies’ secret sauce? We identified four categories of preemptive transformers (figure 6-7).

Continuous adapters constantly evolve their business and operat- ing model by making many small changes. McDonald’s, for example, successfully rode the baby boom of the 1960s and the swelling ranks of teenagers and women in the labor force by providing convenience and an inexpensive, selection-rich menu. In the 1970s and 1980s, the company harnessed the globalization megatrend to expand its foot- print internationally. Today, McDonald’s continues to evolve. It adjusts its product portfolio to reflect new consumer preferences, creates new restaurant formats, and accelerates adaptation by franchising locally to businesspeople with direct market knowledge.

Ambidextrous players maintain a balance between leveraging exist- ing assets and exploring new possibilities, even after the company has found a successful model. Qualcomm Incorporated, for instance, has

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Renewal: Be Viable 171

thrived despite massive shifts in the telecommunications industry. The firm has consistently delivered on its mission—“to continue to deliver the world’s most innovative wireless solutions”—through a business model that uses returns from its core businesses to fuel future ones. Its early innovations in its cellular service standard (code division mul- tiple access, or CDMA) enabled a global licensing business, whose profits Qualcomm reinvested into a mobile chip-set business that has also become a global success. Today both these businesses support continued internal R&D, as well as fund external partnerships through Qualcomm Ventures, the company’s venture-capital business unit.

Portfolio shifters run a portfolio of businesses that the shifters actively rebalance over time. Industrial conglomerate 3M, for example, has more than thirty-five business units divided among five reporting

Transformers

Continuous adapters

Industry shakers

PreemptiveReactive

Large

Small

Ambidextrous players

Portfolio shifters

Dinosaurs

U n

it o

f c

h a

n g

Mode of transformation

Figure 6-7

Models for preemptive transformation

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172 Your Strategy Needs a Strategy

segments. While the sales contribution by segment naturally fluctu- ates in response to market conditions, the mix of underlying business lines reflects very active portfolio management. 3M’s approach to strategic acquisitions and divestments reflects the evolving demand landscape. For example, 3M spun off its print film division in 1996 in advance of the rise of digital imaging, and the conglomerate makes acquisitions in anticipation of future growth trends, such as its 2010 purchase of Cogent Systems, a manufacturer of automated finger- print identification systems. This shifting mix, combined with tight financial management, has allowed the firm, remarkably, to increase dividend payouts to shareholders on an annual basis for the last fif- ty-five years and keep operating margins well above 20 percent for more than a decade.

Industry shakers seek to drive and shape industry change rather than be victims of it. Amazon.com consistently delivers breakthrough innovation, even as it generates only razor-thin profits. Why? Precisely because it continually reinvests in its future—in refrigerated ware- houses for groceries, in same-day delivery in urban centers, and in data servers and analytics, for example. Though the company built an unassailable lead in book distribution, it did not rest on its laurels. It self-disrupted its book business with the launch of its e-reader, the Kindle, in 2007; by 2010, the company was selling more e-books than print copies. What’s next? Amazon.com continues to succeed by com- bining its ability to recognize and position itself optimally to leverage nascent long-term trends with its ability to create and set standards for new markets. And investors reward it—in 2014, Amazon.com’s price-to-earnings ratio was above 200, versus a market average of between 10 and 20.

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chapte r 7

ambidexterity Be Polychromatic

PepsiCo: Practicing the Art of Ambidexterity

When you think of PepsiCo, the first thing that comes to mind is likely its iconic carbonated drink, one of the most famous brands in the world. But PepsiCo is a much more diverse company. In all, it has twenty-two food and beverage brands worth more than $1 billion, and more than forty others worth between $250 million and $1 billion. Lay’s, Walkers, Lipton, Quaker Oats, and Mountain Dew are just some of the household names that PepsiCo manages. The company is geographically diverse too. Today, PepsiCo operates all around the world—only 50 percent of its sales come from the United States and Canada.1

As a result of this breadth, PepsiCo needs to employ multiple approaches to strategy at the same time. In particular, it needs to take both a classical approach (to capitalize on scale advantage in its core brands) while simultaneously deploying an adaptive approach (to build its business in fast-developing and unpredictable markets, categories, and products to match changing competitive conditions or tastes).

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174 Your Strategy Needs a Strategy

In many food and beverage categories, PepsiCo is the global leader, pursuing a scale- and positioning-based classical approach: it’s number one for salty snacks, hot cereals, and sports drinks; number two for carbonated sodas and juice or juice drinks. And in many coun- tries, it is the market-leading food and beverage company—notably in the United States, Russia, and India. In several others, like the United Kingdom and Mexico, PepsiCo is the number two company.2 There are enormous economies of scale to be obtained in each step in the value chain for the core business, from spreading marketing budgets over larger volumes, to negotiation power with large customers, to manufacturing scale in bottling.

PepsiCo also requires more adaptive capabilities. It needs to respond to shifts in consumer behavior, such as a greater focus on healthy living, which requires managing the uncertainty of devel- oping new products and marketing approaches and facing unfa- miliar competitors beyond traditional rivals like Coca-Cola. At the same time, PepsiCo needs to react to rapidly evolving conditions in emerging markets to capitalize on a major source of growth. As a result, PepsiCo is experimenting with a rapid and economical “lift and adapt” approach to innovation, where the company tests new products and services in one country before rolling them out glob- ally. For instance, Lay’s “Do Us A Flavor” competition, which crowd- sourced a new flavor of potato crisps by capturing the tastes and enthusiasm of consumers and offering a $1 million prize, started in the United Kingdom and migrated to Australia before going to the United States.3

To combine these seemingly contradictory requirements, PepsiCo has become a deliberate exponent of the art of ambidexterity. “Different businesses at different times go through different stages of strategy,” Indra Nooyi, PepsiCo’s chief executive, told us. “In par- ticular, business leaders have to negotiate the central contradiction that lies at the heart of the company.” As she explains: “PepsiCo (and any large MNC) must both run and reinvent the business, in each busi- ness. It’s a hard thing to do.”

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Ambidexterity: Be Polychromatic 175

Running the company and, at the same time, reinventing it—that’s the challenge. Nooyi told us that there’s a balance to strike between delivering the quarterly numbers and upending current business models to prepare for the future. To resolve this dichotomy, she has pursued what we call the separation model of ambidexterity. “In each business,” Nooyi said, “we have two strands [running in parallel]: the day-to-day group, and the future group thinking, ‘How do I disrupt myself?’” She went on: “The team that runs the core business should keep doing what they’re doing efficiently: worrying about the cost per pound to the decimal, as though their life depended on it.” The other team should not be “motivated by the current model and [should] focus totally on disrupting [it].”

“Look at our company’s soft drinks business,” she added. “We need to push Mountain Dew and PepsiCo to get the last dollar of growth, but we’re also designing in-home carbonation machines that will totally disrupt the business.”

Of course, the idea of disruption is deeply uncomfortable. But Nooyi is adamant that it has to be addressed because “if someone else does it, we’d be disrupted anyways.” The thing that has changed is that such contradictions need to be addressed simultaneously—and not sequentially—because “what we used to think about as long-term disruption is now happening on that same timeline.” This means “we have to run and transform on parallel tracks.”

Ambidexterity: Core Idea

Like PepsiCo, most large businesses operate in multiple business environ-

ments that change quickly over time, spanning many increasingly diverse

geographies and product categories and supported by a wide range of enabling

functions. This diversity requires firms to be ambidextrous, which we define

as the ability to apply multiple approaches to strategy at any given time or

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176 Your Strategy Needs a Strategy

successively. Ambidexterity is not another color on the strategy palette; it’s

a technique for using the five basic colors in combination with one another.

Referring back to our art analogy, ambidexterity might be epitomized by

Pablo Picasso, who not only mastered classical technique but also shifted

his style markedly on multiple occasions throughout his life: the Blue

Period (1901–1904), the Rose Period (1904–1906), the African-influenced

Period (1907–1909), Analytic Cubism (1909–1912), and Synthetic Cubism

(1912–1919).

What you might KnoW it as

The notion that companies need to combine different, potentially opposed strategic approaches to thrive in the long run is not new.

In the early 1990s, businesses redoubled their efforts to break the efficiency-innovation trade-off, as increasing technological change made business models and products obsolete more quickly. At the time, separation of established and emerging businesses was the dominant approach.

Around the same time, scholars like James March studied the orga- nizational trade-offs between exploration and exploitation. In the late 1990s, Michael Tushman and Charles O’Reilly outlined how compa- nies could build ambidextrous organizations capable of both exploit- ing existing opportunities and exploring new ones.4

By the early 2000s, Julian Birkinshaw suggested that companies solve this challenge by introducing the concept of contextual ambi- dexterity. It calls for individual employees to choose between explor- ing and exploiting on an ongoing basis, thus avoiding some of the pitfalls of the separation approach.5

More recently, BCG identified four approaches to ambidexterity, together with a choice framework that outlined how to select the most appropriate means of achieving ambidexterity depending on underlying business characteristics.6

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Ambidexterity: Be Polychromatic 177

Ambidexterity is hard. Only a small minority of firms consistently out-

performed their industry in both turbulent and stable periods, one measure

of ambidexterity, because ambidexterity requires combining ways of think-

ing and acting that can be diametrically opposed (figure 7-1). But ambidex-

terity is valuable, too: the most ambidextrous companies outperformed the

market by 10 to 15 percent of total shareholder return on average between

2006 and 2011.7 In earlier chapters, we have seen the importance of ambi-

dexterity for firms like Telenor in combining classical established units with

newer, more adaptive businesses and for Amex and Quintiles in switching

from one approach to another over time.

Although many managers will be familiar with one well-tried approach

to solving the challenge, namely, separation into different units, we have

identified four potential and distinct approaches to ambidexterity. These

approaches depend on the degree of diversity (how many different environ-

ments you face) and dynamism (how often they change) in your business

environment (figure 7-2):

• Separation: Like PepsiCo, many firms deliberately manage which approach to strategy belongs in each subunit (be it a division, geography,

or function) and run those approaches independently of one another.

Companies outperforming in stable periods

Companies outperforming in turbulent periods

~2 percent of firms*

Figure 7-1

Few firms are successfully ambidextrous

Source: Compustat, BCG analysis.

Note: Analysis of US public companies, 1960–2011; outperformance based on market-cap growth, calculated relative to industry-average growth.

*Outperforming in 75 percent of both turbulent and stable periods; 30 percent of all observed quarters defined as turbulent.

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178 Your Strategy Needs a Strategy

• Switching: Firms manage a common pool of resources, and the pool switches between approaches over time or mixes them appropriately

at a given moment.

• Self-organization: The firm’s units self-organize, and each unit chooses the best approach to strategy when matters become too

complex to manage these choices in a top-down manner.

• External ecosystem: Firms source different approaches to strategy externally through an ecosystem of players that self-select the

appropriate approach.8

Four Approaches to Ambidexterity: Which Fits Your Canvas?

So how can firms navigate environmental diversity and dynamism in prac-

tice? We will explore how some major firms, like Towers Watson, Corning,

Haier, and Apple, deploy multiple colors of the strategy palette to achieve

balance and success under diverse conditions.

D iv

e rs

it y

Dynamism

Separation

Switching Static

External ecosystem

Self- organization

Figure 7-2

Four approaches to ambidexterity, as a function of the environment’s diversity and dynamism

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Ambidexterity: Be Polychromatic 179

Separation

In the most straightforward situations, both the diversity and the dynamism

in a firm’s environment are very low. The firm doesn’t need an ambidextrous

strategy, since a single approach will suffice. When the environment gets

more diverse, the first-line approach to ambidexterity is separation, in which

firms select from the top down which approach to strategy belongs in each

subunit (often at the level of a division, geography, or function) and run

those approaches independently of one another.

Separation has been the dominant historical approach: Lockheed Martin

used a separation technique as far back as 1943. The company was tasked

with creating an advanced fighter while it was mass-producing its estab-

lished bombers. Lockheed created two fully separate units (marking the

birth of what would become known as the Skunk Works), each with its

own physical location, resources, and culture.9 More recently, companies

like IBM and Toyota have successfully used similar approaches too.10

Separation is the simplest and most common approach to achieving ambi-

dexterity and is appropriate for companies facing environments that are mod-

erately diverse but relatively stable over time. Although separation involves

structurally separating units that deploy different approaches to strategy, this

approach is different from just creating separate business units deploying

similar approaches. Each unit requires its own resources, metrics, incentives,

and culture to support fundamentally different approaches to strategy.

Traditional and New Revenue Sources: Separation at Towers Watson

Towers Watson, one of the world’s biggest pension benefits compa- nies, faces a testing challenge: ensuring its main revenue driver—the traditional defined-benefit pension business—continues to perform while finding new sources of revenue.11 CEO John Haley said: “We’ve

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180 Your Strategy Needs a Strategy

seen the long-predicted demise of the defined-benefit pension plan market, and while it will still be a key part of our business in ten years from now because it’s so big, we can’t rely on it for growth going forward.” For the first part of the challenge, Towers Watson, as the market leader in benefits consulting, pursues a fundamentally clas- sical approach to strategy.12 For the second part, however, the com- pany has started to take a more adaptive approach. Like PepsiCo, it is employing the separation model of ambidexterity. Haley explained: “We have to take care of our core business in order to keep investing in innovation. We didn’t want fourteen thousand people going away and spending 20 percent of the time tinkering.”

Haley described his firm’s approach to strategy in terms of three pil- lars: the first focuses on executing and growing the core business, the second focuses on growth through M&A, and the third on developing innovation as a core competency and deploying it to drive growth.13

As he explained: “The whole existence of the third pillar is something that we simply didn’t have before. People tinkered with things, but our innovation was incremental.” Haley realized that to accelerate growth, the firm would have to take “some slightly risky and unpredictable bets.” As part of the effort to “look beyond existing spaces to drive growth,” Towers Watson would have to try things “even when there are no statistics to help us know if it’s a good idea.” That is, the firm would have to experiment, rather than plan and therefore adopt an adaptive approach.

Towers Watson deliberately pursued a separation approach to prevent the exploratory, adaptive side of the business from getting in the way of the efficiency of the existing one, and vice versa. “Most of the organization should be focused on making sure the trains run on time,” Haley noted. Another reason is that it is not easy to bridge the large cultural gaps between the two approaches, Haley said: “It’s hard to shift into a risk-taking mentality.”

The approach includes giving the new, adaptive “innovation engine” its own supporting infrastructure and ability to allocate resources. For instance, Haley has launched a special investment committee for

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Ambidexterity: Be Polychromatic 181

vetting every proposed innovation project (i.e., the third pillar of com- pany strategy). “We make sure that people have to get funding to pro- ceed: if we decide not to fund something, you can’t work on it.” Also, he has created a cadre of so-called Chairman’s Fellows. These distin- guished employees are given the freedom to spend between 25 and 75 percent of their time on creative solutions to boost the company’s commercial prospects through innovation. In 2014, the Fellows were focused on potential models for health-care exchanges.

It is three years since Towers Watson launched its three-pillar strat- egy, and the signs of progress are encouraging. “We’ve had some ideas that are just banging around a little bit,” Haley said, “but there are some that we’re ready to roll out to the marketplace—and even one that could be [worth] several hundred million [dollars] in a few years.”

Separation is the most common approach to ambidexterity, in part

because it’s the simplest. But separation may not always work, since a compa-

ny’s structure tends to be semipermanent, while its environment may not be

so. Separation also creates barriers that prevent the flow of information and

resources among units, potentially impeding the units’ ability to coordinate,

collaborate, or cross-fertilize and to change emphasis or style when required.

This leads us to when alternative approaches, like switching, are appropriate.

Switching

Dynamic environments, where the company faces only a limited number of

environments that are fast changing, require instead a switching approach.

When the environment or interfaces are too complex or dynamic to separate

out the different approaches, the artificially imposed boundaries of a sep-

aration approach would unacceptably reduce organizational effectiveness.

In switching, a company manages a common pool of resources to fluidly

mix approaches or to change between them over time as its environment

changes, similar to how new companies naturally evolve.

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182 Your Strategy Needs a Strategy

Markets that may require switching are those that witness a high rate of

change or a lot of product turnover, like fashion or technology. Switching

is often used by companies in the early stages of their life cycle, where evo-

lution is rapid. Start-ups, for instance, tend to switch approaches once their

breakout product has been established. Initially, start-ups deploy an explor-

atory style when looking for a breakout product, service, or technology.

Then over time, they make the transition to a more exploitative style to scale

up and secure a profitable market position.

One company that has switched from one approach to strategy to

another in this way is Quintiles. As we saw earlier, Dennis Gillings, the

cofounder of the company, took a canonically visionary approach to strat-

egy. But as his firm grew to become the world’s largest clinical research

organization, the approach evolved to a more classical one under the cur-

rent CEO Tom Pike. As Gillings put it, the current classical approach is

really “the systematization of the visionary strategy.” And as we also saw,

Pike’s emphasis on “one foot in the future” is increasingly requiring a more

adaptive or shaping emphasis as change pressures escalate in the health-

care industry.

Several tactics help a firm manage switching, either in the context of the

transition between approaches to strategy or in the coexistence of multiple

approaches to strategy within a single unit. First, leadership must reduce

barriers that prevent resources and information from flowing freely, since

boundaries are antithetical to the fluidity needed for switching. Breaking

down silo boundaries helps units to share resources and avoid conflicts.

Similarly, the firm creates incentives geared to fostering flexibility and col-

laboration, for instance, rewarding both efficiency and innovation, rather

than focusing on only one of these.

Switching is a more difficult approach to manage because it requires both

flexibility and effective oversight: when leaders decide to change styles,

resource conflicts may erupt between units, staff may resist the change to

an unfamiliar approach, and the organization might not make the transition

promptly. These culture clashes can be real and frustrating, and leaders can

support conflict resolution by providing flexible central functions, like IT

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Ambidexterity: Be Polychromatic 183

and HR, that can cater to different needs over time and help ease complexity

during the switchover. That is, partial separation (of support functions) can

ironically facilitate switching for other units.

Successful Oscillation: Switching at Corning

Corning, the US-based manufacturer of glass, ceramics, and other related materials, is a consistently successful practitioner of switch- ing—typically oscillating between classical and adaptive or visionary approaches. Perhaps its biggest transition took place in the mid- 2000s. In 2006, prices for one of its core sources of revenue—glass for LCD screens—plummeted.14 In response, Corning looked to develop another profit driver. As CEO Wendell Weeks explained in 2014: “When we experience inevitable challenges, we innovate our way out.”15

Corning’s scientists got to work, turning to Chemcor, a “muscled” glass that their predecessors had developed in the early 1960s.16

With further refinements, Corning launched a new, supertough, scratch-resistant glass called Gorilla Glass, which was first brought to market on Apple’s iPhone, and the material was an immediate suc- cess.17 But then, as detailed earlier, Corning had to switch from innova- tion mode to implementation mode so that it could produce as much glass as profitably as possible to meet the extraordinary demand for smartphones. It could do so quickly because of a very flexible organi- zational structure, a lack of silos, and a set of common incentives that ensured that everyone was pulling in the same direction. For instance, Corning kept its R&D and commercial departments tightly linked, often bringing members of those teams together in ad hoc task forces to solve new innovation and marketing challenges. By the early 2010s, Corning’s Gorilla Glass was found on more than 2.7 billion devices.18

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184 Your Strategy Needs a Strategy

The company is now on a new innovation cycle, having developed an entirely different and new, highly flexible glass application called Corning Willow, which is designed for slim displays and smart sur- faces of the future.19

Self-Organization

Highly dynamic and diverse environments may not wait for a firm to manage

a switch. When a company needs to deploy multiple styles simultaneously—

and those styles are changing over time—a self-organizing approach is called

for, since managing the switching or separation process in a top-down man-

ner becomes too complex and infeasible. Here, individuals or small teams are

empowered to choose for themselves which style to employ at any given time.

Companies can achieve self-organizational capabilities by breaking the

organization down into small units and creating individualized performance

contracts for each. Each unit negotiates with its peers according to some rules of

interaction established by the center and deploys whatever approach—classical,

visionary, adaptive, or shaping—it thinks will maximize its performance con-

tribution. In other words, each unit independently determines the approach

that fits the nature of its challenge and role. In effect, the company employs

a market-based model rather than a managerial paradigm to the selection of

strategy approaches. This requires setting high-level, long-term metrics and

incentives and clear “rules of engagement.” The center needs to define the

level at which units self-organize; it should also set the rules for interaction

(e.g., transfer pricing between internal units), provide resource pools for which

individual units can compete, facilitate self-organization, and manage conflict.

Self-organization is a very challenging “ask” of the organization, with

obvious drawbacks. The firm potentially incurs significant costs from dupli-

cation, from lack of scale of the individual units, and from enforcing the local

rules of interaction and keeping score. Further, management must trust its

employees to choose the correct strategic approach. Because the cost of coor-

dination is high, only environments that are highly dynamic and diverse are

good candidates for a self-organizing approach.

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Ambidexterity: Be Polychromatic 185

Room to Maneuver: Self-Organization at Haier

Haier, the world’s biggest manufacturer of refrigerators, washing machines, and other white goods, is one of the pioneers of the self-or- ganization approach to ambidexterity.20 The model was the brainchild of Ruimin Zhang, the company’s inspirational chairman and CEO, in answer to a set of diverse challenges: Haier produces a vast array of products—as of 2002, some thirteen thousand in eighty-five catego- ries.21 It competes in fast-changing markets, with fierce competition from local and international rivals, and it needs to adopt the right approach in each category, innovate quickly, and yet, at the same time, specialize and gain experience to improve quality to stay ahead.

Zhang took control of the company in 1984, when it was on the brink

of bankruptcy. He set about finding a way to manage such a diverse

business. His guiding light was the Chinese philosopher Lao-Tzu, who

said: “In the highest antiquity, the people did not know that there were rulers.”22 Zhang took this to mean that “a leader whose existence is unknown to his subordinates is really the most brilliant one.”23

His goal became to create an organization where units have room to make their own decisions. “The enterprise will become great when it is able to operate by itself,” said Zhang, “with employees acting as their own leaders, understanding what to do to satisfy market and cus- tomer demand.”24 The global conglomerate flattened its organization structure and developed two thousand self-governing units. Each unit functions like an autonomous company, with its own profit-and-loss statement, operations, innovation program, and motivation. To sup- port this arrangement, Zhang devised high-level targets to steer performance as well as rules of engagement to regulate interaction between the units—including transfer pricing and compensation for interunit delays.

In the twelve years up to 2013, Haier has seen its revenues grow from $9 billion to more than $30 billion.25

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186 Your Strategy Needs a Strategy

overcoming the ambidexterity challenge: self-tuning algorithms and evolvable

organizations

At first sight, ambidexterity is a paradox, requiring firms to combine seemingly contradictory imperatives without muddling their inten- tions. This is the exploration-versus-exploitation trade-off.

But is ambidexterity really about breaking a contradiction? In our strategy and environment simulations, we discovered algorithms that not only perform well in specific environments, but also automati- cally find the optimal balance between exploration and exploitation, outperforming simple algorithms that emphasize one or the other in mixed or changing environments. Furthermore, the algorithms can automatically adjust or self-tune to changing conditions (figure 7-3). In other words, apart from algorithms that represent the primary colors of the strategy palette, we have identified ambidextrous, self-tuning algorithms that break the apparent trade-off between exploration and exploitation by mixing and remixing primary colors as appropriate.

We believe that organizations can replicate the essential features and functions of these self-tuning algorithms to constantly retune their strategies by embracing the following practices:

✓ Defining a very broad option space to explore

✓ Modeling expected payoffs from options by leveraging all available information

✓ Testing promising options quickly and cheaply

✓ Rapidly updating option assessments in light of new information, and reallocating resources by scaling up, stopping, or repurposing investments

✓ Quickly iterating the above steps, assisted by appropriate analytics, thereby overcoming the information complexity and speed constraints of explicit managerial decision making

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Ambidexterity: Be Polychromatic 187

✓ Measuring outcomes and optimizing the algorithm itself in response to changing circumstances

Perhaps not surprisingly, firms that build business around such algorithms, such as Netflix, Amazon.com, and Google, appear to do these things well, applying the same principles to their organization and strategy, albeit informally, so that their entire business supports rapid adaptive learning. These firms are able to build what we call evolvable organizations, which embody self-tuning ambidexterity organizationally. We predict that the creation of evolvable organiza- tions and strategies will become increasingly important to all enter- prises as techniques like these become more widely understood and codified.

0 100 200 300 400 500 600 700 800 900 0

180

160

100

120

140

Time

Profit

Static environment

Static environment Dynamic environment

Fixed strategy

Ambidextrous strategySwitch to high explorationLow exploration

Figure 7-3

Ambidextrous strategies adapt well to changes of environments (simulation)

Source: BCG Strategy Institute multi-armed bandit (MAB) simulation.

Note: Fixed strategy has a fixed exploration rate, ambidextrous strategy has a self-tuning exploration rate.

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188 Your Strategy Needs a Strategy

Ecosystem

In the most complex and dynamic cases, when a firm cannot create or man-

age the full suite of required strategy approaches internally, companies may

need to orchestrate a diverse ecosystem of external parties. This approach

is only appropriate in the most complex cases because of the high costs and

risks involved—the company incurs expense to build ecosystem-sustaining

platforms, it must give away profits to incentivize third parties to partici-

pate, and it risks potential loss of control over its business model through

its dependency on the actions of others. A diverse ecosystem is, in essence,

an externalized version of the self-organizing approach. In many respects,

the trade-offs and requirements for success are also similar to those of the

shaping approach to strategy.

As with shaping, when building an ecosystem, the company first defines

which capabilities it can provide and which it will source externally. It

needs to ensure that it develops win-win relationships with outside players.

Incentives and processes in the ecosystem should be structured such that

they ensure the long-term vitality and diversity of the ecosystem. Internally,

company culture should be focused on relationship building, diversity, and

an external orientation.

Orchestration of a Complex Network: Ecosystem at Apple

We have already seen how Apple shaped an ecosystem of app devel- opers to cater to the range and diversity necessary to make its devices valuable for users. The same logic applies for the diverse set of compo- nents it needs for the physical devices it produces. Without a manufac- turing ecosystem, Apple could never have created the iPhone in 2007. From a consumer point of view, Apple’s signature product is defined by its elegant simplicity: an easy-to-use interface, a sleek design, and a

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Ambidexterity: Be Polychromatic 189

fast and effective operating system. Yet its creation relies on a complex network of companies, put together and orchestrated by Apple.

To build the iPhone, Apple needed several approaches: a visionary approach to develop both the overall concept and new chip technol- ogies, an adaptive one to adjust software and hardware components to rapidly changing customer needs and technological possibilities, and a classical approach for achieving assembly scale and efficiency. Furthermore, the requirements shift with and within each product generation. Apple could not realistically have accommodated all of the required diversity and dynamism in-house—it had, after all, never built or sold a mobile phone, let alone a smartphone, before.

Hence, Apple skillfully created an ecosystem of companies—rather than own the full iPhone supply chain. China’s Foxconn assembles the components, Corning makes the glass cover (as discussed earlier in this chapter), Broadcom makes the Wi-Fi chips, Infineon makes the baseband processor, and ARM Holdings designs the iPhone’s brain— the mobile processor—to name just a few key players in the iPhone ecosystem.26

Strategy Operating on Two Levels

At first sight, the requirements of the different approaches to ambidexterity

around organization, incentives, and resource allocation may seem confus-

ing. Each of the strategic approaches discussed in earlier chapters also had

a distinct set of requirements for structure, resources, and metrics. Do the

requirements of ambidexterity replace those?

They don’t. The practical imperatives for ambidexterity affect the firm

at a higher level than those of each specific approach to strategy. To give an

example: the classical and adaptive approaches manage for scale and economics

of experimentation, respectively. In order to ambidextrously combine the

two in a separation approach, a firm would need to set up separate units that

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190 Your Strategy Needs a Strategy

are each individually managed for either scale or experimentation. For this

reason, ambidexterity does not give you more detail about each of the basic

strategy colors, but rather tells you how to combine those basic colors in such

a way that they maintain their integrity.

Beyond Ambidexterity? Tinting and Shading with the Strategy Palette

In the five preceding chapters, we explained the five archetypal approaches

to strategy—each comprising distinct ways of thinking and acting to win in

different types of environments. And this chapter has explored how to mix

or use multiple approaches, at the same time or sequentially, to respond to

the range of environments that large businesses face in practice.

So far, though, we’ve highlighted only the far ends of the spectra of pre-

dictability or unpredictability, malleability or nonmalleability, and attrac-

tiveness or harshness. In reality, though, firms’ strategic approaches will

occupy intermediate and changing points on those continuums. So while

the basic colors of the approaches to strategy and their combinations are the

building blocks for a business, in practice, a firm will also use the shades and

tints of the colors in the strategy palette.

In other words, each approach needs to be calibrated. For instance, adap-

tive and classical firms exist on opposing ends of a continuum of strategic

clock speed. But in practice, even the most adaptive firms do not experiment

as much and as fast as theoretically possible, and classical firms still have

some elements of experimentation. Instead, the pace and extent of experi-

mentation is determined by the cycle-time of change in the environment,

the adaptiveness of competitors, and the costs of experimentation. The same

is true for shaping. While classical firms rarely create entirely new markets,

they may still try to shape demand through tactics like branding, category

building, and promoting new usage occasions.

When considered as part of this broader spectrum, the thinking behind

each of the canonical approaches becomes less polar and absolute. Rather,

it provides a language and logic for making choices within the context of a

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Ambidexterity: Be Polychromatic 191

specific strategic challenge, empowering leaders to ask the right questions

and to develop the right set of capabilities in light of where the environment

and company fit on the continuum. Familiarity with the thinking legiti-

mates and facilitates the need to think in different ways depending on the

environmental circumstances and helps leaders recognize signals that may

require adjustments to the approach.

Ultimately, it is the leader who serves as the animator of the firm’s collec-

tion of strategic approaches, a topic we will turn to in chapter 8.

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chapte r 8

Lessons for Leaders Be the Animator

Pfizer: Embracing Complexity

Pfizer is a large and complex organization by any measure: with about seventy-eight thousand people and over $50 billion in revenues, it is the largest research-based pharmaceutical company in the world. When Ian Read assumed the CEO role in 2010, Pfizer faced signif- icant challenges: the completion of the integration of Wyeth; the patent expiry of Lipitor, the world’s best-selling drug; declining R&D productivity; and a sharp drop in market capitalization from historical heights in the early 2000s.1

Under Read, Pfizer has succeeded in addressing these chal- lenges and the stock value has appreciated accordingly. How? For one reason, Read understands that a company as large and complex as Pfizer needed a de-averaged approach to strategy and execution, between units like consumer products, vaccines, and innovative drugs and between mature and emerging markets: “A big, diverse company plays in several boxes [of the strategy palette] at the same time.” Read stressed that each unit requires its own approach to strategy: “These units are distinct and global, and they have their own culture and their own focus.”

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194 Your Strategy Needs a Strategy

Early during his incumbency, Read led a strategic reassessment that showed that Pfizer needed to rethink how it managed its var- ied portfolio of businesses. As a result, he refined the organizational structure, creating separate, global business units for innovative pharma and for established products and creating separate units for consumer, vaccines, and oncology under a single senior executive. Additionally, he led the successful divestment of Pfizer’s infant nutri- tion and animal health units in 2012 and 2013, respectively.2

The result is a collection of commercial operations, each of which faces a very different strategic environment. The Global Innovative Pharma (GIP) unit is responsible for novel, high-value, new therapies, which are often prescribed by specialist doctors. Global Established Pharma (GEP), on the other hand, focuses on long-established prod- ucts that have or will soon lose their exclusivity and will compete in highly contested, dynamic markets. Read compared the two units: “The culture we need in GIP isn’t the same as that in GEP. The question is, Can we have them coexist if we create enough degrees of separation?”

As Read explained, Pfizer indeed faces multiple, differentiated business environments. The consumer business competes in a less regulated environment and enjoys a relatively speedy route to mar- ket. Vaccines prevent rather than treat disease, have very different economics, and involve public-health authorities. Oncology is quite different again, since products are launched in one indication and then tested in others and are dispensed by specialists, increasingly in combination with genetic diagnostic tests.

Alongside these varied environments, Read created functional units, like global supply, R&D, and finance, all with very distinct stra- tegic approaches. For instance, R&D needs to capture and mobilize around new discoveries, which are often serendipitous. This requires an exploratory approach and flexible resource-allocation mecha- nisms, all hallmarks of an adaptive approach. However, Pfizer’s early science work, often performed in partnership with academic medical

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Lessons for Leaders: Be the Animator 195

institutions and universities, more closely resembles a visionary approach, focusing on cutting-edge science in areas of high unmet medical need—innovative science that could one day revolutionize health care.3

Read thus effectively differentiated the strategic approach for each part of the organization, but he recognized that the resulting apparent complexity might seem confusing to employees or inves- tors. In response, he devised four simple themes or imperatives: (1) improve the performance of the company’s innovative core, (2) allo- cate resources effectively, (3) earn society’s respect, and (4) create an ownership culture where colleagues feel fully accountable for their decisions and results. These four themes coherently describe the common thread that runs through Pfizer’s combination of strategic approaches, Read said: “I set a clear purpose and mission based on our four imperatives that help us to align across businesses. All of our conversations rest on that context.”

For example, the third imperative requires demonstrating to stake- holders, including governments and private payers, that innovation in the prevention and treatment of disease is vital to the health of society. The strategy for executing on that imperative depends on the business unit. And while the strategies within Pfizer are unique to each business, the fourth imperative strives to create an owner- ship culture throughout the company and signals to colleagues that thoughtful risk-taking is encouraged within the context of the unique go-to-market approach for each of the businesses.

Read emphasizes the importance of culture in cascading the appropriate approach to strategy and implementation into each unit: “To be successful you need the right culture. Strategy and organiza- tion come in the same breath. I don’t think the hardest part is getting the strategy right. It’s implementation.”

In short, Read identified the need to differentiate approaches to strategy and execution in different parts of the organization and cre- ated the right level of segmentation of the organization, deciding

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196 Your Strategy Needs a Strategy

which approaches to apply where. He then sold his strategy internally and externally by creating unifying themes that allowed managers to see the common thread in the strategic choices he made.

In an industry that is still struggling with R&D productivity, Pfizer has brought a succession of new, branded drugs to the market, includ- ing two launched and a third getting FDA approval in 2013 alone. Simultaneously, while de-averaging the strategy, the firm has also reduced complexity, and it has shrunk its annual cost base by over $4 billion from 2011 to 2013. Finally, under Read’s tenure, Pfizer’s market cap has increased by almost 50 percent through 2014.4

Animating a Combination of Approaches: Core Idea

Pfizer illustrates a common theme that has surfaced throughout this book:

large corporations need to execute multiple approaches to strategy because

they inevitably operate in multiple strategic environments and, furthermore,

these environments change over time. Successful firms meet the challenge of

selecting, combining, and effectively implementing the appropriate combi-

nation of strategic approaches and adjusting it dynamically as circumstances

change. In chapter 7, we looked at several organizational and operational

solutions to this challenge.

But there is a critical, overarching role for the leader in animating the

dynamic combination of strategic approaches, what we might call the strat-

egy collage, across the organization. The leader must manage a state of artful

disequilibrium, often against an organization’s natural tendency to lock in a

familiar, comfortable, or successful recipe. Leaders are uniquely positioned

to read the external context to determine which approach to strategy is

applied where and to put the right people in the right place to execute each

approach. Moreover, leaders have a vital role in selling the strategy narrative

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Lessons for Leaders: Be the Animator 197

externally and internally. Equally importantly, they keep the collage up-to-

date by maintaining an external orientation and triggering self-disruption

by forcing changes in strategic approach. Finally, they selectively influence

the execution of the strategic approaches of individual units, by asking the

right questions, preventing a dominant logic from clouding a unit’s perspec-

tive, and putting their weight behind critical strategic initiatives.

Many of the CEOs we interviewed stressed that animating the strat-

egy collage is the critical differentiator between effective and ineffective

strategy-setting and implementation and a key role for the CEO. As Indra

Nooyi, CEO of PepsiCo, said, “You talk of a single approach to strategy—

and therein lies the problem! For a company as relatedly diverse as PepsiCo,

you must apply different models of strategic thinking to different parts

of the business. For instance, how we choose to play in the e-commerce

world with our products has to be fully rethought, and we might break new

ground there.”

We also heard over and over that animating this collage of approaches

to strategy is hard, since it involves reconciling apparent contradictions, but

also that it is a critical dimension of leadership. Peter Hancock of AIG said:

“I always hear, ‘You’re giving me mixed messages.’ I say, ‘You’re a leader—

you’re paid to deliver mixed messages!’ Grow and shrink. We’re in a complex

world where we have to be growing in some places and shrinking in others,

and that’s what we need to pay managers to do—to think!”

Key Leadership Roles in a Complex and Dynamic World

With the multiple, complex environments of today’s markets, leaders need

to be the animators of a dynamic combination of multiple approaches to strategy. Such

a task requires that leaders adopt and excel at eight roles to ensure that the

strategy collage delivers results and continues to do so as circumstances

change. Figure 8-1 is an example of how a company’s approaches to strategy

vary over time and with each business unit or function.

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198 Your Strategy Needs a Strategy

• Diagnostician: Continuously take an external perspective to diagnose the degree of predictability, malleability, and harshness of each

business environment, and match this with the required strategic

approach for each part of the firm.

• Segmenter: Structure the firm to match the strategic approach to the environment at the right level of granularity, balancing the trade-off

between precision and complexity.

• Disrupter: Review the diagnosis and segmentation on an ongoing basis, in line with shifts in the environment, to protect the

organization from becoming rigid and to modulate or change

approaches when necessary.

• Team coach: Select the right people for the job of managing each cell in the collage in line with their capabilities, and help develop

their understanding of the strategy palette, both intellectually and

experientially.

• Salesperson: Advocate and communicate the strategic choices as a whole in a clear and coherent narrative to investors and employees.

Time

Unit Approach to strategy over time

Diagnostician

Segmenter

Disrupter

Team coach

Salesperson

Inquisitor

Antenna

Accelerator

Eight roles of leadership

Classical

Adaptive

Visionary

Shaping

Renewal

Figure 8-1

The strategy collage and the eight leadership roles needed to dynamically preserve its fit with a shifting environment

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Lessons for Leaders: Be the Animator 199

• Inquisitor: Set and retune the correct context for each particular strategic approach by asking probing questions—not dictating

answers—to help stimulate the critical thinking flow that is

appropriate to and characteristic of each approach.

• Antenna: Look outward continuously, and selectively amplify important signals to ensure that each unit stays in tune with the

changing external environment.

• Accelerator: Put weight behind select critical initiatives to speed up or bolster their implementation, especially when the required

approach has changed, is unfamiliar, or is likely to be resisted.

We’ll look in detail at these eight roles and how various CEOs embody

them.

Animating the Collage: The Eight Roles of Leaders

Diagnostician

The leader’s first important role is diagnosing each of the firm’s environments

to determine the best strategic approach. This is the leader as metastrategist.

By assessing the dimensions of unpredictability, malleability, and harshness

by geography, function, and industry segment, leaders can select the appro-

priate approach of strategy for each part of the firm.

In the role of diagnostician, leaders need to deeply understand the under-

lying dimensions of the environment and, in light of this information, choose

the appropriate strategic approach. For instance, Ian Read explained that in

Pfizer’s commercial business, different approaches are appropriate: “Global

Established Pharma’s approach is far more customer- and service-centric,

whereas Global Innovative Pharma’s is far more oriented toward deliver-

ing value for innovation. They each have to answer fundamentally different

questions.” For GIP, that means considering, “Can I make innovation pre-

dictable? Can I produce products with enough added value?” GEP, on the

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200 Your Strategy Needs a Strategy

other hand, needs to ask, “Can I get my cost base down? Can I get into areas

that are differentiated and growing?”

Getting the diagnosis right depends on identifying which characteristics

are most discriminating for where a business is positioned in the strategy pal-

ette. This is not always simple, given that many businesses often have charac-

teristics on both sides of the spectrum, and the differences may be nuanced.

For instance, Read explained that in his firm’s established-products business,

a classical approach is most appropriate even though there are some com-

plex dynamics and sources of potential instability: “The Global Established

Pharma’s business is theoretically predictable. Prices may be volatile, but

given the unmet need, we would expect volume to adjust for it.”

Segmenter

Leaders need to segment their organization at the right level of granularity

when determining where to apply different approaches to strategy. To do

so, leaders must balance an accuracy-complexity trade-off. The more gran-

ular a leader is in assigning strategic approaches, the better matched those

approaches will be. In theory, every intersection of geography, function, and

industry could require a differentiated approach: a plan for a mature category

in a mature market may require a very different approach from an emerging

one in a fast growing market. But in practice, finely differentiated segmenta-

tion would generate too much complexity and coordination costs to justify

itself (there are exceptions to this, as highlighted earlier in the book, when

we discussed self-organization).

Sometimes, assigning approaches purely on a geographic or functional

basis might be appropriate; other times, the CEO might decide that a more

granular segmentation is necessary despite the additional cost. Regardless, the

responsibility resides at the top. At PepsiCo, Indra Nooyi assigns approaches

at the business-unit level but also runs “disruption” teams parallel to the day-

to-day operations of most of her core business units. For instance, as men-

tioned earlier, she has a team developing in-home carbonation devices with

an adaptive mandate at the same time that her Mountain Dew team works

to maximize carbonated soft drink sales with a more classical approach: “In

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Lessons for Leaders: Be the Animator 201

each business, we have two strands: the day-to-day, and the future group

thinking, ‘How do I disrupt myself?’ The people running it can’t be the

same ones thinking about its disruption.”

On the other hand, the leader may set a single approach across the entire

organization, especially if the industry is on the cusp of a fundamental

shift that will eventually affect all parts of the business. For instance, Ken

Chenault wove a strategic approach aligned with building technological dis-

ruption into every part of the firm’s fabric as Amex came out of the recession:

“We had to make the choice,” he said. “Do we form a separate unit focused

on digital, or do we have the whole company embrace the digital transfor-

mation? I decided the whole company. And what we articulated was not

just that the digital transformation was taking place but why we could be

successful at leading it.”

Disrupter

Throughout the book, we have seen how important it is not only to select

the right approach to strategy initially but also to keep the match dynamic

by pivoting to new approaches over time. Leaders have a key role in guiding

or even forcing these transitions. As environments change and businesses

develop—and do so faster and faster—leaders need to continuously reexamine

their collection of strategic approaches and adjust it where necessary to keep

up with shifts in unpredictability and malleability in their environment.

This continuous adjustment is neither easy nor natural. As BCG’s

founder, Bruce Henderson, noted: “Success in the past always becomes

enshrined in the present by the overvaluation of the policies and attitudes

which accompanied that success.”5 Therefore, one of the leader’s key roles

is to keep the organization’s approach to strategy fluid. In practice, this

means that leaders need to be on the lookout externally for changes in

the underlying characteristics of the environment that affect the choice of

approach at the segment level. Through that external assessment, the leader

must serve as both a counteracting force against the unit’s natural organi-

zational inertia to stay on its established path and a catalyst for periodic

self-disruption.

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202 Your Strategy Needs a Strategy

As Nooyi told us, the possibility of self-disruption needs to be continu-

ously on the leader’s radar: “I am always asking, ‘How do I disrupt myself?’

Look at the trends in the world and say, ‘Gosh, if that or that or that hap-

pened in our industry, I’m dead.’ Just because you don’t want to look at the

problem doesn’t mean it will go away.” Then, the leader needs to drive that

change through the organization: “If the disruption doesn’t happen at the

top, the organization will kill it in committee since today’s cash flow trumps

unfamiliarity.”

Team Coach

Since leaders set the strategic approaches and then turn to their teams to exe-

cute them, the task of putting in place the best people and familiarizing them

with the strategy palette, both intellectually and experientially, is one of the

most important jobs a leader has. Getting the right talent in the right places

in their organizations was a prevailing theme from our CEO interviews.

Ideally, any manager should be able to execute any of the approaches to

strategy, but often, individual managers are naturally inclined to thrive more

in one of the five approaches than in the others. The forward-looking vision-

ary manager may have intrinsically different traits from the disciplined, clas-

sical one. And since teams will perform best in environments suited to their

strengths, it is critical to fit the team to the purpose: the team members’

specific skills should match those required to execute their unit’s approach

effectively.

Nooyi said: “There are two types of people: there are the ambidextrous,

and then there are those who are very good today but can’t see beyond their

blinders. As the CEO, we can’t expect everyone to be ambidextrous. Ain’t

going to happen . . . [But] let them be very good at keeping the trains run-

ning on time.”

At the same time, even managers who, for example, need to execute

on a disciplined, classical approach may sometimes need to deploy at least

some aspects of other approaches. Therefore, successful leaders also develop

their people’s strategy palette, both intellectually and experientially. Ken

Chenault explained Amex’s approach to development: “In our leadership

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Lessons for Leaders: Be the Animator 203

model, I talk about situational leadership. People ask, ‘What type of leader

are you?’ But that’s the wrong question. At the end of the day, you have to

lead according to the situation and the readiness of your people. You have

to be willing to, in fact, go through not only multiple phases, but you have

to simultaneously follow a range of styles.”

Intellectually, a leader develops people’s ability to reflect on how they

approach strategy and on the value of and distinction between different

approaches. He or she teaches others how to cultivate an awareness of their

environment and the most important underlying drivers for success in dif-

ferent environments. A leader also encourages self-reflection.

Leaders also give their reports opportunities to directly experience dif-

ferent approaches to strategy. Ever since Peter Hancock joined AIG in 2010,

then-CEO Bob Benmosche helped him to diversify his understanding of

different strategic approaches by experiencing them firsthand. In 2011,

Benmosche switched Hancock’s role from manager of Finance, Risk, and

Investments to CEO of the Property Casualty division. Hancock needed to

familiarize himself quickly with a new approach. “When we paid back the

Fed and did the share exchange in 2011, Bob asked me to take a different role,

so my life changed overnight from thinking about restructuring to thinking

(a) how do I learn enough about the insurance industry and (b) how do I

forge a business for this firm to thrive? . . . Then we had to think about how

to innovate and do new business in a sensible way.” Pushing reports into

new, challenging roles not only builds the metastrategic repertoire within

the firm’s top talent base but also helps employees to feel trusted, credible,

valuable, and empowered.

Salesperson

Given that success depends on both internal stakeholder alignment and

the buy-in of external parties like investors, customers, or partners, the

leader needs to communicate his or her firm’s strategic rationale externally

and internally. However, as we saw with Ian Read at Pfizer, a dynamic

and changing collection of strategic approaches could seem confusing for

employees and investors alike. Therefore, one of the leader’s roles is to craft a

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204 Your Strategy Needs a Strategy

narrative to help stakeholders make sense of the strategy in total and articu-

late the common denominator.

Take for instance, the role of leaders in communicating with investors.

When a leader cannot forecast the firm’s performance with a lot of accuracy,

because, for instance, the firm leverages an adaptive approach, Wall Street

may still expect the firm’s reporting to follow an essentially classical line.

The CEO, then, needs to send a message that satisfies external stakeholders

without distracting or confusing internal ones.

Nooyi explained that challenge to us. In her case, she must balance inves-

tor communication to capture both PepsiCo’s traditional classical elements

and its novel—but less familiar—approaches to disruption: “When investors

are talking to you, it’s often about giving them inputs for a row and a column

[of a spreadsheet]—so whatever you do, you have to land the plane by scale,

market share, cost. Only after you land the plane, while the plane is taxiing

to the gate, can you say, ‘I’m doing something else, too.’”

Likewise, Hancock told us the story of how Benmosche persuaded stake-

holders to support his strategic approach after the financial crisis, convincing

the US Treasury and Federal Reserve to back his plan to keep the company

intact and return it to the public markets, in exchange for repaying the US

taxpayers in full: “We had to get multiple investors to write billion-dollar

tickets in the equity investment, and there was no playbook for managing

that initial float. We needed to persuade an assortment of stakeholders who

could veto what we wanted to do in the near term and whose support was

critical to what we needed to do in the long term.”

Benmosche recognized that the stakeholders were essentially failing to

coordinate and that the lack of agreement on whether the company was a

set of assets to be broken up or an ongoing concern was depressing AIG’s

enterprise value by as much as $15 billion. He convinced the stakeholders to

take a step back and demonstrated that if they could bury their differences,

they had, effectively, a $15 billion “peace dividend” to share.6 His persuasion

tactics worked: AIG’s creditors agreed to cooperate, and in a series of six

offerings during 2011 and 2012, AIG sold over $44 billion of AIG stock, net-

ting the US government a profit of $22.7 billion and successfully concluding

the period of government ownership of the company.7

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Lessons for Leaders: Be the Animator 205

Questions by approach

Each approach to strategy has its own characteristic thought flow and, therefore, its own specific set of questions to guide strategy formulation and execution. Let’s look at some sample questions for each of the thought flows. By no means exhaustive, these questions will illustrate how to shape and sharpen a team’s strategic approach through appropriate probing.

For a classical approach, questions follow a linear sequence, in line with the thought flow of analyze, plan, and execute. Leaders wanting to apply a classical approach may, for instance, ask their management team: “Where will we play? What is our competitive advantage? What is the goal? What are the steps required to achieve our goal? Which capabilities do we need to build to realize our goal?”

In an adaptive setting, leaders should repeatedly ask questions that check whether the organization is following the vary, select, and scale up mantra. For instance, to check whether the focus of variation is correct they might ask: “What is the pattern of external change? What is predictable? What do we not know? Which blind spots do we have? Does our clock speed match that of the environment?” They can pressure-test selection mechanisms, asking: “How do we know if a project is worth continuing? Are we failing enough? What have we learned from failed projects?” And, finally, they question the approach for scaling up successful projects: “What do we need to know to move from pilot to product? What would it take to turn this pilot into a $1 billion business?”

Leaders promoting a visionary approach should expect very clear answers to questions in line with the envisage, build, and per- sist thought flow. They can first ask questions like “What future do we want to realize? What is the basis of our confidence that this is plausible and valuable and hasn’t been preempted? Does the organi- zation clearly see and believe the vision, too?” Then, to verify whether

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206 Your Strategy Needs a Strategy

the proposition is practically implementable, they ask: “What are we trying to build? How do we make it happen?” And finally, they verify whether the vision is being deployed with enough persistence: “Are we staying ahead of the pack? How do we educate the marketplace on our vision? What roadblocks could we be coming up against, or what roadblocks already exist, and how will we overcome them?”

The shaping organization needs to answer different questions altogether. To ensure that the strategy works to engage, orchestrate, and coevolve with external parties, leaders ask questions like these: “What is the win-win here? How can we influence the stakeholder ecosystem to our advantage? What specifically can we control, and what do we need to control? How do we ensure that our ecosystem stays healthy?” Rather than directly asking about the strategy, leaders check whether the mechanisms are in place to let that strategy contin- uously emerge by itself: “Are we evolving our platforms effectively to facilitate learning?”

To create the context for a strategic renewal, leaders check whether their management is preparing for both the survival and the renewal phases of the react, economize, and grow thought flow. First, they verify whether enough is done to ensure survival: “Have we cut sufficiently deeply? How do we know we cut the right things?” There- after, they ensure that the long-term vitality of the company is being thought about too: “How do we innovate strategically to ensure that we thrive in the long term? When do we switch from survive to thrive? Is our organization set up to support growth and innovation?”

Inquisitor

Once they have selected the appropriate approach to strategy for each unit

and assigned the right people for the job, leaders set the context for effective

execution by asking the right questions. Obviously, the CEO has neither the

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Lessons for Leaders: Be the Animator 207

time nor the information to direct every unit or be involved in every day-to-

day decision. By asking the right questions, executives help their reports to

think along the lines of the appropriate approach-specific thought flow, be it

analyze, plan, and execute for a classical part of their business or vary, select, and

scale up for a more adaptive unit.

Many CEOs we interviewed emphasized the value of questions. Nooyi

explained: “You have to ask the right questions, assuming you have the right

people to give the answers. CEOs should go an inch deep and a mile wide

on most areas but go a mile deep on areas where you don’t believe [the orga-

nization] has the skills. The onus is on the CEO to know the lay of the land

to ask the right questions.”

Through inquiry and framing, CEOs empower their organizations to

execute the appropriate strategic approach correctly rather than dictating

its implementation through instructions. In addition to empowering his or

her people, the CEO who is overseeing many approaches gains informed

visibility. The readiness and quality of the answers lets the leader know

how well management understands the strategy. At the same time, the

questions focus management’s attention on what matters most to get the

strategy right.

Antenna

Well after leaders have selected the appropriate approach for each unit, they

facilitate its ongoing execution by making sure the organization stays in tune

with the external environment. To do so, they continuously look outward

and selectively amplify important signals. They confront their organizations

with reality.

The leader is in a unique position to step outside the firm’s dominant

mind-set and to challenge established beliefs. This can mean, for example,

spotting a new visionary opportunity, identifying false knowns in an adap-

tive approach, or taking a fresh look at industry boundaries in a classical one.

Over time, established units tend to become inward-looking and reliant

on a self-reinforcing, dominant logic—tendencies that come with increasing

success at executing a particular approach. The leader can help to combat

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208 Your Strategy Needs a Strategy

this natural tendency. As Ken Chenault stressed to us: “The danger in a large

organization is that you embrace only one way of thinking and one way of

doing. A very simple point I make to the organization is, if you say we live

in a changing world, that means that one formula doesn’t work.”

The leader as antenna can actively seek external, different views—even

ones apparently disconnected from the business. For instance, Nooyi looks

for diverse sources of inspiration: “I go to trade shows—unrelated trade

shows: snack and beverage shows are fine, but I go to shows on supply chain,

digital, consumer electronics, design shows, speed-dating events in Silicon

Valley.”

Like Nooyi, AIG’s Hancock saw that his teams were doing fine on

a day-to-day basis but would benefit from more external perspectives

and an expanded use of more innovative approaches. Consequently,

Hancock founded a science team to bring a wholly unique perspective

to staid insurance-industry practices. Hancock explained that the team,

a collection of social scientists, data scientists, physicists, biologists,

and economists, has one core task: to keep offering disruptive views on

AIG’s core business.8 “This is essentially an R&D team that is funded

centrally and has a mandate to revolutionize the way we do business,” he

explained.

Accelerator

Finally, the role of accelerator goes beyond spotting external changes and

offering disruptive points of view, since even the most convincing stories

can fall on deaf ears in large, inert organizations. Yet the leader can’t pos-

sibly chase down every possible promising initiative. Instead, artful lead-

ers selectively put their weight behind high-profile, critical initiatives that

demonstrate to the organization that change is possible, beneficial, necessary,

exciting, and—most importantly—supported from the top.

Nooyi selectively deploys her efforts where they have the highest chance

to fundamentally influence the direction of the firm. She gave us this advice:

“Lean in on themes that need a little bit of a push . . . Initially it’s a push

from the top, then it becomes a pull.” For instance, she recognized that the

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Lessons for Leaders: Be the Animator 209

fountain equipment group at PepsiCo was at risk of not succeeding in the

time frame, so she formed and funded a separate group to develop more

innovative equipment. “One day our incumbent team woke up and realized,

‘We need completely different fountain equipment with a new user interface

and new flavors,’ and the other group was able to say, ‘Oh, yeah, we have it

for you.’” The incumbent group wouldn’t have pushed for the change on its

own, since the new equipment would have had to bet against the current

business—a scary prospect. But from her vantage point, Nooyi could antici-

pate the future need and put her influence against it.

Tips and Traps

The leader has a number of critical roles in matching strategic approaches to

environments, keeping the resulting strategy collage dynamic, and catalyz-

ing the execution of those approaches. From the CEOs we interviewed for

this book, we heard that the toughest and most valuable challenge of all is

managing the dynamic complexity inherent in large companies that require

multiple simultaneous or successive approaches to strategy.

A CEO needs to master leading the ambidextrous organization and ani-

mating the strategic collage. With all of its inherent contradictions, this is

what distinguishes great leaders from good managers. Table 8-1 offers some

trips and traps that we picked up in our interviews and research.

Table 8-1

Tips and traps: key contributors to success and failure for leaders in navigating diverse and changing strategic environments

Tips Traps

• Embrace contradiction: The demands of the many approaches you lead may be diametrically opposed, and that’s okay— but tailoring your messages to each envi- ronment is critical.

• Single-color palette: Any large organiza- tion is probably too complex for a single, unchallenged, and unchanging view of strategy. Avoid oversimplification and uniformity.

(Continued)

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210 Your Strategy Needs a Strategy

Table 8-1 (Continued)

Tips and traps: key contributors to success and failure for leaders in navigating diverse and changing strategic environments

Tips Traps

• Embrace complexity: Introduce com- plexity in your organization where this will improve the match between envi- ronment and strategy without incurring excessive coordination costs.

• Explain simply: The resulting strategic collage may be confusing to workers and investors; find the common thread to communicate a clear story.

• Look outward: Use your unique position to counteract the self-reinforcing tenden- cies of your organization to perpetuate dominant beliefs by keeping the organi- zation externally focused and fluid.

• When in doubt, disrupt: Organizations naturally become entrenched in their established ways of doing things. In a dynamic world, an overemphasis on continuity is a larger danger than unnec- essary disruption.

• Managing instead of leading: Getting too deeply involved in managing each approach can prevent you from shaping the strategy collage at a higher level, as encapsulated in the eight roles of leaders.

• Planning the unplannable: In a world that changes quickly and unpredictably, overinvesting in precise predictions and plans can backfire. An effective leader recognizes that sometimes plans are not the sign of good leadership.

• Rigidity: Some leaders select an approach but are unwilling to change as new information arises, even though the original course will likely not survive the tides of change.

Chapter_08.indd 210 07/03/15 7:00 PM

E pi log u E

pErsonally MastEring thE stratEgy palEttE

We have seen how the diverse circumstances of business require funda-

mentally different approaches to developing effective strategies and imple-

menting them. We have also seen how large corporations with businesses

in multiple environments need to master the art of applying more than

one approach to strategy sequentially or simultaneously. And we have seen

how leaders play an essential role in animating the resulting collage of

approaches. A corollary of these conclusions is that our individual success

as leaders or managers will also depend on personally mastering the art of

applying the right approach to strategy to the right circumstances at the

right time.

But understanding is only half of the journey. How can you build and

harness the necessary skills to put the strategy palette to work for you? How

should you personally develop a better approach to strategy? How do you

bring what you learned in this book to life?

Essentially, strategy is problem solving, and in both your professional and

personal life, you have many opportunities every day to choose between

alternative approaches—if only you give yourself that explicit choice. By

engaging with each opportunity with the right framing and awareness, you

can accelerate your own personal learning journey.

Epilogue.indd 211 05/03/15 11:34 PM

212 Your Strategy Needs a Strategy

Here are a four practical ways to help build the essential skills:

1. First deepen your understanding of the strategy palette.

2. Practice applying it both to the business at hand and in nonwork

situations.

3. Broaden your experience.

4. Practice the skill of setting and shaping the context for others.

Deepening Your Understanding of the Palette

Work on deepening your understanding of each of the different approaches

in the strategy palette by reading some of the references in appendix B. As

you do so, ask yourself how the thinking process, the critical questions to

ask, the tools and frameworks, and the approach to implementation differ

between styles. Ask yourself also how these differ from what you are most

familiar or comfortable with. Stretch your comfort zone by asking yourself

which approach is appropriate for different businesses that you read or hear

about or otherwise encounter.

Applying the Palette to Business and Life

Probably the single most powerful step you can take is to ask yourself one

extra question as you approach any strategic challenge: what sort of challenge

or opportunity is this, and what is the best approach to solving it? That

is, before embarking on any particular favorite thought flow to address the

challenge, pause to consider which one is the best for the challenge at hand.

More technically, use the diagnostic tool in appendix A (or the more

detailed online version) to determine the appropriate strategic approach

for your business. Reread the appropriate chapter and try to apply various

techniques and tools associated with that style. Note what is unfamiliar or

difficult, and look around for role models that you can learn from. As you

Epilogue.indd 212 05/03/15 11:34 PM

Epilogue 213

do so, you will begin to develop your own repertoire of questions, tools,

and techniques.

You can also practice the different mental disciplines of each style by

applying them in everyday problem solving. In mapping out your personal

investment strategy, for example, you might try out different approaches.

You could plot out future inflows and outflows and create a detailed end-

to-end plan (classical). You could spread your investment across many types

of risk and then reallocate rapidly and iteratively according to performance

(adaptive). You could make a big-bet investment in something that you can

directly control, like a family business or interest (visionary). You could try

pooling funds and collaborating with others to develop a new opportunity

for returns (shaping). Or you could focus on cutting unnecessary expen-

diture and creating a strict spending budget to free up resources for saving

(renewal).

Another thought experiment is to ask yourself which thinking path is

most appropriate. You can then mentally simulate different approaches

when confronted with a challenge—will you plan, adapt, envision, shape, or

renew? You will develop intuition for which problems are attacked best with

which approach, and you will likely derive different and complementary

insights as you carry out this series of thought experiments.

Remind yourself that the strategy palette is not just for strategizing but for

the whole cycle of thought and action toward creating a desired outcome.

Therefore, apply the thinking to the whole cycle of your actions, and make

sure that you are using information and are innovating, organizing, and

leading in a manner consistent with your chosen approach.

Diversifying Your Experience

You should try to work in different types of businesses so that you can gain

hands-on experience with each style. Deploy yourself in different situations,

even if they do not play to your natural strengths. You will be able to do

this without becoming a career butterfly since any large company comprises

multiple businesses that are very different in character, and any individual

Epilogue.indd 213 05/03/15 11:34 PM

214 Your Strategy Needs a Strategy

business requires different approaches in different geographies and at different

stages of its life cycle. Furthermore, every product or function within a busi-

ness will face strategic challenges of a different nature. Many Japanese compa-

nies have a tradition of the “horizontal fast track” to broaden the experience of

promising employees by rotating them through different parts of the business.

Consider developing your own career plan along the same lines.

Setting the Context for Others

You should develop your strategic leadership capabilities by building and

managing teams to deploy each approach. In particular, think about select-

ing individuals with the right traits and capabilities for the desired approach

or approaches. Do you need an analyst or an entrepreneur? A visionary or

a follower?

You should also practice asking the questions noted in chapter 8 to set the

context for each style. Developing your own repertory of such questions is

one of the most powerful moves you can make to improve your leadership

skills.

Keep your eye on changing conditions, and help connect your team with

that changing reality and help them modulate their approach accordingly.

Remind yourself that you are trying to manage an artful disequilibrium, not

perfect an unchanging recipe. Constantly ask and observe what needs to

change, and then be the agent of this change.

The digital technology revolution, globalization, and other drivers of

change look set to continue: the diversity of conditions that business faces

will likely persist or even increase for some years to come. Gone are the

days when a manager could start and end a career with one firm, in one

relatively unchanging business, rising through the ranks while accumulating

and deploying a static set of knowledge and skills. Managers who master the

strategy palette will surely generate more value for their companies and be

advantaged themselves in developing their careers successfully.

Now, let’s get painting!

Epilogue.indd 214 05/03/15 11:34 PM

Appe n d ix A

Self-Assessment What Is Your Approach to Strategy?

This short self-assessment is designed to assess the fit between your environ-

ment, your intended approach to strategy, and your strategic practices.

Your Current Strategizing Practices

Please select one statement that best describes your current strategizing practices.

A. We set a clear goal and plans, which do not change frequently,

and we execute to achieve them.

B. We strive to realize an imagined end state, and we react flexibly

to obstacles that we encounter along the way.

C. We identify opportunities to reduce costs and preserve capital, guided by

detailed plans, so that we can eventually identify a new path to growth.

D. We constantly scan the environment for signals of change, which we

use to guide a portfolio of experiments to remobilize our resources

around successful ones.

E. We actively engage other stakeholders and companies in our

industry, create a shared long-term vision, and build platforms to

enable collaboration.

Circle your answer above, and write it down here:

Appendix A.indd 215 06/03/15 18:47 PM

216 Appendix A

Your Perceived Business Environment

Please select one statement that best describes your perceived business environment.

F. Our industry or company has been shaken by an internal or

external shock or has become misaligned with a shifting business

environment.

G. Our industry is ripe for disruption by an imaginative new player.

H. Our industry is marked by a high degree of dynamism and

unpredictability, driven by shifting customer demand, technologies,

or competitive structure.

I. Our industry has a stable, predictable pattern of demand and

competitive structure.

J. Our industry can be shaped or reshaped by a coalition of players

acting in coordination.

Circle your answer above, and write it down here:

Your Intended Approach to Strategy

Please select one statement that best describes the strategy you currently intend

to pursue.

K. We continuously renew our competitive edge, leveraging our agility

and flexibility.

L. We build sustainable competitive advantage through superior scale or

capabilities.

M. We succeed by seeing and realizing new possibilities, leveraging our

imagination, speed, and persistence.

N. We succeed by building and maintaining platforms to orchestrate the

activities of other companies and stakeholders.

Appendix A.indd 216 06/03/15 18:47 PM

Appendix A 217

O. We are focused on ensuring short-term viability as a prelude to

reigniting growth by realigning our strategy.

Circle your answer above, and write it down here:

Results: Are You Using the Right Approach to Strategy?

Please circle the quadrants that best reflect your answers regarding strategizing practices,

perceived environment, and intended style:

Looking at the results, reflect on the following questions:

• Are our current strategizing practices in line with our intended

approach to strategy?

• Does our intended approach to strategy match our perceived

environment?

• What are the reasons for any mismatch, and how could we address

them?

Harshn ess

Malleability

U n

p re

d ic

ta b

ili ty

Adaptive • Practiced – D • Perceived – H • Intended – K

Shaping • Practiced – E • Perceived – J • Intended – N

Visionary • Practiced – B • Perceived – G • Intended – M

Renewal • Practiced – C • Perceived – F • Intended – O

• Practiced – A • Perceived – I • Intended – L

Classical

Appendix A.indd 217 06/03/15 18:47 PM

Appendix A.indd 218 06/03/15 18:47 PM

Appe n d ix B

Further Reading

Chapter 1: Introduction

Freedman, Lawrence. Strategy: A History. Oxford: Oxford University Press, 2013. Ghemawat, Pankaj. “Competition and Business Strategy in Historical Perspective.”

Business History Review 76, no. 1 (2002): 37–74. Reeves, Martin, Claire Love, and Philipp Tillmanns. “Your Strategy Needs a

Strategy.” Harvard Business Review, September 2012. Wiltbank, Robert, Nicolas Dew, Stuart Read, and Saras D. Sarasvathy. “What to Do

Next? The Case for Non-Predictive Strategy.” Strategic Management Journal 27, no. 10 (2006): 981–998.

Chapter 2: Classical: Be Big

Ansoff, Igor H. Corporate Strategy. An Analytic Approach to Business Policy for Growth and Expansion. New York: McGraw-Hill, 1965.

Barney, Jay. “Firm Resources and Sustained Competitive Advantage.” Journal of Management 17, no. 1 (1991): 99–120.

Henderson, Bruce. “The Experience Curve.” BCG Perspectives, 1968. . “The Product Portfolio.” BCG Perspectives, 1970. . “The Rule of Three and Four.” BCG Perspectives, 1976. . “Strategic and Natural Competition.” BCG Perspectives, 1980.

Lafley, A. G., and Roger L. Martin. Playing to Win: How Strategy Really Works. Boston: Harvard Business Review Press, 2013.

Lochridge, Richard. “Strategy in the 1980s.” BCG Perspectives, 1981. Peters, Thomas J., and Robert H. Waterman Jr. In Search of Excellence. New York:

Warner Books, 1982. Porter, Michael. “How Competitive Forces Shape Strategy.” Harvard Business Review,

March–April 1979, 137–145. . “What Is Strategy?” Harvard Business Review, November 1996.

Prahalad, C. K., and Gary Hamel. “The Core Competence of the Corporation.” Harvard Business Review, May–June 1990.

Appendix B.indd 219 06/03/15 10:29 PM

220 Appendix B

Stalk, George, Philip Evans, and Lawrence E. Shulman. “Competing on Capabilities: The New Rules of Corporate Strategy.” Harvard Business Review, March–April 1992.

Wernerfelt, Birger. “A Resource-Based View of the Firm.” Strategic Management Journal 5 (1984): 171–180.

Chapter 3: Adaptive: Be Fast

Darwin, Charles. The Origin of Species. London: John Murray, 1859. Eisenhardt, Kathleen M., and Donald N. Sull. “Strategy as Simple Rules.” Harvard

Business Review, January 2001. Fine, Charles. Clockspeed: Winning Industry Control in the Age of Temporary Advantage.

New York: Basic Books, 1999. McGrath, Rita G. The End of Competitive Advantage: How to Keep Your Strategy Moving as

Fast as Your Business. Boston: Harvard Business Review Press, 2013. Mintzberg, Henry. “Patterns in Strategy Formation.” Management Science 24, no. 9

(1978): 934–948. Nelson, Richard, and Sidney Winter. An Evolutionary Theory of Economic Change.

Cambridge: Belknap Press, 1985. Reeves, Martin, and Mike Deimler. Adaptive Advantage: Winning Strategies for Uncertain

Times. Boston: Boston Consulting Group, 2012. . “Adaptability: The New Competitive Advantage.” Harvard Business Review,

August 2011. Stalk, George. “Time: The Next Source of Competitive Advantage.” Harvard Business

Review, July–August 1988.

Chapter 4: Visionary: Be First

Bower, Joseph L., and Clayton M. Christensen. “Disruptive Technologies: Catching the Wave.” Harvard Business Review, January–February 1995.

Hamel, Gary and C. K. Prahalad. Competing for the Future. Boston: Harvard Business Review Press, 1996.

Johnson, Mark, Clayton Christensen, and Henning Kagermann. “Reinventing Your Business Model.” Harvard Business Review, 2008.

Kim, W. Chan, and Renée Mauborgne. “Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant.” Harvard Business Review, October 2004.

Lindgardt, Zhenya, Martin Reeves, George Stalk, and Mike Deimler. “Business Model Innovation: When the Going Gets Tough.” BCG Perspectives, December 2009.

Moore, Geoffrey A. Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers. New York: Harper Business Essentials, 1991.

Reeves, Martin, George Stalk, and Jussi Lehtinen. “Lessons from Mavericks: Staying Big by Acting Small.” BCG Perspectives, June 2013.

Appendix B.indd 220 06/03/15 10:29 PM

Appendix B 221

Chapter 5: Shaping: Be the Orchestrator

Brandenburger, Adam M., and Barry J. Nalebuff. Co-opetition. New York: Currency Doubleday, 1996.

Chesbrough, Henry. “Open Innovation: The New Imperative for Creating Profit from Technology.” Academy of Management Perspectives 20, no. 2 (2006): 86–88.

Evans, Philip, and Tom Wurster. Blown to Bits: How the New Economics of Information Transforms Strategy. Boston: Harvard Business School Press, 1999.

Freeman, R. Edward. Strategic Management: A Stakeholder Approach. Boston: Pitman, 1984.

Henderson, Bruce. “The Origin of Strategy.” Harvard Business Review, November 1989. Iansiti, Marco, and Roy Levien. The Keystone Advantage: What the New Dynamics of

Business Ecosystems Mean for Strategy, Innovation, and Sustainability. Boston: Harvard Business School Press, 2004.

Levin, Simon. Fragile Dominion: Complexity and the Commons. New York: Basic Books, 2000.

Moore, James F. The Death of Competition: Leadership and Strategy in the Age of Business Ecosystems. New York: Harper Business Press, 1996.

Prahalad, C. K., and Venkat Ramaswamy. The Future of Competition: Co-creating Unique Value with Customers. Boston: Harvard Business School Press, 2004.

Reeves, Martin, and Alex Bernhardt. “Systems Advantage.” BCG Perspectives, 2011. Reeves, Martin, Thijs Venema, and Claire Love. “Shaping to Win.” BCG Perspectives,

2013.

Chapter 6: Renewal: Be Viable

Burrough, Brian, and John Helyar. Barbarians at the Gate: The Fall of RJR Nabisco. New York: HarperBusiness, 1990.

Duck, Jeanie D. The Change Monster: The Human Forces That Fuel or Foil Corporate Transformation and Change. New York: Three Rivers Press, 2001.

Hammer, Michael, and James A. Champy. Reengineering the Corporation: A Manifesto for Business Revolution. New York: HarperCollins, 1993.

Hout, Tom M., and George Stalk. Competing Against Time: How Time-Based Competition Is Reshaping Global Markets. New York: Free Press, 1990.

Kaplan, Robert S., and William J. Bruns. Accounting and Management: A Field Study Perspective. Boston: Harvard Business Review Press, 1987.

Kotter, John P. Leading Change. Boston: Harvard Business School Press, 1996. Reeves, Martin, Kaelin Goulet, Gideon Walter, and Michael Shanahan. “Lean, but

Not Yet Mean: Why Transformation Needs a Second Chapter.” BCG Perspectives, October 2013.

Reeves, Martin, Knut Haanæs, and Kaelin Goulet. “Turning Around a Successful Company.” BCG Perspectives, December 2013.

Appendix B.indd 221 06/03/15 10:29 PM

222 Appendix B

Chapter 7: Ambidexterity: Be Polychromatic

Birkinshaw, Julian, and Christina Gibson. “Building Ambidexterity into an Organization.” MIT Sloan Management Review, summer 2004.

March, James G. “Exploration and Exploitation in Organizational Learning.” Organization Science 2, no. 1 (1991): 71–87.

Reeves, Martin, Knut Haanæs, James Hollingsworth, and Filippo L. Scognamiglio Pasini. “Ambidexterity: The Art of Thriving in Complex Environments.” BCG Perspectives, February 2013.

Reeves, Martin, Ron Nicol, Thijs Venema, and Georg Wittenburg. “The Evolvable Enterprise: Lessons from the New Technology Giants.” BCG Perspectives, February 2014.

Tushman, Michael L., and Charles A. O’Reilly III. “Ambidextrous Organizations: Managing Evolutionary and Revolutionary Change.” California Management Review 38, no. 4 (1996): 8–30.

Chapter 8: Lessons for Leaders: Be the Animator

The Boston Consulting Group. “Jazz vs. Symphony—A TED Animation,” BCG Perspectives, October 24, 2014.

Clarkeson, John. “Jazz vs. Symphony.” BCG Perspectives, 1990. Torres, Roselinde, Martin Reeves, and Claire Love. “Adaptive Leadership.” BCG

Perspectives, December 13, 2010. von Oetinger, Bolko. “Leadership in a Time of Uncertainty.” BCG Perspectives, 2002.

Appendix B.indd 222 06/03/15 10:29 PM

Appe n d ix C

Multi-Armed Bandit (MAB) Simulation Model

We researched the characteristics and effectiveness of each of the approaches

to strategy in the strategy palette by simulating how they perform in dif-

ferent business environments. We modeled environments as a so called

multi-armed bandit (MAB) problem, which is able to richly capture the

economics of decisions under uncertainty. Different algorithmic solutions

to this problem then represent the strategic approaches in the palette.

The MAB problem is named after a well-known problem in decision

theory. A gambler is faced with choosing which of several slot machines

to play. After having played, the gambler will have some knowledge

about the payout of some machines but no knowledge of others and will

therefore be forced to choose between partial knowns and unknowns. The

problem is therefore ideal for modeling trade-offs between exploitation

of known options and exploration of unknown options, and for testing

strategies under high degrees of ignorance and uncertainty.

More technically, each slot machine, or bandit, is modeled as a proba-

bility distribution, with a given mean value and standard deviation. These

two parameters may change over time, both independently (e.g., to model

exhaustion over time or environmental dynamism) and in response to

choices made by one or more gamblers (e.g., to model competition or envi-

ronmental shaping). The probability distribution is, of course, unknown to

the gamblers, but may be learned over time as more and more values are

drawn from each bandit. In our model, the bandits correspond to a set of

Appendix C.indd 223 06/03/15 7:13 PM

224 Appendix C

investment options, with payoffs that are independent from each other and

unknown to the strategy being tested.

By changing model parameters such as the uncertainty of the payout dis-

tributions, the rate and uncertainty by which the means of the distributions

change, the degree to which the distributions change in response to invest-

ment behavior, and the costs of making investments, we can richly model

a set of business environments. Specifically, unpredictability is modeled by

uncertainty in the shifts in payout distributions over time. Malleability is

modeled as payouts’ shifting in response to repeated investments. Harshness

is modeled as a cost imposed on shifting between options against an overall

resource constraint. In this way classical, adaptive, visionary, shaping, and

renewal environments can all be modeled.

The strategies that compete in these various environments can also be

modeled as the choices the fictional gambler or strategist makes, according to

the information he or she has about payoffs from previous investments. The

algorithms driving these choices can be varied with respect to how much

information from previous investments is retained, how that information

is weighted, how much effort and time is devoted to exploration of new

options, how beliefs about the payouts of the investment arms are updated,

and how quickly the strategy converges and settles on a preferred investment

option. In this way, it is possible to model the behaviors of search, adapta-

tion, shaping, and resource conservation, which underpin the five strategies

of the strategy palette.

Specifically, classical strategies are modeled as a limited period of explora-

tion followed by convergence on a preferred investment option. An adaptive

strategy is modeled by a continued allocation of a portion of investments to

exploration of random options. A visionary strategy is modeled as a deep

(multiround) exploration of multiple options followed by convergence on a

preferred option, and a shaping strategy is simulated as a periodic, ongoing,

deep exploration of multiple options. A renewal strategy is simulated as a

rapid convergence on the best option discoverable within a limited period

of exploration.

We simulated which strategies performed best in each environment by

allowing them to compete with each other in the various environments

Appendix C.indd 224 06/03/15 7:13 PM

Appendix C 225

represented in the strategy palette, and validated that the canonical strat-

egies of the palette were indeed the ones best fitted for their respective

environments (figure C-1).

For ease of visual representation, we compared each strategy against a

baseline strategy of moderate exploration: this strategy invests in explora-

tion by testing new options—one out of every ten rounds. For the rest of

the time, it settles on the best option found so far, which is determined by

average rewards gathered over the past ten rounds in which any one option

was pursued.

The same simulation model forms the analytical core of the compan-

ion app for this book. With this app, readers have a chance to build mus-

cle memory of the different approaches to strategy by running a lemonade

stand in a series of environments that correspond to those of the strategy

palette.

Classical

Adaptive

Visionary

Shaping

Survival / Renewal

Options (thick lines imply higher rewards)

Exploratory choice Exploitative choice

Figure C-1

Simulation of five core strategies (schematic view)

Appendix C.indd 225 06/03/15 7:13 PM

Appendix C.indd 226 06/03/15 7:13 PM

N OTE S

Chapter 1

1. Rita G. McGrath, The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business (Boston: Harvard Business Review Press, 2013).

2. Martin Reeves, Claire Love, and Philipp Tillmanns, “Your Strategy Needs a Strategy,” Harvard Business Review, September 2012.

3. The discussion of Mars throughout this book comes from Paul S. Michaels (Mars CEO), interview with authors, April 2014, and is supplemented by other sources where indicated.

4. Tata Consultancy Services, “Corporate Facts,” About TCS, accessed May 7, 2014, www.tcs.com/about/corp_facts/Pages/default.aspx; Times Internet Limited, “Circuit of Glory,” “Times of Tata,” Economic Times, May 14, 2014, http:// economictimes.indiatimes.com/timesoftata.cms. The discussion of Tata Consultancy Services (TCS) throughout this book comes from Natarajan Chandrasekaran (TCS CEO), interview with authors, June 2014, and is supplemented by other sources where indicated.

5. “Quintiles Named Preferred Provider in Phase I Market Report,” Wall Street Journal, August 9, 2013, http://online.wsj.com/article/PR-CO-20130809-908208 .html. The discussion of Quintiles throughout this book comes from Dennis Gillings (Gillings founder) and Tom Pike (Gillings CEO), interviews with authors, February– March 2014, and is supplemented by other sources where indicated.

6. Liu Jie, “Paying Price for Success in Commerce,” China Daily, Biz Updates, February 3, 2014, www.chinadaily.com.cn/beijing/2014-02/03/content_17272245.htm.

7. Sara Lepro, “Amer ican Express to Cut 7,000 Jobs,” Huffington Post Business, November 25, 2011, www.huffingtonpost.com/2008/10/30/american-express-to- cut-7 _n_139476.html. The discussion of American Express throughout this book comes from Ken Chenault (Amex CEO), interview with authors, April 2014, and is supplemented by other sources where indicated.

Chapter 2

1. David A. Kaplan, “Mars Incorporated: A Pretty Sweet Place to Work,” Fortune, January 17, 2013, http://fortune.com/2013/01/17/mars-incorporated-a-pretty-sweet- place-to-work/.

2. For brand values, see Mars, “How We Work,” Mars website, accessed May 8, 2014, www.masterfoodsconsumercare.co.uk/global/careers/how-we-work.aspx. For U.S. ranking, see “Mars,” Forbes, May 12, 2014, www.forbes.com/companies/mars/.

Notes.indd 227 16/03/15 11:29 AM

228 Notes

The discussion of Mars throughout this book comes from Paul S. Michaels (Mars CEO), interview with authors, April 2014, and is supplemented by other sources where indicated.

3. Sebastian Joseph, “Cadbury and Mars Push to Boost Chocolate Sales in Slow Summer Months,” Marketing Week: News, July 13, 2013, www.marketingweek.co.uk/news/ cadbury-and-mars-push-to-boost-chocolate-sales-in-slow-summer-months/4007375 .article.

4. Bruce D. Henderson, “The Product Portfolio,” BCG Perspectives, 1970, www .bcgperspectives.com/content/classics/strategy_the_product_portfolio/.

5. BCG Strategy Institute, “Average Operating Margin 2007–2012.” Analysis based on Compustat and CapitalIQ data.

6. David J. Lynch, “Thousands of Layoffs by DHL, ABX Air Hit Wilmington, Ohio,” USA Today, December 15, 2008, http://usatoday30.usatoday.com/money/ economy/2008-12-15-wilmington-dhl-abx-air-layoffs_N.htm.

7. Igor H. Ansoff, Corporate Strategy. An Analytic Approach to Business Policy for Growth and Expansion (New York: McGraw-Hill, 1965).

8. Bruce D. Henderson, “The Experience Curve,” BCG Perspectives, 1968, www .bcgperspectives.com/content/classics/strategy_the_experience_curve/.

9. Henderson, “The Product Portfolio.” 10. Richard Lochridge, “Strategy in the 1980s,” BCG Perspectives, 1981, www

.bcgperspectives.com/content/classics/strategy _strategy _in_the_1980s/. 11. Michael Porter, “How Competitive Forces Shape Strategy,” Harvard Business

Review, March–April 1979, 137–145. 12. Birger Wernerfelt, “A Resource-Based View of the Firm,” Strategic Management

Journal 5 (1984): 171–180; Jay Barney, “Firm Resources and Sustained Competitive Advantage,” Journal of Management 17, no. 1 (1991): 99–120; C. K. Prahalad and Gary Hamel, “The Core Competence of the Corporation,” Harvard Business Review, May–June 1990.

13. George Stalk, Philip Evans, and Lawrence E. Shulman, “Competing on Capabilities: The New Rules of Corporate Strategy,” Harvard Business Review, March–April 1992.

14. Bob Cramer, “With Developed Markets Reaching Maturity and Emerging Markets Slowing Down, What Will Drive Future Growth?” Bidness Etc., February 5, 2014, www.bidnessetc.com/business/the-household-and-personal-products- industry-dark-clouds-on-the-horizon/.

15. Ivan Marten and Andrew Mack, “The European Power Sector: Only the Nimble Will Survive,” BCG Perspectives, March 2013, www.bcgperspectives.com/content/ articles/energy_environment_european_power_sector_only_nimble_will_thrive/.

16. Frank Klose and Jonas Prudlo, “Flexibilization: The New Paradigm in Power Generation,” BCG Perspectives, June 2013, www.bcgperspectives.com/content/articles/ energy _environment_flexibilization_new_paradigm_in_power_ generation/;

Notes.indd 228 16/03/15 11:29 AM

Notes 229

Cornelius Pieper et al., “Solar PV Plus Battery Storage: Poised for Takeoff,” BCG Perspectives, July 2013, www.bcgperspectives.com/content/articles/energy _ environment_solar_pv_plus_battery _storage_poised_for_takeoff/; Deutsche Telekom, “QIVICON Wins Innovation Prize and Gains New Partners,” Qivicon: Media Information, September 7, 2014, www.qivicon.com/en/meta/media-relations/ qivicon-wins-innovation-prize-and-gains-new-partners/.

17. Jack Welch, Winning (New York: Harper Business, 2004). 18. William Reed Business Media SAS, “Inside Quintiles: The World’s Largest

CRO,” Outsourcing Pharma, July 29, 2013, www.outsourcing-pharma.com/Clinical- Development/Inside-Quintiles-The-World-s-Largest-CRO. The discussion of Quintiles throughout this book comes from Dennis Gillings (Quintiles founder) and Tom Pike (Quintiles CEO), interviews with authors, February–March 2014, and is supplemented by other sources where indicated.

19. Michael Porter, “What Is Strategy?” Harvard Business Review, November 1, 1996. 20. Deutsche Bahn, “Competition Report 2013,” 2013, 6–23. 21. Diageo, “Reserve: Leading Growth in Luxury Spirits,” investor conference

transcript, November 2013, www.diageo.com/en-row/investor/Pages/resource .aspx?resourceid=1600.

22. The discussion of Huawei throughout this book comes from Guo Ping (Huawei CEO), interview with authors, March 2014, and is supplemented by other sources where indicated.

23. Nathaniel Ahrens, “China’s Competitiveness: Myth, Reality, and Lessons for the United States and Japan: Case Study: Huawei,” Center for Strategic and International Studies, Washington DC, 2013.

24. Michael J. Silverstein et al., The $10 Trillion Prize: Captivating the Newly Affluent in China and India (Boston: Harvard Business Review Press, 2012).

25. Will Connors and Devon Maylie, “Nigeria Gives Huawei a Place to Prove Itself,” Wall Street Journal, September 12, 2011, http://online.wsj.com/news/articles/SB10 001424053111904279004576524742374778386.

26. Henderson, “The Product Portfolio”; Bruce D. Henderson, “The Rule of Three and Four,” BCG Perspectives, 1976, www.bcgperspectives.com/content/ Classics/strategy _the_rule_of_three_and_four/; Martin Reeves, Mike Deimler, and George Stalk, “BCG Classics Revisited: The Rule of Three and Four,” BCG Perspectives, December 2012, www.bcgperspectives.com/content/articles/ business_unit_strategy _the_rule_of_three_and_four_bcg _classics_revisited/.

27. John A. Byrne, “How Jack Welch Runs GE,” BusinessWeek, June 8, 1998, www .businessweek.com/1998/23/b3581001.htm.

28. Henderson, “The Experience Curve.” 29. Barney Jopson, “P&G Chief AG Lafley Promotes Four Executives to Head

Major Units,” Financial Times, June 5, 2013, www.ft.com/intl/cms/s/0/d0579dc2-ce2e- 11e2-8313-00144feab7de.html?siteedition=intl#axzz3DUT2FjD3.

Notes.indd 229 16/03/15 11:29 AM

230 Notes

30. The discussion of Mahindra throughout this book comes from Anand Mahindra (Mahindra CEO), interview with authors, June 2014, and is supplemented by other sources where indicated.

31. Shell International BV, “Chairman’s Message,” Annual Report 2012: Our Business, accessed May 7, 2014, http://reports.shell.com/annual-report/2012/ businessreview/ourbusinesses/chairmansmessage.php.

32. Shell International, “Introduction from the CEO,” Sustainability Report 2012, accessed May 7, 2014, http://reports.shell.com/sustainability-report/2012/introduction.html.

33. The discussion of Mylan throughout this book comes from Heather Bresch (Mylan CEO), interview with authors, April 2014, and is supplemented by other sources where indicated.

34. Diageo, “Diageo Opens Its New Customer Collaboration Centre,” Diageo, Our Brands website, accessed May 12, 2014, www.diageo.com/en-row/ourbrands/ infocus/Pages/CustomerCollaborationCentre.aspx.

35. Goodreads, “Peter F. Drucker,” Quotes, May 8, 2014, www.goodreads.com/ author/quotes/12008.Peter_F_Drucker.

36. MastersInDataScience.org, “Data Science in Retail,” May 17, 2014, www .mastersindatascience.org/industry/retail/; James L. McKenney and Theodore H. Clark, “Procter & Gamble: Improving Consumer Value Through Process Redesign,” Case 195126 (Boston: Harvard Business School, March 31, 1995).

37. Quintiles, “Where We Are: Locations,” May 8, 2014, www.quintiles.com/ locations/.

38. Amir Hartman, “The Competitor: Jack Welch’s Burning Platform,” Financial Times Press, September 5, 2003, www.ftpress.com/articles/article .aspx?p=100665&seqNum=5.

39. Kaplan, “Mars Incorporated.” 40. The discussion of Pfizer throughout this book comes from Ian Read

(Pfizer CEO), interviews with authors, February–March 2014, and is supplemented by other sources where indicated.

41. Andrew Ward, “Pfizer Break-up May Follow AstraZeneca Deal,” Financial Times, May 4, 2014, www.ft.com/intl/cms/s/0/ba383d00-d399-11e3-b0be-00144feabdc0 .html?siteedition=intl#axzz31X8zJqbT.

42. Jim Collins, “The 10 Greatest CEOs of All Time,” Jim Collins website, July 21, 2003, www.jimcollins.com/article_topics/articles/10-greatest.html.

Chapter 3

1. The discussion of Tata Consultancy Services (TCS) throughout this book comes from Natarajan “Chandra” Chandrasekaran (TCS CEO), interview with authors, June 2014, and is supplemented by other sources where indicated.

Notes.indd 230 16/03/15 11:29 AM

Notes 231

2. See the following Tata Consultancy Services documents, all accessed May 7, 2014: “Corporate Facts,” www.tcs.com/about/corp_facts/Pages/default.aspx; “Innovation Brochure,” www.tcs.com/SiteCollectionDocuments/Brochures/ Innovation-Brochure-0513-1.pdf; Tata Consultancy Services Facebook page, www .facebook.com/Corporate.Learnings/posts/571975139536810?stream_ref=5.

3. Natarajan Chandrasekaran, e-mail message to authors, May 20, 2014. 4. Chaitanya Kalbag and Goutam Das, “The Whole Organisation Is Pumped Up

and I Have to Keep That Going,” Business Today, November 10, 2013, http://businesstoday. intoday.in/story/bt-500tcs-ceo-natarajan-chandrasekaran-interview/1/199788.html.

5. Tata Consultancy Services, “Annual Report 2009–10,” accessed May 6, 2014. 6. Shishir Prasad, “TCS’ N Chandrasekaran: Planet of the Apps,” Forbes India,

October 10, 2012, http://forbesindia.com/printcontent/33871. 7. Saritha Rai, “India’s TCS Becomes the World’s Second Most Valuable IT

Services Firm,” Forbes, September 13, 2013, www.forbes.com/sites/saritharai/2013/09/13/ indias-tcs-is-second-most-valuable-it-services-firm-globally/.

8. Daniel Pantaleo and Nirmal Pal, From Strategy to Execution: Turning Accelerated Global Change into Opportunity (Berlin: Springer, 2008), 10.

9. The discussion of Zara and Inditex throughout this book comes from Zara senior management, correspondence with authors, June 2014.

10. Greg Petro, “The Future of Fashion Retailing: The Zara Approach, Part 2 of 3,” Forbes, October 25, 2012, www.forbes.com/sites/gregpetro/2012/10/25/the-future- of-fashion-retailing-the-zara-approach-part-2-of-3/; Unique Business Strategies, “The Story of Zara: The Speeding Bullet,” The Strategist’s Choice, May 12, 2014, www .uniquebusinessstrategies.co.uk/pdfs/case%20studies/zarathespeedingbullet.pdf.

11. Nelson M. Fraiman, “Zara,” Columbia Business School, Case 080204, New York, May 13, 2014.

12. Seth Stevenson, “Polka Dots Are In? Polka Dots It Is!: How Zara Gets Fresh Styles to Stores Insanely Fast—Within Weeks,” Slate: Operations, June 21, 2012, www .slate.com/articles/arts/operations/2012/06/zara_s_fast_fashion_how_the_company_ gets_new_styles_to_stores_so_quickly_.html.

13. Henry Mintzberg, “Patterns in Strategy Formation,” Management Science 24, no. 9 (1978): 934–948.

14. Richard Nelson and Sidney Winter, An Evolutionary Theory of Economic Change (Cambridge, MA: Belknap Press, 1985); George Stalk, “Time: The Next Source of Competitive Advantage,” Harvard Business Review, July–August 1988.

15. Charles Fine, Clockspeed: Winning Industry Control in the Age of Temporary Advantage (New York: Basic Books, 1999); Kathleen M. Eisenhardt and Donald N. Sull, “Strategy as Simple Rules,” Harvard Business Review, January 2001; Rita Gunther McGrath and Ian C. MacMillan, “Discovery Driven Planning: Turning Conventional Planning on Its Head,” DeepCanyon, August 1999.

Notes.indd 231 16/03/15 11:29 AM

232 Notes

16. Martin Reeves and Mike Deimler, “Adaptability: The New Competitive Advantage,” Harvard Business Review, August 2011; Reeves and Deimler, Adaptive Advantage.

17. BCG Strategy Institute analysis, “Increasing Unpredictability of Returns 1950– 2010,” calculated as average five-year rolling standard deviation of percent firm market capitalization growth by sector, weighted by firm market capitalization for all public US companies, based on Compustat data.

18. Paul Bjacek, “Commodities Volatility: It May Not Go Away Soon!” Accenture, February 10, 2012, www.accenture.com/us-en/blogs/cnr/archive/2012/02/10/ Commodities-volatility.aspx.

19. Informa Australia, “BHP Billiton: Flexibility Needed in Mining Industry,” Mining and Resources, September 27, 2013, http://informaaustralia.wordpress.com/2013/09/27/ bhp-billiton-flexibility-needed-in-mining-industry/.

20. Nathan Bennett, “What VUCA Really Means for You,” Harvard Business Review, January–February 2014.

21. Martin Reeves et al., “Signal Advantage,” BCG Perspectives, February 2010. 22. James Sterngold, “New Japanese Lesson: Running a 7-11,” New York Times, May

9, 1991, www.nytimes.com/1991/05/09/business/new-japanese-lesson-running-a-7-11 .html.

23. Donald Rumsfeld, “Donald Rumsfeld Unknown Unknowns!” YouTube, August 7, 2009, www.youtube.com/watch?v=GiPe1OiKQuk.

24. Standing Committee to Review the Research Program of the Partnership for a New Generation of Vehicles, Review of the Research Program of the Partnership for a New Generation of Vehicles (Washington, DC: National Academy Press, 2001).

25. Toyota Motor Sales USA, “Worldwide Sales of Toyota Hybrids Top 6 Million Units,” news release, January 14, 2014, http://corporatenews.pressroom .toyota.com/releases/worldwide+toyota+hybrid+sales+top+6+million.htm; Henk Bekker, “Most-Popular Japanese Passenger Vehicle Brands and Cars,” 2009 Full Year List of Top 10 Best-Selling Cars in Japan, June 20, 2011, www.best-selling-cars .com/japan/2009-full-year-list-of-top-10-best-selling-cars-in-japan/.

26. Andy Serwer, “Larry Page on How to Change the World,” Fortune, April 29, 2008, http://archive.fortune.com/2008/04/29/magazines/fortune/larry_page_change_ the_world.fortune/index.htm.

27. Josh Halliday, “Google+ Launch: Search Giant Closes 10 Products,” Guardian (London and Manchester), September 5, 2011, www.theguardian.com/technology/2011/ sep/05/google-plus-launch-closes; Bharat Mediratta, “The Google Way: Give Engineers Room,” New York Times, October 21, 2007, www.nytimes.com/2007/10/21/jobs/21pre .html?_r=0.; Christopher Mims, “Google’s ‘20% Time,’ Which Brought You Gmail and AdSense, Is Now as Good as Dead,” Quartz, August 16, 2013, http://qz.com/115831/ googles-20-time-which-brought-you-gmail-and-adsense-is-now-as-good-as-dead/.

28. Miltiadis D. Lytras, Ernesto Damiani, and Patricia Ordóñez de Pablos, Web 2.0: The Business Model (Berlin: Springer, 2008); Martin Reeves, Henri Salha, and

Notes.indd 232 16/03/15 11:29 AM

Notes 233

Marcus Bokkerink, “Simulation Advantage,” BCG Perspectives, August 4, 2010, https://www.bcgperspectives.com/content/articles/strategy _consumer_ products_ simulation_advantage/.

29. Halliday, “Google+ Launch.” 30. The discussion of Telenor throughout this book comes from Jon Fredrik

Baksaas (Telenor CEO), interview with authors, June 2014, and is supplemented by other sources where indicated.

31. Lillian Goleniewski, Telecommunications Essentials: The Complete Global Source for Communications Fundamentals, Data Networking and the Internet, and Next-Generation Networks (Boston: Addison-Wesley Professional, 2002).

32. Telenor Group, “Telenor Digital,” Our Business, accessed June 5, 2014, www .telenor.com/about-us/our-business/telenor-digital/.

33. Randall Stross, “So You’re a Good Driver? Let’s Go to the Monitor,” New York Times, November 25, 2012, www.nytimes.com/2012/11/25/business/seeking-cheaper-insurance- drivers-accept-monitoring-devices.html?_r=1&adxnnl=1&adxnnlx=1410959757-PWjgA23/ PwV/7Lj2mrSMgA.

34. Morningstar, “Q1 2012 Earnings Call Transcript,” Morningstar, June 14, 2012, www.morningstar.com/earnings/39922695-progressive-corporation-pgr-q1-2012.aspx.

35. Leslie Brokaw, “In Experiments We Trust: From Intuit to Harrah’s Casinos,” MIT Sloan Management Review, March 3, 2011, http://sloanreview.mit.edu/article/ in-experiments-we-trust-from-intuit-to-harrahs-casinos/.

36. Erik Brynjolfsson and Michael Schrage, “The New, Faster Face of Innovation: Thanks to Technology, Change Has Never Been So Easy or So Cheap,” New York Times, August 17, 2009, http://online.wsj.com/news/articles/SB10001424052970204830 304574130820184260340.

37. Halliday, “Google+ Launch.” 38. Martin Reeves, Yves Morieux, and Mike Deimler, “People Advantage,”

BCG Perspectives, March 2010, www.bcgperspectives.com/content/articles/strategy _ engagement_culture_ people_advantage.

39. Hal Gregersen, “How Intuit Innovates by Challenging Itself,” Harvard Business Review Blog Network, February 6, 2014, http://blogs.hbr.org/2014/02/how- intuit-innovates-by-challenging-itself/.

40. Robert I. Sutton and Huggy Rao, “When Subtraction Adds More,” BusinessWeek, February 11, 2014, www.businessweek.com/articles/2014-02-11/when- subtraction-adds-more.

41. Robert Safian, “The Secrets of Generation Flux,” Fast Company, November 2012, www.fastcompany.com/3001734/secrets-generation-flux.

42. Seth Weintraub, “Apple Acknowledges Use of Corning Gorilla Glass on iPhone, Means Gorilla Glass 2 Likely for iPhone 5,” 9to5Mac, March 2, 2012, http://9to5mac .com/2012/03/02/apple-acknowledges-use-of-corning-gorilla-glass-on-iphone-means- gorilla-glass-2-likely-for-iphone-5/.

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234 Notes

43. Reed Hastings, “Netflix Culture: Freedom and Responsibility,” Slideshare, August 1, 2009, www.slideshare.net/reed2001/culture-1798664.

44. Yahoo!, “Netflix: Historical Prices,” Yahoo! Finance, May 20, 2014, https://uk.finance .yahoo.com/q/hp?s=NFLX&a=00&b=01&c=2009&d=11&e=31&f=2009&g=d&z=66&y=198; Tom Huddleston Jr., “Netflix Is Gobbling Up Internet Traffic, Study Finds,” Fortune, May 14, 2014, http://fortune.com/2014/05/14/netflix-is-gobbling-up-internet-traffic-study-finds/.

45. Hastings, “Netflix Culture,” 80. 46. 3M, “McKnight Principles,” 3M Company website, History page, accessed

May 11, 2014, http://solutions.3m.com/wps/portal/3M/en_US/3M-Company/ Information/Resources/History/?PC_Z7 _RJH9U52300V200IP896S2Q3223000000_ assetId=1319210372704.

47. Alec Foege, “The Trouble with Tinkering Time,” Wall Street Journal, January 18, 2013, http://online.wsj.com/news/articles/SB100014241278873234686045782460705 15298626.

48. Eric von Hippel, Stefan Thomke, and Mary Sonnack, “Creating Breakthroughs at 3M,” Harvard Business Review, September 1999.

Chapter 4

1. The discussion of Quintiles throughout this book comes from Dennis Gillings (Quintiles founder) and Tom Pike (Quintiles CEO), interviews with authors, February–March 2014, and is supplemented by other sources where indicated. See also Matthew Herper, “The Next Billionaire: A Statistician Who Changed Medicine,” Forbes, May 8, 2013, http://www.forbes.com/sites/matthewherper/2013/05/08/ the-next-billionaire-a-statistician-who-changed-medicine/.

2. Quintiles, “Investor Overview,” May 8, 2014, http://investors.quintiles.com/ investors/investor-overview/default.aspx; Matthew Herper, “Money, Math and Medicine,” Forbes, November 3, 2010, www.forbes.com/forbes/2010/1122/private- companies-10-quintiles-dennis-gillings-money-medicine.html.

3. TED Conferences, “Alan Kay,” TED Speaker, May 17, 2014, www.ted.com/ speakers/alan_kay.

4. Gary Hamel, “Bringing Silicon Valley Inside,” Harvard Business Review, September 1999.

5. The discussion of 23andMe throughout this book comes from Anne Wojcicki (23andMe founder and CEO), interview with authors, February 2014, and is supplemented by other sources where indicated.

6. Genomeweb, “23andMe Raises $50M in Series D Financing,” Genomeweb, December 11, 2012, www.genomeweb.com/clinical-genomics/23andme-raises- 50m-series-d-financing.

7. Aaron Krol, “J. Craig Venter ’s Latest Venture Has Ambitions Across Human Lifespan,” Bio IT World, March 4, 2014, www.bio-itworld.com/2014/3/4/j-craig- venters-latest-venture-ambitions-across-human-lifespan.html.

Notes.indd 234 16/03/15 11:29 AM

Notes 235

8. Ibid. 9. Anita Hamilton, “1. The Retail DNA Test,” Invention of the Year, Time,

October 29, 2008, http://content.time.com/time/specials/packages/article/ 0,28804,1852747 _1854493,00.html.

10. Elizabeth Murphy, “Inside 23andMe Founder Anne Wojcicki’s $99 DNA Revolution,” Fast Company, October 14, 2013, www.fastcompany.com/3018598/ for-99-this-ceo-can-tell-you-what-might-kill-you-inside-23andme-founder-anne- wojcickis-dna-r.

11. Jemima Kiss, “23andMe Admits FDA Order ‘Significantly Slowed Up’ New Customers,” Guardian (London and Manchester), March 9, 2014, www.theguardian .com/technology/2014/mar/09/google-23andme-anne-wojcicki-genetics-healthcare-dna.

12. Robert Langreth and Matthew Herper, “States Crack Down on Online Gene Tests,” Forbes, April 18, 2008, www.forbes.com/2008/04/17/genes-regulation- testing-biz-cx_mh_bl_0418genes.html; Andrew Pollack, “F.D.A. Orders Genetic Testing Firm to Stop Selling DNA Analysis Service,” New York Times, November 25, 2013, www.nytimes.com/2013/11/26/business/fda-demands-a-halt-to-a-dna-test- kits-marketing.html; US Food And Drug Administration, “23andMe, Inc. 11/22/13,” Inspections, Compliance, Enforcement, and Criminal Investigations, November 22, 2013, www.fda.gov/ICECI/EnforcementActions/WarningLetters/2013/ucm376296 .htm.

13. Alison Sander, Knut Haanæs, and Mike Deimler, “Megatrends: Tailwinds for Growth in a Low-Growth Environment,” BCG Perspectives, May 2010, www .bcgperspectives.com/content/articles/managing_two_speed_economy_growth_ megatrends/.

14. W. Chan Kim and Renée Mauborgne, “Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant,” Harvard Business Review, October 2004; Gary Hamel and C.K. Prahalad, Competing for the Future (Boston: Harvard Business Review Press, 1996); Joseph L. Bower and Clayton M. Christensen, “Disruptive Technologies: Catching the Wave,” Harvard Business Review, January–February 1995; Martin Reeves, George Stalk, and Jussi Lehtinen, “Lessons from Mavericks: Staying Big by Acting Small,” BCG Perspectives, June 2013.

15. United Parcel Service of America, “About UPS,” UPS website, accessed May 15, 2014, www.ups.com/content/us/en/about/index.html?WT.svl=SubNav.

16. United Parcel Service of America, “1991–1999: Embracing Technology,” History, UPS website, accessed May 15, 2014, www.ups.com/content/ky/en/about/ history/1999.html?WT.svl=SubNav.

17. Martin Reeves, “UPS: Big Bet Vision,” case study of the US freight market, India Strategy Summit, Mumbai, August 22, 2014.

18. United Parcel Service of America, “Enabling E-Commerce,” Business Solutions, UPS website, accessed May 15, 2014, www.ups.com/content/us/en/bussol/browse/ebay .html.

19. Reeves, “UPS: Big Bet Vision.”

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236 Notes

20. Eric T. Wagner, “Five Reasons 8 out of 10 Businesses Fail,” Forbes, September 12, 2013, www.forbes.com/sites/ericwagner/2013/09/12/five-reasons- 8-out-of-10-businesses-fail/.

21. Murphy, “Inside 23andMe founder Anne Wojcicki’s $99 DNA Revolution.” 22. Stephen Nale, “The 100 Greatest Steve Jobs Quotes,” Complex, October 5,

2012, www.complex.com/pop-culture/2012/10/steve-jobs-quotes/. 23. Intuitive Surgical, “Company Profile,” Intuitive Surgical website, accessed

May 11, 2014, www.intuitivesurgical.com/company/profile.html. The discussion of Intuitive Surgical throughout this book comes from an interview by the authors in April 2014 with the company’s management; and BCG, “Meet the Mavericks,” joint seminar at Strategic Management Society Conference, Geneva, March 2013, and is supplemented by other sources where indicated.

24. Intuitive Surgical, “Annual Report 2013.” 25. Jay P. Pederson, International Directory of Company Histories: General Electric

Company, vol. 137 (Detroit: St. James Press, 2012). 26. Trevor Butterworth, “The Fifth Wave of Computing,” Forbes, June 6, 2010,

www.forbes.com/2010/06/29/computing-technology-internet-media-opinions- columnists-trevor-butterworth.html. The discussion of Mobiquity throughout this book comes from Scott Snyder (Mobiquity cofounder and president), interview with authors, February 2014, and is supplemented by other sources where indicated.

27. Peter Cohan, “Mobiquity’s Founder and CEO Bill Seibel Is Unstoppable,” Forbes, July 17, 2013, www.forbes.com/sites/petercohan/2013/07/17/mobiquitys- founder-and-ceo-bill-seibel-is-unstoppable/.

28. Cohan, “Mobiquity’s Founder and CEO.” 29. The Henry Ford, “Henry Ford’s Quotations,” March 12, 2013, http://blog

.thehenryford.org/2013/03/henry-fords-quotations/. 30. Michael Karnjanaprakorn, “Take a Bill Gates-Style ‘Think Week’ to

Recharge Your Thinking,” Lifehacker, October 22, 2012, http://lifehacker.com/5670380/ the-power-of-time-off.

31. Adrian Covert, “Facebook Buys WhatsApp for $19 Billion,” CNN Money, February 19, 2014, http://money.cnn.com/2014/02/19/technology/social/ facebook-whatsapp/.

32. Kevin Baldacci, “7 Lessons You Can Learn from Jeff Bezos About Serving the Customer,” Salesforce Desk, June 6, 2013, www.desk.com/blog/jeff-bezos-lessons/.

33. Jim Davis, “TiVo Launches ‘Smart TV’ Trial,” CNET, December 22, 1998, http://news.cnet.com/TiVo-launches-smart-TV-trial/2100-1040_ 3-219409.html.

34. Dominic Gates, “Seattle’s Flexcar Merges with Rival Zipcar,” Seattle Times, October 30, 2007, http://community.seattletimes.nwsource.com/archive/?date= 20071030&slug=flexcar31; Bernie DeGroat, “Hitchin’ a Ride: Fewer Americans Have Their Own Vehicle,” Michigan News, January 23, 2014, http://ns.umich.edu/new/ releases/21923-hitchin-a-ride-fewer-americans-have-their-own-vehicle.

Notes.indd 236 16/03/15 11:29 AM

Notes 237

35. Jay P. Pedersen, International Directory of Company Histories: Groupe Louis Dreyfus S.A. History, vol. 60 (Detroit: St. James Press, 2004); BCG, “Meet the Mavericks,” joint seminar at Strategic Management Society Conference, Geneva, March 2013.

36. Clare O’Connor, “Amazon’s Wholesale Slaughter: Jeff Bezos’ $8 Trillion B2B Bet,” Forbes, May 7, 2014, www.forbes.com/sites/clareoconnor/2014/05/07/ amazons-wholesale-slaughter-jeff-bezos-8-trillion-b2b-bet/.

37. Richard Harroch, “50 Inspirational Quotes for Startups and Entrepreneurs,” Forbes, February 10, 2014, www.forbes.com/sites/allbusiness/2014/02/10/50-inspirational- quotes-for-startups-and-entrepreneurs/4/.

Chapter 5

1. Novo Nordisk, “The Blueprint for Change Programme: Changing Diabetes in China,” Sustainability, February, 2011, www.novonordisk.com/images/Sustainability/ PDFs/Blueprint%20for%20change%20-%20China.pdf. The discussion of Novo Nordisk throughout this book is from written correspondence by the authors in July 2014 with Novo Nordisk senior management and is supplemented by other sources where indicated.

2. PharmaBoardroom, “Interview with Lars Rebien Sørensen, CEO, Novo Nordisk,” PharmaBoardroom, April 30, 2013, http://pharmaboardroom.com/interviews/ interview-with-lars-rebien-s-rensen-president-ceo-novo-nordisk.

3. China Daily Information, “Diabetes in China May Reach Alert Level,” China Daily USA, September 4, 2013, http://usa.chinadaily.com.cn/china/2013-09/04/ content_16941867.htm; International Diabetes Federation, “IDF Diabetes Atlas,” accessed May 16, 2014, www.idf.org/sites/default/files/DA6_Regional_factsheets_0.pdf.

4. Novo Nordisk, “Changing Diabetes,” Novo Nordisk School Challenge, accessed May 17, 2014, http://schoolchallenge.novonordisk.com/diabetes/novo-nordisk- changing-diabetes.aspx.

5. Novo Nordisk, “Blueprint for Change Programme,” 8. 6. PharmaBoardroom, “Interview with Lars Rebien Sørensen.” 7. Novo Nordisk, “Blueprint for Change Programme.” 8. Ibid.; Novo Nordisk, “Novo Nordisk Expands R&D Centre in China,” Novo

Nordisk News, August 3, 2004, www.novonordisk.com/press/news/chinese_r_and_d.asp. 9. Novo Nordisk, “Blueprint for Change Programme,” 3. 10. PharmaBoardroom, “Interview with Lars Rebien Sørensen.” 11. Bruce D. Henderson, “The Origin of Strategy,” Harvard Business Review,

November 1989. 12. Edward R. Freeman, Strategic Management: A Stakeholder Approach (Boston:

Pitman, 1984). 13. James F. Moore, The Death of Competition: Leadership and Strategy in the Age of

Business Ecosystems (New York: Harper Business Press, 1996); Marco Iansiti and Roy

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238 Notes

Levien, The Keystone Advantage: What the New Dynamics of Business Ecosystems Mean for Strategy, Innovation, and Sustainability (Boston: Harvard Business School Press, 2004); Simon Levin, Fragile Dominion: Complexity and the Commons (New York: Basic Books, 2000); Adam M. Brandenburger and Barry J. Nalebuff, Co-opetition (New York: Currency Doubleday, 1996).

14. Philip Evans and Tom Wurster, Blown to Bits: How the New Economics of Information Transforms Strategy (Boston: Harvard Business School Press, 1999); Martin Reeves and Alex Bernhardt, “Systems Advantage,” BCG Perspectives, June 2011, www .bcgperspectives.com/content/articles/future_strategy_strategic_planning_systems_ advantage/; Martin Reeves, Thijs Venema, and Claire Love, “Shaping to Win,” BCG Perspectives, October 2013, www.bcgperspectives.com/content/articles/business_unit_ strategy_corporate_strategy_portfolio_management_shaping_to_win/.

15. Henry Chesbrough, “Open Innovation: The New Imperative for Creating Profit from Technology,” Academy of Management Perspectives 20, no. 2 (2006): 86–88; C. K. Prahalad and Venkat Ramaswamy, The Future of Competition: Co-creating Unique Value with Customers (Boston: Harvard Business School Press, 2004).

16. Christopher Null, “The End of Symbian: Nokia Ships Last Handset with the Mobile OS,” PC World, June 14, 2013, www.pcworld.com/article/2042071/the-end-of- symbian-nokia-ships-last-handset-with-the-mobile-os.html.

17. Nathan Ingraham, “Apple Announces 1 Million Apps in the App Store, More than 1 Billion Songs Played on iTunes radio,” Verge, October 22, 2013, www.theverge .com/2013/10/22/4866302/apple-announces-1-million-apps-in-the-app-store.

18. BBC, “Nokia at Crisis Point, Warns New Boss Stephen Elop,” BBC News: Technology, February 9, 2011, www.bbc.co.uk/news/technology-12403466; Chris Ziegler, “Nokia CEO Stephen Elop Rallies Troops in Brutally Honest ‘Burning Platform’ Memo? (Update: It’s Real!),” Endgaget, February 8, 2011, www.engadget .com/2011/02/08/nokia-ceo-stephen-elop-rallies-troops-in-brutally-honest-burnin/.

19. Mark Scott, “Nokia Announces New Strategy, and a New Chief to Carry It Out,” New York Times, April 29, 2014, www.nytimes.com/2014/04/30/technology/ nokia-announces-new-strategy-and-chief-executive.html?_r=0.

20. Justin Smith, “Facebook Platform Payment Providers Report Strong Growth in Q1,” Inside Facebook, April 14, 2009, www.insidefacebook.com/2009/04/14/ facebook-platform-payment-providers-report-strong-growth-in-q1/.

21. Julie Bort, “It’s Official: Red Hat Is the First Open Source Company to Top $1 Billion a Year,” Business Insider, March 28, 2012, www.businessinsider.com/its-official- red-hat-becomes-the-first-1-billion-open-source-company-2012-3. The discussion of Red Hat throughout this book comes from Jim Whitehurst (Red Hat CEO), interview with authors, February 2014, and is supplemented by other sources where indicated.

22. Red Hat, “Our Mission,” Red Hat website, accessed September 18, 2014, www.redhat.com/en/about/company.

Notes.indd 238 16/03/15 11:29 AM

Notes 239

23. Yahoo!, “Red Hat Inc.,” Yahoo! Finance, September 18, 2014, https://uk.finance. yahoo.com/q/hp?s=RHT&b=11&a=00&c=2008&e=16&d=11&f=2008&g=d.

24. Facebook, “Facebook Platform Migrations,” Facebook website, accessed May 23, 2014, https://developers.facebook.com/docs/apps/migrations.

25. Apple, “iTunes Charts,” Paid Apps, accessed September 18, 2014, www .apple.com/uk/itunes/charts/paid-apps/; Greg Kumparak, “Apple Announces Top 10 iPhone App Downloads of 2008,” Tech Crunch, December 2, 2008, http://techcrunch .com/2008/12/02/apple-announces-top-10-iphone-app-downloads-of-2008/.

26. Ian Urbina and Keith Bradsher, “Linking Factories to the Malls, Middleman Pushes Low Costs,” New York Times, August 7, 2013, www.nytimes.com/2013/08/08/world/ linking-factories-to-the-malls-middleman-pushes-low-costs.html?_r=0; Fung Group, “Supply Chain Management,” Fung Group Research, accessed September 18, 2014, www .funggroup.com/eng/knowledge/research.php?report=supply; Fung Group, “Who We Are,” Fung Group website, September 3, 2014, www.funggroup.com/eng/about/.

27. “The World’s Greatest Bazaar: Alibaba, a Trailblazing Chinese Internet Giant, Will Soon Go Public,” Economist, May 23, 2013, www.economist.com/news/ briefing/21573980-alibaba-trailblazing-chinese-internet-giant-will-soon-go-public- worlds-greatest-bazaar. The discussion of Alibaba throughout this book comes from Ming Zeng (Alibaba CSO), interview with authors, March 2014, and is supplemented by other sources where indicated.

28. Alexa Internet, “The Top 500 Sites on the Web,” Alexa website, accessed September 18, 2014, www.alexa.com/topsites.

29. Stephen Gandel, “What Time Is the Alibaba IPO?” Fortune, September 17, 2014, http://fortune.com/2014/09/17/what-time-is-the-alibaba-ipo/.

30. “The World’s Greatest Bazaar.” 31. Christina Bonnington, “Apple’s Developer Conference, WWDC, Has Grown

into a Disaster,” Wired, April 29, 2013, www.wired.co.uk/news/archive/2013-04/29/ wwdc-is-too-big.

32. Google, “Google I/O 2013,” Developers home page, accessed May 5, 2014, https://developers.google.com/events/io/.

33. Adam Bryant, “The Memo List: Where Everyone Has an Opinion,” New York Times, March 10, 2012, www.nytimes.com/2012/03/11/business/jim-whitehurst-of-red- hat-on-merits-of-an-open-culture.html?pagewanted=all.

Chapter 6

1. HSN Consultants, Inc., “Global Cards,” Nilson Report, 2008, http://www .nilsonreport.com/publication_chart_and_ graphs_archive.php. The discussion of American Express throughout this book comes from Ken Chenault (American Express CEO), interview with authors, April 2014, and is supplemented by other sources where indicated.

Notes.indd 239 16/03/15 11:29 AM

240 Notes

2. Michael Barbaro and Louis Uchitelle, “Americans Cut Back Sharply on Spending,” New York Times, January 14, 2008, www.nytimes.com/2008/01/14/business/14spend .html?pagewanted=all&_r=0.

3. Sara Lepro, “Amer ican Express to Cut 7,000 Jobs,” Huffington Post Business, November, 25, 2011, www.huffingtonpost.com/2008/10/30/american-express-to-cut- 7 _n_139476.html.

4. Peter Eichenbaum, “American Express Marketing Cuts May ‘Cheat’ Brand (Update2),” Bloomberg, August 6, 2009, www.bloomberg.com/apps/news?pid= newsarchive&sid=a2Y3p_tL_ J1A.

5. Yahoo!, “Historical Prices: American Express Company,” Yahoo! Finance, May 21, 2014, http://finance.yahoo.com/q/hp?s=AXP&a=11&b=1&c=2009&d=00&e=2&f=2010&g=d.

6. Ibid. 7. Kenneth I. Chenault, “Amer ican Express Chairman & CEO Key Remarks,”

Bank of America Merrill Lynch 2009 Banking and Financial Services Conference, New York, November 10, 2009.

8. Ibid. 9. Peter Eavis, “Kenneth Chenault’s Crisis Years,” New York Times, December 18,

2012, http://dealbook.nytimes.com/2012/12/18/kenneth-chenaults-crisis-years/?_ php=true&_type=blogs&_r=0.

10. American Express Company, “American Express Announces 2008 Membership Rewards(R) Program Partner Lineup,” Investor Relations, May 22, 2008, http:// ir.americanexpress.com/Mobile/file.aspx?IID=102700&FID=6134500.

11. Chenault, “Key Remarks.” 12. Robert S. Kaplan and William J. Bruns, Accounting and Management: A Field

Study Perspective (Boston: Harvard Business Review Press, 1987); Michael Hammer and James A. Champy, Reengineering the Corporation: A Manifesto for Business Revolution (New York: HarperCollins, 1993); Tom M. Hout and George Stalk, Competing Against Time: How Time-Based Competition Is Reshaping Global Markets (New York: Free Press, 1990).

13. Ron Nicol, “Shaping Up: The Delayered Outlook,” BCG Perspectives, October 2004, www.bcgperspectives.com/content/articles/strategy_shaping_up_the_delayered_ look/.

14. John P. Kotter, Leading Change (Boston: Harvard Business School Press, 1996); Jeanie D. Duck, The Change Monster: The Human Forces That Fuel or Foil Corporate Transformation and Change (New York: Three Rivers Press, 2001).

15. Clifford Krauss and John Schwartz, “BP Will Plead Guilty and Pay Over $4 Billion,” New York Times, November 15, 2012, www.nytimes.com/2012/11/16/business/ global/16iht-bp16.html.

16. Martin Reeves, Sandy Moose, and Thijs Venema, “BCG Classics Revisited: The Growth Share Matrix,” BCG Perspectives, June 2014, www.bcgperspectives.com/content/ articles/corporate_strategy_portfolio_management_strategic_planning_growth_ share_matrix_bcg_classics_revisited/.

Notes.indd 240 16/03/15 11:29 AM

Notes 241

17. The discussion of Bausch & Lomb and Forest Laboratories throughout this book comes from Brent Saunders (Bausch & Lomb CEO), interviews with authors, March 2014, and is supplemented by other sources where indicated.

18. Matthew Herper, “$9 Billion Bausch & Lomb Sale Mints New Turnaround Artist,” Forbes, May 27, 2013, www.forbes.com/sites/matthewherper/2013/05/27/9- billion-bausch-lomb-sale-mints-new-turnaround-artist/; United Securities and Exchange Commission, Form S-1 Registration Statement (Washington, DC: 2013).

19. Bausch & Lomb, “Investor Relations,” Our Company, August 5, 2013, www .bausch.com/our-company/investor-relations#.VByPDstOW70.

20. Martin Reeves et al., “Lean, but Not Yet Mean: Why Transformation Needs a Second Chapter,” BCG Perspectives, October 2013, www.bcgperspectives.com/content/ articles/transformation_growth_why_transformation_needs_second_chapter_lean_ not_yet_mean/. Note: For our study we looked closely at transformation programs using a method of paired historical comparison, an approach that eliminates interesting but irrelevant details and zeroes in on the key factors that separate success from failure. We looked at a dozen pairs of companies, each in the same industry and facing similar challenges at similar times.

21. Ibid. 22. Martin Reeves, Knut Haanæs, and Kaelin Goulet, “Turning Around the

Successful Company,” BCG Perspectives, December 2013, www.bcgperspectives.com/ content/articles/transformation_large_scale_change_growth_turning_around_ successful_company/.

23. This discussion of Kodak comes from a series of interviews and e-mail correspondence by the authors between May and June 2014 with leaders of Kodak’s corporate communications department and is supplemented by various other sources such as Giovanni Gavetti, Rebecca Henderson, Simon Giorgi, “Kodak and the Digital Revolution (A),” Case 705448 (Boston: Harvard Business School, 2005); Robert J. Dolan, “Eastman Kodak Co.,” Case 599106 (Boston: Harvard Business School, 1999); A. Cheerla, “Kodak—A Case of Triumph & Failure” (2010), http:// www.managedecisions.com/blog/?p=444; and Steve Hamm, Louise Lee, and Spencer E. Ante, “Kodak’s Moment of Truth,” BusinessWeek, February 18, 2007, http://www .businessweek.com/stories/2007-02-18/kodaks-moment-of-truth.

24. “Marc Faber: We Could Have a Crash Like in 1987 This Fall! Here’s Why,” Before It’s News, May 12, 2012, http://beforeitsnews.com/gold-and-precious-metals/2012/05/ marc-faber-we-could-have-a-crash-like-in-1987-this-fall-heres-why-2129176.html.

25. “Fortune 500: 2008,” Fortune, September 18, 2014, http://fortune.com/ fortune500/2008/wal-mart-stores-inc-1/. The discussion of AIG throughout this book comes from Peter Hancock (AIG CEO), interview with authors, April 2014, and is supplemented by other sources where indicated.

26. Matthew Karnitschnig, “U.S. to Take Over AIG in $85 Billion Bailout; Central Banks Inject Cash as Credit Dries Up,” Wall Street Journal, September 16, 2008, http://online.wsj.com/news/articles/SB122156561931242905; Leslie P. Norton, “The Man

Notes.indd 241 16/03/15 11:29 AM

242 Notes

Who Saved AIG,” Barrons, August 11, 2012, http://online.barrons.com/news/articles/ SB50001424053111904239304577575214205090528#articleTabs_article%3D1.

27. Jody Shenn and Zachary Tracer, “Federal Reserve Says AIG, Bear Stearns Rescue Loans Paid,” Bloomberg, June 14, 2012, www.bloomberg.com/news/2012-06-14/ new-york-fed-says-aig-bear-stearns-rescue-loans-fully-repaid.html.

28. American International Group, “Annual Report,” 2013, 5. 29. Stuart Read et al., Effectual Entrepreneurship (New York: Routledge, 2011). 30. BCG, “DICE: How to Beat the Odds in Program Execution,” August 2014. 31. Perry Keenan et al., “Strategic Initiative Management: The PMO Imperative,”

BCG Perspectives, November 2013, www.bcgperspectives.com/content/articles/program_ management_change_management_strategic_initiative_management_pmo_ imperative/.

32. Mike Sager, “What I’ve Learned: Andy Grove,” Esquire, May 1, 2000, www .esquire.com/features/what-ive-learned/learned-andy-grove-0500.

33. For One AIG identity, see Bloomberg, “AIG’s Bob Benmosche Memo to Employees,” Newsarchive, September 17, 2014, www.bloomberg.com/bb/newsarchive/ aWbEUgKiZLNM.html. For return of brand name, see American International Group, “AIG Returns Core Insurance Operations to AIG Brand, Reveals New Brand Promise,” Business Wire, November 11, 2012, www.businesswire.com/news/home/20121111005039/en/ AIG-Returns-Core-Insurance-Operations-AIG-Brand#.VBypRMtOW71.

Chapter 7

1. Hugh Johnston, “Geared for Growth,” PepsiCo website, February 21, 2013, www.pepsico.com/Download/CAGNY_Webdeck.pdf. The discussion of PepsiCo throughout this book comes from Indra Nooyi (PepsiCo CEO), interview with authors, April 2014, and is supplemented by other sources where indicated.

2. Ted Cooper, “PepsiCo Shows Why Frito-Lay and Pepsi Are Better Together,” Investing Commentary, Motley Fool, January 15, 2014, www.fool.com/investing/ general/2014/01/15/heres-why-pepsico-is-positioned-better-for-2014-th.aspx; PepsiCo, “Quick Facts,” PepsiCo website, August 22, 2013, www.pepsico.com/Download/ PepsiCo_ Quick_Facts.pdf.

3. PepsiCo, “Annual Report 2012,” 2012, 24. 4. James G. March, “Exploration and Exploitation in Organizational Learning,”

Organization Science 2, no. 1 (1991): 71–87; Michael L. Tushman and Charles A. O’Reilly III, “Ambidextrous Organizations: Managing Evolutionary and Revolutionary Change,” California Management Review 38, no. 4 (1996): 8–30.

5. Julian Birkinshaw and Christina Gibson, “Building Ambidexterity into an Organization,” MIT Sloan Management Review, summer 2004.

6. Martin Reeves et al., “The Evolvable Enterprise: Lessons from the New Technology Giants,” BCG Perspectives, February 2014, www.bcgperspectives.com/

Notes.indd 242 16/03/15 11:29 AM

Notes 243

content/articles/future_strategy_business_unit_strategy_evolvable_enterprise_ lessons_new_technology_giants/; Martin Reeves and Jussi Lehtinen, “The Ingenious Enterprise: Competing Amid Rising Complexity,” BCG Perspectives, May 2013, www .bcgperspectives.com/content/articles/growth_business_unit_strategy_ingenious_ enterprise_competing_amid_rising_complexity/.

7. Martin Reeves, Claire Love, and Nishant Mathur, “The Most Adaptive Companies 2012: Winning in an Age of Turbulence,” BCG Perspectives, August 2012. Adaptive companies are defined as outperforming in 75 percent of turbulent and stable periods or 30 percent of all turbulent quarters. Outperformance calculation is based on market cap growth relative to industry-average growth. The analysis looked at US public companies between 1960 and 2011 and is based on Compustat data.

8. Martin Reeves et al., “Ambidexterity: The Art of Thriving in Complex Environments,” BCG Perspectives, February 2013, www.bcgperspectives.com/content/ articles/business_unit_strategy _ growth_ambidexterity _art_of_thriving _in_ complex_environments/.

9. Lockheed Martin, “Skunk Works® Origin Story,” Aeronautics, May 7, 2014, www.lockheedmartin.com/us/aeronautics/skunkworks/origin.html.

10. Joe Clifford, “Toyota’s Skunkworks Plug-in Hybrid Sports Car,” Toyota (blog), January 28, 2014, http://blog.toyota.co.uk/toyotas-skunkworks-plug-in-hybrid- sports-car#.VCBnsstOW70.

11. This discussion of Tower s Watson comes from John Haley (Tower s Watson CEO), interview with authors, February 2014, and is supplemented by other sources where indicated.

12. Julia Cooper, “Towers Watson, Mercer Lead Largest Benefits Consulting Firms,” San Francisco Business Times, July 11, 2014, www.bizjournals.com/sanfrancisco/subscriber- only/2014/07/11/benefits-consulting-firms-2014.html.

13. Tower s Watson, “Annual Report 2012,” 2012, 15. 14. Christopher Lawton, “TV Sellers Are Thinking Big,” Wall Street Journal,

November 20, 2007, http://online.wsj.com/news/articles/SB119551914597698572. 15. Corning, “CEO: ‘Corning Is Built for Longevity,’” press release, April 29, 2014,

www.corning.com/news_center/news_releases/2014/2014042901.aspx. 16. Ben Dobbin, “Gorilla Glass, 1962 Invention, Poised to Be Big Seller for

Corning,” Huffington Post, February 10, 2010, www.huffingtonpost.com/2010/08/02/ gorilla-glass-1962-invent_n_667416.html.

17. Seth Weintraub, “Apple Acknowledges Use of Corning Gorilla Glass on iPhone, Means Gorilla Glass 2 Likely for iPhone 5,” 9to5Mac, March 2, 2012, http://9to5mac .com/2012/03/02/apple-acknowledges-use-of-corning-gorilla-glass-on-iphone-means- gorilla-glass-2-likely-for-iphone-5/; Bryan Gardiner, “Glass Works: How Corning Created the Ultrathin, Ultrastrong Material of the Future,” Wired, September 24, 2012, www.wired.com/2012/09/ff-corning-gorilla-glass/all/.

Notes.indd 243 16/03/15 11:29 AM

244 Notes

18. Corning corporate communications department, e-mail message to authors, July 29, 2014.

19. Corning, “Corning Launches Ultra-Slim Flexible Glass,” press release, June 4, 2012, www.corning.com/news_center/news_releases/2012/2012060401.aspx.

20. Haier Group, “Haier Ranked the #1 Global Major Appliances Brand for 4th Consecutive Year—Euromonitor,” Reuters, December 24, 2012, www.reuters.com/ article/2012/12/24/haier-ranked-first-idUSnPnCN34281+160+PRN20121224. This discussion of Haier comes from written correspondence by authors with Haier senior management in June 2014 and is supplemented by other sources where indicated.

21. Haier Group, “Haier: The Evolution of You,” Haier website, accessed May 8, 2014, www.haier.com/us/about-haier/201305/P020130512352743920958.pdf.

22. Lao-Tzu, “The Tao-te Ching,” May 11, 2014, http://classics.mit.edu/Lao/ taote.1.1.html.

23. Ruimin Zhang, “Raising Haier,” Harvard Business Review, February 2007. 24. Ibid. 25. Haier corporate communications department, e-mail message to authors,

June 13, 2014. 26. Lance Whitney, “iPhone 6 Images Reportedly from Foxconn Reveal

Larger Body,” CNET, May 12, 2014, www.cnet.com/news/iphone-6-renders- reportedly-from-foxconn-reveal-larger-body/; Allan Yogasingam, “Teardown: Inside the Apple iPhone 5,” EDN Network, September 21, 2012, www.edn.com/ design/consumer/4396870/Teardown--Inside-the-Apple-iPhone-5.

Chapter 8

1. Pfizer, “To Our Shareholders,” CEO letter, February 28, 2014, www.pfizer .com/files/investors/financial_reports/annual_reports/2013/letter.htm; Pfizer, “Annual Report 2011,” 2011, and “Annual Report 2013,” 2013; Simon King, “The Best Selling Drugs Since 1996: Why AbbVie’s Humira Is Set to Eclipse Pfizer’s Lipitor,” Forbes, July 15, 2010, www.forbes.com/sites/simonking/2013/07/15/the-best-selling-drugs- since-1996-why-abbvies-humira-is-set-to-eclipse-pfizers-lipitor/; Yahoo!, “Historical Prices: Pfizer Inc. (PFE),” Yahoo! Finance, September 17, 2014, https://uk.finance.yahoo .com/q/hp?s=PFE&a=00&b=1&c=2000&d=11&e=30&f=2000&g=d&z=66&y=66.

2. Pfizer, “Annual Report 2013,” 2, 8. 3. Pfizer, “R&D Collaborations,” Annual Review 2013, May 13, 2014, www.pfizer

.com/files/investors/financial_reports/annual_reports/2013/assets/pdfs/pfizer_13ar_i_ collaborate.pdf.

4. Pfizer, “To Our Shareholders”; Pfizer, “To Our Stakeholders,” CEO letter, February 28, 2013, www.pfizer.com/files/investors/financial_reports/annual_reports/2012/letter .html; Andrew Ward, “Pfizer Break-up May Follow AstraZeneca Deal,” Financial Times, May 4, 2014, www.ft.com/intl/cms/s/0/ba383d00-d399-11e3-b0be-00144feabdc0 .html?siteedition=intl#axzz31X8zJqbT.

Notes.indd 244 16/03/15 11:29 AM

Notes 245

5. Bruce Henderson, “Why Change Is So Difficult,” BCG Perspectives, 1968, www .bcgperspectives.com/content/Classics/why_change_is_so_difficult/.

6. Dow Jones Newswires, “AIG’s Benmosche Pushes on Bid to Buy Bonds,” Wall Street Journal, March 23, 2011, http://online.wsj.com/news/articles/SB1000142405274870 4050204576218401104973260.

7. US Department of the Treasury, “Treasury Sells Final Shares of AIG Common Stock, Positive Return on Overall AIG Commitment Reaches $22.7 Billion,” Press Center, November 12, 2011, www.treasury.gov/press-center/press-releases/Pages/ tg1796.aspx.

8. Erik Holm, “Hoping to Strike Profit Gold, AIG Ramps Up in Data Mining,” Wall Street Journal, October 15, 2012, http://online.wsj.com/news/articles/SB1000087239 6390444799904578052591860897244.

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Notes.indd 246 16/03/15 11:29 AM

I N D EX

Page numbers followed by f refer to figures and page numbers followed by t refer to tables.

Abbott, 146 accelerator leadership role

description of, 24, 199 PepsiCo example of, 208–209 strategy collage and, 197, 198f tasks of, 208–209

accountability, 35, 42, 45, 51, 53, 142, 160, 163

action plans, 43, 45–46, 160 activity-based costing, 146 adaptation, 61, 64, 68, 74, 129, 148, 166,

170, 224 adaptive advantage, 16t, 64 adaptive approach to strategy, 57–86

actions consistent with, 84 ambidexterity approach using

separation and, 189–190 business environment dimension and,

7, 7f, 15t change signals in, 68, 69–72, 77, 79,

80, 81, 84, 85 core idea in, 7, 15t, 60–61 culture and, 81–82 description of, 10–11, 10f implementation of, 76–84 information and, 69–71, 77–78 innovation and, 78–79 iPad app for exploring, 23 key elements, examples, and traps of,

15t–16t leadership in, 69, 82–84, 205, 207 mathematical basis and simulations for,

22–23, 23f mismatch of perceived environment

with, 20 organization and, 79–81

other strategy approaches compared with, 10, 11, 13, 61, 67, 68

portfolio of experiments in, 72–73 related approaches with, 9, 16t, 63 shareholder return from successfully

matching environment with, 8 simulating strategy in, 74, 74f, 224–225,

225f strategizing in, 68–76 strategy palette used with, 14–15, 14f Tata Consultancy Services (TCS)

example of, 10–11, 57–60 thought flows used in, 10, 10f,

60–61, 60f tips and traps in, 84–86, 86t when to apply, 65–68, 65f, 66f Zara example of, 61–63, 63f

adaptive environment archetypal approach to strategy used

with, 7 assessing your business for, 67 business environment dimension and,

6, 7, 7f shareholder return from successfully

matching strategy with, 8 agility, 9, 16t, 64, 68, 77 Airborne Inc., 29 Alibaba.com, 131 Alibaba Group, 129, 131–133, 134 AliPay service, 131 Aliyun service, 131 Amazon.com, 95, 106, 131, 172, 187 ambidexterity, 173–191

approaches to, 176, 177–178, 178f contextual, 176 core idea in, 175–178

Index.indd 247 20/03/15 4:45 PM

248 Index

ambidexterity (continued ) definition of, 21, 175–176 evolvable organizations using, 187 external ecosystems approach to, 22,

178, 178f, 188–189 leadership in renewal approach and,

166 PepsiCo example of, 173–175 related approaches with, 176 self-organization approach to, 22, 178,

178f, 184–185 self-tuning algorithms for, 185–187, 187f separation approach to, 22, 175, 177,

178f, 179–181, 190 strategy for operating on two levels in,

189–190 strategy palette used with, 14f, 190–191 successful use of, 177, 178f switching approach to, 22, 178, 178f,

181–184 techniques used to achieve, 21–22 Towers Watson example of, 179–181

ambidextrous organizations concept, 176 ambidextrous players, in renewal

approach, 170–171, 171f American Express (Amex), 14, 141–143,

145, 157, 162, 163, 177, 201, 202–203 American International Group (AIG),

157–158, 165–166, 197, 203, 204, 208 analysis

adaptive approach and, 68 basis of competition step in, 39 classical approach and, 7, 8, 8f, 28, 28f,

37–41, 207 competitive position step in, 39–41 market attractiveness step in, 37–39

Android operating system, 120, 134 Ansoff, Igor, 30 antenna leadership role

description of, 24, 199 strategy collage and, 197, 198f tasks of, 207–208

Apple, 18, 98, 120, 121, 125, 126, 134, 178, 183, 188–189

Apple App Store, 6, 120, 126, 127, 129

ARM Holdings, 189 AT&T, 106

Babson College, 102 Baksaas, Jon Fredrik, 75–76 Bank of America, 146 Barney, Jay, 31 Bausch & Lomb (B&L), 148–149, 161,

167–168 BCG matrix, 16t, 30, 49 Bell Canada, 39 benchmarking, 50, 128, 154, 160 Benmosche, Bob, 157, 165–166, 203, 204 Bezos, Jeff, 106, 108 BHP Billiton, 67 big data, 36, 92, 100 Big Night In initiative, Mars, 27 Birkinshaw, Julian, 176 Blown to Bits (Evans and Wurster), 117–118 blue ocean strategy, 3, 16t, 94 Bohr, Niels, 69 Boston Consulting Group (BCG), 30, 64,

94, 117–118, 146, 176, 201 Boston Consulting Group (BCG)

Strategy Institute, 5–6 BP, 146 Brandenburger, Adam, 117 brand names, 89, 96, 165 breakthrough technologies, 11, 90, 98,

99, 102, 172 British Telecom, 38–39 Bresch, Heather, 44–45 Broadcom, 189 building, in visionary approach, 11, 11f,

90, 90f, 97, 110 burning the furniture approach, 155, 169t business ecosystem concept, 9, 16t, 117,

135–136 business environments

adaptive approach for, 10, 55, 60, 67, 72, 86t

ambidexterity and multiple, 175–176, 177 analysis of, over sixty-year period,

5–6

Index.indd 248 20/03/15 4:45 PM

Index 249

applying a strategy for, 20 choosing a strategy for, 6 classical approach for, 31, 34 diagnostician leadership role on, 23,

198 dimensions of, 6, 17. See also harshness;

malleability; unpredictability diversity and range of, 2, 2f iPad app for exploring, 6 leaders and knowing when to shift,

110–111 leadership for complexity in,

194–195 mismatches of selected strategy

approach with, 19–20 multi-armed bandit (MAB) simulation

model for, 22, 223–225 performance gap for companies and,

2, 3f for Pfizer, 194 portfolio of experiments in, 72 rapid change in, 1, 20 renewal approach for, 150 self-assessment of, 216 shaping approach for, 123 traps in perception of, 19–20 visionary approach for, 96, 110, 111

business models ambidexterity and, 175 deconstructed, 117 environmental change and, 145 innovation and, 11, 57, 100f, 106, 107,

135, 156, 161, 162, 169t opportunities for visionary approach

and, 111 preemptive transformers using, 170, 171 renewal approach and, 145, 156, 161,

162, 169t shaping approach and, 118, 134 Tata Consultancy Services (TCS) and,

58 technological change and, 33, 176 visionary approach and, 11, 99, 105

business process reengineering, 146, 163

Caesars Entertainment, 78 candy industry, 25–27 capabilities

adaptive approach and, 77, 85 analysis of, 8, 77 change and, 146 classical approach and, 7, 8, 16t, 28, 29,

32, 39, 40–41, 48, 49, 205 innovation and, 49, 106, 107 leaders and, 191, 198, 205, 214 Mars and, 25, 27 PepsiCo and, 174 Progressive and, 77 Quintiles and, 35, 36 resource-based view and, 31 self-organizational, 184 shaping approach and, 12, 115, 124, 188 sustainable competitive advantage and,

28, 29, 39, 40–41 Tata Consultancy Services (TCS) and, 59 team coach leadership role and, 198 visionary approach and, 99

catalysts leaders as, 201, 209 Red Hat example of, 121, 138 in renewal approach, 164 in shaping approach, 121, 125, 128, 133,

134–135, 136, 138 CEOs

in classical organizations, 53 performance gap for companies and

need for, 2, 3f See also leadership and leaders

Chairman’s Fellows, Towers Watson, 181 Champy, James, 146 Chandrasekaran, Natarajan “Chandra,”

58–59, 60 change, and renewal approach, 147 change management, 146, 170 change signal recognition

adaptive approach and, 68, 69–72, 77, 79, 80, 81, 84, 85

antenna leadership role and, 24, 199, 207

visionary approach and, 98

Index.indd 249 20/03/15 4:45 PM

250 Index

Changing Diabetes Bus program, Novo Nordisk, 114

Chartis brand, 165 Chase, Robin, 107 Chenault, Ken, 141–142, 143, 162, 201,

202–203, 208 Chesbrough, Henry, 118 China

Alibaba’s strategy in, 129, 131–133, 134 Apple iPhone supply chain in, 189 as emerging market, 119, 119f Haier’s strategy in, 178, 185 Huawei’s positioning in, 38–39 Kodak’s investment in, 154 Novo Nordisk’s strategy in, 13, 113–115,

121, 125 shaping strategy and, 119, 119f visionary strategy and, 93

China Diabetes Society, 114 chocolate candy industry, 25–27 Chrysler, 71 classical approach to strategy, 25–56

actions consistent with, 55 ambidexterity approach using

separation and, 189–190 analysis in, 8, 8f, 28, 28f, 37–41 business environment dimension and,

7, 7f, 15t core idea in, 7, 15t, 27–30 culture and, 51–53 description of, 8–9, 8f familiarity with and popularity of, 9 implementation of, 47–54 information and, 48–49 innovation and, 49–50 iPad app for exploring, 23 key elements, examples, and traps of,

15t–16t leadership and, 53–55, 205, 207 Mars example of, 9 mathematical basis and simulations for,

22–23, 23f mismatch of perceived environment

with, 20 organization and, 50–51

other strategy approaches compared with, 10, 11, 12, 13, 61, 67, 68, 137–138, 139

planning in, 7, 8, 8f, 27, 28, 28f, 35–36, 42–45, 54–55, 68

related approaches with, 9, 16t, 30–31 scale and, 29 shareholder return from successfully

matching environment with, 8 simulating strategy in, 46–47, 224–225,

225f strategizing in, 34–47 strategy palette used with, 14–15, 14f sustainable competitive advantage and,

8, 10, 28, 29, 33, 40, 61 thought flows used in, 8, 8f, 28, 28f tips and traps in, 54–55, 56t when to apply, 32–33

classical environment archetypal approach to strategy used

with, 7 assessing your business for, 34 business environment dimension and,

6, 7, 7f shareholder return from successfully

matching strategy with, 8 clinical research organizations (CROs),

11–12, 87, 88 Clinton administration, 70 clock speed, 64, 79 cloud computing, 10, 57, 95, 131, 132 coach leadership role. See team coach

leadership role Coca-Cola brand, 174 cocreation, 118 codevelopment, 114, 117, 120, 136 coevolution, 117, 134 Cogent Systems, 172 collaboration

in classical organizations, 50 shaping approach using, 116–117, 121,

124, 125, 126, 127, 132–133, 135–136, 140t

communication leadership and, 110, 112t, 136, 167, 210t

Index.indd 250 20/03/15 4:45 PM

Index 251

of renewal strategy, 156, 167, 168, 169t salesperson leadership role and, 24,

198, 203–204 of vision, 97, 101–103, 107–108, 112t, 136

Competing for the Future (Hamel and Prahalad), 9, 94

competition analysis of, in classical approach, 37–41 life-cycle stage changes and, 147, 148f Telenor’s use of adaptive approach and,

75–76 time-based, 64, 146

competitive advantage erosion of sources of, 66f forms of classical, 30, 31f planning and, 44 Progressive example of adaptive

approach to, 77–78 sustainable competitive, 8, 10, 28, 29,

33, 40, 61 competitive strategy, 30, 125 complements, in five forces framework,

30 complex adaptive systems theory, 117 complexity, leadership for, 194–195, 210t Conoco Phillips, 146 conserving resources simulation, 158–159,

159t consumer-centric approaches, 59, 100, 199 contextual ambidexterity, 176 continuous adapters, 170, 171f co-opetition, 117 Corning, 81, 178, 183–184, 189 corporate culture. See culture corporate strategy, 30 cost reductions, in renewal approach, 155,

162, 163, 169t creativity

in adaptive approach, 69, 80, 82 in shaping approach, 116 in visionary approach, 11, 109

culture adaptive approach and, 71–72, 81–82 AIG example of organization and,

165–166

classical approach and, 51–53 leadership in complex organizations

and, 195 Pfizer example of, 52–53, 195 Red Hat example of, 137–138 renewal approach and, 143, 159,

164–166 of self-challenge, 71–72 shaping approach and, 136 strategy approach implementation and

requirements for, 15 3M example of, 83–84 visionary approach and, 97, 109

customer-centric approaches, 59, 100, 199

Customer Collaboration Centre, Diageo, 48

customer dissatisfaction, and visionary approach, 11, 90, 93, 98

customers communicating vision to, 101 five forces framework with, 30 information collection on, 134 Tata Consultancy Services (TCS) and,

59 customer satisfaction, 16t, 134

Daimler, 146 Danielson, Antje, 107 Darwin, Charles, 63 de-averaging approach, 16, 156, 162, 163,

193, 196 decision-making culture

multi-armed bandit (MAB) simulation model for, 223–224

in shaping approach, 137 deconstructed business models, 117 Deepwater Horizon drilling rig disaster,

Gulf of Mexico, 146 delayering, 146, 160, 162–163 delegation

classical approach using, 50 3M and, 83

Delta Air Lines, 138, 162

Index.indd 251 20/03/15 4:45 PM

252 Index

Deutsche Bahn, 37 DHL, 29 diagnostician leadership role

description of, 23, 198 Pfizer example of, 199–200 strategy collage and, 197, 198f tasks of, 199–200

Diageo, 37–38, 48 DICE, BCG, 160 differentiation

classical approach and, 7, 8, 28, 29, 39, 49, 56t

competitive advantage and, 31, 39, 40, 41

corporate culture and, 52 innovation and, 49 leaders and, 19 Mahindra and, 41 Pfizer and, 52, 194, 195 segmenter leadership role and, 200

digital video recorders (DVRs), 106–107 discovery-based planning, 64 disruptive innovation, 7, 49, 94, 99, 105,

118, 121, 132–133 disrupter leadership role

description of, 24, 198 strategy collage and, 197, 198f tasks of, 201–202

Drucker, Peter, 48

eBay, 96, 131 ecological thinking, 117 e-commerce, 91, 95–96, 100, 106, 129,

131, 197 economic crises, and renewal approach,

147–148, 155 economics of information, 117–118 economizing, in renewal approach, 13,

13f, 144, 144f, 145–146, 153–156, 206 ecosystems, 9, 16t

ambidexterity and external, 22, 178, 178f, 188–189

Apple’s approach to orchestration of, 188–189

evolving, 129–131 Red Hat example as orchestrator of,

121–123 shaping strategy and, 115, 116, 117,

135–136, 139 See also business ecosystem concept

Eisenhardt, Kathleen, 9, 64 Elop, Stephen, 120 emergent strategies, 44, 64 emerging markets, 38, 75, 115, 118,

119–120, 119f, 158, 174, 193 engaging, in shaping approach, 12, 12f,

115, 116f, 124 entrepreneurialism, 90, 94 environments matrix, 30 envisaging, in visionary approach, 11, 11f,

90, 90f, 97, 110 e-readers (Kindles), 106, 107, 172 Ericsson, 146 Evans, Philip, 31, 117–118 evolutionary economics, 64 evolutionary processes, 6, 61 evolvable organizations, 187 evolving, in shaping approach, 12, 12f, 115,

116f, 124 execution

adaptive approach using, 68 classical approach using, 8, 8f, 28, 28f,

207 leadership in complex organizations

and, 195–196 questions for leaders to guide, 205–206

experience curve, 9, 16t, 30, 50, 98 experiments, portfolio of, in adaptive

approach, 68, 72–73, 77, 78, 79 exploration-versus-exploitation trade-

offs, 176, 180, 186 external ecosystem approach to

ambidexterity, 22, 178, 178f, 188–189

Facebook, 105, 118, 121, 125, 126f, 135 false knowns, 70, 71, 71f, 207 fast fashion, Zara, 62 FedEx, 29

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Index 253

Fedora operating system, 128 Fidelity Investments, 102 Fine, Charles, 64 five forces framework, 3, 9, 30–31 flexibility

adaptive approach with, 67, 81, 85t ecosystems in shaping approach with, 131 visionary approach with, 100, 108

FMC, 146 focus

leadership and, 53–54 renewal approach and, 143, 148–149

Ford, 71 Ford, Henry, 105, 159 forecasts, 36, 43, 44, 65, 97, 120, 123 4E Model (Tata Consultancy Services),

59 Foxconn, 189 fragmentation, and competitive

advantage, 30, 31f, 39 France Telecom, 107

Gates, Bill, 105 GE, 40, 99, 102 Gillings, Dennis, 12, 87–89, 106, 110, 182 GlaxoSmithKline, 146 Global Established Pharma (GEP), Pfizer,

194, 199–200 Global Innovative Pharma (GIP), Pfizer,

194, 199 GM, 71 goals

action plans for, 43, 45–46 adaptive approach and, 78, 82, 85t classical strategy and, 28, 37, 48, 51, 52,

53, 55 culture and, 51, 52 focus of leadership on, 53, 55 Mars and, 52 strategy and defining, 1 visionary approach and, 97, 100, 104,

107, 108 Goblin Sword app, 125 Google, 73, 79, 84, 120, 135–136, 187

Google Maps app, 126 Gorilla Glass brand glass, 81, 183 Grove, Andy, 164 growing, in renewal approach, 13, 13f,

144, 144f growth

separation approach to ambidexterity and, 180

Towers Watson example of, 180 growth phase, in renewal approach,

156–158, 163, 206 growth-share matrix, 9, 16t Guo Ping, 38 Gyllenhammar, Per, 155

Haier, 178, 185 Haley, John, 179–181 Hamel, Gary, 9, 31, 90, 94 Hammer, Michael, 146 Hancock, Peter, 157, 158, 165, 197, 203,

204, 208 harshness

as business environment dimension, 6, 7f, 17

diagnostician leadership role and, 198, 199

Hastings, Reed, 82 Henderson, Bruce, 9, 29, 30, 40, 117, 201 Hoover Company, 89 horizontal fast track, 214 Hout, Tom, 64 Huawei Technologies, 38–39

Iansiti, Marco, 117 IBM, 60, 102, 106, 122, 179 IDEO, 102 implementation

adaptive approach and, 76–84 classical approach and, 47–54 leadership roles and, 199, 207 renewal approach and, 159–168 shaping approach and, 133–138 visionary approach and, 97, 104–105

Index.indd 253 20/03/15 4:45 PM

254 Index

India as emerging market, 119, 119f Mahindra in, 41, 42–43 PepsiCo in, 174 Tata Consultancy Services (TCS) in,

10–11, 57–60 visionary strategy and, 93

Inditex, 62 industry shakers, 171f, 172 Infineon, 189 information management/information

adaptive approach and, 69–71, 77–78 Bausch & Lomb’s management of, 161 classical approach and, 48–49 quantitative measurements of, 134 renewal approach and, 159, 160–161 7-Eleven’s capture of, 69–70 shaping approach and, 133–134 strategy approach implementation and

requirements for, 15 visionary approach and, 97, 98,

104–106 innovation

adaptive approach to, 78–79 business models and, 11, 57, 100f, 106,

107, 135, 156, 161, 162, 169t capabilities from another industry in,

107 classical approach to, 49 disruptive, 7, 49, 94, 99, 105, 118, 121,

132–133 Intuit example of safe space for, 80–81 managing, 49 Mars example of, 27 new technology applied in, 106–107 open, 3, 118 renewal approach and, 161–162, 169t separation approach to ambidexterity

and, 180 shaping approach and, 133, 134–135 strategy approach implementation and

requirements for, 15 strategic investments in, 162 Tata Consultancy Services (TCS)

example of, 59

Telenor example of, 76 Towers Watson example of, 180 visionary approach and, 106–107

inquisitor leadership role description of, 24, 199 strategy collage and, 197, 198f tasks of, 206–207

Instagram, 105 Intel, 164 Intuit, 80–81 Intuitive Surgical, 98–99 iOS operating system, 120, 128, 133, 134 iPhones, 18, 75–76, 81, 183, 188–189

Japan, 69–70, 71, 214 Jobs, Steve, 98, 106, 110 Jorman, Ollila, 44 Just Ask product (Tata Consultancy

Services), 59

Kay, Alan, 89 Kim, W. Chan, 94 Kindle e-readers, 106, 107, 172 Kodak, 153–154 Koi Pond app, 125 Kotter, John, 146 Krogh, August, 113

Lafley, A. G., 41 Lao-Tzu, 185 Lay’s brand, 173, 174 leadership and leaders, 193–210

adaptive approach and, 69, 82–84, 205 as animators of multiple approaches to

strategy, 18–19, 197, 198f, 199 Bausch & Lomb example of, 167–168 classical approach used by, 28, 30, 50,

53–54 classical environments and, 55 core idea for, 186–197 critical roles played by, 23–24,

197–199, 198f. See also accelerator

Index.indd 254 20/03/15 4:45 PM

Index 255

leadership role; antenna leadership role; diagnostician leadership role; disrupter leadership role; inquisitor leadership role; segmenter leadership role; salesperson leadership role; team coach leadership role

diversifying business experience of, 212, 213–214

Mahindra example of, 42 Mars and, 26 personally mastering strategy palette

skills by, 211–214 Pfizer example of complexity and,

193–196 questions to guide strategy formulation

and execution by, 205–206 Red Hat example of, 137–138 renewal approach and, 159, 166–168,

206 setting context for others by, 212, 214 shaping approach and, 136–137, 206 strategy application problems and, 20 strategy approach implementation and

requirements for, 15, 47 strategy collage and, 197–199, 198f, 209 strategy palette and, 14–15, 14f, 18, 191,

211–214 Tata Consultancy Services (TCS) and, 59 3M example of, 83–84 tips and traps for, 209, 209t–210t visionary approach and, 97, 105,

110–111, 205–206 Walmart example of, 54

learning from mavericks, 94, 98 legacy software architectures, 120 legacy thinking, 169t legacy trap, 154 leveraged buyouts, 145 Levin, Simon, 6, 117 Li & Fung, 121, 128, 133 Linux language, 121, 122 Lochridge, Richard, 30 Lockheed Martin, 179 Louis Dreyfus Group, 107 Loveman, Gary, 78

Ma, Jack, 131 Mahindra, 41, 42–43 Mahindra, Anand, 41, 42 malleability

as business environment dimension, 6, 17

diagnostician leadership role and, 198, 199

mathematical basis and simulations for, 22–23, 23f

shaping approach used with, 115, 116, 118, 119f, 120, 123, 129–130, 130f, 139

as strategy palette axis, 7f, 17 traps in perception of, 19 visionary approach and, 93, 103, 104f,

111, 112t management

adaptive approach with, 82 of change, 146, 170 innovation decisions and, 81 of platforms, 129 program management office (PMO)

for, 163 renewal approach and, 155, 170 3M example of principles for, 83–84

management work-outs, at Quintiles, 51 market attractiveness, analysis of, 37–38 Marriott, 102 Mars, 9, 16t, 25–27, 28, 37, 52 Mars, Frank, 25 MasterCraft suite of tools (Tata

Consultancy Services), 59 Mauborgne, Renée, 94 mavericks, learning from, 94, 98 maverick scan, 105 Mavica brand camera, 153 McDonald’s, 170 McGrath, Rita, 9, 64 McKnight, William, 83 megatrends, 11, 90, 93, 98, 99, 102, 170 Michaels, Paul, 16t, 25–27, 28 Microsoft, 105 Mintzberg, Henry, 64 mobile technology, 102–103 Mobiquity, 101–103, 107–108

Index.indd 255 20/03/15 4:45 PM

256 Index

Mobiquity Labs, 103 Moore, James, 117 multi-armed bandit (MAB) simulation

model, 24, 223–225 multidimensional approaches. See

ambidexterity Murdoch, Rupert, 61 Mylan, 44–45

Nalebuff, Barry, 117 nanotechnology, 93 Nasser, Jac, 67 Nelson, Richard, 64 Netflix, 75, 82, 187 News Corporation, 61 Nokia, 120, 129 Nooyi, Indra, 174–175, 197, 200, 202, 204,

207, 208–209 NovoCare Club, 114 Novo Nordisk, 13, 113–115, 121, 125, 126,

128, 133–134, 136

open innovation, 3, 118 opportunity identification

ambidextrous organizations and, 176 information collection for, 134 in shaping strategy, 116, 134 in visionary approach, 97–99, 102,

104–105, 106, 111, 112t Oracle, 122, 123 orchestrating

Alibaba example of, 132–133 building a platform step in, 127–128 operating a platform step in, 128–129 shaping approach and, 7, 12, 12f, 115,

116f, 121–123, 124–125, 126, 127–129, 131, 132, 133–134, 135, 139, 140t

orchestrator model, 118 O’Reilly, Charles, 176 organization

adaptive approach and, 79–81 AIG example of culture and, 165–166 ambidextrous, 176

classical approach and, 50–51 delayering of, 146, 160, 162–163 evolvable, 187 Intuit example of, 80–81 program management office (PMO)

in, 163 Quintiles example of, 51 Red Hat example of, 137–138 renewal approach and, 159, 162–163 segmenter leadership role and, 198,

200–201 self-organization approach to

ambidexterity in, 22, 178, 178f, 184–185

shaping approach and, 133, 135–136 strategy application and, 20 strategy approach implementation and

requirements for, 15 visionary approach and, 97, 107–109

organizational culture. See culture

Page, Larry, 73 PepsiCo, 173–175, 177, 180, 197, 200, 204,

209 performance tracking, 48–49 persistency trap, 154, 169t persisting, in visionary approach, 11, 11f,

90, 97, 90f, 110 Peters, Tom, 73 Pfizer, 52–53, 193–196, 199, 203 PhotoStream feature, Facebook, 135 Picasso, Pablo, 176 Pike, Tom, 35–36, 51, 182 planning

action plans resulting from, 45–46 in classical approach, 7, 8, 8f, 27, 28, 28f,

35–36, 42–45, 53, 54–55, 56t, 68, 207 cycles and horizon in, 44 disciplined approach to, 44–45 discovery-based, 64 economizing in renewal approach

using, 153–156 information for, 48 leadership in, 53, 207

Index.indd 256 20/03/15 4:45 PM

Index 257

Mahindra example of, 42–43 Mars example of, 26 Mylan example of, 44–45 Quintiles example of, 35–36 setting strategic direction using, 43–44 simulating strategy in, 46–47 strategy choice and, 20 visionary approach with, 100–101

platform businesses concept, 9, 16t platforms, in shaping approach

building, 127–128 information sharing using, 133–134,

140t operating, 128–129

Playdom, 121 Playfish, 121 Porter, Michael, 9, 30–31, 37 portfolio of experiments, in adaptive

approach, 68, 72–73, 77, 78, 79 portfolio shifters, 171–172, 171f positioning

AIG and, 165 Amazon.com and, 172 classical approach using, 7, 8, 17, 28, 32,

37, 39–40 Diageo and, 38 Huawei and, 38–39 Mahindra and, 41 Mars and, 25 PepsiCo and, 174 Procter & Gamble and, 41 resource-based view of, 31 start-ups and, 182 Walmart and, 54

Prahalad, C. K., 9, 31, 94, 118 predictability

as business environment dimension, 6 diagnostician leadership role and, 198,

199 disrupter leadership role, 201 traps in perception of, 19 See also unpredictability

preemptive transformers using, 170–171, 171f

Prius brand automobiles, 71

Procter & Gamble (P&G), 32, 41, 49 program management office (PMO), 163 Progressive, 77–78

Qualcomm Incorporated, 170–171 Qualcomm Ventures, 171 Quintiles, 11–12, 18, 35–36, 51, 87–89

Ramaswamy, Venkat, 118 reacting, in renewal approach, 13, 13f, 144,

144f, 206 Read, Ian, 52, 53, 193–195, 196, 199, 200,

203 Realize Your Potential program (Tata

Consultancy Services), 59 Red Hat, 121–123, 125, 128, 137–138 reengineering, 146, 163 Remington Typewriter Company, 106 renewal approach to strategy, 141–172

actions consistent with, 168 AIG examples in, 157–158, 165–166 American Express example of, 14,

141–143, 145, 163 Bausch & Lomb examples of, 148–149,

161, 167–168 business environment dimension and,

7, 7f, 15t combinations of approaches in, 144 core idea in, 7, 15t, 143–144, 144f culture in, 164–166 description of, 13–14, 13f economizing phase in, 153–156 focus in, 148–149 implementation of, 159–168 information and, 160–161 innovation and, 161–162 iPad app for exploring, 23 key elements, examples, and traps of,

15t–16t Kodak example of, 153–154 leadership in, 166–168, 206 life-cycle stage changes and, 147–148,

147f, 148f

Index.indd 257 20/03/15 4:45 PM

258 Index

renewal approach to strategy (continued ) mathematical basis and simulations for,

22–23, 23f organization in 162–163 other strategy approaches compared

with, 13, 145–146 pivot to growth phase in, 156–158, 163 reacting to triggers in, 152–153 related approaches with, 16t shareholder return from successfully

matching environment with, 8 simulating strategy in, 158–159, 159t strategizing in, 150–158, 224–225, 225f strategy palette used with, 14–15, 14f temporary aspect of, 144 thought flows used in, 13, 13f, 144, 144f tips and traps in, 168–169, 169t transformations in, 150–151, 151f, 152f turning around successful company in,

170–172, 171f when to apply, 144–148, 147f, 148f

renewal environment archetypal approach to strategy used

with, 7 assessing your business for, 150 business environment dimension and,

7, 7f shareholder return from successfully

matching strategy with, 8 Renwick, Glenn, 78 restructuring, 27, 141, 145, 155, 160,

161, 162, 163, 165. See also renewal approach to strategy

risk taking in adaptive approach, 69 organizational culture and, 164, 180 Pfizer and, 195 shaping strategy and, 115

rivals, in five forces framework, 30 Rumsfeld, Donald, 70

salesperson leadership role AIG example of, 204 communication by, 24, 198, 203–204

description of, 24, 198 strategy collage and, 197, 198f tasks of, 203–204

SAP, 122, 123 Saunders, Brent, 149, 161, 167–169 scale

BCG matrix using, 30 classical approach and, 16t, 28, 35, 38,

41, 42, 49, 52, 54 competitive advantage and, 30, 31, 31f,

39–41 culture and, 52 innovation and, 49 Mars example of, 25, 27 See also size

scaling up, in adaptive approach, 10, 10f, 60f, 61, 207

segmenter leadership role description of, 24, 198 PepsiCo example of, 200 strategy collage and, 197, 198f tasks of, 200–201

Seibel, Bill, 102 selecting approaches, in adaptive

approach, 10, 10f, 60f, 61, 207 self-assessment tool, on approach to

strategy, 24, 212, 214–217 self-challenge culture, in adaptive

approach, 71–72 self-organization

ambidexterity approach using, 22, 178, 178f, 184–185

Haier example of, 185 self-tuning algorithms, for ambidexterity,

185–187, 187f separation

ambidexterity approach using, 22, 175, 177, 178f, 179–181, 190

of businesses, 176 Towers Watson example of, 179–181

serial temporary advantage, 10, 61 7-Eleven, 69–70 shaping approach to strategy, 113–140

actions consistent with, 138 Alibaba example of, 131–133

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Index 259

business environment dimension and, 7, 7f, 15t

core idea in, 7, 15t, 115–117, 116t culture and, 136 description of, 12–13, 12f engaging stakeholders in, 124–127,

126f evolving ecosystems in, 129–131 implementation of, 133–138 information and, 133–134 innovation and, 134–135 iPad app for exploring, 23 key elements, examples, and traps of,

15t–16t leadership and, 136–138, 206 mathematical basis and simulations for,

22–23, 23f mutual value proposition in, 125, 126f Novo Nordisk example of, 13, 113–115 orchestrating collaboration in, 127–129 organization and, 135–136 other strategy approaches compared

with, 12–13, 117–118, 137–138, 139 Red Hat example of, 137–138 related approaches with, 9, 16t shareholder return from successfully

matching environment with, 8 simulating strategy in, 129–130, 130f,

224–225, 225f strategizing in, 123–133 strategy palette used with, 14–15, 14f thought flows used in, 12, 12f, 115, 116f tips and traps in, 139, 139t–140t when to apply, 118–123, 119f

shaping environment archetypal approach to strategy used

with, 7 assessing your business for, 123 business environment dimension and,

7, 7f shareholder return from successfully

matching strategy with, 8 Shell International, 44 Shulman, Lawrence, 31 simple rules-based strategy, 9, 64, 80

simulations adaptive approach and, 74, 74f classical approach and, 46–47 multi-armed bandit (MAB) model for,

223–225, 225f renewal approach and, 158–159, 159t shaping approach and, 129–130, 130f visionary approach and, 103, 104f

single-mindedness, in visionary approach, 89

size BCG matrix and, 30 classical approach and, 8, 29, 30, 32,

39, 56t competitive advantage and, 31f, 39,

40 visionary approach and, 90 See also scale

Skunk Works, Lockheed Martin, 179 Smith, Brad, 80, 81 Snapshot telematic device, 77–78 Sony, 153 Snyder, Scott, 102, 108 Sørensen, Lars, 113–114, 115, 125, 136 specialization

classical organizations using, 50, 52 competitive advantage, 31f, 39 Haier and, 185 Mahindra and, 41 Quintiles and, 51 shaping organizations using, 131, 140t visionary organizations using, 108

speed accelerator leadership role and, 24,

199 adaptive approach and, 63, 72, 75, 78,

79, 80, 86t culture for, 109 innovation and, 106 leadership and, 167 Mobiquity example of, 101–103 technological disruption and, 153, 154 visionary approach and, 101–103, 104,

106, 109 Zara example of, 61–63, 63f

Index.indd 259 20/03/15 4:45 PM

260 Index

stakeholder management theory, 117 stakeholders

engaging, 124–125 identifying, 126–127 mutual value proposition with, 125, 126f shaping approach and, 121–122,

124–127, 126f stalemate, in competitive advantage, 30,

31f, 39 Stalk, George, 31, 64 standardization

in adaptive organizations, 81 in classical organizations, 50 of project reports and metrics, 48, 163

strategic planning. See planning strategizing

in adaptive approach, 68–76 AIG example of, 157–158 Alibaba example of, 131–133 in classical approach, 34–47 Mobiquity example of, 101–103 in renewal approach, 150–158 self-assessment of current practices

in, 215 in shaping approach, 123–133 Telenor example of, 75–76 in visionary approach, 97–103

strategy approaches adaptive. See adaptive approach to

strategy application problems after selection

of, 20 classical. See classical approach to

strategy collage of. See strategy collage diversity and range of environments

and, 2, 2f leaders as animators of, 18–19, 197,

198f, 199 mismatches of business environment

with choice of, 19–20 multi-armed bandit (MAB) simulation

model for choosing, 223–225, 225f multiple. See ambidexterity palette using. See strategy palette

performance gap for companies and need for, 2, 3f

proliferation of, 3, 4f renewal. See renewal approach to

strategy research evidence on, 5–6 selecting and using right approach, 1–4 self-assessment of, 24, 212, 214–217 shaping. See shaping approach to

strategy traps in using, 19–20 visionary. See visionary approach to

strategy strategy archetypes, 113–140

iPad app for exploring, 23 mathematical basis and simulations for,

22–23, 23f multiple. See ambidexterity overview of, 7–14, 14f See also adaptive approach to strategy;

classical approach to strategy; renewal approach to strategy; shaping approach to strategy; visionary approach to strategy

strategy collage description of, 18–19, 20, 196–197 leaders as animators of, 18–19, 197,

198f, 199 leadership roles needed with, 197–199,

198f, 209. See also accelerator leadership role; antenna leadership role; diagnostician leadership role; disrupter leadership role; inquisitor leadership role; segmenter leadership role; salesperson leadership role; team coach leadership role

strategy palette and, 14 tips and traps with, 209, 209t–210t

strategy palette axes in, 7f, 17 ambidexterity and, 176, 186, 190–191 application levels for, 14–19, 14f applying to business and life, 212–213 deepening understanding of, 212–213 description of, 5, 6–7, 7f

Index.indd 260 20/03/15 4:45 PM

Index 261

diversifying business experience and, 213–214

examples of companies using, 15t–16t key elements of, 15t–16t leadership roles needed with, 18,

197–199, 198f. See also accelerator leadership role; antenna leadership role; diagnostician leadership role; disrupter leadership role; inquisitor leadership role; segmenter leadership role; salesperson leadership role; team coach leadership role

mathematical basis of, 22–23, 23f personally mastering skills for, 211–214 related schools of strategy with, 9, 16t setting context for others for, 214

streamlining, 145, 146, 157, 162, 165. See also renewal approach to strategy

substitutes, in five forces framework, 30 successful companies, turning around,

170–172, 171f suppliers, in five forces framework, 30 supply chains, Zara’s use of, 62 sustainable competitive advantage, 8, 10,

28, 29, 33, 40, 61 switching

ambidexterity approach using, 22, 178, 178f, 181–184

Corning example of, 183–184 Symbian platform, 120 symbiosis, 117 system advantage, 118

talent management team coach leadership role and, 198,

202–203 Telenor’s approach to, 76

Taobao, 129, 131, 132 Tata Consultancy Services (TCS), 10–11,

57–60 team coach leadership role

description of, 24, 198 strategy collage and, 197, 198f tasks of, 202–203

technological change, 1, 15t, 17, 32, 57–58, 93, 94, 118, 120, 154, 176

telematics, 77–78 Telenor, 71, 75–76, 177 temporary advantage, 10, 16t, 61, 64, 68 3M, 83–84, 171–172 time-based competition, 64, 146 Timeline feature, Facebook, 135 timing

with collaboration in shaping approach, 127

life-cycle stage changes and, 147–148, 147f, 148f

in shaping approach, 139t in visionary approach, 89, 90, 91–92,

93, 112t tips and traps

adaptive approach and, 84–86, 86t classical approach and, 54–55, 56t leadership roles and, 209, 209t–210t renewal approach and, 168–169, 169t shaping approach and, 139, 139t–140t strategy collage and, 209, 209t–210t visionary approach and, 111, 112t

TiVo, 106–107 T-Mobile, 39 TNT, 29 Towers Watson, 178, 179–181 Toyota, 71, 179 transformation

renewal approach and, 16t, 19, 145 success rate of, 150–151, 151t trajectories of phases in, 151, 152f

Transocean, 146 traps

key elements and examples of strategies and, 15t–16t

See also tips and traps triggers, in renewal approach, 19, 152–153 turnarounds, 16t, 145, 150

leaders and, 166 for successful companies,

170–171, 171f triggers for, 19 See also renewal approach to strategy

Index.indd 261 20/03/15 4:45 PM

262 Index

Tushman, Michael, 176 23andMe, 91–92, 98, 101, 109

uncertainty adaptive approach used with, 65–66,

65f, 74, 74f tool for segmenting, 70–71, 71f

underexploited knowns, 70, 71f Unilever, 32 US Food and Drug Administration

(FDA), 92, 196 unknown unknowns, 70, 71, 71f unpredictability

adaptive approach used with, 65–66, 65f, 74, 74f, 76, 85

as business environment dimension, 6, 7f, 17

mathematical basis and simulations for, 22–23, 23f

shaping approach used with, 116, 118, 119–120, 119f, 129–130, 130f, 131–132, 139

traps in perception of, 19 UPS, 29, 95–96 urbanization, 93, 107

value creation, cocreation of, 118 value propositions

in innovation, 135 in shaping approach, 125, 126f in visionary approach, 97, 99, 100f, 112t

variance in adaptive approach, 72–73 in classical approach, 50, 72–73

varying approaches, in adaptive approach, 10, 10f, 60f, 61, 207

Venter, Craig, 91 vision

Alibaba example of, 131–133 American Express example of, 143 communicating, 97, 101–103, 107–108,

112t, 136 formulating, 99–100, 100f

innovation’s role in defining and realizing, 106–107

leadership in renewal approach and, 166–167

shaping approach and development of, 124–125, 131–133

visionary cultures anchored on, 109 visionary approach to strategy, 87–112

actions consistent with, 111 business environment dimension and,

7, 7f, 15t communicating vision in, 101–103,

107–108 core idea in, 7, 15t, 89–90 culture and, 109 description of, 11–12, 11f formulating vision in, 99–100, 100f implementation of, 97, 104–105 information and, 104–106 innovation and, 106–107 iPad app for exploring, 23 key elements, examples, and traps of,

15t–16t leadership and, 110–111, 205–206, 207 mathematical basis and simulations for,

22–23, 23f mismatch of perceived environment

with, 20 opportunity identification in, 97–99 organization and, 107–109 other strategy approaches compared

with, 11, 13, 139 planning in, 100–101 Quintiles example of, 11–12, 87–89,

108–109 related approaches with, 9, 16t, 94 shareholder return from successfully

matching environment with, 8 simulating strategy in, 103, 104f,

224–225, 225f strategizing in, 97–103 strategy palette used with, 14–15, 14f thought flows used in, 11, 11f, 90, 90f timing in, 89, 90, 91–92 , 93 23andMe example of, 91–92

Index.indd 262 20/03/15 4:45 PM

Index 263

tips and traps in, 111, 112t UPS example of, 95–96 when to apply, 93–96

visionary environment archetypal approach to strategy used

with, 7 assessing your business for, 96 business environment dimension and,

7, 7f shareholder return from successfully

matching strategy with, 8 vision statements, 97, 99 Vivacious Enterprise platform (Tata

Consultancy Services), 60 Vodafone, 38 volume, in competitive advantage, 30,

31f, 39, 40 Volvo, 155 VUCA (volatility, uncertainty,

complexity, ambiguity) environments, 68

Wallenberg family, 92 Walmart, 54 Walter, Bob, 143

Walton, Sam, 54 Weeks, Wendell, 183 Welch, Jack, 34, 40, 51 Wernerfelt, Birger, 31 WhatsApp, 75, 105 Whitehurst, Jim, 121–122, 137–138 William Wrigley Junior Company,

27 Winter, Sidney, 64 Wireless Innovation Council, 102 Wojcicki, Anne, 91–92, 99, 100–101,

109, 110 working-capital factoring, 145 World Diabetes Foundation, 114 Wurster, Tom, 117–118 Wyeth, 193

Xerox, 89

Zara, 61–63, 63f, 66 Zeng, Ming, 131–133 Zhang, Ruimin, 185 Zipcar, 107 Zynga, 121

Index.indd 263 20/03/15 4:45 PM

Index.indd 264 20/03/15 4:45 PM

ACKN OWLE DG M E NTS

This book has been a true collaborative effort of many within and beyond

our firm, The Boston Consulting Group, and we sincerely thank all of those

who have contributed in many ways.

Special credit is due to Kaelin Goulet and Thijs Venema, ambassadors to

the BCG Strategy Institute, who worked tirelessly and selflessly over a one-

year period to help develop the ideas, examples, interviews, and analyses

that constitute the foundation of the book and without whose great dedica-

tion and partnership the project could not have come to fruition.

Thanks are also due to other Strategy Institute ambassadors who con-

tributed significantly to the ideas in this book. Claire Love cowrote the

original HBR article “Your Strategy Needs a Strategy,” which was the

trigger for writing the book and which forms its conceptual foundation.

Georg Wittenburg developed the simulation model for testing the effec-

tiveness of different strategies in different environments and conceived

and designed the companion app, which experientially simulates dif-

ferent approaches to strategy. Amin Venjara ran the development pro-

cess for the app. Tomasz Mrozowski, Lisanne Pueschel, and Caroline

Guan developed the illustrations and analyses for the book, and Bastian

Bergmann ran the time- consuming permissions, editing, and finishing

process. Other SI ambassadors helped lay the conceptual foundations

for the book; they include Jussi Lehtinen (algorithmic strategy); Nishant

Mathur, Charles Hendren, Matt Stack, Peter Goss, Eugene Goh, and

Sofia Elizondo (adaptive strategy); Akira Shibata (strategy styles survey

and analytics); Alex Bernhardt (shaping strategy); Filippo Scognamiglio

(experience curve revisited); Judith Wallenstein (social dimensions of

strategy); and Maya Said (adaptive strategy capabilities).

We also thank our academic collaborators, who guided our thinking

throughout the process. Professor Simon Levin of Princeton University

helped us understand and learn from biological strategies and evolutionary

processes and supported us in developing an index of adaptive advantage

Acknowledgments.indd 265 18/03/15 5:18 PM

266 Acknowledgments

for US companies. Mihnea Moldoveanu of the Rotman School, Toronto

University, inspired us with his thinking on metaheuristics; and an algorith-

mic conception of strategy was the trigger for the simulation model. Philip

Tillmans, University of Aachen, was also a coauthor on the original HBR

article. Thomas Fink of the London Institute of Mathematical Sciences;

Luciano Pietronero, Rome University; and Can Uslay, Rutgers University,

also contributed significantly to our thinking.

We are especially indebted to the CEOs and other leaders who agreed to

be interviewed for this book and who shared their experiences and reflec-

tions on different approaches to strategy under different circumstances: Tom

Pike (CEO, Quintiles), Dennis Gillings (Chairman and Founder, Quintiles),

Anne Wojcicki (CEO, 23andMe), Jim Whitehurst (CEO, Red Hat), Scott

Snyder (CEO, Mobiquity), Ian Read (Chairman and CEO, Pfizer), Kenneth

Chenault (CEO, Amex), Ming Zeng (CSO, Alibaba), Heather Bresch (CEO,

Mylan), John Haley (CEO, Towers Watson), Indra Nooyi (CEO, PepsiCo),

Natarajan Chandrashekaran (CEO, Tata Consulting Services), Peter

Hancock (CEO, AIG), Brent Saunders (CEO, Forest Labs), Guo Ping (CEO,

Huawei), Paul Michaels (CEO, Mars), Anand Mahindra (CEO, Mahindra),

and Jon Fredrik Baksaas (CEO, Telenor).

We are grateful to our BCG partners and former partners who contrib-

uted to various publications that paved the way for this book, including

Mike Deimler, Ron Nicol, Rachel Lee, Yves Morieux, Ted Chan, Roselinde

Torres, Mike Shanahan, Philip Evans, George Stalk, Gideon Walter, Marcus

Bokkerink, Rob Trollinger, Sandy Moose, and Wolfgang Thiel. Also to

those who opened doors to their clients to support our research: Andrew

Toma, Tom Reichert, Francois Candelon, Dag Bjornland, Craig Lawton,

Achim Schwetlick, Grant Freeland, Sharon Marcil, Vikram Bhalla, and

Roselinde Torres. We thank our former and current CEOs for encourage-

ment and help in removing obstacles throughout the process: Carl Stern,

Hans Paul Buerkner, and Rich Lesser.

Thanks are due to our friends at Harvard Business Review Press for both

their encouragement and for managing the project so professionally and

smoothly, especially to Melinda Merino, our editor.

Acknowledgments.indd 266 18/03/15 5:18 PM

Acknowledgments 267

We are grateful to Bernadette Hertz for tireless administrative support.

Finally, we dedicate this book to BCG’s founder, Bruce Henderson, who

was an early pioneer in business strategy and strategy consulting and who

shaped the intellectual foundations of strategy at BCG and beyond. We

celebrate the hundredth anniversary of his birth on April 30, 2015, which

roughly coincides with the publication date for this book. We hope that our

effort proves worthy of this coincidence and renews and adds in a small way

to his inestimable legacy.

Acknowledgments.indd 267 18/03/15 5:18 PM

Acknowledgments.indd 268 18/03/15 5:18 PM

ABOUT TH E AUTH O RS

MARTIN REEVES is a senior partner and managing director in BCG’s New York office and leads the Bruce Henderson Institute, BCG’s vehicle

for research and translation of ideas from beyond the world of business into

practical frameworks and tools for business strategy.

Martin has devoted a significant part of his career to developing and

applying new ideas in business strategy. He was named a BCG Fellow in

2008, and he has published and spoken widely on strategy issues. He splits

his time equally between research and client service. His interests include

self-tuning organizations, corporate longevity, commoditization, strategy

and sustainability, new bases of competitive advantage, the economics of

trust, adaptive strategy, and managerial heuristics.

Martin joined BCG in London in 1989 and later moved to Tokyo, where

he led the firm’s Japan Health Care practice for eight years and was responsi-

ble for BCG’s business with global clients. He has led numerous strategy and

organizational assignments, both for individual companies and for industry

associations across the globe.

Martin lives in New York City with his wife Zhenya. He is the proud

father of five: Thomas, Morris, Alexandra, Anastasia, and Ekaterina.

KNUT HAANÆS is a senior partner and the global leader of BCG’s Strategy practice. He also leads the BCG Geneva office and has previously been office

administrator of BCG Oslo.

Knut consults widely on strategy with clients across multiple industries

and sectors, focusing on value creation and growth. Knut also has a deep

passion for sustainability and has worked for international organizations

such as the World Economic Forum (WEF) and the World Wide Fund

for Nature (WWF). In particular, he is interested in how sustainability can

drive innovation and new business models. Knut is also co-responsible for

the collaboration between BCG and MIT Sloan Management Review in the area

of strategies for sustainability.

About_the_Author.indd 269 18/03/15 3:29 PM

270 About the Authors

Knut has published more than twenty articles on strategy and sustain-

ability in journals such as Harvard Business Review, MIT Sloan Management

Review, Business Strategy Review, Journal of Applied Corporate Finance, European

Management Review, Scandinavian Management Review, and has authored a num-

ber of BCG reports.

Previously, Knut was executive director of the Research Council of

Norway. He has also been an associate professor at the BI Norwegian

Business School and a research associate at IMD in Switzerland. His first job

was as a trainee at the trade council in the Norwegian Embassy in Paris. Knut

holds an MSc in economics from the Norwegian School of Economics and

a PhD in strategy from Copenhagen Business School. He was subsequently

a visiting scholar at Stanford University, sponsored by the Scandinavian

Consortium for Organizational Research (SCANCOR).

Knut is married to Sabine and has two children, Nora and Maxim.

JANMEJAYA SINHA is chairman of BCG’s Asia Pacific practice. He is also a member of BCG’s global Executive Committee.

Janmejaya works extensively with clients in the United States, United

Kingdom, Asia, Australia, and India over a range of issues encompassing

large-scale organization transformation, strategy, governance, and fam-

ily business issues. He has been a member of various committees set up by

the government of India, the Reserve Bank of India (RBI), and the Indian

Banks’ Association (IBA). He is currently chairman of the Confederation of

Indian Industry’s (CII) Committee on Financial Inclusion.

Janmejaya writes extensively for the press and is a regular speaker at the

World Economic Forum, the Confederation of Indian Industry (CII), the

Indian Banks’ Association (IBA), the Federation of Indian Chambers of

Commerce and Industry (FICCI), the Reserve Bank of India (RBI), and

other media events. He is a coauthor of the book Own the Future: 50 Ways to

Win from The Boston Consulting Group. Janmejaya has presented a TED talk on

“What’s Really Happening in Emerging Markets” as part of a series of talks

curated by TED and BCG. In 2010 Consulting magazine named him one of

the Top 25 most influential consultants in the world.

About_the_Author.indd 270 18/03/15 3:29 PM

About the Authors 271

Prior to joining The Boston Consulting Group, Janmejaya worked for

the Reserve Bank of India for several years in various departments. He also

worked briefly for the World Bank.

He holds a PhD from the Woodrow Wilson School of Public and

International Affairs, Princeton University, a BA and an MA in economics

from Clare College, Cambridge University, and a BA and an MA in history

from St. Stephen’s College, Delhi University.

Janmejaya lives with his wife Malvika in Mumbai and has two sons,

Amartya and Advait.

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About_the_Author.indd 272 18/03/15 3:29 PM

Contents
Chapter 1
Chapter 2
Chapter 3
CHAPTER 4
Chapter 5
Chapter 6
Chapter 7
Chapter 8
Epilogue
Appendix A
Appendix B
Appendix C
NOTES
INDEX
ACKNOWLEDGMENTS
ABOUT THE AUTHORS