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The Strategy Paradox: Why Committing to Success Leads to Failure (And What to do About It) ReviewAs a strategy consultant, I'm always on the look out for the next book to either recommend to my clients, or that they are likely to gravitate towards, to be prepared with my opinion when asked about the work. And since I have been a fan of Clay Christensen and disruption theory and was looking forward to see what Raynor would do on his own. Thanks goodness for a relaxing the long weekend so I could finally make the time for this.
Also, I have never written a review before. Since I really liked the book and there seemed to be few comments yet doing it justice, I figured I would cut my teeth on this one.
Generally, I have to agree with the HBR review -- he's a disruptive thinker in his own right: this is an approach to corporate strategy that is new, combining the merits of commitment-based strategy with the inescapable need for flexibility. I am looking forward to practically applying the core concepts on behalf of my clients.
The Strategy Paradox: Hidden in Plain Sight
Raynor begins by demonstrating what many of us have long suspected but weren't able to come out and say: when it comes to traditional strategic planning, the emperor has no clothes. Established frameworks -- from Ansoff to Porter to Hamel to, for that matter, Christensen, are premised on an ability to decide today what will be successful tomorrow. We're told again and again that the future will yield its secrets if only we're smart enough and our analysis is rigorous enough.
But prediction is a dark art at best: the data are always ambiguous. Personally, I've never seen a single path forward as clearly the best choice. This means that unfortunately, the most successful strategies are necessarily based on big commitments: it is fine to want to be "agile" and commit only once the data are clear, but the company that guesses right in the face of ambiguity will always outperform the "wait and see" approach of the adapative enterprise.
And so you have to commit big if you want to win big, but when you commit big you create the risk of losing big. That's the Strategy Paradox: the same strategic positions that hold out the promise of extreme success create the possibility of extreme failure.
Raynor demonstrates this both anecdotally and with a truly extraordinary large-scale data set. Anecdotally, in Chapter 2 Raynor has a totally new take on Sony's Betamax and MiniDisc fiascos. The tendency is to look at strategic failures such as these and conclude that the perpetrators were just plain dumb. What Raynor shows is that the strategic choices made, at the time they were made, were perfectly reasonable. Better still, Raynor shows that the opposite choices -- the ones made by Matsuhshita (VHS) and Apple (iPod) respectively were also perfectly reasonable. And that's the point: the future is uncertain, but you have to commit if you want to win big. A "take-it-as-it-comes" approach might have avoided catastrophe, but at the cost of having any real hope of real success. The ultimate winners are determined by the outcomes of unpredictable future events -- in other words, luck.
Raynor then shows that this is not just a one-shot thing. In Chapter 3, drawing on fascinating survey data, he shows that companies with clear cost leadership or product differentiation strategic positions deliver higher average returns than firms that are "stuck in the middle". In other words, big commitments made extreme success much likelier. Now the bad news: those same "extreme" strategic positions have much higher frequency of bankruptcy. Raynor has identified true "strategic" uncertainty -- the risk attached the pursuit of a specific strategy. And it turns out that the better returns that come with commitment-based strategies come at the cost of a higher risk of failure. Raynor's Strategy Paradox is not just a theoretical proposition -- it is a general, empirical fact. I'm left to conclude that, as Raynor says, everything we know about strategy is true, but it's "dangerously incomplete". (I love the drama he infuses into my strategy discussions with clients and colleagues!)
So, there's a risk/return trade-off in strategy. Is this news? I think so: there is no strategy book before now that qualifies its advice on achieving greatness with the caveat that you're also increasing your chance of total failure. In fact, much of strategic thinking is based on the idea that higher returns are correlated with lower variance in returns, and so risk and return are inversely correlated. But these findings are polluted with survivor bias, something Raynor's data correct for, perhaps for the first time. By identifying and empirically substantiating the risk/return tradeoff in strategic planning, Raynor has made a material contribution to the field.
I was convinced that better prediction isn't the answer; if you're not, Raynor spends Chapter 5 talking about why we'll never be able to predict the future with the necessary accuracy, drawing heavily (and respectfully) on the work of N. N. Taleb and Stephen Wolfram in particular.
I was more sceptical of Raynor's claims that the "organizational adaptation" school didn't hold a useful answer, either, but I was largely won over, if only because, as Raynor points out, the adaptation school hasn't done a very good job of defining its own boundaries. In Chapter 4 Raynor begins to sketch out, for the first time, as far as I can tell, what those limits might be, and through this makes it clear that a better answer is needed.
Growth Options vs. Strategic Options
The commentary the book has received on this site doesn't seem to me to describe accurately the true nature of "Strategic Flexibility." Some have described it simply a "portfolio of alternatives" or a way to "invest small in uncertain ventures." This misses the point. Raynor is describing a way for different product groups or divisions in a company to make their own high-intensity commitments yet collectively face lower strategic uncertainty.
For example, in Chapter 7, MSFT in 1988, draws on Beinhocker (Origin of Wealth) but extends it. MSFT's portfolio was more than just different forays into the OS space: each division created capabilities that could be recombined to create a more effective OS strategy than was being explored by any given division. So, for instance, the company was exploring enterprise markets with Unix, consumer markets with Windows, and commercial markets with OS/2. This was not merely covering different bets; it was covering only those bets that could both survive on their own -- and so have growth option value -- and, depending on how the world turned out, be recombined to create a new strategy in the OS market -- and so have strategic option value.
This distinction, between growth options and strategic options, is a significant contribution to the real options field. Raynor's Chapter 7 discussion of BCE (a Canadian telecoms company), brought the difference into focus for me. Growth options are essentially attempts to "run away" from your core business. So, if you're Enron and you think pipelines are boring and in decline, you get into energy trading as a way to pull yourself up by your bootstraps get out of that business. Trading is simply a "growth option" -- an option on entirely new growth trajectories.
Strategic options, on the other hand, are new businesses that are created in order to potentially reinvent and extend your existing core business. BCE got into systems consulting, e-commerce, and media, but not to escape its core telecoms operations; rather, BCE diversified in order to keep open the possibility of reinvigorating the core. At the corporate level, BCE didn't commit to these new initiatives, taking partial equity stakes in a number of different companies that it could dial up or down as circumstances warranted. But at the operating division level, those firms were entirely committed to achieving their own success.
As different market conditions or technologies evolved, BCE would be able to "exercise" its "strategic options" and completely change the strategy of the core telecoms unit but -- and this is the brilliant part -- without ever having had the core telecoms unit attempt to change itself. What Raynor also convinced me of is that strategic options are not an attempt to capture synergies. Strategic options aren't businesses that ARE related, they're businesses that might BECOME related. Strategic options create capabilities the core operations might need, often by forcing the corporate parent to invest in industries it doesn't understand. BCE had a portfolio of high-commitment strategies, but because each created strategic options -- not just a growth option -- for the others, the company as a whole had created a lower strategic risk profile.Uncertainty and Strategic Flexibility
In the end, BCE wasn't able to follow through on its strategy, largely because, according to Raynor, the strategy was largely intuitive, and was not guided by a clear set of frameworks. That's something Raynor sets out to remedy, developing two powerful concepts largely through a case study of Johnson & Johnson that occupies all of chapter 8.
The first part of the solution is Requisite Uncertainty, described first in chapter 6, which is a powerful synthesis of Elliott Jacques's work on hierarchy with Raynor's insight into strategic uncertainty. He provides a powerful distinction between competitive strategy and corporate strategy: competitive strategy lives in the operating units, and is about generating returns; corporate strategy is about managing uncertainty by creating a portfolio of the necessary strategic and growth options.
The reason...Read more›
The Strategy Paradox: Why Committing to Success Leads to Failure (And What to do About It) OverviewA compelling vision.Bold leadership.Decisive action.Unfortunately, these prerequisites of success are almost always the ingredients of failure, too.In fact, most managers seeking to maximize their chances for glory are often unwittingly setting themselves up for ruin.The sad truth is that most companies have left their futures almost entirely to chance, and don't even realize it.The reason?Managers feel they must make choices with far-reaching consequences today, but must base those choices on assumptions about a future they cannot predict.It is this collision between commitment and uncertainty that creates THE STRATEGY PARADOX.This paradox sets up a ubiquitous but little-understood tradeoff.Because managers feel they must base their strategies on assumptions about an unknown future, the more ambitious of them hope their guesses will be right – or that they can somehow adapt to the turbulence that will arise.In fact, only a small number of lucky daredevils prosper, while many more unfortunate, but no less capable managers find themselves at the helms of sinking ships.Realizing this, even if only intuitively, most managers shy away from the bold commitments that success seems to demand, choosing instead timid, unremarkable strategies, sacrificing any chance at greatness for a better chance at mere survival.Michael E. Raynor, coauthor of the bestselling The Innovator's Solution, explains how leaders can break this tradeoff and achieve results historically reserved for the fortunate few even as they reduce the risks they must accept in the pursuit of success.In the cutthroat world of competitive strategy, this is as close as you can come to getting something for nothing.Drawing on leading-edge scholarship and extensive original research, Raynor's revolutionary principle of Requisite Uncertainty yields a clutch of critical, counter-intuitive findings.Among them:-- The Board should not evaluate the CEO based on the company's performance, but instead on the firm's strategic risk profile-- The CEO should not drive results, but manage uncertainty-- Business unit leaders should not focus on execution, but on making strategic choices-- Line managers should not worry about strategic risk, but devote themselves to delivering on commitmentsWith detailed case studies of success and failure at Sony, Microsoft, Vivendi Universal, Johnson & Johnson, AT&T and other major companies in industries from financial services to energy, Raynor presents a concrete framework for strategic action that allows companies to seize today's opportunities while simultaneously preparing for tomorrow's promise.
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