I had the pleasure recently of meeting with Michael Raynor, author of The Strategy Paradox and co-author of The Innovator's Solution.
I wanted to try to convince him that the solution to the Paradox is
designing for organizational resilience, an idea I've been exploring with Steve Barth. Michael wasn't having any of it.
In
a nutshell, the Paradox is that the more you plan and commit to certain
strategies for your organization's future, the more likely you are to
achieve exceptional results, and the more likely you are to achieve
disastrous results. The greater your commitment, the greater you
opportunities and your risks.
The
reason for this is that, by committing to particular strategies and
executing based on those strategies, you will, if your expectations
about the future prove correct, achieve competitive advantage as a
result of that commitment. But, if your expectations about the future
turn out to be very wrong, you will have over-committed your energies
and resources to the wrong things, and will lose big time.
As a
consequence, organizations tend to be shy to commit to strategies
unequivocally. They'll avoid both risks and opportunities. And their
performance will be mediocre.
Michael's solution is to do two divergent things:
- Get
the executive office to manage strategic uncertainty and create
strategic options. This means keeping doors open and being ready to
commit to various alternatives as they emerge, and making small
risk-conscious strategic investments, each of which will pay off if
various future scenarios come to pass. This requires a long-term focus,
scenario planning and balancing investments, committing a little to a
variety of possible alternative possibilities, knowing most of them
will not pan out.
- Get the operating divisions to commit fully
to specific short-term strategies. These strategies need to be set by
the executive office, and division management needs to be resourced to
act on them fully and indemnified if the strategy proves to be the
wrong one.
This combination minimizes risk (by keeping longer
term strategic options open) and maximizes return (by committing
aggressively to shorter-term strategies). He argues that the reason the
Paradox is so little understood in business is that most research on
performance focuses only on successful companies, and ignores the
lessons from spectacular failures.
The process of strategic
uncertainty management or strategic flexibility therefore entails the
following four steps for the executive office:
- Anticipate:
build future state scenarios that suggest alternative ways future
events could unfold and their consequences to the company.
- Formulate: create optimal strategies for each scenario
- Accumulate: assess what strategic real options are available and invest in them
- Operate: manage that portfolio of options (add, cut bait, exercise, commit operating divisions)
Michael
argues that, because the future is so unpredictable, rapid changes
cannot be adapted to (no matter how resilient the organization) and
slow changes encourage incrementalism and expose the organization to
disruptive innovations from competitors.
As a consequence of
the lack of good strategic uncertainty management competence in most
organizations, Michael suggests that the best investment strategy might
be:
- From all the companies in an industry or market,
identify the ones that boldly commit to strategies. These will probably
include those that guess right about the future (spectacular successes)
and those that guess wrong (spectacular failures).
- Because the
outstanding performance of the spectacular successes will more than
offset the poor performance of the spectacular failures, investing in a
'bucket' of these boldly committed companies will achieve a higher rate
of return than investing in the non-committed companies, which are
likely to achieve only mediocre performance.
I also spoke with Michael about Elliott Jaques' Requisite Organization
which argues that "managerial hierarchy is a reflection in post-tribal
organizational life of discontinuities in the nature of human
capability". My regular readers will not be surprised that I violently
disagree, and believe that such hierarchy exists because it's essential
to compel acquiescence and obedience of the majority of workers to
mindless, meaningless, soul-destroying work. But that's a subject for
another article.
Michael's newest project revolves around his
organic view of business organizations whose essential purpose, he
argues (contrary to The Corporation's view of their essential pathological nature) is to secure its own survival.
That requires, at least in a 'perfect' market, satisfying all
stakeholders in a balanced way including maximizing their social
welfare, even more than making profits. We discussed how market
'imperfections' (the ability to form oligopolies, the ability to
externalize costs to other countries, the environment and future
generations) distort this seemingly natural and evolutionary
development in the real world. I'm not willing to concede that
organizations are truly this organic. Just as unhealthy societies are
perverted by scarcity, corruption, psychopathy, acquisitiveness, thirst
for power, and greed, so too are corporations in a world where too many
people are chasing too few resources and jobs. When this happens, agile
social structures based on abundance and collective well-being are
replaced by mechanistic, fragile ones based on deliberate perpetuation
of scarcity, power and inequality.
Can organizations, at least
non-hierarchical, responsible enterprises designed for sustainability
truly be resilient? My experience, with much smaller companies than
Michael has studied, is that they can. I believe that size,
and the number of degrees of separation between an entrepreneurial
organization and its customers, partners and community, is the real
cause of lack of organizational resilience, which gives rise to the
need for the complicated and counter-intuitive solution Michael
proposes for giant monoliths.
There is no strategy paradox for
Natural Enterprises -- their capacity for and focus on excellent
need-driven research, innovation, continuous improvisation and acting
responsibly and responsively is their competitive advantage over the
arthritic hierarchical giants, and the key to their inherent resilience
and sustainability.
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