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Words: Michael E. Raynor and Dwight L. Allen
Most companies (not yours, of course, but many companies you know well) face a future characterized by either mediocrity or ruin. Some of this is a consequence of the relativity of economic performance: only 10 percent of companies can be in the top 10 percent, but there is something more sinister at work. Thanks to their inability to manage strategic risk effectively, most managers either: (1) make big bets and accept the possibility of total failure as the price of possible greatness; or (2) avoid the distinctive positions that define the most successful strategies, opting instead for “me too” strategic profiles, accepting uninspired returns as the price of mere survival.
The source of this conundrum is a central, but too-often overlooked, tension in strategic planning between the possibilities for greatness created by bold, differentiated and hard-to-reverse commitments and the increased likelihood of failure those same choices create.
When a good product fails
Take, for example, Sony’s much-analyzed and much-maligned, experience with the Betamax VCR. This is often held up as an example of strategic and marketing incompetence, but in fact Sony made precisely the kinds of bets required for market dominance to be even a possibility. The company had cutting-edge recording technology and focused its efforts on a specific customer application: time-shifting television programs. Had those choices been the right ones, we could have added Betamax to the list that includes the Walkman, the CD and the Playstation 2.
As it turned out, the “killer app” was not recording TV shows but renting movies. Sony’s chief competitor at the time, Matsushita, made very different commitments with its VHS format, focusing on low-cost and widespread distribution made possible through liberal licensing terms to rival manufacturers. When the movie studios reversed their position on VCRs and began making movies widely available, VHS’s lower price gave it a marginally higher market share that spiraled into complete victory.
Sony’s strategy, then, although entirely reasonable, was wrong. The problem is that there was no way of knowing this when Sony had to make its commitments. Matsushita was no more prescient than Sony… but it was much luckier.
Capitalizing on a new medium
Let’s contrast making “reasonable but wrong” attempts at greatness with not pursuing greatness at all. By 1997, most North American newspaper publishers had an online presence. They were all sure that the internet could change everything, but none knew precisely how. Straight-faced predictions made in 1996 called for two-thirds of the newspaper industry’s classified advertising to migrate to the internet within 18 months, so something had to happen, and fast. And beyond these short-term threats, the critical long-term uncertainty was whether or not the internet and newspapers would compete, coexist, or complement each other, which had important implications for how internet and newsprint operations would interact.
As it turned out, the revolution was slow in coming. In North American and European markets, classified advertising and readership have continued to erode, but they have not collapsed. As a result, newspapers have had to remain newspapers while the internet divisions were left to explore the new medium on their terms. Success in each industry has required managers of the newsprint and online divisions to focus on their respective operations.
However, most publishers have not only held operating managers accountable for their divisional results, but also insisted that they simultaneously attend to the longer-term issues surrounding when and how to combine newsprint and online capabilities into a new hybrid medium. This has diluted the ability of managers to focus on their own divisions. Unable to commit either to the current industry structure or to creating a new one, managers could do no better than keep one eye on independence and one eye on possible integration.
This wall-eyed approach avoided disaster, for newspapers have had a decidedly lower bankruptcy rate than dot-com start-ups, but the longevity has come at the cost of having accomplished nothing exceptional. After all, it wasn’t newspapers that gave us the defining businesses of the internet, but eBay, Google and Craigslist.
Managing the risk
It turns out that this trade-off between the possibility of greatness and increased chances of survival is a general phenomenon. Consider some definitive research on this topic I’ve done with colleagues at the Richard Ivey School of Business in London, Canada. The responses came from Canadian businesses of every size, industry and ownership structure. Our conclusions are based on the statistical equivalent of more than 40,000 survey responses, and, as far as I know, this is the single largest investigation into the connections between strategy, performance and firm survival.
Survey responses allowed us to place each company along the “strategy continuum” between two extremes: cost leadership or product differentiation – less formally, between being the cheapest and being the best. We found that firms concentrating on one extreme or the other tend to be more profitable than those with “in-the-middle” profiles. This validates the oft-repeated observation that success requires vision, focus and commitment – qualities that manifest themselves in bold, hard-to-reverse bets.
However, we also found that firms with these extreme strategic positions had much higher mortality rates than firms in the middle. Even after controlling for firm size, age, industry and other factors known to affect firm-level survival, the strategy effect remained material and significant.
In short, there is a tradeoff between risk and return that has been systematically ignored in most strategy research and in essentially all practitioner-oriented advice. As evidence, ask yourself: when was the last time you read a strategy book that admitted that by seeking to go from good to great you might just end up going from good to gone?
What makes this trade-off between strategic risk and return so debilitating? The fact that in most companies, the same managers who make strategic commitments must also cope with the risk created by those commitments. And even though the CEO gets all the press, it is middle managers who typically make and keep a company’s strategic commitments: which products to launch, which markets to enter, how to improve quality while reducing cost and so on. Faced with a choice between possible greatness and survival, it should come as no surprise that survival takes priority. Most companies end up average not because of the laws of statistics, but because they can’t muster the courage to try to be anything more.
Success, online and in print
The answer is not simply to take the risks that greatness seems to demand. Rather, the key is to manage the strategic risk created by the commitments companies seeking greatness must make. Doing this well requires separating who makes these commitments from who deals with uncertainty.
We can see the germ of this in how the more successful newspapers have dealt with the challenges of the internet. While most stayed in the middle of strategic space, their offline and online divisions neither afoot nor on horseback, and suffered the mediocre performance typically associated with such an ambiguous strategic position, papers like Toronto-based The Globe & Mail (daily circ. 330,000) have gone from strength to strength. In the late 1990s, The Globe won a newspaper circulation war while its online division was recognized as among the best in North America. Today, it remains a pioneer, successfully integrating new and old media by, for example, cross-promoting content and advertisers. In the process, it has invented the new millennium newspaper.
How was The Globe, among others, able to win first in print, then online, and in today’s converged world while others merely muddled through? Senior management took responsibility for long-term strategic uncertainty by first launching an internet division and then ensuring that the internet and newsprint divisions remained sufficiently connected that they could integrate if necessary. This left operating managers free to make the aggressive commitments required to deliver success in their individual industries. Each division still had to cope with the operating uncertainties that characterize all businesses in some form or other, but the larger, longer-term strategic uncertainties surrounding the nature of mass communications in an internet age were on senior management’s plate.
Strategy and commitment
The general principle at work here requires each hierarchical level to focus on different time periods. With a time horizon of two to five years, operating managers decide what strategy their organizations should adopt to achieve profitable growth. Strategic risks play out over a longer time horizon, typically five to seven, and sometimes as much as ten years. Dealing with these genuinely strategic risks is the job of senior executives. They consider what longer-term developments might require fundamental changes in the strategies operating managers have committed their divisions to, and create the necessary strategic options. This focus on strategic options defines corporate strategy, compared to the focus on strategic commitments that defines operating managers’ focus on competitive strategy.
This approach breaks the trade-off between risk and return. Firms are no longer consigned to a mediocrity, timidity or disaster born of temerity. When the corporate office manages strategic uncertainty, operating managers can commit to greatness without courting catastrophe.
Michael E. Raynor is the author of The Strategy Paradox: Why committing to success leads to failure (and what to do about it). For more information, go to http://www.thestrategyparadox.com/
For more information
http://www.thestrategyparadox.com/
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