When you substitute flexibility for strategy, your organisation never stands for anything or becomes good at anything, according to this extract from the book Understanding Michael Porter — The Essential Guide to Competition and Strategy
One of the most difficult facts of life for managers is having to make decisions under conditions of uncertainty. And if you operate in a highly uncertain environment, it’s easy to get caught in a false syllogism that goes something like this:
I can’t predict the future.
Strategy requires a prediction of the future. Therefore, I can’t commit to a strategy.
If you can’t predict what’s going to happen next quarter, let alone three to five years from now, maybe it’s safer to stay flexible, run harder, and sleep faster. This logic has pervaded the debate about competition for at least the past decade, if not longer.
But the second premise, Porter argues, is flawed. Great strategies are rarely, if ever, built on a particularly detailed or concrete prediction of the future. Walmart, for example, found itself in the midst of a revolution in retailing, yet its strategy didn’t require Walmart to predict the direction that revolution would take. Since In-N-Out Burger’s launch in 1948, there has been nothing short of a revolution in the way food is produced, prepared, and consumed, yet its strategy didn’t depend on its ability to predict any of those massive changes. BMW’s strategy didn’t require unusual foresight about events that have shaken the auto industry, ranging from an oil shock to the emergence of China as the world’s fastest-growing car market.
You need only a very broad sense of which customers and needs are going to be relatively robust five or ten years from now. Strategy is implicitly a bet that the chosen customers or needs-and the essential trade-offs for meeting them at the right price — will be enduring. In that sense, some value propositions turn out to be more robust than others. Dell’s direct business model was based on the fact that some customers didn’t want, or didn’t need, a retailer or an intermediary such as a reseller to give them advice and information. The brilliance of that positioning choice in the early years of personal computers was that, as customers became more comfortable with computers, the number of customers willing to forego an intermediary would probably grow, not shrink. Dell was positioned in a strategy that was likely to have more growth opportunity than other strategies.
In that sense, Dell made an implicit forecast that proved to be correct, at least up until a few years ago.
The strategy of America Online (AOL) was the mirror image of Dell’s. AOL helped to introduce millions of people to the Internet, making the experience user friendly and charging a premium price for doing so. This positioning choice had an inherent vulnerability. As customers grew more comfortable going online, they would be less likely to need what AOL was configured to deliver. They would inevitably trade up from simple Web pages and hand-holding to deeper functionality or faster speed. Or they would trade down to a more stripped-down Internet service provider at a lower price. Beyond this fundamental bet that the chosen needs will be enduring, strategy does not require what Porter calls “heroic predictions” about the future. Southwest Airlines had only to predict that people would continue to want low-cost, convenient transportation. They did not have to predict the rising concern over terrorism, or the price of jet fuel, or any of a host of variables that have had an impact on the airline industry. In-N-Out Burger had only to predict that some people would continue to want simple fresh burgers and fries, freshly prepared. Similarly, BMW had only to predict that the need for design, driving performance, and prestige would be enduring.
Alan Mulally is building Ford’s future around a simple prediction that consumers across the globe are becoming more similar in what they want from a car. The strategy doesn’t depend on how steep the penetration curve will be for electric vehicles, although that could potentially be a blockbuster technological disruption — if it happens at all. Says Mulally, “ ‘That is what strategy is all about. It’s about a point of view about the future and then making decisions based on that. The worst thing you can do is not have a point of view, and not make decisions.’ ” Porter couldn’t have said it better himself.
Go back to the false syllogism we started with. Many executives, cheered on by management gurus, have embraced flexibility as an alternative to strategy. But if you apply the economic fundamentals of competitive advantage, you’ll be quick to spot the flaw in this approach. Ask yourself, Where’s the link between flexibility and superior performance? Is it likely that flexibility will meet any customer’s needs better than a strategy sharply focused on those needs? Will hedging your activities — going halfway, doing some, not all — likely result in higher prices and lower costs? The problem, Porter argues, is that when you substitute flexibility for strategy, your organization never stands for anything or becomes good at anything. Flexibility sounds good in theory, but trace it down to the concrete level of the activities you perform and you’ll see why flexibility without strategy will guarantee mediocrity — tailoring will be poor, trade-offs nonexistent, fit impossible. All of these require a company to maintain a direction.
| WHEN DOES STRATEGY NEED TO CHANGE? The longer a strategy has been successful, the more difficult it may be to see genuine threats that might invalidate it. Continuity does not mean complacency, but, people being human, complacency can set in if managers aren’t vigilant. Good strategies have stayingpower, but there are clearly times when a strategy must be changed. In Porter’s view, these so-called inflection points are relatively rare, and companies are more likely to pull away from their strategies prematurely. It is therefore important to understand the conditions that absolutely require new strategies. First, as customer needs change, a company’s core value proposition may simply become obsolete. Often, as needs shift, companies are able to evolve to serve them, but not always. The real problem occurs when the needs disappear. Founded in 1976, Liz Claiborne met an emerging need for a generation of women entering the professional workforce for the first time. Liz Claiborne gave its customers the security that they would be dressed appropriately for success. Tapping into this new need, Liz Claiborne grew rapidly and profitably. Throughout the 1980s, the company was a stellar performer. By the early 1990s, however, women’s fashion insecurity in the workplace had diminished. After a decade of relying on Liz Claiborne for fashion guidance, women became more confident about their own choices and more interested in variety. At the same time, office dress codes loosened up. The need Liz Claiborne served so well shrank rapidly. Earnings dropped from $223 million in 1991 to $83 million in 1994. Many factors beyond demographics and social change can cause customer needs to shift. Significant changes in regulation, for example, typically alter the mix of buyer value and cost that companies can offer. Regulation can hold an industry in an artificial equilibrium by defining customer needs in an arbitrary way. Deregulation can unleash pent-up economic forces, allowing new needs to emerge. Major structural changes in an industry often require new strategic positions. Second, innovation of all sorts can serve to invalidate the essential trade-offs on which a strategy relies. Dell’s strategy, meeting basic PC needs at low relative prices, was based on the cost advantages of its direct model. That strategy worked for the better part of two decades. But the rise of Taiwanese ODMs (original design manufacturers) has enabled rivals like Hewlett-Packard to outsource design and assembly, basically wiping out Dell’s cost advantage. Dell has also struggled with the shift in PC sales from large business customers to consumers and with the sharp rise in the percentage of industry sales sold through the retail channel. These changes neutralized Dell’s most important trade-offs. When I interviewed Michael Dell in the late 1990s, he said he worried about people at Dell “who talk about ‘the model’ as if it were an all-powerful being that will take care of everything. It’s scary because I know that nothing is ever 100 percent constant.” His concern turned out to be prophetic. A company needs a new strategy if its value chain does not allow it to outperform its competitors in delivering its unique value proposition. Third, a technological or managerial breakthrough can completely trump a company’s existing value proposition. Of all the forces that threaten strategies, none gets more attention than technology. Sometimes new technology changes the rules of the game; often it does not. A truly disruptive technology will invalidate the assets of the current generation of industry leaders. Digital photography was a disruptive technology for Kodak, the dominant producer of photographic film. For most uses, digital photography is superior to film. As a result, the value of Kodak’s existing chemistry based assets, assembled over a 100-year history, has been decimated. But even in this extreme case, in which Kodak will have to invest billions to assemble new expertise in electronics, the company still has its valuable brand and other assets on which to build a new future. To determine whether a technology is truly disruptive, ask whether it can be integrated into the company’s existing value chain or customized in a way that enhances the company’s existing activities. In practice, Porter argues, truly disruptive technologies are quite rare. |
Reprinted by permission of Harvard Business Review Press. Excerpted from Understanding Michael Porter — The Essential Guide to Competition and Strategy. All rights reserved.
UNDERSTANDING MICHAEL PORTER
AUTHOR: Joan Magretta
PUBLISHER: Harvard Business Review Press
PRICE: Rs 795
