The Strategy Paradox: Why committing to success leads to failure (and what to do about it) [Englisch] [Gebundene Ausgabe]

As 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 I found this is so powerful is because it takes seriously the organizational implications of trying to manage strategic uncertainty. Most explorations of the topic do a great job motivating the need to manage uncertainty and providing tool kits and frameworks for doing it, and Raynor is careful to give them all their due. But what's been missing, and what this book adds, is an organizational framework that divides up the responsibilities for making and delivering on commitments from the need to create strategic options that can mitigate the uncertainty created by those commitments.

The result is a liberating framework. It makes it possible for operating managers to make the commitments required if greatness is to be even possible. That is, they are free to pursue powerful competitive strategies because corporate strategy identifies and mitigates those risks.

Then Raynor takes up the challenge of "operationalizing" these concepts in the Strategic Flexibility framework. He synthesizes scenario-based planning with real options, making it tangible and actionable. In addition the J&J example, he works through applications at Alliant Energy, AT&T, and CIBC, a Canadian bank.

Closing thoughts

If you've read this far, you might conclude I haven't a bad word to say about The Strategy Paradox. And I don't, sort of: the contributions strike me as so profound and potentially powerful that pointing out the book's shortfalls strikes me as petty. Nevertheless, in the interests of being "fair and balanced," let me point out some items I wish had been death with more directly and fully.

First, there is a question of measurement. How do we actually know the strategic risk profile at BCE or J&J was lower? This is a big issue, which Raynor engages, and concludes that in the end, we can't measure it in as hard-nosed a way as we might like. The full explanation is somewhat laborious, but I think it boils down to this: risk is about the future, and there are no data about the future. The past is only a useful proxy when we have reason to think the future will look like the past. Since strategy on this level is not a repeated game -- how many times will we see the risk of the Internet? -- we simply have to make educated guesses. I would have liked more detail on how to think through the valuation question more carefully.

Also, applications to smaller companies (some of my clients) are missing. The examples are all big, diversified companies. I don't think that undermines the "generalizability" of the lessons learned. But implementing Strategic Flexibility does seem to require a certain minimum level of resources, one that is likely beyond the reach of, say, start-ups. Where is the "lower limit" of the application of these principles? I'm okay with it if they don't apply everywhere -- Raynor's not obligated to come up with a theory of everything -- but it would help to know what to look for so I could know precisely when and where to get out this particular toolkit.

But these are nits. The endorsements for this book from the likes of Christensen and Bernstein seem perfectly justified: one of the most important books on strategy ever written, and the best lesson on corporate strategy, in particular, I have read. I think this book should take the corporate strategy conversation in a whole new direction.

A significant intellectual contribution and a welcome addition to the serious management literature.

The author basically argues that most studies of "great organizations" are incomplete because they compare companies that are spectacularly successful against those that are simply "mediocre." Drawing management practices solely from "great" companies in studies like these, he says, is fundamentally flawed, because they omit the most revealing comparison set, namely, those companies that have failed. His surprising finding is that when you compare the spectacular successes with the spectacular failures, they actually look pretty much the same: they both tend to have very clear strategies and consistent, focused execution against those strategies. The difference being that the failures simply picked the wrong strategy.

The "Strategy Paradox" is that the strategic bets you need to make to pursue "spectacular success" (high commitment of plant, capital, technology, etc.) simultaneously increase your odds for "spectacular failure." The rest of his book presents a mind-set and tool-set leaders can use to mitigate the risk inherent with high-return strategies, increasing their odds of success.

The job of the CEO is central to his approach. Basically, the CEO plays a "different in kind" strategic role. Instead of making strategic "commitments" (this role falls to operating unit leaders) and "executing" against them (this role falls to functional leaders), the CEO should be in the business of creating strategic "options," so that as the future changes, operating units have alternatives.

Because of the extreme uncertainty about how the future will turn out in the long term, the CEO's ability to create "real options" against various scenarios of how the future will turn out becomes critical to long-term organizational success. The CEO does this through intelligent investment (partial equity stakes in emerging technologies, etc.) and other mechanisms that create options that divisional leaders can "exercise" or "abandon" as the future unfolds.

I recommend this book highly and consider it one of the few true "paradigm shifting" books out there--meaning, one that can permanently affect your leadership mindset for the better!

Assessment

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As a Contributing Editor to Strategy and Leadership magazine, I read a lot of strategy books. This is an excellent book, well worth reading. It's a must addition to the library of anyone interested in strategy. It's particularly useful for executives dealing with uncertain markets.

Strategy is a relatively new field. Many books and ideas in strategy are ill thought out and not useful. In contrast, Michael Raynor's new book is well written, insightful and useful. It is particularly useful for companies in industries that have high degrees of uncertainty.

Perhaps most importantly, unlike many books on strategy, it will cause management teams to rethink how they develop and manage strategy.

The Author

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Michael Raynor's last book, The Innovator's Solution is the best of the three books on disruptive strategy that have been authored by the lead author, Harvard Business School professor, Clayton Christiensen.

The Subject

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Raynor's strategy paradox is that companies that execute strategies may, by virtue of their commitment to their strategy, experience strategic failure. The example of Sony with Betamax and disc players is used illustrate new insights into these familiar cases of product failure.

This core idea is a fascinating extension to the core idea in The Innovator's Solution where Christiensen and Raynor argue the well managed companies will often overlook disruptive strategies being pursued by new companies with initially inferior products. The different business models required for the successful and emerging disruptive strategy may not be manageable by the same team.

Raynor's book addresses the issue of how should companies avoid overconfidence in their ability to develop strategies and implement in an uncertain environment. In brief, his prescription is to (1) explicitly manage the commitments to a strategy and (2) simultaneously manage the uncertainty around the strategy. The consequences of his prescription are important because they affect how organizations should view the role of executive and operating management.

His prescriptions for portfolio management are based indirectly upon options theory, and illustrated by examples from Sony, Vivendi, Johnson