Saturday, September 11, 2010

Engineering Strategic Shifts: Managing Dynamic Future

Times are changing more rapidly than ever for businesses. Whether economies are constrained by recession or are bolstered by growth, competition is becoming more intense than ever. Changes in technology are enabling certain agile firms to customize products and services to meet challenges of recession and growth, and of cost effectiveness and feature differentiation, simultaneously as well as effectively. Such firms are achieving competitive advantage through innovative strategic shifts, and are even opening up new industrial and market segments. The larger universe of established corporations which stand dedicated to strategies that are pre-fixed for the long term, in contrast, are likely to face competitive disadvantage if they do not recognize the need for dynamic strategic shifts.

Strategic shifts

Strategic shifts are deliberate moves by organizations to expand business potential by creating products and services that are out of box with respect to current strategies of the firm. The established strategic paradigm has four components of (i) defining a strategy for a fixed period of 5 to 10 years, (ii) defining the boundaries of industry to operate in, (iii) creating fixed asset infrastructure for organic growth, and (iv) staying focused on established market segments. This rigid strategic framework would soon be archaic for firms which aspire to stay ahead, and lead rather than follow competition. Shifts in strategy rather than compliance to strategy would be the future growth triggers. These strategic shifts are broader in scope and impact than the usual competitive strategies that seek superiority for firms in the marketplace through a mix of generic strategies.

Strategic shifts can be expansionistic as well as minimalistic. The fundamental driver for a successful strategic shift is an identification of a potential fit between a firm’s current competencies that can be leveraged and the environment’s emerging opportunities that can be harnessed. Google offers a towering example of engineering successful and expansionistic strategic shifts. From being a universal search engine to becoming an email medium, video sharing platform, global mapping systems, cloud infrastructure, operating system for mobile and computing devices, and branded mobile devices, Google has engineered a series of well thought out strategic shifts. Intel offers a superb example of leveraging core competencies of chip development and manufacture to align itself with, or even lead the multifarious strategic shifts in computing and connectivity platforms.

Strategic shifts can be proactive or reactive. Use of touch technology , streaming of online music or creation of mobile applications are innovative and proactive moves that helped Apple diversify into mobile audio and video devices, and quickly assume leadership position in compact music and mobile devices. Once a proactive strategic shift is made by a firm, it becomes doubly difficult for incumbent firms to defend their positions with reactive strategic shifts. To gain advantage over proactive leaders, reactive strategic shifts need to have some element of differentiation. Toyota Prius was probably not the first hybrid car ever; the concept of hybrid cars was decades old while Honda Insight was the first commercial scale hybrid car. However, by engineering Prius to the same levels of performance as a conventional car with the added advantages of fuel economy and minimal pollution of a green car Toyota demonstrated how a reactive strategic shift can be successful.

Subtle or sweeping?

Strategic shifts can be subtle or sweeping over time. From adding products within a business, and adding related and unrelated businesses to totally jettisoning originating industries, and leapfrogging into sunrise sectors, models of strategic shift take several hues. The motivation for strategic shifts, and preference for discrete models of shift stem from a combination of market opportunity, industry context, and professional entrepreneurialism. A few industries, in particular, are notable for keeping their firms specialized in the respective industries irrespective of market vicissitudes while growth aspirations of entrepreneurs and firms induce firms to consciously explore strategic shifts.

Automobile and pharmaceutical industries are particularly notable for specialization. Nonetheless, strategic shifts which appear subtle or related could have profound business impact. For example, Wyeth’s decision to add vaccines and biopharmaceuticals made the company highly valuable. In the automobile industry, moves from sedans to small cars or vice versa, and from cars to commercial vehicles or vice versa were subtle strategic shifts that generated profound impact on global business development of the involved companies. For example, had Hyundai not moved to develop a small car in mid-1990s its entry into the Indian automotive market would not have been as enormous and successful as it is today.

In another facet of subtle strategic shifting, base or commodity product manufacturers tend to add value added finished products to their portfolio. While in conventional strategic terms such shifts are classified as integration moves the importance of organizations mastering a shift in strategic thought cannot be underemphasized. Steel manufacturers moving into steel products, paper manufacturers moving into stationery items and bulk drug manufacturers moving into finished dosage forms represent a different class of subtle yet value-adding strategic shifts.

As companies take more remarkable strategic shifts in steps, product lines get added, changing business mix over time, in some cases transforming companies into conglomerates. Wipro which started in 1945 as a vegetable oil company with 100 percent of its revenues from oils and soaps is today a software giant with over 80 percent of revenues accruing from software services, but still dealing in soaps, oils and other consumer products. Reliance Industries which started as a small textile mill in 1975 is today an oil, gas and petrochemical conglomerate with continued presence in textiles. Many conglomerates are, in fact, a direct result of a series of strategic shifts.

It is, however, more interesting that certain sweeping strategic shifts taken at the inflection points of technological development can completely disconnect the companies from their origins and radically transform them. Set up in 1865 as a riverside paper mill in Finland Nokia completely transformed itself into a telecommunications and mobile devices global giant in an amazing story of strategic shifts from paper to rubber to cables, and to electronics (from 1967). Toyoda family first set up Toyoda Automatic Loom Works in 1926 but took an important strategic shift to set up Toyota Motor in 1933. India’s automotive major Tata Motors was first set up in 1945 to manufacture railway locomotives and engineering products but took a strategic shift towards truck manufacturing in 1954.

Companies which stand steadfastly committed to their core or original product and business lines without considering any type of strategic shift, subtle or sweeping, on the other hand, face economic pressures. At one end of the spectrum, technological changes cause obsolescence and call for timely strategic shifts. For example, manufacturers of type writers, dot matrix printers, incandescent bulbs, long playing records, and audio tapes failed to see the compulsions of technological change that destroyed the functionality and economics of the applicable industries. At the other end of the spectrum, market forces dictate the need for strategic shifts even in technologically vibrant and economically viable industries. For example, innovator pharmaceutical companies failed to see the imperatives for lower healthcare costs and the growing need for affordable generic medicines and lost significant time in taking decisive steps towards generics and/or new classes of innovative therapies.

Clearly, strategic shift is an essential element of corporate development and growth. Strategy departments often get robotized with time-bound long range planning or corporate planning exercises. The larger a company is the more bureaucratic and voluminous the work becomes, making the strategists impervious to the undercurrents that dictate the need for strategic shifts. In the alternative, strategy departments get excited with current strategic flavors, be it a merger, an acquisition or a licensing trend. The greater the cash resources of a company the greater is the risk of hasty cash deployment on the strategy of the season. There is, therefore, need for strategy departments to have strategists who can identify emerging shades of competitive disadvantage and who can visualize the drivers of future competitive advantage. They need to have the ability to influence the firms to see the future of strategic shifts the way they do.

Mindset shifts

Successful strategic shifts require dramatic mindset shifts. Strategists, despite the capability and responsibility for long term planning tend to become rigid and inflexible towards strategic mobility. Strategic projects do involve creation of assets and organizations and require lead times to develop, manufacture and launch products. This cannot be an alibi for not evaluating dynamic strategic shifts. In fact, a successful and agile firm would be adept at identifying strategic overlaps and overlays. Commitment to a strategic direction, which certainly is required, should not lead to an inflexible mindset that fails to visualize a dynamic future. Mindset mobility, especially at the level of chief officers of the company is essential to trigger successful strategic shifts. The mindset shifts are typically threefold.

From established to emerging. It is important for firms to set targets of certain percentages of their current resources to be expended on, and certain percentages of their future revenues to be obtained from emerging fields. As an extension of the McKinsey Alchemy of Growth Model the third horizon of growth should by design be something of real future. A company specializing in conventional energy in India, for example, needs to commence allocating resources to emerging energy sources like nuclear and solar. An energy equipment manufacturer would need to similarly redirect its strategies to enabling such emerging energy opportunities. The concept of entry into emerging areas cannot merely be R&D oriented thinking; this concept cannot also be mere business diversification either. It has to be an all-encompassing mindset shift to enter and succeed in new industrial or business lines, even though the current going seems to be adequate.

From conventional to creative. Firms that desire to be agile in strategic shifts cannot be conventional in the processes to achieve such shifts. The conventional in-house design-develop-manufacture-market cycle is highly asset dependent and time intensive. As a result, the cycle needs to be commenced far too ahead of the opportunity without any platform technologies and with all the attendant risks. If firms are willing to be creative by deploying emerging technologies and adapting novel platforms that have been proven in other domains, strategic breakthroughs can be achieved with lower investment intensity and reasonable risk profiles. The charm of the modern automobile, for example, lies in the creative integration of electronics, proven elsewhere. The ease of modern surgery, for example, lies in dramatically reducing invasion-intensity through better intra-body imaging and navigation techniques.

From continuity to discontinuity. Oftentimes, a dramatic and much needed mindset shift is induced by mandatorily welcoming discontinuity into the system. Discontinuity can be technology driven like the use of robots, lasers and photonics in surgery, medicine and diagnostics. It can simply, but yet profoundly, be people driven by shaking up an in-bred organization with massive induction of multi-cultural high talent. The decision by the Government of India to allow its prestigious technological institutions, Indian Institutes of Technology (IITs) to offer medical courses and induct foreign faculty and students is a perfect example of discontinuity as a game changer. Treating cancer through cell apoptosis and tumor starving mechanisms as well as bio-marker based directed drug delivery, as opposed to treating it solely through cytotoxic mechanisms, represented discontinuity in thinking that expanded medicine and benefitted society.

Structural shifts

Successful strategic shifts also require significant structural shifts in the ways of doing business. Over time, managers and organizations become overly proud of their creations and achievements, and fail to see the benefit of alternative structural solutions to their business needs. This structural inflexibility becomes a big barrier to the advocacy of even logical strategic shifts. This weakness tends to be more palpable in firms that have been traditionally integrated and introverted. Successful strategic shifts can be pursued through three types of structural reconfiguration of doing business.

From competition to collaboration. The conventional wisdom has been that a manufacturer of an end- product can cooperate with only a component manufacturer and not with another end-product manufacturer. The conventional wisdom has also been that platforms have to be kept proprietary to achieve sustainable competitive advantage. This outlook has made firms in established industries become asset intensive and lose the ability to leverage the assets available elsewhere for a quick go-to-market strategy. Interestingly, electronics industry has rewritten the rules of competition and collaboration for overall synergy. Operating systems, displays, chips and build facilities are widely shared amongst overt competitors providing latent synergies to all players. Traditional industries and go-solo firms would need to accept more collaborative models with competitors.

From in-housing to out-sourcing. The riskiness of integration increases proportionally with the speed of technological change. Only those product launches which recover the asset costs in a short period of time can hope to balance the twin challenges of manufacturing integration and design differentiation. This is typically feasible in fast moving consumer and retail electronics products marketed by global majors with considerable distribution and selling power. Most other manufacturers would need to keep their fixed asset costs down by relying on out-sourcing as a means of securing the advantages of specialization without the burden of integration.

From integration to incubation. Strategic shifts of firms involve entry into new areas, through new products and new services to which the organization is not used to. Many times, firms make the mistake of entrusting strategic shifts to divisions that are seen to be allied to the new ventures. While it may be cost-effective to do so, it would not be the best way to execute a strategic shift. Strategic shifts are very much like start-ups which require technological novelty, process creativity, entrepreneurial passion and dedicated funding. Firms undertaking strategic shifts would need to incubate such undertakings with organizational leaders and structures that enable the above four characteristics.

Summary

Strategic shifts are essential for growth aspiring firms to visualize and manage a dynamic future ahead of competition. Firms need to be able to proactively identify the declining status of current businesses and product lines and visualize the need for appropriate strategic shifts. There is challenge involved in undertaking a strategic shift. Strategists and chief officers should embrace mindset changes that passionately look for emerging opportunities, creatively manage new product or service developments and deploy discontinuities to advantage. In addition, firms should pursue beneficial structural configurations that favor collaboration, out-sourcing and incubation to make strategic shifts truly transformational.

Posted by Dr CB Rao on September 11, 2010

1 comment:

Unknown said...

Thank you for sharing with us such a useful information!

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