Wednesday, September 19, 2012

The Strategist’s Challenge: Managing Choices and Options

The strategy of a firm is, by and large, collectively shaped. However, the strategist of a company, usually the chief strategy officer or in some cases the chief executive officer has the primary responsibility to develop and drive the strategy of the company. With the environment becoming more complex and more volatile, the job of a strategist, which essentially involves taking bets on the future, has become more challenging. Fortunately, however, the complexity of strategy formulation also lends itself to certain simplicity of choices for each strategic direction a firm could take. To put differently, unlike in a scientific or engineering experiment which may have infinitely variable experimental conditions, strategy lends itself to fewer options and sharper selectivity.

For a truly professional strategist, the choice is never between doing something and doing nothing. Status quo is not an option for a strategist who loves his or her domain. The choice, on the other hand, is often between two or more options which can shape the future positioning of the firm in a more distinctive manner. For example, a decision between growth and profitability is a complex strategic choice. A decision between consolidation and growth is a more obvious choice. Again, the choices are not to be interpreted in generic terms. As an example, defining whether a firm should collaborate or compete in the industry is unlikely to provide any clear solution for the future. The options must be business and firm specific so that the impact can be perceived relative to the other players in the industry. Strategic choices are available as a generic tool kit; the strategist has to customize the tool box to the firm’s specific needs.

Simple words, significant impact

The strategist’s complex choices are often couched in very simple words and/or seemingly straight questions. Organic or inorganic in development, regional or global in expansion, specialization or diversification in business, penetration or diffusion for market share, equity or debt to drive investments, functional or business in organization structure, growth or profitability for dominance, generic or proprietary in technology, cost or value as niche, leader or follower in the marketplace, reinvestment or divestment for sunset businesses, integration or outsourcing in value chain, labor or automation in operations, private or public in constitution, and so on. Each strategic choice sets the company on a customized path of investment and growth which determines how the firm is positioned vis-à-vis other firms in the industry.

While all strategic choices are theoretically reversible or changeable, some choices are much more rigid in terms of investment, asset and organizational commitments compared to others. For example, for a computer maker, backward integration into chip manufacture could be a move that is virtually irreversible except at a great cost. For an Indian developer and manufacturer of products, global marketing could be a highly investment-intensive gamble that may accommodate little chance of error. On the other hand, for a tablet computer manufacturer, reliance on one of the operating system vis-à-vis another good one may not raise huge stakes. For a firm, a spin-off of an acquired entity may be easier than that of an organically built entity. The history of strategy is replete with examples of strategic choices delivering envisaged value as much as distorting established fundamentals.

Strategy: an outcome or a process?

Many a time, strategy is seen as an outcome; firms refer to expansion strategy, diversification strategy and acquisition strategy, for example. There would be explicit outcomes in each case. It is, however, incorrect to assume that strategy is all about outcomes. The outcomes are just strategic objectives; the route to achieve the objectives is, in fact, the core of the strategy. Except in the case of inorganic developments, outcomes rarely tend to constitute the total strategy. Even in such cases, the way the objective is described determines the central theme of strategy. If Tata Motors had the strategic objective of just becoming a global player in automobiles, its acquisition of Jaguar-Land Rover (JLR) as a good acquisition strategy in terms of an outcome. However, if the strategic objective of Tata Motors is described as building a sustainable global business in automobiles, acquisition of the ailing JLR was nothing but a first step in the strategy of building viable global automobile business.
Strategists have to therefore view each of the strategies in terms of not only immediately visible short term outcomes but also continuing strategic processes that deliver the envisaged long term value to the corporation.

Reverting to the example of Tata Motors-JLR, it is clear that without a clear turnaround strategy in mind for the acquired JLR entity and a synergy plan for the group as a whole, the acquisition strategy would not have been a complete strategy at all. In hindsight, it appears that Tata Motors, in fact, had a total strategy laid out before them. Given such a perspective, the acquisition price that was seen to be high and the risk assumed that was seen to be bordering on adventurism are actually well measured and successful strategic bets to redefine Tata Motors as a sustainable global player. Probably, the same may not be said to the same extent of Tata Steel-Corus acquisition in the steel industry, though belonging to the same group. Several overseas acquisitions by Indian pharmaceutical companies, in fact, failed to live up to the value generation objectives.

Extensibility and reversibility

Like the theory of mobility barriers and switching costs that is formulated with reference to strategic groups in competitive strategy, the domain of strategy formulation has to consider two important concepts: extensibility and reversibility. The concept of extensibility deals with the degrees of forward freedom built into the strategy to not only convert the first outcome into the first lap of a transformation process but also have enough flexible joints to integrate new pieces of strategy, which are not foreseen at the time of strategy formulation. GE’s strategy of first entry into India with business process outsourcing and medical equipment joint ventures had enough flexible joints to foray into Indian R&D and manufacture and also diversify into many market facing verticals. The same applies to the Korean groups of Samsung and LG and several other Japanese corporations which built their India strategies aggressively on the concept of extensibility.

Reversibility is a more challenging and complex concept to incorporate in strategy formulation. Both professionally and emotionally, no strategist builds a strategy to slide back in time. That said, reversibility need not necessarily have only a negative connotation. Unanticipated and more attractive new opportunities could encourage reversibility to generate revenues for investment. GE’s exit from what is seen as a pioneering Indian BPO operation enabled the firm (Genpact) specialize as an insurance against future captivity in a rapidly commoditizing domain space besides generating revenue and space for new businesses by GE. L&T’s move out of the cement business despite the firm’ deep involvement in construction as a core business reflects a revised thinking on cement as a vital adjunct to construction. Most times, however, reversibility could be triggered by basic faults in the initial strategy, including lack of end-to-end strategic think-through, inexplicable failures in execution, and surprising adversities of competition and environment. Sahara and Deccan demonstrated reversibility and semi-reversibility by exiting unviable low cost air carrier options in the airliner industry.

Solidity with adaptability

The strategic choice is as good as the execution to achieve the intended final outcome with the end-to-end enabling process. It is important that the strategist is involved and provided co-ownership in the strategy execution phases so that the outcomes and processes are either assured or modified to respond to any dynamic changes. Typically, the strategy is formulated by a rarefied team while the execution is carried out by a number of other stakeholders, who may have collateral objectives that are either complementary or contradictory to the basic outcomes. Co-ownership of the execution phase by the strategist ensures that the primary objectives are not overturned by an expanded team. For example, in the case of Tata Motors-JLR while it may be appropriate for the Aria (cross-over vehicle) design team to derive synergy from the Range Rover team, it would be inappropriate for the Nano design team to try to derive synergy from the Jaguar team! The more solid the strategy remains to its fundamentals the greater would be its chances of success.

That said, responsiveness to a dynamic internal and external environment is also crucial to the success of a strategic choice. This requires that the strategy must have appropriate avenues for adaptability. L&T’s move out of the cement business and GE’s move out of the BPO business, though they were strategies in reverse, actually represented firm level response to commoditization at industry level. Definition of what is core and non-core in strategy is a feature of adaptability. Adaptability in terms of switching options would be feasible in all the typical strategic choices enumerated earlier in domains as varied as business development, market expansion, portfolio selection, market share, growth financing, organizational structuring, turnover-profitability balance , technology direction, value and cost drivers, entry and exit, value chain management, operations management and corporate constitution. The net switching costs or benefits (ie., the difference in the NPVs of the current and future substitute strategies) would need to be mapped out along with other qualitative organizational issues prior to embarking on adaptive and reversal strategies.

Managing strategic change

Managing strategic change on the lines of extensibility, reversibility, solidity and adaptability discussed herein certain organizational wherewithal and resilience. The approaches would be covered in another blog post.

Posted by Dr CB Rao on September 19, 2012

1 comment:

Narayanan said...

I fully concur with the view Strategy is a process but one wonders why even some of the most process oriented companies with a good track record and strong leadership tend to fail. While there may be instances of such failures due to poor execution, this would appear to be an inadequate explanation as a whole. Couple of things come to mind -(a)mistaking robustness for resilience and (b)lack of awareness of cognitive biases in decision making. I suggest these two points based on two recent books I have read - Andrew Zolli's Resilience and Daniel Kahneman's Thinking Fast and Slow. In addition to various quantitative/analytical measures, it seems to me the tool box needs to be expanded to include the ability to "preserve adaptive capacity" and an acute awareness of human decision making processes to combat bias/poor judgment at the personal and the organizational level. This is more of a cultural change...something that must be owned by the entire leadership team to reap even a modicum of success.