by: Issues: May / June 2007. Tags: Strategy. Categories: Strategy.

By Stephen Bernhut, Editor, Ivey Business Journal

Michael Raynor is an Adjunct Professor at the Richard Ivey School of Business. He is also a Distinguished Fellow with Deloitte Research in Boston, and the coauthor, with Clayton Christensen, of The Innovator’s Solution. His latest book, published earlier this year, is The Strategy Paradox: Why Committing To Success Leads to Failure (And What To Do About It). Doubleday, 2007. This interview is based on The Strategy Paradox.

IBJ: You travel around the world in your consulting work. What did you see that led you to write this book?

Michael Raynor: In 2004, I was on a Deloitte consulting engagement with Johnson & Johnson’s venture capital arm, Johnson & Johnson Development Corporation (JJDC), which is responsible for about 200 operating companies. Dave Holveck, the head of JJDC, was responsible for making sure that the operating companies were connected in the right ways to the emerging technologies that could shape their competitive futures. Holveck had to make sure that the relatively shorter term priorities of the operating businesses didn’t crowd out the need to invest in longer-term priorities. It’s an age-old problem, to which no satisfactory, structural solution existed.

What began as an investigation into the intricacies of the relationship between the business units and the corporate office ended up giving rise to what we think is a new, or at least novel, way of thinking about this problem. Beginning with the generally accepted view that time horizons matters – that is, that the units had a shorter time horizon than the corporate office – we ended up connecting that insight with the observation that longer time horizons were necessarily more uncertain. That meant that the corporate office shouldn’t be making strategic bets, it should be managing strategic uncertainty.

That critical insight dovetailed nicely with a stream of work I’d been developing since 2000 into a framework for strategic planning called Strategic Flexibility – really, an attempt to connect scenario-based planning with real options. As a result, I felt that by 2005 we had something useful to say about a substantive and unresolved issue in corporate strategy, from both a conceptual and pragmatic point of view.

IBJ: To make those roles and responsibilities more clear, you suggest a new hierarchy of responsibilities for key players such as the board, CEO, senior managers and line managers…?

MR: The principle underlying this new division of responsibility is “Requisite Uncertainty,” a term I’ve coined in homage to Elliott Jacques. Jacques described the principle of “requisite organization” which takes the hierarchy and allocates decisions based on the time horizons associated with those decisions. What “time horizon” really means is just how long it takes before you know whether or not you’ve made a good decision, and how long it take before you get sufficient feedback from the environment so that you can assess the appropriateness of a choice that you’ve made. Certainly it may be less before you know it was a bad decision, because sometimes when these things go wrong they go wrong very quickly, and it may take 3 to 12 months before you know you’ve made a good call.

As you move up the hierarchy you’re making decisions that, in Jacques’ view, and even in the most well functioning hierarchies, just take a lot longer before you know whether or not you’ve made the right call. If you’re making decisions on competitive strategy, are we going to be a cost leader or a product differentiator or that sort of thing, It takes a number of years just to implement those decisions never mind determine whether or not they’ve in fact worked out well. So that’s the notion of time horizon.

When it comes to strategy, each layer of the hierarchy should be dealing with fundamentally different time horizons, and those longer time horizons necessarily imply a greater level of strategic uncertainty.

What’s strategic uncertainty? Well, you can always get struck by lightening tomorrow and that’s an uncertainty, and that has precious little to do with strategy. And there are all sorts of operational uncertainty – things like “will my critical supplier go bankrupt?”, Financial uncertainty – things like exchange rate or interest rates that can fluctuate pretty wildly in the short run, and have a material impact on the success of the business. So you need tools for managing that. I actually don’t say much about that – and deliberately so. There are well developed fields designed to address things like operational and financial uncertainty.

What really tends to go unexplored is “strategic uncertainty” and so “strategic” is a carefully chosen modifier. It means “uncertainty surrounding the way in which you create and capture value in an industry.” This is something that really only plays out over the long term. For example, we’ve known about the digitization of music, the distribution of music over the Internet and so on since the early 90’s – 1991/1992, and it has taken a full 15-16 years for this thing to now reach its fullest flower. So it’s taken a long time. We tend to look at these things – “Oh my God, it happened so fast!” But in fact it didn’t happen so fast at all.

It’s the same thing with newspapers and the Internet. People looked at the Internet and newspapers in 1996 and said “newspapers are going to lose 40 percent of their classified ads in the next 18 months.” They didn’t. Here we are 10 years later and the same long-term decline has continued, to be sure, so I’m not dismissing the importance of the change. What I am suggesting is that true, strategic change is something that’s played out over a longer time period.

This means that folks who are responsible for shorter time periods actually don’t need to worry much about “strategic uncertainty” and in fact should not worry much about strategic uncertainty. Why? Because somebody needs to actually deliver on the strategy that’s in place. Today you are essentially taking cooking out of the oven that got put in several years ago, and the essence of performance in the short-run is making good on those strategic commitments.

The problem I think in a lot of organizations is that the need to manage both delivering on the present and thinking about the future is something that has historically sort of been in the same place organizationally – people who make decisions with respect to one of those things have also been making decisions with respect to the other.

To address that problem I’ve tried to combine some principles that have been very powerful in understanding the horizontal separation of responsibilities. Horizontally, we divide work up in order to make it possible to get complex tasks done. We just don’t put everybody in a room and say “figure it out” but we divide things up into Manufacturing and Distribution and R&D and HR and IT; and then we have different processes for each, with various integrating mechanisms to ensure sufficient degrees of coordination.

I think what we’ve missed is that that same principle can be applied to a vertical hierarchy. So when we say “time horizons”, what is the material, defining difference about decisions that play out over longer periods of time? My candidate is in fact the strategic uncertainty associated with those decisions; which is different from just any old kind of uncertainty. What ends up happening to managers who have to manage both the present and the future is that they end up either with a very undifferentiated, uninspired risk-averse strategy, or a strategy that holds up the promise of greatness but at enormous risk. So that’s what we’re trying to resolve.

With this in place, the board, in my view, should take responsibility for essentially the overall risk/return and profile the firm. My hope is that this is a way for the board to be involved in strategy without usurping responsibility for the substance of strategy. Because a lot of what I’ve read in the corporate governance arena sort of exhorts the board to get involved in strategy, but it’s not clear to me that the cure is not worse than the disease in that case. The CEO of the organization is therefore responsible for actually identifying the relevant uncertainty and then creating the options required in order to create the risk/return profile that the board requires. That’s an iterative process of course.

Business unit managers are on the hook for actually making strategic commitments. There’s a line I use in my presentations, which is that “Everything we know about strategy is absolutely true, it’s just dangerously incomplete.” And so the notion that the most powerful strategies are built on bold commitments is, in fact, true. We can’t do anything about that. And so it falls to operating unit managers to actually make those commitments. Where the complementarity between the operating units and the corporate office comes in is that the corporate office is now actually thinking carefully about the uncertainties they’re exposed to as a consequence of making those commitments, and they’re doing something material to help manage them.

And then finally you get to Functional and Line Management and those folks are running the play – making sure that they are delivering on the promises that had been made in the past; because it’s only by doing that that the corporation, the company, the business units are actually able to create the wealth that they need to.

IBJ: You write that some companies fail in spite of some very good planning and excellent execution. They just have bad luck?

MR: Yes. What I’m pushing on is that the failure as a consequence of perfectly reasonable choices is probably a little more common than we realize, because I don’t know that anybody knowingly makes a stupid decision. The choices we make when we make them seem like perfectly reasonable choices to have made. A lot of folks will look at decision-making errors and say, “Ah, the decision making process was flawed and the explicit premise is very often if you follow a better decision making process, you would have made the right decision.” I’m all for better decision-making. But there are limits to that kind of advice, limits created by the inescapable uncertainty of the future.

IBJ: Why you write that “adaptation is not a good response to uncertainty”?

MR: I’m saying adaptation has limits. A highly adaptive organization will survive better than one that cannot adapt at all; but it won’t create as much wealth as one that has simply guessed right. And since there is a large number of companies out there and all of whom are attempting to guess right, somebody who focuses on adaptation as a source of coping with the uncertainty of the future is sort of willing to settle for, at best, fourth place, no matter what, because they will always be finishing behind the different companies that bet big and bet right.

IBJ: The strategy paradox is that committing to success leads to failure. Why?

MR: The big issue there is the collision between uncertainty and commitment. The paradox is a function of that underlying tension. So the strategies that succeed biggest are the strategies that are based on the boldest and the most difficult to imitate, and hence hard-to-reverse commitments. The problem is, especially with respect to strategy, you don’t just snap your fingers and have a strategy materialize. It takes time for these things to unfold; and so as a consequence you are necessarily required to make choices today based on beliefs about what you think is going to drive performance in the future; and as we’ve discussed the future is irreducibly uncertain; and so there’s a very real probability that you will commit to the wrong things. And so that’s where the paradox comes from: precisely the same sorts of behaviours that are systematically associated with success are also systematically associated with total collapse.

IBJ: Betamax, which you detail in the book, is one of the more the most conspicuous examples.

MR: The reason I spent time with it is because it’s one that lots of folks are familiar with, but we often learn the wrong lesson from the failure of Betamax. Folks look at Betamax and say that this is an example of bad planning. In the book, I make the point that all the choices Beta-Max made were perfectly reasonable choices – they just turned out to be the wrong ones, and that’s really the part that people have difficulty with. They say, wait a minute, if they made the wrong choices then how could they have made the right choices?

What’s missing is the recognition that we need to be able to identify whether or not we think a strategy is any good independently of observing its performance and outcomes. If we can’t do that, then we really don’t know what good strategy is, because of course managers have to commit to their strategies before they observe the outcomes of those strategies. And so I try and unpack Betamax and MiniDisc in great detail, because I think that in each case the strategies pursued passed the tests of what constitutes a great strategy. Other strategies – in fact, the opposite strategies pursued by VHS and Apple’s iPod respectively, also passed those tests: they were high-commitment forays into an uncertain market based on reasonable assumptions. But the data are always ambiguous: there’s no one path that unambiguously suggests itself, and what the future holds will never succumb to any degree of analytical rigour.

What I’ve tried to do is really separate corporate strategy from competitive strategy. Competitive strategy is about creating and capturing value. Corporate strategy may primarily be about the identification and management of strategic risk. This holds out the prospect of something for corporate strategy to be about, other than merely attempt to be supplementary to the competitive strategy designs of the operating units.

IBJ: Thanks very much.

MR: You’re welcome.