Strategic Management Insights
New Thinking for a Turbulent Economy
The Black Swan
C.K. Prahalad’s death 3 years ago has inspired a plethora of literature on the strategic thinking of the man who coined the concepts of “strategic intent” and “core competence.” In fact, the strategic management guru’s thinking has increasingly been called upon since the economic crisis. Strategic management – the process of getting from the current state to the future state that ensures competitive advantage – has never been more relevant. “Business as usual” can no longer be the context in which to make decisions.
In a hypercompetitive global market, more companies are feeling the effects of Prahalad’s “strategic decay” – the idea that strategy starts to decay the moment it is created. Strategic management can help managers think smarter and act faster.
Organizations that used strategic planning during the economic crisis were more successful in their pursuit of growth opportunities and more confident about short-term growth prospects, according to a 2009 study of 190 US firms sponsored by the Association of Strategic Planning.
As a brief review of the current research shows, strategic management is rising to the challenge in a time of economic uncertainty.
By driving strategic management further into the organization, companies are finding new growth opportunities. At the University of St. Gallen, Switzerland, strategic management experts Drs. Christoph Lechner and Markus Kreutzer identified four modes of coordination across multi-unit firms that lead to corporate growth, based on the analysis of 51 corporations in Asia, Europe and North America. In the context-setting mode, for example, international food producer Hügli equipped middle managers across Europe with strategic management training and tools – business and financial planning, risk analysis, project flow charts – to identify and execute growth initiatives. Emphasis is placed on pragmatic risk analysis: pulling the ‘rip cord’ when growth initiatives are going off track rather than throwing good money after bad. More on Coordinating Growth Initiatives in Mulit-unit Firms.
Another way in which to eke out growth is by optimizing friction, according to research by Wharton management professor Olivier Chatain and INSEAD strategy professor Peter Zemsky in a review of How a Little Friction Can Change a Competitive Landscape. Friction is defined as anything that creates interference between the supplier and its customer – a bad location, poor product design and so forth. Their approach integrates industry analysis with firm-level analysis to find the optimal level of friction – moderate levels – at which a company’s profits can increase.
Sustainability and growth
Sustainability is a hotbed of research and the focus of leading global management thinker CK Prahalad before his death last month. From product development to processes and business models, companies now have to think strategically about sustainability.
“Our research shows that sustainability is a mother lode of organizational and technological innovations that yield both bottom-line and top-line returns..” CK Prahalad et al
Sustainability is the key driver of innovation, says Prahalad. Early movers in sustainability , he argues, will build competencies that others will find hard to challenge.
It’s a brave new world for strategic management but one populated with fresh ideas and tools that are raising the discipline to a new level. To make the best use of these fresh ideas and tools, an overall organizing framework is needed to pull them together in a practicable way. Such a framework is the Systems Thinking Approach to Strategic Management, a proven framework that has been continually evolving over the last 20 years and used with great success by many organizations.
Any discussion of new directions for strategic management must inevitably address the growing debate around the accuracy of the forecasting models used as the basis of decision-making.
Decision Making and Planning Under Low Levels of Predictability, appearing in the International Journal of Forecasting, argues that accurate forecasting is not possible. Uncertainty is the business as usual scenario. Its authors, therefore, introduce four principles to advance strategic thinking under uncertain scenarios, including challenging mental frames, understanding human motivations, applying crisis management and assessing strategic options in a structured option-against-scenario evaluation.
One of the authors Nassem Nicholas Taleb — the analyst who forged new ground in risk analysis and decision making by focusing on how to turn a lack of information and understanding into decision-making — is set to release an updated edition of his best-selling book the Black Swan this month, in which he plans to tell us how to operationalize this lack of knowledge. Rather than building more complex models, to face globalization, he will argue for making our structures less complex.
Along the same lines of thinking, a Harvard Business Review case study in May’s edition argues that qualitative intelligence is needed to manage in a world of an “ambiguous system of systems.”In Beyond the Numbers: Building Your Qualitative Intelligence, Roger Martin saliently questions whether our quantitative models and predictive analysis skills are up to the task in a crisis situation. For more on applying qualitative intelligence to an organization, read A Systems View of the Organization by Stephen Lin, the Haines Centre for Strategic Management’s Regional Managing Partner in Asia.
Going forward, expect qualitative intelligence to play a bigger role alongside quantitative analysis.
The disappearance of many stalwarts of industry has changed the competitive landscape.
Such a dramatic change in the competitive structure of the market has led to questions of how competitive advantage is affected in up and down markets. Is the economic crisis simply accelerating trends that were already in play? The outsourcing industry, for example, has significantly expanded as a direct result of the economic downturn and the do-more-with-less management philosophy.
Re-strategizing competitive advantage in up and down markets should be of concern to all firms. Going forward, global industry will face periods of crises that will be more severe and longer, according to S.D. Shibulal, cofounder of Infosys, in a “Leadership Amidst Crisis” speech to MIT. Infosys, which has leveraged its competitive advantage during the economic crisis to great effect, recently entered into a $150-million contract to manage the help desk and other technical services for Microsoft.
The economic crisis is accelerating forces that can erode competitive advantage, according to Richard D’Aveni, author of Beating the Commodity Trap, in press reports. Commoditization was already a ‘virulent’ competitor says the professor of strategic management at Dartmouth’s Tuck School of Business. D’Aveni, who has been talking sustainable advantage since his book launch in January, warns against solely depending on cost cutting and capacity reductions as a response to commoditization. Instead, he tells Bloomberg News that the focus of companies should be on improving competitive position and pricing power.
The advantages of such strategic thinking are evident in the case of LG Electronics, one of several Korean electronics suppliers that have out-strategized the incumbent Japanese electronics suppliers, according to a recent study by the faculty of economics at the University of Tokyo. Rather than cost cutting, LG responded to slowing sales at home by going global and employing a localization strategy, differentiated design capabilities and innovative marketing and brand strategies. The studyKorean Firm`s Competitive Advantagecredits LG’s 25-30% annual growth rate in India to its “continuous innovative thinking.”
In April’s Harvard Business Review, Vijay Govindarajan – a follower and friend of leading management thinker CK Prahalad echoes this view. In the article, he depicts the strategic actions of managers as follows:
STRATEGIC ACTION #1: Managing the Present
STRATEGIC ACTION #2: Selectively Abandoning the Past
STARTEGIC ACTION #3: Creating the Future
During a downturn, most leaders are managing their competitive advantage by focusing on STRATEGIC ACTION #1 “Managing the Present,” which focuses on cost reductions and margin improvements. Strategies in STRATEGIC ACTION #1, warns Govindarajan in Modern Strategy and Hinduism: Finding Parallels, have already been commoditized by competitors, and hence will not likely provide significant competitive advantage. Instead, leaders should be “Creating the Future,” STRATEGIC ACTION #3, with a focus on innovation and transformation.
Coaching to Build In-depth Competency
A common theme in our research overview this month is that strategic management is being drilled down deeper into organizations. As a result, coaching and group facilitation of middle and senior managers, to develop specific strategic management skills such as strategic thinking, which includes scenario thinking, is becoming more common.
The airline crisis created by the Icelandic volcanic ash in 2010 highlighted the need for scenario thinking/planning capability at all levels of an organization to cope with crisis situations. Lots of ‘what ifs’ were raised during the grounding of European planes, but not everyone had the tools to assess the options and their impact. Risk managers are now talking about preparing for “black ash” events, clearly a play on “black swan,” or low probability events that are hard, if at all possible, to predict. (For an informative article on scenario planning, read The Use and Abuse of Scenarios by McKinsey’s Charles Roxburgh.)
Coaching & group facilitation creates a dynamic environment, in which the capacity for strategic & scenario thinking and planning can be developed and honed. At the Haines Centre for Strategic Management, we recognize the need to cultivate strategic & scenario thinking throughout the organization as a core competency for the fast moving business environment, as well as for “black ash” events. Our seasoned consultants can provide you with the customised coaching & group facilitation programs you need, to develop the core competencies of strategic & scenario thinking in your organization.
Please email to: firstname.lastname@example.org, to enquire about our services.