Todd Biske: Outside the Box

Presenter: Michael Raynor, Deloitte Consulting

This session is from Michael Raynor, author of “The Strategy Paradox.” The title is “The Accidental Strategist: Why uncertainty makes EA central to strategy.” He feels that it is ironic that there is a separation between the formulation of strategy and the implementation of strategy. He doesn’t agree with this approach. He feels that formulation and implementation should be a more interactive process and less linear, minimizing the strategic risk that an organization takes.

On this slide, his observation is that strategic uncertainty has been ignored. He used an example of the search engine competition of years ago and how, at least in part, Google won the space by making the best guess with regards to their strategy. It’s not that AltaVista made poor choices, they simply guessed wrong with what would be the most important factors in that marketplace. There is uncertainty associated with strategy.

An interesting anecdote he’s showing us now is that organizations that have a high commitment to strategy, which often times are the companies that we try to emulate, have an extremely high chance of failure, while companies with a relatively low commitment to strategy have a very low failure rate. To me, this seems be an example of low risk/low return and high risk/high return.

Extreme positions help customers know what to expect. Companies that are in the middle, “wander around like a stumbling drunk.” His example of the continuum was Wal-Mart at one end (cost differentiation, if given a choice of make it better or make it cheaper, Wal-Mart makes it cheaper), Nordstrom at the other end (product differentiation, Nordstrom makes it better), and Sears in the middle. Margins are best at the extremes and squeezed in the middle, yet most companies are in the middle. The reason is that at the extremes, it’s a winner take all approach. K-Mart can’t compete with Wal-Mart, Lord & Taylor couldn’t compete with Wal-Mart, yet Sears and JcPenney can both co-exist just fine. The reason for this is that companies in the middle have chosen to minimize their strategic risks. Companies at the extremes take on more risk in their strategic choices.

He’s now discussing Microsoft. He’s explaining the Microsoft manages strategic risk through their portfolio and understanding that things will change over time. This is different than diversification, where the profits of one division would cover losses in another. This is where if what’s important to revenue changes, the company is positioned to quickly leverage it. For example, if consolidation of computing in the home is centered at the gaming console rather than at the PC, Microsoft has XBox.

Another good example he’s presenting is Johnson & Johnson. Their Ethicon & Endo-Surgery division sells colonoscope, an area that previously differentiated on the technical excellence of the product. For growth, however, the problem was enough people weren’t getting colonoscopies. In the US & Canada, a colonoscopy is a sedated procedure, which greatly increases the cost associated with it. In order to manage the strategic risk that selling colonoscopes may switch and become a pain management rather than technical excellence issue, Johnson & Johnson’s VC arm invested in a company that was advancing sedation technologies. (Hopefully, I got this recap right…)

The metaphor that he believes captures how to manage strategic risk is not evolution, but gene therapy. That is, if the environment changes in certain ways, the genes can be recombined in new ways to leverage that environment appropriately. Good talk!