The Strategy Paradox

Posted on November 19, 2007 by Dave Pollard

I had the pleasure recently of meeting with Michael Raynor, author of The Strategy Paradox and co-author of The Innovator’s Solution. I wanted to try to convince him that the solution to the Paradox is designing for organizational resilience, an idea I’ve been exploring with Steve Barth. Michael wasn’t having any of it.

In a nutshell, the Paradox is that the more you plan and commit to certain strategies for your organization’s future, the more likely you are to achieve exceptional results, and the more likely you are to achieve disastrous results. The greater your commitment, the greater you opportunities and your risks.

The reason for this is that, by committing to particular strategies and executing based on those strategies, you will, if your expectations about the future prove correct, achieve competitive advantage as a result of that commitment. But, if your expectations about the future turn out to be very wrong, you will have over-committed your energies and resources to the wrong things, and will lose big time.

As a consequence, organizations tend to be shy to commit to strategies unequivocally. They’ll avoid both risks and opportunities. And their performance will be mediocre.

Michael’s solution is to do two divergent things:

Get the executive office to manage strategic uncertainty and create strategic options. This means keeping doors open and being ready to commit to various alternatives as they emerge, and making small risk-conscious strategic investments, each of which will pay off if various future scenarios come to pass. This requires a long-term focus, scenario planning and balancing investments, committing a little to a variety of possible alternative possibilities, knowing most of them will not pan out.
Get the operating divisions to commit fully to specific short-term strategies. These strategies need to be set by the executive office, and division management needs to be resourced to act on them fully and indemnified if the strategy proves to be the wrong one.

This combination minimizes risk (by keeping longer term strategic options open) and maximizes return (by committing aggressively to shorter-term strategies). He argues that the reason the Paradox is so little understood in business is that most research on performance focuses only on successful companies, and ignores the lessons from spectacular failures.

The process of strategic uncertainty management or strategic flexibility therefore entails the following four steps for the executive office:

Anticipate: build future state scenarios that suggest alternative ways future events could unfold and their consequences to the company.
Formulate: create optimal strategies for each scenario
Accumulate: assess what strategic real options are available and invest in them
Operate: manage that portfolio of options (add, cut bait, exercise, commit operating divisions)

Michael argues that, because the future is so unpredictable, rapid changes cannot be adapted to (no matter how resilient the organization) and slow changes encourage incrementalism and expose the organization to disruptive innovations from competitors.

As a consequence of the lack of good strategic uncertainty management competence in most organizations, Michael suggests that the best investment strategy might be:

From all the companies in an industry or market, identify the ones that boldly commit to strategies. These will probably include those that guess right about the future (spectacular successes) and those that guess wrong (spectacular failures).
Because the outstanding performance of the spectacular successes will more than offset the poor performance of the spectacular failures, investing in a ‘bucket’ of these boldly committed companies will achieve a higher rate of return than investing in the non-committed companies, which are likely to achieve only mediocre performance.

I also spoke with Michael about Elliott Jaques’ Requisite Organization which argues that “managerial hierarchy is a reflection in post-tribal organizational life of discontinuities in the nature of human capability”. My regular readers will not be surprised that I violently disagree, and believe that such hierarchy exists because it’s essential to compel acquiescence and obedience of the majority of workers to mindless, meaningless, soul-destroying work. But that’s a subject for another article.

Michael’s newest project revolves around his organic view of business organizations whose essential purpose, he argues (contrary to The Corporation’s view of their essential pathological nature) is to secure its own survival. That requires, at least in a ‘perfect’ market, satisfying all stakeholders in a balanced way including maximizing their social welfare, even more than making profits. We discussed how market ‘imperfections’ (the ability to form oligopolies, the ability to externalize costs to other countries, the environment and future generations) distort this seemingly natural and evolutionary development in the real world. I’m not willing to concede that organizations are truly this organic. Just as unhealthy societies are perverted by scarcity, corruption, psychopathy, acquisitiveness, thirst for power, and greed, so too are corporations in a world where too many people are chasing too few resources and jobs. When this happens, agile social structures based on abundance and collective well-being are replaced by mechanistic, fragile ones based on deliberate perpetuation of scarcity, power and inequality.

Can organizations, at least non-hierarchical, responsible enterprises designed for sustainability truly be resilient? My experience, with much smaller companies than Michael has studied, is that they can. I believe that size, and the number of degrees of separation between an entrepreneurial organization and its customers, partners and community, is the real cause of lack of organizational resilience, which gives rise to the need for the complicated and counter-intuitive solution Michael proposes for giant monoliths.

There is no strategy paradox for Natural Enterprises — their capacity for and focus on excellent need-driven research, innovation, continuous improvisation and acting responsibly and responsively is their competitive advantage over the arthritic hierarchical giants, and the key to their inherent resilienceand sustainability.

Category: The Innovation Process

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6 Responses to The Strategy Paradox

TG says:

November 20, 2007 at 00:36

** real cause of lack of organizational resilience, which gives rise to the need for the complicated and counter-intuitive solution Michael proposes for giant monoliths. **Giant monoliths like Exxon, Chevron and GM who do possess great measure of organizational resilience due to profits in the billion$, maintain that staying power by funding both left and right political powers.Re-election is the paramount motive for any political party and the reason they will do the bidding of these mega-monoliths.Example: Canada*s two Electric Vehicle manufacturers, Zenn and Dynasty, have vehicles for sale that meet current Department of Transport specifications, yet the federal government, with an ear to their corporate sponsors, flatly refuse to issue license for in Canada sales to both firms.The MSM [CBC}, gave this one exposure only in the news. View the clip at;http://TonyGuitar.blogspot.com Exxon owns the firm who make the polymer film for Lithium-Ion batteries. [basic essential].Chevron holds the patents for the large format Nickel-Hydrid battery for N.A.Panasonic had to close down their N.American battery plant and retreat to Japan.Too bad, because at 96% Oil dependency, our economy will grind down quickly if refiners are bombed.S. America, and Brazil especially, are at 75% high efficiency bio-fuel. They learned their lesson.France uses battery vehicles for postal service. Bills get delivered and bills get paid, gas or no gas. Many Paris taxis run on compressed air.Battery operated commercial truck fleets are becoming more common place in both France and the UK.Multi-party coalitions not so easily swayed by resilient monoliths. . . eh? =TG
Vladimir Dzhuvinov says:

November 20, 2007 at 01:50

Well, to me you’re both right, in a way :)Micheal’s approach to the problem seems to be at a level where he regards the corporation as a whole conscious entity. Your approach focuses on what makes up the corporation – the people and their interrelations.To me, for a business to be exceptionally successful at innovation it has to be both resilient at the organisational level, and at the same time have a spirit of ‘oneness’. Now, some people think that to have ‘oneness’ and ‘alignment’ you need a strict command hierarchy – I’m not so sure, but this is another topic :)Also, I’m not convinced that strategic risks – exceptional results/disastrous results – are necessarily symmetrical. Where is the evidence for this generalisation? Recently you mentioned James Surowiecki and he has written a good book, The Wisdom of the Crowds, which presents a fine approach to how businesses can use collective intelligence to gauge risk.One final thought: here and there the phrase “predicting the future” gets mentioned :) Since when does the future result from prediction? ;)
Vladimir Dzhuvinov says:

November 20, 2007 at 01:56

TonyGuitar:I think you are idealising that greenness of European transportation :) That of course is not to say that there’s capacity for improvement!Greetings from other side of the Atlantic,Vladimir
TG says:

November 20, 2007 at 23:59

Vladimir, Compared to the 96% oily blackness of ExxonAmerica, you live in a green garden of growing transport cleanliness.Truck fleets on battery, TDI diesel, and cars that run on compressed air..for cleaner air.Lucky you, TG
Vladimir Dzhuvinov says:

November 21, 2007 at 08:10

I personally tank biodiesel (from sunflower or rapeseed oil) instead of petro-diesel because of the price incentive. 1l petro-diesel costs 1.25 Euros, 1l biodiesel 1.00 Euro. For a full tank of 60l this translates to a saving of 15 Euros or U$22. I drive approx. 30’000km a year and at 6.5l/100km this adds up to an annual saving of 488 Euros or U$721. Enough to rent a small chalet in the Alps for about a week :-)The price difference comes mostly from the extra mineral oil tax and eco-tax that the government levies on petrol diesel.My dad used to drive an LPG (butane gas) car for more than 10 years and with that fuel the cost savings were even greater in the long run. (but you have to retrofit your car at one time cost of about 300-500 Euros).Forgot to mention, I also do another 5000km on my bicycle every year ;-)
TG says:

November 21, 2007 at 19:46

[ In Canada ]GM, Canadian Government Bet Jobs Against Environment… and then they arrange to lose on both counts.Per this column from the Globe and Mail’s Jeff Simpson, Canadian auto workers were celebrating this week with the announcement that GM will spend three quarters of a billion dollars refurbishing an Oshawa, Ontario auto plant to build the come-back Camaro. It’s cool. The Camaro’s cool (or it was a quarter century ago), the jobs are cool (3,900 times over) and the local investment is cool.But the climate is warm and getting warmer, and Canada and GM continue to expend more energy contributing to the problem than trying to face it down.desmogblog.com/gm-canadian-government-bet-jobs-against-environment[. . . . ]We at the DeSmogBlog are, obviously, all about saving the world. But we try to make time in each day to be all about making money, as well. And that makes us ask: Why does GM continue betting on this loser strategy? And why does the Canadian government line up and cheer when it happens? [ABG ]================== Yeah,and why would the gbmt not issue Canada sales clearance for EVs that fully qualify under D.O.T. regulations? Two Electric vehicle firms in Quebec and BC? News video…TonyGuitar.blogspot.comExxon, Chevron, Shell and GM funding is mandatory for winning any election in Canada.Harper is betwixt a rock and a hard place. = TGPosted by: TG at November 21, 2007 7:56 PM =============================== [ Woe the contrast ]That*s Canada… This is USA . . .Gompertz, the owner of Eco Auto, Inc. He was mentioned in an article on MSNBC about eco-car dealers in the U.S.Lynne Mason over at Electric Cars Are For Girls has gotten hold of Gompertz for a lengthy Q&A on what it’s like to sell EVs and other green cars in Bozeman, Montana.Gompertz sells ZENN, Miles, Evader scooters, SNUGG electric bicycles, and Smart cars, and will ship them to you no matter where you live in America.How does he feel about the two NEV makers on his list? Gompertz told Mason that, **For electric cars, we chose the Zenn and the Miles. They’re both excellent quality electric cars that you can plug in like a cell phone, and both are easily adaptable to Montana’s 35mph NEV speed limit.**======== AutobogGreen.com [ Zenn is excellent quality! . . Hear that D.O.T. Canada? ] = TGPosted by: TG at November 21, 2007 8:11 PM