The Paradox of Strategy
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Good morning,
It’s a particularly difficult time for India with Covid-19 cases rising exponentially every day. By now, we all know some people who have suffered from it. Prayers with all those who are affected by it 🙏
It is also hard to write a post around business/strategy knowing what the whole country is going through because it feels hollow at some level. At the same time, most of us are looking for some semblance of normality in our lives. Beyond what we can do to help ourselves and others, we have to keep doing normal things to feel normal.
Off to the post,
The paradox of strategy is super interesting. It states that the same strategy that can lead to massive success can also lead to failure. To understand it better, let’s look at two components of strategy:
Commitment — A successful strategy requires full commitment to reap maximum rewards in the future.
Uncertainty — As the future is unpredictable, it’s hard to find which commitment will pay off. So a full commitment can lead to failure if things in the future didn’t turn out the way we expected.
The most successful companies today are those who made a commitment that turned outright. But then there are other companies who failed because they made a commitment that didn’t turn outright.
Nokia made a commitment on closed-source Symbian OS, and failed.
Apple made a commitment on closed-source iOS, and succeeded.
Nokia’s CEO broke out in an interview saying they didn’t do anything wrong.
That’s the paradox of strategy. Nokia failed because things didn’t turn out as expected on their commitment.
But can’t we create a strategy that can work moderately well under different circumstances and hence manage uncertainty? Yes, we can.
Enter Mediocrity
When we create a strategy that can work moderately well under various future scenarios, it will lead to mediocre results. This might look like a safe bet, but it isn’t really safe because mediocre performance inevitably loses over time by the law of competitive exclusion. It just loses more slowly than bad performance.
Since mediocrity is not preferred, we have to manage uncertainty to ensure we don't fail catastrophically in case the committed strategy doesn't pan out well.
Is there a way to manage uncertainty?
Managing Uncertainty
Uncertainty can be managed in one of the two ways — either predicting the future or adapting to the future when it arrives. We already know that predicting the future is hard.
What about improving adaptability? To improve adaptability, one has to understand the industry well and act accordingly. The changes in an industry could be either fast or slow, and demand for different levels of adaptability depending on the velocity of change. Let’s take some examples.
In consumer-facing products, the changes are fast. And the companies have to adapt fast if they have to survive.
There are numerous examples of failures in B2C space that failed to adapt fast. Facebook vs Myspace is the poster child of the B2C competition. On why Facebook won the war to a social network, here is an excerpt from the Forbes article around this,
The brilliance of Mark Zuckerberg was his willingness to allow Facebook to go wherever the market wanted it. Farmville and other social games - why not? Different ways to find potential friends - go for it. The founders kept pushing the technology to do anything users wanted. If you have an idea for networking on something, Facebook pushed its tech folks to make it happen. And they kept listening. And looking within the comments for what would be the next application - the next promotion - the next revision that would lead to more uses, more users and more growth.
In enterprise products, on the other hand, the changes are slow. There is enough time for the company to adapt and win.
An example of adaptability in the enterprise is Microsoft Azure. Amazon launched AWS for cloud computing in 2006, whereas Microsoft launched Azure in 2010. MS Azure was able to do well in a slow-changing enterprise market. 10 years later, while AWS is the market leader (32%), Azure does have a good share of the cloud computing market (20%).
Improving Adaptability
Another approach to manage uncertainty is suggested by Michael E. Raynor in his book The Strategy Paradox. He suggests assigning the two elements of strategy to different sets of people:
The CEO and top leadership should be thinking about the long term and creating options to manage the uncertainty. There is high uncertainty in the long-term and managing that should be the job of this group.
The operating division heads should be focussing on executing the short-to-medium term commitments. There is usually low uncertainty here.
It’s hard for a single person to focus on both commit (execute) and manage uncertainty, so it sounds like a good idea to separate both. If you look at Facebook or Google, this is exactly what they have done. The top leadership at these companies has focussed on creating options for the future by investing and acquiring companies that can become big tomorrow. Facebook acquired WhatsApp and Instagram. Google acquired YouTube, Android, etc.
However, in my opinion, there are two problems with the approach while applying it to all companies:
This might work for a big company that has a stable product/business but will not work for small-to-mid ones.
It’s hard to understand customers and gain insights into a particular market if you aren’t involved in building the product. Big companies make this happen by creating large research teams which work as their eyes and ears on the ground. Startup CEOs have to be in the process of building products if they want to understand and adapt fast.
To sum it up, uncertainty can be managed by creating options and improving adaptability. Both improve the survival and winning rate for companies. In the next post, we will discuss the common fallacies of strategy.
Have a good day and take care,
Deepak
Hi Deepak, thanks for sharing this article. I relate to the point of improving adaptability; it is what Taleb calls "antifragility". One really can't predict the future and further can't expect a fat tail event like Covid, so the strategy is to be antifragile.