As organisations shake off the New Year’s cobwebs many begin to think about ‘strategy’. Perhaps begin by asking: where are we on the strategy life cycle curve? Different phases of the strategy life cycle present different challenges. (Click here to read more about the strategy life cycles ).
My previous blog Austerity is not a strategy discussed the ‘rebuild’ phase. This piece touches on some of the challenges of ‘renewal’ as organisations approach the latter stages of their strategy life cycle.
The challenge of ‘renewal’ … escaping the status quo trap
Strategic renewal is a fact of life. While strategies constantly evolve, organisations experience strategic drift either through organisational entropy (the tendency for systems toward increasing disorder) or market and competitive shifts that are no longer reflected in our strategies. The challenge is to respond to these issues before you reach crisis. Regrettably, organisations often move too late. Why?
There are two explanatory factors: a ‘failure to see’ or a ‘failure to move’[i].
The ‘failure to see’ is why strategy almost always starts with the ‘case for change’. Change occurs in the context of history, and where that history has been successful it is especially difficult to ‘get people’s attention’. Imagine over the last two years:
- Your portfolio of contracts has fallen from 19 to 8 (with 2 of these at risk);
- The industry average revenue growth has been 44% … you are tracking at -4%; and
- The industry average profit growth has been 35% … your profit growth has been 7%
To an outsider this would appear compelling evidence of a ‘case for change’. To the executive it was evidence profits were still growing. Optimism is a powerful force in leadership, but leaders also need to know how to balance that with realism.
Once we recognise the need for change, why would we not change? The status quo trap is at least a partial explanation.
Firstly, there is a sunk cost effect. For evidence of this, look no further than some of the commentary on steel demand in China over recent years, or Woolworth’s investment into Masters Hardware. The larger the past investment, the greater the inclination to continue on that path.
Then there is ‘regret avoidance’. We experience much greater regret if a bad outcome is a consequence of new actions taken than if the same outcome occurs as a result of maintaining the status quo. Corporations apply the same logic: the cost to executives (eg. careers) for poor outcomes is typically much greater when these are the result of a ‘new’ course of action, as distinct from a failure to move. The result is a natural inhibition to do something different or new.
We also tend to under-estimate the risk of the status quo. The implicit logic is that the risk associated with the status quo is largely understood, relatively stable and low. When we examine other strategic options and the associated risks there are always risks which cannot be fully mitigated. Do we really want to take on that additional risk? The natural ‘antidote’ to this thinking is to subject the status quo to the same test: “what do we have to believe to think this is our best option?”
The evidence shows that people are typically surprised that they personally would fall prey to these effects. That probably means you too.
So what? The best remedy in the first instance lay in the quality of the strategic conversations. In a recent strategy workshop exploring a potential new business model we surfaced two explicit conversations: what are the risks if we adopt the new business model that was on the table? And what is the risk if we don’t? The conversation revealed a few key insights:
- We were explicit in terms of the value the new model would deliver not just to the client’s business, but also to his end ‘consumers’ … the value to the end consumer was compelling
- There was an implicit assumption that there would be a significant negative backlash from parts of the ‘ecosystem’ … but once these assumptions were made explicit and tested in an open conversation it became apparent that the impact would not be that dramatic.
- Regardless of whether we moved early, a structural shift was inevitable, and many of these same ‘costs’ would be incurred anyway, but under a scenario in which we were followers.
Michael Jacobides (London Business School) argues[ii] that the concern about ‘black swans’ is overdone: “the real danger is ‘gray rhinos’. While hard to miss in the zoo, they are surprisingly difficult to spot in the South African bush, obscured as they are by the vegetation. By the time they’re visible, they are already storming toward you, leaving little chance to react”. Perhaps renewal is about moving before the gray rhinos get close.
[i] From Black & Gregersen’s Leading strategic change: breaking through the brain barrier where they use a simple ‘fail to see; fail to move; fail to finish’ framework
[ii] Michael Jacobides (2014). From black swans to gray rhinos: four ways academics can help managers. McKinsey Quarterly(September).