How much strategy in the strategy?

How much strategy in the strategy?

Poland was the first country in Central and Eastern Europe to join the world’s most developed economies, but it is the only one in this group not yet having its own global product. Our development goal was to join the global top performers and we did achieve that at a record-breaking pace. It takes about as much time to create a global industrial brand from scratch. At the beginning of the transformation, pursuing both of these objectives at the same time was not possible. Now, however, it is essential, because only building our own global brands can secure us a firm foothold among the world’s most developed countries. The challenge is not an easy one, as this stage of the transformation requires a change in the way we think of the economy. To bring about a shift towards an innovation-driven economy, we first need to put ourselves on the right track.

Let’s start with a brief diagnosis. So far, there has been no need for us to have our own technologies and products. We have been growing formidably on technologies imported from abroad, and the economic policy, science and industry have adapted to this model. Starting from a very humble beginning, in 20 years’ time Poland caught up with the high-income countries and another 10 years on was promoted to developed market status. However, every success comes at a price. The price we have paid for following the faster, cheaper and safer way (free from any technological uncertainty) is connected with the absence of our own technologies and products and lack of experience in organising business processes to facilitate them. As a result, the economic sphere is dominated by short-term thinking and application of existing best practices in areas in which we already operate (to improve efficiency and extend value chains). We underinvest in research and development, cope poorly with technological uncertainty and still prefer using technologies well tested by others. Although we experiment with innovations more and more often, we want to see quick rewards, and are thus looking for technologically advanced solutions. We do not think of innovation as a major driver of our future development.

Is it possible to keep following this path? Well, it is still possible, but is it worth it? If we want to develop further without suppressing an increase in labour costs, we need to use the advantage that can only be generated through our own (innovative) technologies and products recognisable on global markets. Such technologies cannot be purchased. They need to be created, which is neither easy, nor fast, nor cheap. There is a reason why innovation is the preserve of the most developed economies. They innovate by necessity. In order to grow, they need to constantly push their productivity, which they are able to do because they are already appropriately organised. Innovation is born when people employed in state institutions, science and industry form cooperative links, and their coordinated long-term efforts are driven by the awareness that this is the only way forward.

How to grow from an economic imitator to a creator of the future? To find out, let’s move to the business level and take a look at corporate strategies, as they illustrate the way companies think about the future. What distinguishes the strategic thinking of leaders? Professor Richard Rumelt, a renowned authority figure in the field of strategy, explains this in his interview for McKinsey. Below are key excerpts from this interview:

Executives expect the strategy to provide a pathway to substantially higher performance. Most successful companies quickly exploit changes in their environment—in technology, consumer tastes, laws, resource prices, or competitive behaviour – and ride that change with quickness and skill. Changes, however, don’t come along in nice annual packages, so the need for strategy work is episodic, not necessarily annual.

Unfortunately, most corporate strategic plans have little to do with strategy. They are simply three-year or five-year rolling resource budgets and some sort of market share projection. Such plans are important but calling this strategic planning creates false expectations that the exercise will somehow produce a coherent strategy. I think the annual rolling resource budget (forecast of real and financial flows) should be separated from strategy work and named a "long-term resource plan".

At the same time, a company should start a separate, nonannual, opportunity-driven process for strategy work. This is the essence of strategic thinking and the starting point for taking a good position. Strategy starts with identifying changes in your environment. Even though effects of these changes may emerge in ten or more years, companies need to take a position now, and by “take a position” I mean invest in resources that will be made more valuable by the changes that are happening now.

Can you predict clearly which positions will pay off? Not easily. If we could actually calculate the financial implications of such choices, we wouldn’t have to think strategically; we would just run spreadsheets. Strategic thinking is essentially a substitute for having clear connections between the positions we take and their economic outcomes. Strategic thinking helps us take positions in a world that is confusing and uncertain. You can’t get rid of ambiguity and uncertainty—they are the flip side of opportunity. If you want certainty and clarity, wait for others to take a position and see how they do. Then you’ll know what works, but it will be too late to profit from the knowledge.

All innovation flows from the unexpected combination of two or more things, so companies need access to and control over the right knowledge and skill pools. So how do we know which changes are important and which resources to combine? It is a key issue—the next frontier. And it is always underresearched, underwritten about, and underunderstood. But this is what makes the strategy dynamic.

And what is the "strategy dynamics"? Rumlet explains it as follows.

Most of the strategy concepts in use today are static. They explain the stability and sustainability of competitive advantages. Strategy concepts like core competencies, experience curves, market share, entry barriers, scale, and corporate culture are essentially static, telling us why a particular position is defensible—why it holds the high ground. If the terrain never changed, that would be the end of the story. High ground is always high, and low ground is always low. But in business, unlike geology, change happens in years rather than millennia. In the modern business world, there are earthquakes all the time that quickly take the low ground and raise it high and, at the same time, submerge some mountain peaks below water. Strategy dynamics studies how those changes would shift each dimension of an industry. Would the industry become more concentrated or less? More integrated or less? Would there be more product differentiation or less? More segmentation or less? Given consumer desires and available technologies, how should the industry or business look in, say, ten-fifteen years? Where are the economic forces (mega-trends) trying to take you? Should your strategy ride those forces or fight them?

There are tools and exercises that help trigger inductive insights about dynamics. One useful exercise is to rethink the following metaphor. During the telecom boom of 1997 to 2000, people were saying that fiber optic cable was like the microprocessor: capacity was rising exponentially while costs were fixed (as in Moore’s law.) And just as the microprocessor revolutionized the computer industry, optical fiber would totally restructure telecom. But the metaphor was specious. Excess cable capacity has a very different effect than excess PC capability. Because network capacity is a shared resource, excess capacity can slam prices down to variable cost, which is virtually zero. By contrast, overpowered PCs have no real effect on price, because there is no market for using excess CPU cycles or excess memory. Once you see the underlying metaphor, you can adjust your expectations.

What kind of teams can analyse such things? According to Rumlet, the best chances are with small teams of top-class specialists. This is because the activity of such a group boils down to solving a certain puzzle, at which tight-knit teams are decidedly better. After the key to the puzzle is found, larger groups and more complex processes can help choose a better solution, and also get consensus, buy-in and consequently commitment.

Interestingly, Rumlet claims that if it was up to him he would absolutely prohibit using PowerPoint presentations in such small groups because using "bullet points" seems to very much displace thinking. One of the nice features of PowerPoint is how fast you can create a presentation. But that’s the trouble. People end up with "bullet points" that contradict one another, and no one notices! It is simply amazing. If you ask a group to put aside the bullet points and just write three coherent paragraphs about what is changing in an industry and why, the difference is incredible. Having to link your thoughts, giving reasons and qualifications, makes you a more careful thinker—and a better communicator.