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Friday, May 7, 2021

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The Strategy Paradox

By Shari L.S. Worthington

The Balanced Scorecard, McKinsey Matrix, Strategy Maps, BCG Matrix...a search on Google for "business strategy" theories produces 1.6 million hits, far more than any company can read and digest, let alone successfully implement. I've read my fair share of business strategy books. Michael Porter's Competitive Strategy is still my all time favorite. But I have a new, runner up, The Strategy Paradox by Michael Raynor.

Recommended by ISA for volunteer leaders in the organization, The Strategy Paradox stands out from the pack. Most strategy books require you to, at some point, make assumptions about how the future will unfold. The Strategy Paradox starts out by breaking from the pack and admitting, "Most strategies are built on specific beliefs about the future. Unfortunately, the future is deeply unpredictable. Worse, the requirements of breakthrough success demand implementing strategy in ways that make it impossible to adapt should the future not turn out as expected."

Thus, the "strategy paradox"...the strategies most likely to succeed - those based on extreme positions of differentiation or cost leadership - are also the strategies most likely to fail. The best strategies require companies to make commitments today based on circumstances tomorrow. But the future is decidedly unpredictable. How can we know what tomorrow will bring? No matter what the strategy gurus say, you cannot know.

The Strategy Paradox spends a lot of time analyzing the limits of such time-honored business traditions as forecasting and "adaptability." Again, if you can't know what the future will bring, how can you develop a successful strategy? Using detailed examples from Sony, Vivendi, and BCE, the book lays out a new approach, one based on scenarios and real options. According to Raynor, "Scenarios allow one to take seriously the uncertainly of the future, while real options make it possible to act in a manner calibrated to that uncertainty."

No matter what time horizon you are considering, there are limits to what can happen. Scenario building is a tool for determining what those limits are. Scenarios are most useful to senior management where time horizons are long enough to consider strategic change. Scenarios capture the range of plausible future conditions. The challenge is to build an optimal strategy for each one and to determine the core and contingent elements that are required.

Real options then help a company gain exposure to strategic opportunities or mitigate risk. "Scenario building and strategic planning allow a company to identify what options it needs," states Raynor. "Actually creating those options can require some very careful and creative deal structures, but in general terms it is simple: invest in a manner that confers the right, but not the obligation, to make additional investments at some point in the future."

Raynor then spends several chapters outlining how to resolve the paradox and goes back to prior examples, such as Sony's Betamax failure, to analyze scenarios and options with a fresh pair of eyes. Hindsight is perfect, but Raynor demonstrates how successful strategy begins by identifying the limits of our knowledge.